Change in Substantial Holding

An entity called 468 Management GmH has aquired just under 20% of Marley Spoon.

468 Management has very little online presence and a wafer thin website but seems to be a Berlin and San Francisco based technology investment firm mainly focused on early seed funding, who have raised $1.3 Billion.

That would seem to indicate a full takeover is unlikely so I'm guessing they just see Marley Spoon as dirt cheap and a good investment?

More info on 468 Management can be found here: https://www.businesswire.com/news/home/20220131005245/en/468-Capital-Raises-400-Million-Fund-II

27/10/2022 - Q3 2022 4C

Highlights:

• Q3 2022 net revenue of €100m, +26% growth year-over-year (+13% growth in constant currency)
• Global Contribution Margin (CM) in Q3 at 28.8%, up 160 basis points (bp) vs. the previous quarter and 70 bps better than the previous corresponding period (PCP)
• Q3 Operating EBITDA loss of €(1.0)m, an improvement compared to the previous quarter (€(3)m) and the PCP (€(13)m)
• US and Australia both delivered positive Operating EBITDA in the quarter; initiatives under way to turn EU to profitability
• Operating Cash Flow at €3m, including foreign currency tailwinds, and quarter end cash balance of ~€22m
• On track to deliver full year 2022 guidance
• Q4 22 Operating EBITDA expected to be profitable, €2-4m

Guidance is re-affirmed:

• Mid-to-high teens YoY net revenue organic growth plus full year contribution from Chefgood
• Contribution Margin in-line with 2021
• Operating EBITDA better than €(15)m

My comments on previous quarter (Q2) guidance vs Q3 results:

Q2 guided for “H2 Operating EBITDA expected to be breakeven” which seems to be on track with Q3 Op EBITDA only slightly negative at -1m (-0.1%). Means Q4 Op EBITDA will need to be at least slightly positive, which they have guided for in Q3 4C at 2-4m for Q4. If that happens it means they’ll handily beat their full year guidance of Op EBITDA of better than -15m. Current YTD Op EBITDA is -13.7m, so forecasting to end up on -11.7 to -10m for the full year. That would be a good result IMO.

Q2 also guided for “Continued growth at lower levels of marketing spend” and this hasn’t gone quite as well. While, positively, marketing spend as a % of revenue is down QoQ and YoY, revenue for the quarter unfortunately went backwards, declining by 8% QoQ, the first QoQ decline since Q3CY21 and the largest ever decline.

So the question still remains, can they continue to grow revenue while reducing marketing spend as a % of revenue?

This also calls into question their ability to hit their 2025 target of 1 billion EUR in revenue, given YoY growth of only 26%.

Once Full Year results are out in February I will need to reassess my valuation based on their ability (required growth rate) to hit $1 billion in revenue in 2025.

My comments on Q3 4C:

Overall mixed results for Q3 with good bottom line performance but a drop off in top line.

On the positive side:

• Improved CM% QoQ and inline with yearly guidance (29%)
• Marketing spend was down QoQ and YoY, both in absolute and % of revenue terms
• Op EBITDA loss of only 1mEUR, the smallest since the COVID boosted year of 2020
• Positive EBITDA in both USA and AUS for second quarter in a row
• Positive Operating cashflow of 3mEUR, best quarterly result since 1Q21
• Free cashflow of 0.327mEUR, first ever quarter of positive free cashflow

On the negative side:

• Revenue down 8% QoQ to 100mEUR and lowest quarter of revenue YTD
• Revenue down QoQ across all regions
• Increase in G&A costs QoQ and YoY, both in absolute and % of revenue terms
• Active subscribers down 11% QoQ (Q3 does seem to be a seasonally weak quarter)
• Active subscribers down across all regions and lowest YTD

While the positive OCF result was pleasing, it was driven almost entirely by reduction in marketing spend with other payments broadly flat.

The result also seems boosted by timing of payments with receipts from customers higher than quarterly revenue and payments less than reported costs. So I would expect a return to negative OCF next quarter.

The drop in revenue and active subscribers is concerning, particularly given how large it is.

Is the lower marketing spend leading to a drop in revenue? Can they continue to grow revenue while reducing marketing costs as a % of revenue? Or will revenue continue to decline inline with reduction in marketing spend?

The next quarter will tell!

• Enormous Total Addressable Market
• Attractive unit economics
• Potential to expand margins
• Founder-led business

It's too early to confirm yet but I believe that Marley Spoon could be approaching an inflection point. It has been severely punished by the market for downgrading guidance in late 2021 as COVID tailwinds became headwinds and it struggled to deal with rising costs, while also being punished in general like all cash burning growth businesses currently.

Right now the market has it priced like it's basically worthless however it key metrics have rebounded.

• YoY Revenue growth has returned to a respectable 30+% for the past two quarters and is on track to beat guidance (albeit including contribution from the aqusition of ChefGood), plus keeping it on track for its 2025 target of 1 billion EUR revenue
• Contribution Margin has remained steady
• Marketing and G&A costs have declined in H1 CY22 vs H2 CY21 and are guided to remain low
• EBITDA losses are reducing, particularly compared to CY21, and company has reaffirmed EBITDA breakeven in H2, meaning a CY22 EBITDA loss of 15 mEUR or better, in line with guidance, and a OpEBITDA % of -3%, the best since the covid boosted year of 2020.
• Number of Active Subscribers continuing to grow, including Europe which returned to growth in CY22

While these trends are positive I don't feel it's enough proof yet to show that Marley Spoon has overcome it's difficulties in CY21, so I'm not yet a buyer.

However, if Marley Spoon can continue to show active subscriber growth, meet or exceed it's full year guidance, particuarly around EBITDA and then guide for continued 30+% revenue growth in CY23 improved EBITDA (maybe even breakeven?) then I believe that trust in management will be restored and the business will be showing an ability to scale and a path to profitability.

At that point, I believe it will present quite an asymmetric bet.

• Competition - Hello Fresh is the gorilla in the room but all markets also have local competitors
• Growth slows - With meal kits still in the early stage of adoption it is difficult to truly forecast how large its opportunity can get and how quickly market penetration can grow
• Can't scale effectively - While Marley Spoon has attractive unit economics on the meal kits themselves, currently it's marketing spend (basically CAC) and G&A costs are higher than it's contribution margin resulting in operating losses. Can it demonstrate operating leverage and achieve scale and operting profit before the market, and it's lenders, run out of patience?

I have just completed a deep dive on Hellofresh (ETR:HFG) and will be purchasing shares. Marley Spoon is a direct competitor of Hellofresh, as a result I thought I would put my thoughts here as to why I am buying Hellofresh rather than Marley Spoon.

Why Hellofresh over Marley Spoon or others in the space?

• Hellofresh is the major player in the space and is actually profitable and has positive cash flows. In just ten years, HFG has gone from a start-up in Germany to delivering 1 billion meals worldwide in CY21 with $8.8 bn (AUD) worth of revenue. IMHO Hellofresh now has the scale that it is the winner that takes all from the network effects and size compared to smaller competitors.
• From my research Hellofresh is one of those businesses that has worked out the "secret formula" of business. Over COVID they scaled massively and not from a small base. CY19 revenue = EUR 1.8 bn to CY21 = EUR 6 bn. To scale like that during a pandemic you must have a highly effective and efficient business model and processes. I might add the CY20 and CY21 were the first years the business become profitable and significantly operating cash flow positive, so it wasn't just a case of pump the money in and see the revenues increase.
• Hellofresh knows how to land and expand. Currently based in around 19 countries. Hellofresh's size means it has learnt all the lessons and growing pains already compared to smaller competitors.
• Hellofresh plans to spend EUR 500 mil this year in capex on tech and expanding capacity for EUR 10 bn of revenue. MMM revenue in CY21 was less than HFG capex for this year. How can you compete when your largest competitor is able to grow so much faster than you can?
• Marley Spoon is a dinner meal kit business only currently. Hellofresh has expanded into ready to eat (Youfoodz and Factor) and launched in some geographies "Hellofresh Market" that provides breakfast and lunch options. Another advantage over competitors for Hellofresh. Especially considering part of the business model of HFG and MMM is convivence.
• Hellofresh management is all about optimising the business through technology. Decisions are made on data. The profitability of the business is showing this is working.
• Customer reviews of both brands are about equal.
• MMM is currently a cash burner and unprofitable. Growth rates were less than HFG during COVID on a much lower base which should make it easier to grow at a faster rate.
• Blue Apron a USA based competitor. Listed at around US$145 a share in 2017. Current share price is US$5.25. Total losses (retained earnings) = US$666 mil and according to TIKR around US$750 mil of paid in capital. Money was thrown at this business for years and it couldn't crack the market. Last year revenues were under US$500mil and the company is still burning cash. Just shows the differences in outcome between two businesses in the same space...

Hellofresh is currently priced at a PE of around 30x. Not expensive for a company increasing revenues at a CAGR of 50%+ for at least 5 years (100% in 2020). Why take a punt on MMM comparatively? In my view any risks to the Marley Spoon model are the same as Hellofresh, unless you feel Hellofresh isn't the winner. Therefore, the risk reward of purchasing Hellofresh shares over Marley Spoon is heavily skewed to Hellofresh in my view.

Broker note from Sequoia Financial Group: mmm-update-sequoia-121121.pdf

Based on the recent Q3 results they rate it a High Risk BUY with a price target of $1.41

However, it should be noted that this is a serious downgrade on their previous target of $2.67.

"Our composite valuation and 12-mth Price Target is now $1.41 based on a 33%/33%/33% weighting of EV/Sales, DCF and EV per active customer. This implies +61% potential upside. Despite our PT downgrade, we think the long-term global growth story for MMM is still intact. Potential user numbers and TAMs (total addressable markets) are huge at ~ 190m households for MMM’s existing countries. Customer awareness is high and acceptance growing. And HelloFresh is showing the way. MMM is targeting EUR 1bn revenue by 2025 and 5bn by 2030 (we regard as stretch targets). The share price is down -42% since the Q3 result. We maintain our Buy (High Risk) recommendation. "

Marley Spoon financially is actually a pretty easy company to analyse. There are 3 key metrics that drive the business:

• Active Subscribers - These are not active customers. The difference is that subscribers have an active subscription (i.e., ordered or skipped a delivery) and not include one-time trial customers. 
• The number of orders - How many meals kits is delivered to customers. Higher the number the greater the utility of the service. 
• Orders per subscriber - Which is the result of dividing the number of orders by Active subscribers. It measures customer loyalty and whether existing customers are buying more on average. 

Also, I found the average (€ per order) for each region is surprisingly consistent for the past 3 years.  

• Australia ~ €46 per order
• Europe ~ €40 per order
• USA ~ €45 per order

Playing around the variables using those metrics above can allow you to forecast topline revenue growth.

For the bottom line, the financial metric to keep in mind is the contribution margin. Not their operating contribution margin (OCM). Marley Spoon report OCM to show that if they did not spend on marketing vouchers or pay rent for manufacturing centres, the contribution margin would be higher. This is absurd in my perspective, like why would you make the investment in the first place? I feel the rent, in particular, is a necessary cost to run the business. I will use CM, literally every business use CM when presenting the strategy. 

There are 3 brands in Marley Spoon Group: Martha Stewart (which is an interesting partnership up for revision on 31 December 2022. In exchange for these branding rights, Marley Spoon pays royalties, based on a percentage of ‘Martha & Marley Spoon’ sales to Martha Stewart). Martha Stewart is paid a decent royalty and it has soo far paid off for both parties with US sales growing rapidly. I wonder what the revised royalty percentage fee is? The other 2 brands are Marley Spoon and Dinnerly. Dinnerly has been popular in Germany but we do not know the penetration as of today. 

The online meal delivery market is massive and post-covid, I am not expecting habits would change. Instead, more people will start cooking instead of buying fast food all the time. Customer acquisition is key during the pandemic, and they need to win more. The active subscribers started to plateau and are now looking at 25-30% revenue growth in 2021.  

Hello Fresh is the market leader and I will need to do more on them. My sister is using Hello Fresh in Europe, and she enjoys the meal kits. Recently, she decided to stop using the meal kits and start making her own recipes. She told me that the recipes were getting repetitive and now confident to have a go herself. Ironically, users gaining the confidence to cook for themselves could result in churn. Hence lifetime customer does not = forever. 

The sector is extremely interesting from a financial analyst perspective. All competitors are fighting for customer acquisition and retaining their existing customers. 

Here are some of the links for you to do more research I just covered the tip of the iceberg :) 

Prospectus -https://newswire.iguana2.com/af5f4d73c1a54a33/mmm.asx/2A1089433/MMM_Prospectus

Updated Martha Stewart agreement- https://newswire.iguana2.com/af5f4d73c1a54a33/mmm.asx/2A1092559/MMM_Agreement_Extended_with_Martha_Stewart_Living_Omnimedia 

Latest quarterly report-  https://newswire.iguana2.com/af5f4d73c1a54a33/mmm.asx/2A1277026/MMM_Market_Update_Q4_2020_Presentation

A 30% drop in share price for management selling a stake for $56M institutional capital raise.

This could be one of the biggest bargains I have seen on a company growing triple digits in revenue. I am not sure what I am missing here?  

Hopefully, Marley Spoon can improve my standing on the competition :D