In short
A “deep dive” on Australian retailer Temple & Webster, focusing on why the stock fell after an AGM update (revenue up but profit and growth concerns), and whether the business is fundamentally improving or just spending its way to growth.
Guests (backgrounds)
Adam Schwab and Adir Shiffman host. Scott (Terram Capital) is an acquisitions-focused private equity/holding-company operator; he started Terram Capital ~13–14 years ago, builds via cash flow/profitability, and has acquired multiple B2B tech businesses (including a facilities management software business around 15 years old). He discussed an earlier IAG spin-out acquisition and a sale to a Nasdaq-listed buyer (buyer/multiple not disclosed).
Key claims
- Temple’s profit is heavily inflated by interest income from cash; operating profitability has weakened.
- Gross margin slipped (33.3% to 32.9%) while marketing intensity rose (marketing as % of gross profit 47% to 49.5%).
- CAC rose sharply (e.g., ~$58 to ~$101), while revenue growth slowed (AGM: last four months +18% vs expectations ~23%).
- Cash flow is “real” but partly driven by working-capital timing (payables/deferred revenue), not pure earnings.
Notable examples
- AGM commentary: December typically quieter; analysts flagged further deceleration risk.
- Customer metrics: average order value ~450–462; repeat orders ~57% to 59%.
- Debate over “brand spend” vs performance marketing and whether brand reduces CAC.
Written by AI. May contain mistakes. Listen to the episode to check what was said.
Chapters
Tap a time to open that second in VOSetting the Stage for a Special Deep Dive
0:45 to 1:32
Hosts discuss the special deep dive episode featuring Scott from Terram Capital.
“It's exciting, and I think we're doing a bit of a special deep dive.”
Scott's Background and Terum Capital Overview
1:32 to 2:26
Scott shares his journey with Terum Capital and its business model.
“So I started Terum Capital about 13, 14 years ago now and built the group up through cash flow, profitability, doing technology development for other companies.”
Acquisition Strategy and Industry Insights
2:26 to 3:35
Discussion on the acquisition strategy and the state of the private equity sector.
“We'll wait until the earn out's done and then maybe.”
Value in Established Businesses
3:35 to 5:04
Exploring the value in established businesses and market positioning.
“So you've got obviously this VC, this PE, this search.”
Temple and Webster's Market Performance
5:04 to 6:41
Analysis of Temple and Webster's recent market performance and share price drop.
“A Nasdaq listed business not keen on disclosures.”
Comparative Analysis with Competitors
6:41 to 8:27
Comparison of Temple and Webster with competitors like Kogan in the market.
“And so, and the reason people are transacting with you is because they're tired, is that why?”
Scott's Insights on Temple's Business
8:27 to 12:32
Scott shares his perspectives on Temple and Webster's business model and valuation.
“That's more shocking than nerve-wracking.”
Current Trends and Future Projections
12:32 to 14:01
Discussion on current trends affecting Temple and Webster's future performance.
“I always find it interesting because I always jump to the, looking at hundreds of these a day, and I haven't looked at Temple and Webster except for listening to you guys talk about it.”
Analyzing Interest Income and Profitability
14:01 to 17:46
Explore how interest income impacts profitability and operational metrics.
“Because they didn't have their COVID opportunity to raise 100 plus million dollars, right?”
Revenue Growth and Marketing Efficiency
17:47 to 21:35
Discuss revenue growth trends and the effectiveness of marketing spend.
“Yeah, because that's the investing view of it, which I agree with.”
Show all 28 chapters
Incremental Profit and Financial Modelling
21:36 to 24:36
Examine how incremental profits relate to overall financial health and projections.
“So we do in top line about double what these guys do, just under double.”
Customer Experience and Product Returns
24:37 to 28:00
Analyze customer experiences with product returns and company policies.
“and that means they incremented$8 million on$32 million.”
Customer Experience and Returns
28:00 to 28:40
Discussion on the customer service and return experience with a defective cabinet.
“And to their credit, the customer service was excellent.”
Competition and Business Models
28:40 to 29:48
Analysis of competition, business models, and customer acquisition costs related to the industry.
“Well, I would take the opposite view on that, which is I think they've 600 mil is scale, and so it becomes predictable at scale, I think.”
Marketing Spend and Customer Retention
29:48 to 30:59
Exploration of marketing expenditures versus customer retention metrics in the business.
“If you're going and keeping one third of your revenue as a gross profit and then spending half of it on marketing to acquire, and you're barely increasing your repeat customer count, like that to me is...”
Brand Value and Business Strategy
30:59 to 33:06
Debate on the effectiveness of brand spend and its impact on business strategy.
“I'd still call out of home whatever is on there as brand spend, even if you've got some sort of draw court action.”
Customer Acquisition Cost Analysis
33:06 to 34:25
Detailed examination of customer acquisition costs and the implications on profitability.
“Nobody would have any issues with this conversation in 1890, although the internet might confuse them slightly.”
Evaluating Business Performance
34:25 to 36:09
Assessing the performance of Temple and Webster against growth and margin challenges.
“Well, you shouldn't include our brand spend in CAC because it's for future acquisition.”
Profit Margins and Future Outlook
36:09 to 37:59
Discussion on profit margins and the business's future with reduced marketing spend.
“I promise you, Temple and Webster will fly.”
Cash Flow Dynamics
37:59 to 42:00
Analysis of cash flow generation and the implications of unpaid liabilities on financial health.
“I'm not talking about 20 mil incremental.”
Understanding Cash Flows in Business
42:00 to 43:28
Learn how different cash flow strategies affect a company's finances.
“So cash, we talked about cash with DroneShield, and so now we see why that was cash receipts.”
Analyzing Cash Increases and Valuation
43:28 to 45:42
Explore how cash increases may not represent true profitability and the implications for valuation.
“Yeah, it increased more than the EBITDA number, but also just going back historically with kind of similar numbers, the cash balance end of year hasn't been moving so much.”
Forecasting Business Growth Scenarios
45:42 to 48:38
Discover how to model revenue growth and its impact on share price.
“Like, let's say 1.8 bill of a business that's doing 10 to 16 mil of free cash.”
Evaluating Bearish and Bullish Cases
48:38 to 53:14
Debate the merits of optimistic and pessimistic outlooks on business valuation.
“You got a better bull case than that, Scott?”
The Market’s Perception of Value
53:14 to 56:00
Analyze how market perceptions impact business valuations and the importance of growth narratives.
“It would be expensive, but let's say you paid it, okay?”
The Challenges of Temple and Webster's Business Model
56:00 to 59:32
Insights into the difficulties faced by Temple and Webster's management and share price volatility.
“They're some of the best operators in Australia.”
Investing vs. Gambling in the Stock Market
59:32 to 1:02:50
Discussion on the similarities between stock market investing and gambling behavior among investors.
“And to be honest with you, it was a much easier short at$29.”
Lessons Learned from Temple and Webster's Performance
1:02:50 to 1:05:29
Key takeaways for investors and executives from Temple and Webster's narrative and performance.
“and when they give away the car, I'm sure you've noticed this if you walk through a casino, there's a photo, a big cardboard photo of the person very excited getting the car.”
Transcript
Automatic transcript. May contain errors.0:00I'm Adam Schwab. I'm Adir Shiffman. And this is The Contrarians with Adam and Adir.
0:10And we are back, episode 155, a very, very special episode, Adir. We are on camera. Oh, I was about to say, it's got video. That's already special. I want video for every episode. I know you do, but one of us is travelling 90 % of the time. It makes it a bit hard. Which one? Each of us. Well, I'm about to go to the UK soon, so that's my fault, but usually it's your fault. They don't have video in the UK, I've heard. I don't know, but it's different. Obviously not in person, it's not the same. And it's a very – so we've got a very good friend of the pod, Scott from Terram Capital, with us today.
0:40So how good is it to have the main man himself in the room? It's exciting. It's exciting, and I think we're doing a bit of a special deep dive. We are doing a very special – so obviously Terram Capital sponsors our deep dive segment every week. So I thought, why don't we do – this is such a special deep dive, talking about Temple and Webster, one of our memes, our muses of the contrarian. So we've got Scott in, we've got a deer in person, and we've got the cameras rolling. So just before we get on to Temple. Can I just say it's a monumental, is that what you say? Momentous, one of those words.
1:09Momentous. Event, because I've pre-read something. Our readers, the thing you hear is our listeners is collapsing. I think I saw a spreadsheet on your computer as well. I do. The first time I'm looking at these numbers is not as we're talking about. Never seen such preparation. Anyway, Scott, before we start on Temple, why don't you give a quick deep dive into Terum and what you guys do? Yeah, for sure. So I started Terum Capital about 13, 14 years ago now and built the group up through cash flow, profitability, doing technology development for other companies. And then over that time, I realised we were learning a lot from our customers and these are kind of the MYBs of the world, other private equity-backed businesses, Pet Circle.
1:56And we realised that we'd learnt a whole bunch and we said, all right, let's use our cash flow and our balance sheet to start doing acquisitions. And so we acquired a, well, spun out a business out of IAG about three years ago in Enterprise Contact Center Software. We sold that to a NASDAQ-listed software firm who I still can't name. What was the name? We can't name it because the name's hard to pronounce. I won't get the remainder of the earn out. It's probably the right. Was it not disclosable by them? They don't want it to be disclosed. What was the multiple you guys? I can't say that either.
2:35You can't even say the multiple? Unfortunately, yeah, yeah, yeah. We'll wait until the earn out's done and then maybe. The last time I heard an investor say, I can't say who bought our company and I can't say what we sold it for, I think that was the liquidation of it.
2:52it wasn't that it wasn't that uh we still came up in a rolls royce earlier so and then and then uh i i think like there was there was a bit of a moment for me where i asked what i want to do with with my life and i just love the business of technology every every bit of it and so i i said about um really kind of was already on the journey of a holding company but then And this model's become a bit kind of popular now, I suppose, and available in some circles. And so I said this is a great – like it mainly gives a bit of a framework for what I was already thinking. And I said let's – this is the model we want to pursue and keep doing acquisitions.
3:35So you've got obviously this VC, this PE, this search. How will you categorise yourself in the sort of sector of private money? It sits under private equity. yeah it's a it's a form of private equity where instead of going for the three to five year exit so you're a bit more earnings focused like private equity might be yeah a bit more stability focused over growth yeah and then the holding company model really came out of private equity having you know you've got your periods of fun life and saying well hang on a second if you remove fun life there's greater returns to be made here potentially um and also a bit more flexibility and so this is where the holding company model really came out of and yeah that's that's the model we're pursuing how old i mean you spoke about that business that spun out of ai and we bought we bought a facilities management software company how old was that business a year ago how old was which business the business we sold uh well no the business you bought the facilities management business like how old how long has that been around for so that's separate to the IAG one.
4:39Yes, I get that. Yeah, yeah, so the business that we bought, FMI, the facilities management business, it had been around for about 15 years. Okay, so that's what I thought. By the way, do you realise you just said the name of a business? I mean, that's problematic for you. Is that you're not allowed to say the name of any business? Oh, no, no, no, no. It's the other business. No, I just can't name it. So I can name it. The business we sold was Attune. I'm just teasing you. I'm just teasing you. I'm just trying to get any, any time you say the name of a business, I'll consider it a win. So 15 years.
5:05The company we sold was called Attune. You can say the name of it. I just can't say who bought it. And what they paid for it. A Nasdaq listed business not keen on disclosures. Especially the CIA. So this 15-year-old business, that's what I thought you were going to say. I mean, 15 was longer. I thought you were going to say 10. But that to me feels like potentially a sweet spot. Is that right? Where a business has been running for a long time. They've built up somewhat of a business, but they're not going to be anything like a unicorn and the owners maybe are looking for an exit. Yeah, this is a really good sweet spot and partly this thinking that there's hundreds of companies out there in technology but in any industry that private equity isn't the right home, VC isn't the right next step for them but they've got great customers, they're solving a really specific problem for them, they're doing a great job They're not going to be the next Canva.
6:06How big are you talking? What's the check size? We look at like$1 million to$10 million in revenue. Yeah. And especially in B2B where we like to play, there's some really great, honestly great businesses doing great profitability. You look at mini Constellation software in some way. Yeah, 100%. Yeah, 100%. I don't think you want to be Constellation today, do you? No, that's huge. Have a huge share price fall? Yes, they have. But they're still, like if you look at over the lifetime, they're still like a$50 billion business or whatever. They're still an incredible story. just obviously not, they were 100 billion at one point.
6:35But you say it's too, so you say it's not for PE, probably because it's too small for PE. It's not for VC because it doesn't have the growth curve of VC. Yep. And so, and the reason people are transacting with you is because they're tired, is that why? Could be tired, could be a special situation. Like, so the business we bought, it was part of a bigger, much bigger business that sold to Autodesk. So PayApps is the name of the group. they sold to Autodesk I was a shareholder in PayApps and as part of that well you're a beneficiary of one of our acquisitions you were the beneficiary of the pittance that Scott paid I think I got like a thousand bucks in that one but yeah you know those extra three cents of return that you got that's what Scott was what was left of the business after the transaction the PayApps guys did actually a really good job that was the first I invested in the first business I forget what it was called that was a disaster and the PayApps guys came and fixed it Jeff and Go Jeff Harrington unbelievable job so credit to him that was a great result.
7:32Yeah. So in that case, how much of the management team comes with it to you? Ideally, we want the whole management team to come, but that's not always, especially if you've got founders in the picture, they may want to go. They want to move on or something. They want to go. I think for us, it's more we want the business to be able to run at arm's length independently. Yeah. So I don't want to have to be, I don't want to have to be, I'll put the cap on for a short period of time and can, but largely that's a kind of, that's a failing if we've ended up in that position. So you're the Warren Buffett of Australia, really.
8:01Well, everyone wants to be that, so congratulations on getting that title from Adam. Now you just have to get the return. Now I've got to live up to it. Everything else in that return will now be considered a failure. It feels like anything I say in the deep dive coming up next will be extra scrutinized for that kind of set up. Well, I don't want to make you feel nervous, but even though it feels like there are maybe five or six people in the room now, you're actually talking to probably 40 ,000 or 50 ,000 people, so don't feel stressed out about that at all. No, more nervous that you've actually come prepared this time.
8:29That's what's got me nervous. That's more shocking than nerve-wracking. I don't know if I'm more nervous about that or you're more nervous. I'm much better extemporary than I'm prepared, but we'll see how we go. So on that note, we'll get into it. And obviously this M &A Deep Dive is brought to you by Terram Capital. As you know, Scott acquires technology companies to grow sustainably over decades. If you're thinking of selling, give Scott a call. He's just here. Or slash Warren Buffett. And that crashing sound you heard last week, guys, that wasn't Constellation Brands. that was the sound of inevitability.
9:01And that was, of course, Temple and Webster share price finally coming back to earth. This is one of your better interests. It's a bit poetic, this intro. Well, we had a pretty good week last week. If you think of like, I don't think there's been a better week of victory laps than what we've seen in the last week between Temple, Drone Shield, the RBA interest rates, the RBA credit card surcharge. We've had a pretty good run and this was probably the culmination. So last week at the company's AGM, it shocked investors by announcing revenue had grown for the last four months by i'll say only 18 because the market was expecting 23 so this was a big miss and the question is whether by the way on that you know when you go and wrap up four months of performance into one number you don't know what the last one month or two months were and it's very possible that they started off strongly i think they did and then it weakened dramatically, which would be more worrying than the reverse, right?
9:54And obviously, Capital Markets analyst and friend of the pod, Wee Wang Chen, said that weaker than forecast result raised the risk of further softness. And Wee Wang noted, December is typically a quieter month, and with Black Friday and Sub-Monday still to cycle, we see potential for additional deceleration over the remainder of the half. Temple shares have dropped from their insane peak of$29 in August to only$15.50, which is a near 50 % drawdown, albeit they are still well above their 2023 low, which is only$3 a share, which I actually forgot it dropped that low. Jerry Hart. Well, I remember when, in all seriousness, I talked to an investor.
10:31It was 15 cents, isn't it? Yeah. At like 12 cents, maybe? Yeah, that was a negative EV. Yeah. Yeah. And that investor was adamant to me that the Australian market didn't know how to value this company. He was right. That was true. It was a company called Kinderhook. Okay. I don't know if you've heard of it. No. Anyway, I met them in a diner in New York when they drove in New Jersey. Yeah. Very early in the morning. And I was awake. I was very interested. I mostly was trying to get them to buy into Catapult, which was not worth much more. I don't think so. It was worth more than zero, I presume.
11:01But they certainly bought into Temple and Webstar. But they didn't write it all the way to$29. Yeah. But they wrote it to a few dollars, I think. So people definitely – they were once upon a time undervalued. Oh, totally. When they were zero, they were clearly undervalued. All right. Well, that's true. Can't argue with that. Jerry Harvey, obviously the legendary retailer, couldn't resist twisting in the knife at his own AGM when he heard the news, which I think was the same day, and he said, Temple and Webster is overpriced to buggery. I've never understood how people flock to it. The PR machine there is extraordinary.
11:29The public has been duped into believing the propaganda by some of these online retailers. And he was nasty about Kogan, which I thought wasn't fair. Yeah, and Kogan's performing really well from an earnings perspective. And I think the Kogan-Temple dichotomy was always the most bizarre one. Kogan which makes like$40 million plus a year is being valued at a tenth of Temple that makes like a third of that Kogan I know we're not talking about Kogan but basically their Australian business is doing really well their New Zealand business is struggling I think they'll turn around their New Zealand business I mean I think they already are turning around it's not a fair comparison yeah so that's pretty much where we're at so Scott what are your why don't you kick us off with your where do you start in looking at this business let's just start it because we've for a long time we've been I've maybe been the chief you were more bearish than me you had a 100 mil value I had a 300 mil value and I went to 3 billion I want to say there is a bull case on this stock that I came to when I was analysing it I don't believe it and even if it happened I'm not sure you'd make money at the current share price on an objective basis I'm looking forward to you in this bull case but I've been very bearish on this stock I haven't had a fairy tale for a while I can't wait to hear this but when you look at this what are your first instincts about this business.
12:43I always find it interesting because I always jump to the, looking at hundreds of these a day, and I haven't looked at Temple and Webster except for listening to you guys talk about it. So it was interesting to me to jump in for the first time. I always skip all the management section straight to the P &L to try and understand the metrics. And I always wish that people would just put that on the front cover. There's a reason for that. Need a bit less story and a bit of like, let's get to the numbers, then tell me the story. In fairness, that is the structure of, especially an annual report. Like even, our numbers have been very strong at Catapult, but still there's an order of the way you put stuff.
13:21Yeah, I get it. I take it. The more revealing thing is when you look at the investor deck that accompanies the results announcement, what is and isn't in that investor deck, and let me tell you the slide order of that investor deck, a lot of thought has gone into that slide order. So the thing, it's interesting you're talking about the share price historically so i got in and started looking back historically around trends and patterns so that's kind of that's where my immediate go to and the the bit that really piqued my interest was back in fy21 fy22 the profitability of the business was well and yeah and in terms of what they were producing they got profit before tax excluding their interest income which was minimal at the time was like 18 million yeah on on significantly less revenue yeah and they've almost kind of gone backwards in in pursuing growth yeah in in profitability terms and then they're getting back to that whole amount so i started just looking at that i got fascinated with that i think what's also interesting is if so if you go back to 2021 what was their what was their revenue the revenue in 2021 was uh 326 so about half of what it currently is making the same amount making the same amount of it yeah but that but then so the magical bit that comes into it, love a good adjustment, is if you look at the interest income that they were earning back in 21, 22, it was only 438 ,000, I think is the number I've got here.
14:48Because they didn't have their COVID opportunity to raise 100 plus million dollars, right? Well, they had 97 million cash at bank, but the interest rate. Oh, because the rate was so low. The interest rate was so low. That's what cheap money means. Yeah, this is the bit like, then if you come forward to where they're at today, on the The same amount of money at bank, they're making$5.6 million. I mean, by the way, as you probably imagine, that interest income, that gets adjusted straight out of all of my numbers. I've got no interest in that whatsoever. It's a pun. I wasn't trying to make a pun, but that is just – I mean, in fairness to them, they do break it out in their profit.
15:24A hundred percent. Very clearly. A hundred percent. A hundred percent. That just goes in – It's against accounting standards. How much cash do they have? That's the fact that you can count interest. You're not – this has nothing to do with the operation. and you can count it up above as revenue. It's crazy. I'm going to take a counter position to that, partly because we do this as well, is if you've got a business that has a negative working capital profile, so it's part of the business you get paid. And you're earning a business. As we do, as SaaS companies do. We get this cash. I can't dividend out to myself because it's not our cash.
15:52Most companies run a little bit light, but not fully. So it's part of it. If you have a negative working capital business, it's part of the ordinary operation of the business to have this interest income. Yes, I agree when interest rates go to zero. If you didn't go and raise$100 million in COVID, and whack it on your balance sheet and then periodically use it for buybacks. The buyback thing's a definition. I mean, this is the inefficient use of shareholders' funds. They also have a negative working capital business. I'm already bearish from the gas. If we are a bit generous to that, you can do that in a certain kind of business.
16:26It's only for a couple of months that that floats really there. And it's not the full hundred million that you're... it's only customer prepayments that you're earning that interest, like in terms of the operations of your business. If you look at our business, we have 150 million in the bank. It's constantly rolling. And as we grow, it constantly increases. Well, let's just end this conversation with the following remark. When it represents two thirds of your operating profit before tax, it probably is something you should pay attention to. I'm not saying it should be ignored at all. That's the bottom line.
16:55I think your point is great in that when you're comparing 2021 to now, it's really relevant that now there's 6 million bucks in interest income. Very relevant. On the plus side, it was five-sixths of their profit before tax in 2024. So at least the percentage has gone down a little bit. Yeah. And just it's worth unpacking why, maybe just for those that aren't familiar, as to why we're calling out the interest income. Because as an investor, you can take that money and go and sit it in the bank account. Yourself. Yourself and earn six or seven percent. But if you're putting it into a company and then ultimately if all it's giving back to you is 6 % or 7%, you're taking a lot of risk and you're probably actually buying only a portion of that 6 % or 7 % in this case, for example.
17:41Well, is that in the fact that a third of the EBITDA they claim, which is the same as it was, is this? So really, if the profitability has dropped significantly. Yeah, because that's the investing view of it, which I agree with. We'll get to my views on why that's happened, by the way. But we're just trying to work out if the actual operating business is any good. and how good it is. Yep. And going and polluting, you use EBITDA because you're a believer in that stuff, but I use profit before tax. I'm not going to mess up more than you. What are you talking about? I use profit before tax. Because it's infamous to them.
18:15What's super defamation? Their depreciation and amortisation is, they're not aggressive on that. No, they're great with that. They're actually very good with it. I mean, one of the things that did stand out is they do, one of the things you've got to handle to, and they call all this stuff out. In other ways, you can often see it hidden, but it's quite well called out for you to make your own. And they're following accounting standards by putting it where it's been put. And the least liability stuff they're really clear on. I think they're good with that stuff, yeah. So we should say a few top-level metrics recently.
18:42So their financial year is just an Australian standard financial year, and it's 30th of June. So 2024, they did just under$500 million. 2025, they grew 21 % or so and did$601 million. That's like their revenue line. I've got lots of feelings about the stuff underneath that revenue line, but maybe I'll make these two overarching comments. In 2025, although they achieved increasing revenue and increasing profit before tax, which we'll get to, what they managed to also achieve is declining gross margins from 33.3 % to 32.9%. So not a big drop, but it's a perverse drop because their own brands went from 43 % to 45 % of transactions.
19:29And so you'd expect margins to improve as their own brands rise. So I thought that was perverse. I know you're about to say something about that. I'll say my second point, which is, and you like to use marketing as a percentage of gross profit, which I think is relevant in this case because their gross margins are so low. So their marketing as a percentage of GP went from 47 % in 2024 to 49.5 % in 2025. I was surprised by that increase in marketing spend, frankly, as a percentage in 2025. You agree? They're doing brand stuff as well. I'm not interested in that. One of the things that does stand out is that there is some good discipline going on in this business, which really needs to be recognised.
20:15Really good discipline in terms of holding. I did marketing as a percentage of revenue and they've held it at 16%. to hold that at this scale of business and be able to manage that well gives a little... But you're generous. Well, I'm being generous for... Because marketing as a percentage of revenue is a bit interesting, but not when your gross margin is going backwards. There's doing things right and then doing the right thing. So I go and sell... Yeah, exactly. It's to separate two different things out. I go and sell a$2 apple and I spend$0.50 marketing it and it's$1 of profit, let's say. So I've got$0.50 profit.
20:51And then I sell the same$2 Apple next year and I spend 50 cents marketing it. But now I'm only going to keep 90 cents of profit on it. And now my profit is down to 40 cents, right? And so that's not the same. Like basically I'm unsympathetic to flat marketing on declining gross margins. Well, if you look at the marketing just the last year, so this is a couple of years of increasing marketing. But one of the things we shouted out six months ago when we looked at Tim, we thought, oh, they've broken this nexus between increasing marketing, increasing growth, GP. But if you look at over the year, the FY last year, marketing went from 77 to 98, so 21 million bucks up.
21:29And GP only went from 166 to 198. They barely were able to scale out of that marketing. And this is, so I'll compare it to us again. So we do in top line about double what these guys do, just under double. And we spend about half of what they spend in marketing. So like this is a terribly inefficient marketing business. If you look back at FY22 and FY21, I know there's a bit of COVID stuff mixed in there. That was handy. But for 13 % revenue, they were producing 31 % growth. It's interesting to think about. Off a lower base in COVID. Off a lower base, yeah, yeah. But you should say something. You can say another generous comment about their cost control because there is another thing you definitely can say, which is true about their discipline.
22:12Their fixed costs have been relatively fixed. And so they do have some fixed cost discipline. I mean, like, I just say there's basically three kinds of expenses in this business. Oh, you say that. Cogs, marketing, and other. And their other went from 87 to 91 mil. That's pretty flat. Well, their employer benefits went up from 45 to 51. So it's not massive. That's still 6 million extra in employee costs. I know, a lot of that. So they definitely were not firing people. But a lot of that was probably... Of which markets, 4 million, ironically. They probably went into FY25 with that run rate or not far off it.
22:46Potentially. But my biggest issue with this business is as follows. So they generated an extra$32 million in gross profit in FY25. Okay, that's good. So that's why it's called my incremental gross profit. I like these numbers, right? What happens to the increments? And so 20 mil goes straight to marketing. Goodbye. So that's 20 of 32 goodnight marketing. At least it's not 32 of 32. I mean, wasn't FY23 all of the incremental gross profit went to marketing? Or whatever it was, one of those years. And then there's a little bit of other bits and pieces. But in the end, they keep 25 % of their incremental gross profit as incremental profit before tax.
23:37That seems good, right? And that's actually not bad. And so that means I can work with that number because then I can start modelling out and I can say, well, where do I think they need to get to on profit before tax? And if they're keeping 25 % of every incremental gross profit dollar, and even if I assume gross margins are going to stay flat, which I think is a massive assumption, then how many incremental revenue dollars do they need to get to the incremental profit before tax to make this business fair value? That's how I think through this. I'm not sure that works when you come off such a low base though because they made so little profit last year.
24:13Well, I just basically say, effectively, you could say last year, 500 mil revenue, they made 6 mil of profit. Yeah, but that was such a bad year because they went nuts on marketing, so I'm not sure that's the right year. Well, whatever. You can use this year. So, 601 mil of revenue. They made 15 mil of profit before tax, of which 6 was interest. Well, this is the numbers. Well, you call it 9. The numbers are 9. They made 9 mil of profit before tax on$601 million. and that means they incremented$8 million on$32 million. That's 25%. I can use those numbers to calculate where I think the business is going and then I can make some assumptions and the two assumptions I would make modelling this out are what's the revenue growth assumption and what percentage of that gross profit are they going to keep?
25:05for your assumptions, I think there's some really interesting, almost like constant, if I'm thinking programming terms and variables and stuff, there's a couple of constants that seem to be emerging. If you look at the marketing, around the marketing metrics, like the average order value seems to be hovering around the 450 mark. And I'm not sure, like, and if you look at - But did you look at the average order value by dividing the revenue by their 1.3 customers? I'm using their numbers of average order value because they've got them published. I do that. And so if you look at them, they – Can I tell you what's fascinating about that number, your 450?
25:40Yeah. So they said they had 1.3 million customers. So I tried – I couldn't work at average order value. I could work at average customer spend. Yeah. And that ended up to be 462. And if the average order value is 450, it means people are buying once a year. That's what it means. 1.01. And so I think that's an interesting metric that customers that come and buy, buy once. in the year. Does it? It's a furniture. How often are you buying furniture? Well, it's a low. So I thought that average order value was low. I don't think at all. If you're fitting out a house, like if you're fitting out a room, you're buying a lot more.
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26:17They sell lamps and stuff. I don't think they sell cheap. Do you think it's low or not? I thought it was high. I know what you think. What does he think? I mean, it's interesting to think about the different segments actually. Just think about it now. Now, the average order value maybe doesn't tell us that much because really you want to know if someone's just buying a lamp for a room, that's kind of one segment of customer. It would be interesting to know what's that average order value and then how often are people fitting out a whole room. It's orders per person being here is much more relevant for me.
26:49People ask me about AOV here all the time. I'm like, who cares? Well, I sell lots of crown casino deals. My AOV drops, but we're making more money. Your point's very valid. I'll tell you some of the interesting metrics about this. if you picked up on these metrics. So I tried to work out what the average – I could only do customer, but it's going to be the same as order because they're the same thing. So the average gross profit is$152 per customer. And so it'll be similar per order. There's something going on with their gross margin. Well, they're getting worse. That's what's going on. But at a high level, it's been about 67 % for three years, but it's too precise.
27:31No, you mean the inverse of 67%. Sorry, sorry. Sorry, cost of service. Like it's been about 67%, which at first I was like, oh, this is great, they're super disciplined. And then I started going, hang on, at this scale of business, something doesn't feel right with that number. Oh, I'm not getting out of bed at 67 % cogs. I don't get out of bed. I'm not sure I'd get out of bed for a 67 % gross margin. Take, take, take. I'm a Temple and Webster customer. I ordered a cabinet. Yeah. The cabinet came. How much was that? I think it might have been around$4.50. There you go. No, it's probably$2.50. You're the average customer.
28:07But that cabinet had a defect. And to their credit, the customer service was excellent. We sent a photo. They confirmed there was a defect. They sent us a new cabinet. We still have the old cabinet. I'm happy to return it if they're listening. It will cost a fortune to return it. Yeah, yeah, yeah. But it's just interesting to me, and I know I'm probably not alone in that experience, if the return, like, it can't be that exact because either everything goes out almost perfectly or they've precisely modelled their return count. I don't know, but it just feels too exact. Well, I would take the opposite view on that, which is I think they've 600 mil is scale, and so it becomes predictable at scale, I think.
28:48That's it. Because does it cost money to return the defective product? Do you have to pay? No, they pay for it. They just left it. It's a hassle for it. It's a hassle for it. Oh, they did the Amazon trick. Don't worry about it. Hang on to it. Keep the junk in your house. This essentially is, we had a direct competitor called The Home and we sold it to Gabby and Hessey. But partly for this, like it's just a nightmare. You've had everything. Most of the work. They've got one business that is basically a rocket heading to Mars and then all these other businesses where you're like head in the hands.
29:16Oh God, I can't believe we did that. Then we learned he's behind Menulog and PayApps and Aureka. Yeah, Menulog was the most unjustified. You did it right with Menulog. That was just unjustified. You did it right with Menulog. So two other metrics quickly. So of that 152 of gross profit, half of it gets spent on CAC. And you might say, that's all right, because their model is building scale, getting repeat customers, but I've got some bad news for you. I think their repeat customers went from 57 % of orders to 59 % of orders. That's not good news. If you're going and keeping one third of your revenue as a gross profit and then spending half of it on marketing to acquire, and you're barely increasing your repeat customer count, like that to me is...
30:01Well, they are increasing total customers as well. But they're not making money off the first-time customer. No, no. And so like you want... I think it's very likely that they're losing money on the first-time customer. Well, can I ask... Well, it's possible, not very likely. They do publish an ROI on first transaction and time to... I think it's like it was two – they used a number of two – I forget what the measure was, but maybe it's like – and then it was declining though because of all the brand spend. Yeah, I'm about to – I was literally – to their credit, they disclosed this. What the hell is brand spend anyway?
30:41Spend is not direct response, I suspect. Well, why is there such a thing as that? Why every bit of – But you do out of home, don't you? Yeah, but every bit of out of home should have a component that drives some response. I do not believe in putting anything and saying, well, this doesn't have to do any heavy lifting for sales. Maybe 20 % of it. I'd still call that brand spend. I'd still call out of home whatever is on there as brand spend, even if you've got some sort of draw court action. Well, how long do you wait for all of this money to start having an effect on your sales? What's your timeframe?
31:11There is a bit of a list they gave, which is kind of to the brand or emerging channels, which I assume is everything that's not paid performance, like Google search. And they said that's 27 % of their marketing or total spend, which I didn't know was marketing or just total, but I assume marketing. And they list as TV, out of home, BVOD, online video, audio, paid social, display, affiliates. Basically everything that's not Google Ads. So this is how I feel about this whole conversation. I tell you why I find this overwhelmingly boring. Because basically what Adam, you know, let's go to the old merger of Hamilton, Helmer and the Contrarians.
31:51what's the point of brand one pricing power two reduce cac three forgiveness now they don't need forgiveness at this time can temple and webster have pricing power no the aov went up three percent can they get reduced cac no it went from 47 of gp to 49 and a half percent of gp which you generously have said is the same percentage of revenue but even that is not reduced cac i'll get delivering the two core benefits of brand I don't think you can say Coca-Cola built a business on brand that's a$300 billion business you can't say brand spend is a waste of time because these guys do it badly I'm saying it's not working for them I agree it's not working for them I love brand equity I love it, I love brand equity they do this really interesting chart in both the annual report and they republished it I don't know why it's like republishing you got done for pedophilia I don't understand.
32:53Well, that escalated quickly. In 2002. And hang on, listen, wait for it, and we're cancelled. Just to clarify, I don't think anybody here is a paedophile. They're good guys, we like them. That makes it better, that's good. This will be a great podcast for 1890. Nobody would have any issues with this conversation in 1890, although the internet might confuse them slightly. So they actually tell you their cost of back, their cack, and they also tell you it looks like their ROI on first measure. Yeah, that's what Scott was saying. In June 21, their CAC was$58. This is COVID mania. It was cheaper for everyone back then.
33:30Yeah. 22, up to$69. Yeah. 23, up to$72. So, flat-ish. 24, brand spend kicks in. Your famous brand spend. Yeah. $88 CAC. 25,$101 CAC. Is it? This is$101. If you take that$450 order value, take away$101, what are you getting down to? No, but the problem is you can't... No, but that's revenue, not margin. What's the margin they're getting? They're getting 6%, 7 % margin on that. They're keeping a third. Yeah, that's what I'm trying to work out. What's the margin? They claim it's 1.4. Yeah, they claim 1.4x on first purchase. Well, a third of$450 is pretty easy. It's$150. $150, so... Yeah, so it was$2.3.
34:09And they're losing$100, yeah. But if you look at that, this makes the Titanic look good. This has gone from$58 CAC to$101 CAC. So you have this CAC basically doubling, and then you've got revenue, and this is why the share price is fine. You know what their retort will be? Well, you shouldn't include our brand spend in CAC because it's for future acquisition. And then you see revenue only increasing by 18%. That's the problem. So you've got revenue dropping, sorry, revenue growth dropping, CAC ridiculous. This is a disaster. Yeah. Just to take the contrarian point of view. The contrarian contrarian point.
34:45I think that's what we're here for. There's a lot of things to like about the steadiness of their metrics. Like if you just take share price out of the picture for a second and you go, you've got, which I know is difficult to do, but let's just take it out and go, we've got a business that's got some pretty kind of steady metrics. It can be profitable. It's producing cash flow, positive cash flow. I mean, they've got 21 % top line growth. 18 % now. Sorry, Aiden. It's interesting to say, well, what if you sacrifice? Because a lot of what they're doing from looking at it from my lens is they're trying to get that growth in and be in the growth category.
35:23If you believe that narrative. Yeah, but if you – And that's what the narrative then killed last week because it was dropped. You're saying this is not a bad business. I agree with you. Yeah, that's what I'm saying. It's not a bad business. There's some good things. I think it's a bad business run by really smart people that have made it the best it can absolutely be. This is the reason why I sold our business, because it's a shit business. You're having to give Scott free draws. It went from one mil of profit before tax, adjusted without the interest stuff, to nine mil year on year. That's not a bad business.
35:56It wasn't 18 three years ago. That's a bad business. If you've gone backwards, why you've doubled revenue? That's the definition of a bad business. In COVID it was 18. Yeah. Oh, well, I'll bring back COVID and they'll do much better. You know what? You become premier, you lock everything down, I promise you, Temple and Webster will fly. But if you take the – just to play out another path, putting the share price to one side, but if you say, well, what if you – instead of trying to run it for maximum growth, which it looks like it's being run for the best growth it can get with a very small contribution.
36:29Staying in an EBITDA band of whatever their band is. What is it, 1 % to 3 % or 3 %? Well, it's almost like break-even. You're just trying to show that you're not a loss-making business, but you're really going for growth. if you took that back you're actually producing a whole bunch of cash flow that I kind of didn't get to I don't believe that narrative I do not believe that the business would keep growing without that spend I don't believe the narrative I think Scott's saying this does it need to well at 601 mil it did 9 mil of EBIT for tax do you need if you just put share price aside You feel safe.
37:11You get into a business. It did 14 mil of profit before tax. No, no. It did 15 with 6 mil of interest income. No, it did 18 with 6 mil of. Of what? Or EBITDA. EBITDA. No, no. I don't use that metric. Profit before tax. Okay. Profit before tax. And so 9 mil adjusted profit before tax. And so you want to buy a business that does a 1.5 % profit before tax margin with declining gross margins and increasing marketing spend as a percentage of gross profit. 1.5 % is your margin of safety. You want that business? No, no, no, no. The price. The question is, what's the price? Yeah, but also a lot of that margin disappearing is coming.
37:51What's hard to pull apart is how much of the margin disappearing is the gross spend versus the… So what's your sales pitch? If they turned off the 20 mil incremental spend next year… Just to pay-per-click. …next year. I'm not talking about 20 mil incremental. Let's keep it simple. you think they might be able to achieve flat revenue next year. So 601 again. What about if you take away marketing? Or if you reduce marketing? Yeah, that's more the... Reduce marketing? So you've got 98 million bucks. Say 30 million stupid brand spend that you think is a waste of time. Well, then you're into... What Scott and I are saying, just do SEM, take 30 million bucks off.
38:25This business could make 40 million bucks potentially. For how long? Yeah, you're pushing a lot of cash for that. I'll probably grow it slightly. Yeah, yeah, yeah. Well, you're Warren Buffett, aren't you? so this is a perfect business for you because this is a cigarette butt business when you do that, right? Hang on, hang on, hang on. How's it? Because it's going to be going backwards. So how's it going to be going backwards? But you're assuming that all of a sudden if all we're doing is spending on ads and then it starts going... What is performance marketing? I don't think it went backwards.
38:55We're saying reduce the brand spend. Keep the Google spend. It's going to be minor growth. It's going to be inflation spend growth. You understand what Google spend does when you don't have any brand... No, we're not saying get rid of the brand. hang on hang on you understand what google what it's got some brand let me finish this sentence when you don't spend when you run performance marketing and you don't spend tons of money on your so-called brand marketing then the cost of your performance marketing acquisition goes through the roof weren't you criticizing brand marketing three minutes ago yeah i would feel like you're contributing yourself what i'm saying is i wouldn't break it out what i'm i'm surprisingly being consistent which is unexpected but like basically what i'm saying is this brand marketing can't be seen in its own bucket because it reduces the cack from performance because people see the brand around and i bet you i bet you will never know the answer to this because they're sure as hell not going to tell me but i bet you the 59 repeat purchases they are not coming direct to the brand they are going through performance channels almost all of them i bet you there paying a CAC on the 59 % of repeat purchases.
39:57And now you're saying, I want to run this business, but I just want to turn everything else off and just do performance marketing. And what I think is almost every customer that you get is coming through performance marketing, somewhat mediated by the brand spent. You turn that off. I'm not sure you'll spend much less money on the performance marketing. I think you will. Because you saw a big jump in CAC. I know there was the COVID impact. Well, we're never going to know because I ain't trying this strategy. I'll give you that. I think the question we come to is, what do we value this business?
40:24Well, hang on. Can I just talk about cash first? Okay. We haven't talked about this. I think you'll love this. So cash. This year they produced$42 million of cash after I take out their little buyback, which is insanity. We now know it's insanity. They were buying at the top of the market, right? That was a great call back here when you criticised the buyback. I did not like that buyback. I think you were the only one to criticise the buyback. And when it was$28 a share, they were buying back shares. and the same time Mark and Connor were selling shares buy high sell low that's the policy of the buy back so I got rid of buy back and tax I tried to because the tax last year was really high for some abnormality so whatever so they generated 42 mil before the buy back and tax now what's your favourite thing we've got to immediately pretend is there which is what do you hate leases no you hate someone getting paid with something share based payments 5 mil not much where's 5 mil share based payments I don't know in the documentation.
41:19I don't see it in the cash flow. Yeah, well, it's only in the cash flow because it's not cash. Of course. But like, so five mil of the 42 is we paid with shares instead of cash. Is that right? Yeah. I thought that. They do have share-based payments. They do, but I know Mark gets a lot of shares, but he gets five mil. That would have been an adjustment though. No, that was FY25, five mil share-based payments. Okay. I think the total share-based payments, the tax that's due on them is some crazy number. Like it went from 14 mil to 43 mil probably because of the share price appreciation. Okay. So anyway, 5 mil is share-based payments.
41:49You agree with that, Scott? Oh, you saw it? Yeah, yeah, yeah. All right, so 42, five of it they would have paid, but they paid it in stock. Okay. Okay. So now I want to say this little preamble for people before we get into the detail. So cash, we talked about cash with DroneShield, and so now we see why that was cash receipts. Yeah. But cash, it seems very real cash, but it is so unreal because there are two ways that you can make cash. One way is that you can bring in cash and not pay out so much cash when you're just generally trading. And another way you can make cash is by not paying some things and bringing some other money in faster.
42:27And so, for example... It's messing with your cash. You've just ruined that long-time phrase of revenues, vanity, profits, sanity, and cash is king. Now we've got to come up with something new. Cash is king, but there are many ways to get on the throne, is perhaps what we might say. And so let's say that if you owed people money and then in 2025 you owed them more money than you owed them in 2024, maybe$19 million more, then maybe$19 of that $42 million would just be money that you should have paid people that you hadn't paid people. Well, just on this point, if you look at the cash balance year on year, it only moves by about 3 % to 4%.
43:09Not the, what did it move? 34 % in the last financial year. So just going more to your, there's definitely a portion of that amount that is future. Well, we're going to get to that portion. Because one way is not paying people. I thought it increased a lot. Sorry, I thought it went from 107 to 144. It increased$42 million, the cash. That's right. And he's saying it increased much more. than the EBITDA number. Yeah, it increased more than the EBITDA number, but also just going back historically with kind of similar numbers, the cash balance end of year hasn't been moving so much. This is an unusual year.
43:45Yeah, and so that's 19 mil if they're 42, and five was we paid stock, but I'm actually a bit more relaxed about that. And how about this? Sometimes you charge customers in this business. You love this business because it's got negative working capital. I'm not sure if it is or it's not, But basically you can charge customers before you have to deliver the goods. It's not like this case, but it's got some negative income. And so this, in FY25, there was$6 million more than FY24 where they charged customers and taken the cash. Which makes sense with the growth. It's growing. Yeah, yeah. Okay, I'm not saying it's bad.
44:17I'm just saying that's another 6 mil of the cash growth. And so increasing payables and taking more deferred revenue, that's$25 million. But they did buy$3 million more inventory. So you're back to 15. And one mil increased receivable. So money they were owed. 16, yeah. And so if you take it all and you even include the share, if you don't include the share-based payments, the 42 drops to 26. If you include the share-based - I hate 16 with all that stuff. No, because 19 and six is 25. So payable's 19, deferred revenue six, that makes 25 of free cash. Minus three for inventory is 22. And then minus receivable is 21.
44:55Yeah. So 21 mil of their cash is just balance sheet movements. and then if you chucked in the share-based payments, you could do that if you wanted to. That would take it to 26 of the 42. So definitely they're increasing cash because they're negative working capital. Like this is a nice cash-generating business, but it ain't a$42 million cash-generating business. No one smart is looking at that$42 million and treating it with anything other than disdain. Well, you know, there's also 6 mil of interest that's factored in. So this is a business where it pays to look in at the detail. of what's going on.
45:30And like, I think that you're basically paying a valuation today of close to$2 billion. It's 1.5 as we speak. Is it? It's dropped off. All right. Well, I think it's more than 1.5. You're saying enterprise value, but I don't care about the cash in the bank. I'm talking about equity value. Like, let's say 1.8 bill of a business that's doing 10 to 16 mil of free cash. 1.8 bill share price. After being negative working capital. And that I think is doing 9 mil of adjusted profit before tax once you take out interest. And so the question is, like, will that ever be what what would make like what valuation could you get to right what are you a buyer at let's say that well i did a few models and my models basically had a couple of variables so i said let's just take two variables the growth rate of revenue and what percentage of the incremental gross profit was going to be kept as profit before tax.
46:28So currently it's 25%. Now, I'll tell you the bullish, the most bullish of bull cases that I could come up with for this business. Then I modeled for FY26, 27, 28. And then I thought, maybe we could find a way for this share price to be justified at the end of FY28. Let's try and get there. That would be a good outcome for me because I think it's so overvalued. So I said, what if we imagined that they kept growing at 20 % a year on the top line for the next three years? That's faster than their current growth rate. And they kept that 25 % margin of gross profit to profit before tax, which I think is going to be tough to maintain.
47:07But let's say they did that. Where would you end up? And at the end of FY28, you would end up with more than a billion dollars of revenue and about$120 million of profit before tax. That's a big number. And you would end up with like more than an 11 % profit before tax margin. I'm not including all the interest stuff, which is like 10x, not quite, but 8x the current margin. I find the whole thing totally implausible. But if you did that, and what would you pay for that? 20 times NPAT? Let's say a pay of 20, would you pay for that business? Yes. Let's say you pay that. Then I can get you to a$14 share price.
47:43Actually, you'd probably give it 25 times, Would you? Okay, so you can add another quarter onto that. So what,$3.50. So I can get you to a$17 plus share price. What's the current share price? $14? One second. So there I think that I can give you a higher share price. $14.80. I can give you, you could make some money if you held on, on my reasonable multiples, on Adam's 25X, which I wouldn't pay as a bear. And what are we counting on specifically to have happen? You have to grow 20 % per annum for the next three years, higher than current. Marketing staying the same? I just want to cleanse the outcome and to say they're keeping the same 25 % of gross profit to profit before tax.
48:28So I think neither of those is plausible, but they're possible. And so if they did those for three years, I think the share price today would be a bit undervalued or write in three years' time. That's my bull case. Yeah. You got a better bull case than that, Scott? That bull case is already well beyond what I'd bother. Implausible, right? Yeah, implausible. But I'm trying to find something where I can say - There's no justification for this price. The question is what is it? Hang on. Someone in the market will believe - Yeah, but there's morons in the market. All right, well, that is true. But there's morons everywhere.
49:08I don't know if you've noticed. But like, so you could have 20 % growth there'll be people that believe this can do 20 % revenue growth. I think Mark Coulter probably believes this can do 20 % revenue growth for 26, 27, 28. And that will pass a billion dollars. That's his medium term target. And someone in the market will believe that this can continue to keep 25 % of its gross profit passing through pre-tax. And so if you believe those, and if someone will pay 20 or 25 % PE on those, then by the end of 28, yes, you'll get to this kind of share price. And so I don't think that's a 0 % chance of happening.
49:41Do you think this is better than well since we say zero the business zero with the X you've got a view about that business you think there's more of a chance of this doing 20 % growth 25 % keeping zero is an infinitely better business than this because it's a business what's a bigger chance of hitting its objectives that thing or the zero outcome what are you assuming zero's objectives are here that the US will kick in and justify oh that's ridiculous they're both neither is going to happen approaching zero right okay What was your best bull case, Scott? I actually didn't even bother doing the bull case.
50:17I just can't get past the valuation and the cash flow production ability of the business with where it's at. So how do you value this? Well, I think of comparables and I think a great comparable because it's actually almost what's happening here is let's say we bought the whole business. What did we say the current market cap or enterprise value was? Like a billion? No, no, much more than a billion. 1.7? 1.7. Here's an interesting factoid. Yeah. The equity value of Temple and Webster is exactly the same as the equity value of another company, to a million bucks. Drone Shield. Drone Shield. Both 1.78 billion.
50:54Weirdly, I just remembered that that was Drone Shield, but also, I know that Drone Shield is branded on your brain currently, so I knew that's what it was going to be. So I was using less Drone Shield. I'd rather own Temple and Webster than Drone Shield. Oh, of course. Yes, you agree. But let's say you pay 1.7 and you buy the whole business. Your current production of yield is like if I just took that 1.7 and 6 % or 7 % on it in a bank account, that's a real comparable here because that's what's happening with the cash production. Don't say 6 % or 7%. Just take 5%. So if you go to NAB and you get 5 % from them, which is a savings account.
51:36I'm going to give them 1.7, or maybe we can make it a round number. Yeah, you get 85 mil, right? Yeah, yeah. 85 mil, and I'll give you nine if you buy Temple and Webster. I'm not including the cash in the bank. Like, it takes a lot of nines to get to 85. That's the problem that you're flagging. It's a bad use of capital. Yeah. So what's a good use of capital? How much? At what point would you guys be buying? Where's the flip to the buy? Everything's got a price. Cool. Can I tell you my most bearish of bear cases? Goes under? No, no. Well, okay. That would be the most. This is, when I say most bearish, I mean still is a decent business.
52:09Yeah. It grows revenue for the next three years at 15 % a year. That's your most bearish? I'm just going to give you - That's not bearish. Well, that's the most bearish I've done for this. That's what it's basically doing now. No, it's doing 18. No, but it's dropping, so I'm probably just doing 15 at the moment. Well, I want to tell you, this will be bad enough, okay? So, basically - You're too generous with your bear scenarios. No, let's say it does 15 % a year growth for the next three years. What, 15? But I think that's not a bear scenario. I'm going to tell you how bad - 5 % is a bear scenario.
52:35I'll tell you how bad this is and then you can go to how bad. The bear idea was saying before is flat. Like if we, you were saying. That was my bull case. No, no, no, the flat revenue. Yeah, that's true. Well, that was because you wanted to hack their revenue, their marketing. You wanted to just stop, I gave you that on stopping the incremental marketing spend and I'm not sure it's achievable by the way, but like, but so if you did 15 % a year revenue growth and instead of keeping 25 % of their gross profit, they keep 15 % of their gross profit. So significant margin erosion. I think that's bear.
53:05That's a bear case. That is bearish. Thank God. I'd rather have similar margin but lower growth. That's more realistic. And so maybe I would pay, let's say someone was prepared to pay 15 times NPAT for that business. It would be expensive, but let's say you paid it, okay? You paid the revenue growth rate. I'm going to tell you what this share price is at 15 times NPAT at the end of 26, 27, and 28. At the end of 28, it's$5. at the end of 27, it's$3.50. And at the end of 26, it's$2 approximately. So I think that if it did that, then it would be currently worth about$2. So I haven't budged on my view of it, right?
53:50Like I said to you, I think this is 90 to 95 % overvalued at its peak. I think those, I haven't really changed. Now, I think, you don't think that's such a bear case. I think that's worse than they're going to do. But my point is - I think we just differ. I don't think the margin will all right. I think the revenue will drop. But whatever the number I think this is, is irrelevant. I think it remains a short. It's always going to be a short. And like - Until it hits 300 mil market cap, then you're probably - I think at 300 mil, I still think this is a pretty decent buy. I think you can make 30 to 40 mil flat no growth.
54:23Okay, it's like a new E. That's like a completely - The thing is to get to that point where it becomes - What you're talking about, Adam, that's like a completely different business. It totally is. It's the Atlassian argument we've had. 400 mil equity value. Yes. Yes. Not enterprise. Because they've almost got that much cash in it. Well, half of that cash in the bank, right? And they've always had that. So take that away. Yeah, I agree with you. 300 mil is return the cash and pay$3-ish for the stock,$2.50,$3. Yeah. But with the cash in the bank, because this business has the cash in the bank. So a 300 mil valuation with this cash in the bank, it's like$1.50 share price.
55:02including like it's a dollar plus sorry it's a reverse of that right sorry it's a four dollar fifty share price four dollar fifty share price so so it doesn't matter if you think this is worth two dollars three dollars four dollars five dollars six dollars seven dollars eight dollars nine dollars ten dollars it's a short because it's worth fifteen dollars at the moment i thought you were selling furniture at the market it doesn't matter any of those numbers this is still a short even after the 50 so this is like if you're looking on a cash kind of basis in a lot of ways like we are how's it producing profits i think the hard thing is if you're in the if you're in the hot seat and i've always got huge respect for anyone in the hot speed a hot seat that's not being um fraudulent and so you think if you're in the hot seat and you're just kind of doing your best thing you're you are stuck between a rock and a hard place because you're in this gross stock territory where you were you really meant to deliver huge revenue growth i agree but then yeah what do you do what's the difference between this hot seat and the zero hot seat and the answer is well i'm not in either of them i'll tell you the zero hot seat someone's sat on that chair while it was already on fire and it was very hot here the ceo of temple and webstar set the seat on fire himself he is the one that had this growth path he's the one that jacked the share price to $29 when i say jack not unlawfully it's not his fault that investors are morons his narrative is so basically what i'm saying is he created a narrative it got investors very excited and then he found himself with a$29 or$14 share price actually the difference is irrelevant for the purposes of this the what it means is if we take the fair road that you are advocating and that adam is advocating this share price tanks it's the atlassian problem not so much anymore zero problem it's all of these problems which is if we run this business for moderate growth generating great profit and cash margins we will tank the share price and no co and chairman wants to do that especially when they've got an awful lot of those shares yeah exactly and so this is what we end up with and there was a time when i said i would if i had to use my own balance sheet i wouldn't take this business for free because it could bankrupt me with a two percent turnaround in margins that's the risk of this business it's such a hard bit like yeah i think we also like and we talk about this every time we talk about them but this is such a hard business to run they if this share price and never got to three bill 2.9 billion and they were just three or four hundred million we'd be saying these guys are unbelievable they've taken a business are worth zero to 400 million.
57:45They're some of the best operators in Australia. But because it got so out of hand and went to the comical 2.9 billion, which is just like AMP at 40 bucks in 2001. Like, because it got so out of hand, we're now sort of forced, not criticizing the management, we're criticizing this sort of business, really, but it's nothing to do with the underlying. The underlying business was never worth more than 300 million bucks. It just got sent to the moon because of the voting machine, weighing machine thing. Yeah, and so I think, you know, how much this is leveraged to top line growth by the reaction to the share price going from what?
58:16Still 18 % growth. 20, 21 % to 18%. It wasn't even a big fall, right? But like the share price got slaughtered. It went from 26 to 23 and it turned out being 18. So there was a bit of a trap but it was more that this business was being priced for beyond perfection. It was being priced for like unobtainable perfection. And so I think the downside, so the beauty of this is you can short this and like obviously I'm not shorting it but you can short this stock on this thesis and I think your downside that is how much could it go up I don't think it's doubling again like how could it how could that euphoria come back on this stock I think in my view even if it did 20 % a year of top line growth and still continue to keep that 20 % 5 % of gross margin I don't think the share price is worth much more than the current share price in three years time it's only insanity that would leave you deeply down and so i think if you had time and you weren't going to get margin calls on shorting it you could short it with a high degree of confidence that you were never going to end up too badly wrong like it's a very asymmetric bet to bet on this thing in my view interesting are you going to bet i know people who have shorted this it's not easy to short this stock like there's There's not much stock to short.
59:33And I don't really do it. And to be honest with you, it was a much easier short at$29. Well, I don't know much easier. It was an easier short at$29 than at$15. But I still think that this is a lay down short when I look at it. So the lessons in this are interesting though for like the CEO, executive teams and investors, which is like if you're going to create a – you've got to be careful with the rod that you create for yourself and the narrative that you go with investors because it can come back problematically for you. There's a book that you might have heard of called Frankenstein. And I think the lesson is if you're Dr.
1:00:15Frankenstein and you create Frankenstein Monster, there might be some consequences after that monster's created. And that's what has happened here with all of these businesses. They've just created Frankenstein's monster. These are the lessons I would learn out of all of this. One, when you do this to a share price, sell as much of it as you possibly can. I think they learned that lesson. They sold a little bit. They could have sold more. Oh, no, I think they sold quite a lot, didn't they, of the stock? They didn't sell drone shield. I mean, it wasn't a drone shield. I was going to say, yeah. Drone shield's a high bar, right?
1:00:45You cannot get a higher bar than 100%. Yeah, yeah. I think, like, you can't get over that bar. You know what's above the drone shield bar? God. That's above the drone shield. I think God is below the drone shield. I could be. but the other lesson is share buybacks do not prop up share prices I don't know how many times people have to learn that lesson this is just so dumb they do not prop up share prices just on the share buybacks one I think what was it it was like 20 million spent over two years it was such an insignificant portion of it and they haven't bought it for a while in fairness they've got an open share buy they haven't been by yeah it stopped over FY25 yeah but they don't work so share buybacks don't work what other lessons could you look I think the fundamental lesson about this is as an investor you need to know but so i think essentially this people love gambling i don't know if you know how popular gambling is it's very popular and so like um anyone if you want to create it like the reason you have to have a license for gambling is because if i set up something tomorrow and i say give me money and you've got a chance to win money like i would be rich in the blink of an eye everyone would give me money because people love gambling and i think the stock market has started to replace um casinos as a gambling myth and so the people that have bought temple and webstar buying and large in my view, are gambling, right?
1:01:55And so I think as an investor, you need to decide, just be honest with yourself. Am I investing because I understand this business and I have a clear thesis for what's going to happen? And if so, like I have to keep checking it. Or do I love the casino? And this is just another form of online gambling. This is worse than pokies. Like a pokies, you lose 10%. You're guaranteed to lose more than pokies on this thing now. It's kind of like, it's interesting to say when you've got your rational cap on, but then when you hear about your next door neighbour or one of your good mates, you're out having dinner with them and they're like, I was in Temple and Webster and I made – I bought into the bottom and I sold at the top.
1:02:32Or crypto. Or crypto. It's easy to – I find the hardest bit with this is actually the emotional – like the rational bit that we're talking about. Which is what we talk about. We say have bubbles make dumb people look smart and that's the worst part of bubbles. You know in the casino when they have like – they give away the car or something. I don't go into casinos but they give away a car and when they give away the car, I'm sure you've noticed this if you walk through a casino, there's a photo, a big cardboard photo of the person very excited getting the car. That is the person that made their money on Bitcoin that is all over the media.
1:03:05They're just a photo of the person that won the car in the casino and everyone sees that and they don't say there's one person out of 100 ,000 that won that car and everybody else sold their house and got divorced, right? They basically say, yeah I can be the person I'm smarter than that person that won the car I can win the car and I worry that the stock market and I don't mean Temple and Webster in particular Temple and Webster is by far not the most egregious example of this because fundamentally I think the business is better than you ironically really? you switched? no no no I might be able to change your mind I'm more bearish about the price so you don't think it's worse but the business I don't think it's a bad business I don't I never thought it was a bad business but there are lots of bad businesses it's a bad model but they run it well.
1:03:48We're not talking about this now but I think OpenAI is a bad business. But like, so like I am very worried that in the last few years since COVID in particular, investors have been replaced by gamblers and they've turned the stock market into a casino. That's what worries me. I was adding in terms of bearishness before we go. They actually did announce what their revenue is doing. So from 1st July to 11th of August, so I call it the first six weeks of the financial year, 28 % year on year growth. So that growth since then is probably low, at best mid-teens, but probably 13%. Oh, so hang on. So this 18 % includes that 28%.
1:04:26It does. Oh, well, that's bad. Yeah, that's a four-month, I'm pretty sure the 18 months, the 18 - So what was that period? The first six weeks was 28%. Yeah. Full 16-week or 17 weeks or whatever it is was 18%. Oh, that's bad news. This is a business that's barely growing. Why do you think they gave a trading update before the end of Black Friday? That's a very weird... I obviously realised they were going really badly and they had to... Continuous disclosure obligations. This is bad. And the share price dropped 30%. Well, they were right about it impacting share price. Yeah. I wonder if they'll put out another update after Black Friday.
1:05:06I reckon they would have had a good Black Friday. Retail confidence is not bad. It's not bad. We'll see. I've seen. I've seen. It's not bad. We better jump off. That was great to have Scott in the house, have a real professional amongst us two amateurs. And thank you all for listening to this emergency deep dive on such an important topic of Temple and Webster. Emergency. Absolute friend of the pod. So thank you, Scott. Thank you, I dear, again. We'll be back for our Ask Us Anything episode on Saturday. Thanks for having me, guys. Great to have you here.
From the publisher
Temple & Webster's share is finally starting to crash back down to earth, with the company's AGM shocking investors with an 18% revenue growth, down from 23%. Adam, Adir and guest Scott from Terem Capital break down the insane drop of Temple's shares in this special bonus episode.
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