Business Breakdowns
· Todd Wenning
[00:00:00] S1: It started in the UK. It feels like a very British company. They're based in Nottingham. The World of Warhammer, the big showcase store is next to their headquarters in Nottingham. They're actually building a new World of Warhammer in Washington, D.C., that comes out in 2027. So that's another part of the story. But it's a big cultural thing in the UK. A lot of young men in particular – it's not always men, but it tends to trend towards young men who get really into this game. Henry Cavill, who I'm sure we'll talk about in a minute because he's producing the Warhammer series for Amazon. He's a big fan, so he'll get on talk shows and talk about it. And a lot of people grew up playing Warhammer. Maybe a similar way to you and I might have collected baseball cards and gone to baseball card shows. So it's a very hobby-driven type of business. Management talks about the "hobby gene," that a lot of their customers have the hobby gene. Not everybody has that. That's a big part of the people who buy it. In terms of age, it tends to be young men between the ages of 10 and say, 18. And then a lot of times they fall away from the hobby because it's an expensive hobby. The starter box that I bought was about $70, to give you an idea. So, it's roughly video game type level and it can go much, much higher. So you can get individual units that cost hundreds of dollars if not more, depending on what you're doing. So it's a very expensive hobby. And so a lot of times young players are supported by their parents when it comes to buying Christmas gifts, birthday gifts, things like this. A lot of times what happens is they discover the opposite sex or they discover someone who they want to partner with, and they just get distracted for 10 years or so. Then in their 30s and maybe in their 40s, they come back to it. That tends to be the trend of the ages and the interest in Warhammer.
· Matt Reustle
[00:00:00] S0: Once you lose access to the parental funds too, it becomes more focused on the budget until you get back out of that hole. But it is interesting when you have the demographic evolution where, as they come back to the hobby, they might also have their own children to help break into the hobby. And I can imagine that happens quite a bit. I think you've laid out who in theory would be the competition, but I'm always very curious when it comes to having the hobby gene, what attracts people to Magic: The Gathering, versus Dungeons & Dragons, versus Warhammer. Are those the right competitors to think about when you think about where competition exists for the business?
· 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.