There’s been a lot of conjecture since the release of the 4C on a number of line items, product manufacturing and operating cost in particular due to the relative increase vs. the prior quarter which came as a surprise to many. Subsequently, a number of comments speculated that some of the non-recurring expenditures would have been reflected in this account that is related to the ongoing integration (and restructuring) of PWD and Kaddy, as well as related investments in infrastructure, etc. This is indeed correct but only reflects part of the reason for the increase in this particular account.
DW8 previously discussed differences in its model vs. eBev, especially how one of the key differences is the way in which Gross Merchandise Value (GMV) flows through its business and how that by extension impacts its cash flow accounts. All of the Marketplace GMV passes from the buyers through DW8’s bank accounts to the suppliers net of trading fees (i.e. the clip) the firm charges (and net of other applicable fulfillment fees etc.). This model is similar to that used by other tech firms whose operating revenue differs from the cash value of products processed through its accounts, i.e. the GMV facilitated by its platform. This is the reason why the “Operating Revenue” of $4.6M stated in the firm’s quarterly report differs substantially from the “Receipts from customers” of $7.2M in the Appendix 4C quarterly cash flow report, the latter referring to the physical cash flowing through the firm’s bank accounts.
Operating Revenue: $4.6M
(Cash) Receipts from Customers: $7.2M
Difference: $1.79M --- reflects primarily $1.6M in GMV (plus a smaller amount due to timing differences in revenue booking vs cash receipts as is common, see prior quarterly reports and 4Cs)
In effect, all cash inflows are captured via Receipts from Customers which include the GMV of $1.6M processed and paid for by customers which pass through DW8’s bank accounts back to the suppliers (net of applicable fees that are reflected in the operating revenue). The outflow from a cash flow perspective is accounted for in the Product Manufacturing and Operating Costs (PMOC) account. So if we were to exclude the Marketplace business for sake of argument, the 4C’s receipts from customers and PMOC would be both roughly $1.6M lower. This explains around 25% of that line item’s total value and accounts for roughly 39% of the difference in value FY22 Q2 vs FY22 Q1. Note: Due to the previously negligible GMV amount in the prior quarter this hasn’t had a material impact until now that we have partially combined WINEDEPOT Market and Kaddy’s GMV. This has implications going forward from a comps perspective that some have tried to apply to this line item because as GMV scales up that increase will be captured in both the Receipts from Customers and also in the PMOC account (as a net of fees amount).
Management has been quite transparent about its integration and restructuring plans and the type of investments being made as part of these plans. The challenge with investment and cost outlays is that these are front-loaded while cost savings, efficiency gains, and additional revenue generated are usually delayed due to the time it takes to implement changes and before benefits accrue to EBITDA. For example, exiting existing financing or service agreements which are all subjects to terms and conditions agreed by prior PWD/Kaddy mgmt. over which DW8 management has limited control will impact how quickly it can impact change leveraging scale to negotiate better terms, etc. Whilst the team is implementing these changes, financials tend to be somewhat muddied as opposed to the clear ex-post implementation version we should expect in 1-2 quarters' time. Comps until then will be less insightful as will be quantifying changes and likely gains as some benefits accrued will be a sum of the parts whilst others can have an exponential impact. This most likely will result in a gradual improvement of net cash burn over the coming quarters rending straight-line assumptions less applicable and predictable. This should be considered when trying to extrapolate current expenditures including non-recurring costs to estimate future values. For comparable context, I suggest reviewing restructuring events undertaken by other firms and the J-curve like impact on financials following the successful completion of these events. I would also recommend comparing the likely synergistic effect of combining the three legacy businesses under the DW8 umbrella that drive business to another due to their complementary business scope.
The current share price reflects arguably substantial mispricing of risk relative to the firm’s historical pricing but more importantly the fundamental results it has delivered to date and the strides it makes further growing the business. The chart below illustrates the historical quarter-end trailing twelve-month (TTM) revenue multiples since DW8 commenced operation relative to today’s valuation (i.e. based on today’s closing SP of 4.4c). Based on actually delivered revenue, not forecasted revenue, the SP is now trading at its lowest valuation level since inception while revenue, operating efficiency, and margin trends are substantially higher than before and continue to improve. For example, at the end of FY22 Q1 the shares were trading at a multiple 86% higher vs. today’s close, yet revenue since then has increased by more than 75%. On a simplistic forward view (e.g. 4x actual FY22Q2 figures), NTM is trading at 5.3x.
And top-line growth is working like a coiled spring in terms of valuations as we move forward. If we simply assume that the SP remained unchanged at 4.4c until the end of FY22 Q3 and quarterly revenue at that point comes in at $4.5M (just for argument sake, I am forecasting that), then using the same TTM revenue metrics would imply a valuation level 26% lower than today due to the rapid increase in the fundamental metrics the company delivered. The rate of change in the fundamentals and their magnitude is not priced in the current SP which prices the firm basically 3x as risky as it was back in Jan 2020 (ceteris paribus).
And clearly, that is not the case.
DYOR and all the usual disclaimers apply.
(20min delay)