Business Breakdowns
· Todd Wenning
[00:00:00] S1: In some ways, yes. I think, a lot of it comes down to what your friends are playing. Warhammer is a lot about community and having something to do with your friends. In an increasingly digital world, it's a great way to come together in the physical world and enjoy time together. One of the things that separates Warhammer from, say, Dungeons & Dragons or Magic: The Gathering, is that you can latch onto various parts of Warhammer. You might really enjoy the gaming, or you might really enjoy the collecting, or you might really enjoy the painting. I don't want to go too deep myself into this world, because otherwise I start mixing up investing and the narrative of the business, but I did get a starter set. And you paint these figures, and then you have to do multiple layers sometimes, to get them right. And so you spend hours of your time putting these things together, so if you can get really into painting them – some people actually paint them, if they do really good at them, they sell them. You can latch onto various parts of the hobby without having it compete with Dungeons & Dragons or Magic: The Gathering. It could be that you really like collecting these space figurines or these medieval fantasy – they actually produced the Lord of the Rings official tabletop games. If you want to collect armies of orcs fighting elves in the Lord of the Rings, you can do that by buying Games Workshop products.
· Matt Reustle
[00:00:00] S0: Yeah, it's always interesting to me in terms of the symbolism of when you see something that is a niche hobby evolve. And one of the key moments, I think, is when you see the resale with customization. There's just something that represents – there's a market above this market that now exists, and that is representative of an ecosystem. And people willing to spend the time to create a business around the original IP is usually telling in terms of the level of enthusiasm there. The other question I had was, vertical integration seems like it can be very impactful for Games Workshop, particularly because of that community element that you mentioned. If you have a traditional hobbyist store, they might have a Magic: The Gathering monthly event, they might not. But I'm sure that pretty much all Warhammer stores have these events. Is that normal in the industry based on what you've seen?
· Todd Wenning, Matt Reustle
[00:00:00] S1: So, Games Workshop does put on a lot of competitions and events. The attendance numbers are much larger, again, than you would probably expect. It's very much a bonding type of business. One of the things I like about this business is there's hidden network effects. If one friend starts to play; another friend starts to play and it starts building. And the community that you build around you gets stronger, which makes Games Workshop stronger and the entire value of the whole ecosystem gets stronger. We think about network effects in Google, Facebook, and eBay. But really, thinking about the physical gaming world, you don't really think about it, but Games Workshop has it. [00:00:00] S0: You gave us some sense of the revenue breakout with retail and trade. I'd be curious what the other 20% is, so maybe we could start off there.
· Matt Reustle, Todd Wenning
[00:00:00] S0: You gave us some sense of the revenue breakout with retail and trade. I'd be curious what the other 20% is, so maybe we could start off there. [00:00:00] S1: Of the other 20%, 15% comes from online and 5% from licensing. The online can just be people who order from warhammer.com. It can be the subscriptions that I talked about earlier. I think they do – my estimate is that their annual run rate on that number of subscribers is about 12 million pounds. It's rising, but still a small part of their business. And then the licensing business is the remaining 5%. And that can be cyclical. They might have a big licensing deal come in with a video game. So if you go onto the Switch marketplace or a PlayStation, you'll be able to see Warhammer games. And so they license their IP to the video game producers. That business is really high margin. So it's well over 90% in a typical year. 90-95% is what I have in mind. As a firm, their gross margins are about 70%. It is almost like a luxury product when you think about those margins. And they have significant pricing power. So if you think about their retail stores, my guess is they do about 80-85% gross margins in those stores where they control the process. Online is probably similar. Their cost there being logistics and distribution. And with trade, I think their gross margins – my guess, they don’t disclose this, but it's probably 50-55% or thereabouts when they sell to a wholesaler. So, it's a very strong model from an economic standpoint. Their EBITDA margins are over 40%. It's a very cash generative business.
· Matt Reustle
[00:00:00] S0: The licensing point. I still remember reading – there's all this lore about Ralph Lauren, but if you go back into the early biographies, it was a failing business, really. Under a lot of stress until he licensed a fragrance. And that was a huge profit driver and cash generator. It always made licensing in my head a completely different concept. But nonetheless, even if that sits atop the chain, 50%, 70% gross margins are quite impressive. On those buckets, would you point to any single bucket being a large growth driver going forward? As you think about expansion, D.C. store, seems like that can make a big leap into the US. And having a Prime show. Seems like they're doing things with the IP that are sensible from both an attention and awareness standpoint. But what would you point to just kind of from a growth perspective?
· Todd Wenning
[00:00:00] S1: So if we think about the network effects that I mentioned, with the TV show coming out, I think it'll appeal to a lot of people who have never even heard of Warhammer. They might go check out their local store. All of a sudden, you’ve got a new node in the network. They introduce their friends and so on and so forth. If you look at what's happened with the Mario movie, for example. When the Mario movie came out, Nintendo management said we were surprised. We had high expectations, but we were surprised by even how much that drove what we wanted them to do, which was buy Nintendo video games. And when The Witcher, which is also starring Henry Cavill, back on Netflix, came out; that was sort of a stagnant video game series, and the sales went through the roof. People, they see IP, whether it's Lord of the Rings or whatever, and they want to continue to engage with that IP. They want to stay with it. My investment thesis is that this will lead to stronger sales in the higher margin categories. It'll certainly drive interest in trade. People might go to a hobby store instead of knowing there's a Warhammer nearby, or maybe they don't have a Warhammer nearby, and they go to the hobby store, in which case it's lower gross margin. But I think that will increase some of the licensing revenue that they have, which is 90% gross margin. The online business, which I think is 80-85% gross margin and certainly drive traffic into the Warhammer stores, which is again, about 80-85%. And that's where management wants you to start your experience – in a Warhammer store. When I went to go buy my Warhammer starter kit, Warhammer 40,000 to be specific, I walk in with my kids and there's probably six or seven 30-year-old men sitting around tables playing this game. They all kind of look up at me to see like, hey, is this guy one of us? I started asking questions, and they were talking to my kids. And I think it's just a great way to get a feel for what Warhammer is, what they offer, how the game is played, what sort of social events are around it. It's a great introduction to the experience and to the community.