“It’s only when the tide goes out you know who's swimming naked,” is a line from Warren Buffett. What he meant is that you don't really appreciate the risks that companies are taking until they are tested by adverse conditions and it applies particularly to new issues, many of which crashed and burned during the past year.
But not all should be given up as worthless. One which recently caught my eye is the UK’s leading re-commerce business, musicMagpie, which owns a trading platform for consumer electronics and has seen heavy buying by directors. Floated at 193p in FY21 in a heavily oversubscribed placing, the shares are now a fraction of the IPO price at 22p and most investors have written off its prospects.
During the month I met with chief executive and co-founder, Steve Oliver, who I found in a particularly ebullient mood. Oliver cut his teeth selling entertainment products but he soon learnt that there was more money in selling used CDs and DVDs and so he set up musicMagpie 15 years ago as an online marketplace for buying and reselling disc media as well as books. As media and entertainment systems shifted towards digital purchases, it provided an opportunity for customers to recycle unwanted phones for instant cash and declutter. Consumer champion Martin Lewis became a big advocate of the business, which helped drive sales and by 2007, Oliver extended musicMagpie to trade in pre-owned consumer technology - smart phones, tablets, video game consoles, Macbooks and the like - and these days this represents 70% of bigger total sales of £146m, of which the US is 25%.
As I describe below, what is intriguing about musicMagpie is what the future may hold. The company is unusual, arguably unique, in that it has now begun to rent pre-owned devices rather than selling outright and is building a very visible revenue stream. I have covered it this month because a statement confirming the rental performance is expected just after this issue lands, providing metrics and allowing analysts to model this new activity.
History
Just before I began to write my report, my neighbour, Stuart, a semi-retired pensions advisor, had taken me for a spin in his new Tesla; I also had a few minutes to see the progress of a raised vegetable patch he installed during the lockdowns, complete with a sequence of composting bins and water butts. It was then that he told me he is installing new solar energy panels. If Stuart was a corporate he would be top rank for his ESG credentials – short for Environmental, Social and Governance. These days most companies’ Annual Reports include a section on corporate ESG strategy and greener business practices. For example, they may be adopting manufacturing processes to meet future environmental legislation or putting forward strategies on how they reduce waste by recycling.
I didn’t ask my neighbour about whether he also has a stash of old phones lying around at home. If he is like me and many people I know then he probably has a stash of them in a drawer. Electronics account for 70% of landfill’s toxic waste and according to Oliver, each household typically has 11 items of unused consumer technology, worth an eye watering £16.5bn in the UK and depreciating by the day.
This is where musicMagpie comes in. Last year, it recycled over 16m units in the UK and 4m in the USA.
musicMagpie is a straightforward business. Consumers visit its website and enter details of an old phone they may wish to sell and are then given a fixed quote. The customer mails the phone to musicMagpie’s Manchester office (free of charge) and once received, the item gets quality checked and graded, with musicMagpie paying out the same day. Around 70% of customers receive the full price, with the rest either seeing deductions for screen damage or an outright rejection if the device is in a really bad way.
As well as buying from individuals, musicMagpie also bulk buys from corporates. For instance, it has an agreement to take Deloitte’s 25,000 old devices over a three year period - corporates are happy because they get a certified data wipe but also an ESG certificate demonstrating that by extending the shelf life of an iPhone, they have saved 55kg CO2e that would have otherwise been used to make a new device.
Refurbishes devices
musicMagpie adds value by refurbishing in-house (eg. new batteries for phones; new cases for DVDs, which are also polished). It then adds a 12-month warranty and sells these “as good as new” items to consumers at a fraction of the price of new. Sales channels include the musicMagpie online store in the UK and its Declutter website in the USA (apparently Americans don’t know what a magpie is). Alongside those it also sells on Amazon and ebay and since April it has also been selling on Back Market (a refurbished electronics marketplace).
Dropping off kiosks in supermarkets
What originally caught my eye was that on 8 November, largely unnoticed by the market, musicMagpie said that it has now rolled out its SMARTDrop kiosks into 290 Asda stores.
For customers, this is not just an easy location to drop their phone off if they have agreed a sale online. Instead, SMARTDrop has also been developed to help musicMagpie to “buy more” from walk up customers. As Oliver explains, the customer can insert their phone into the kiosk where the IMEI number is read (an identifier on each phone that allows the kiosk to identify what type of device it is), after which they are taken through a very simple journey to validate the phone’s details and condition before being offered a price.
SMARTDrop kiosks hook up over the internet allowing a quality assessment team back at HQ to evaluate the condition of the phone. Once the operator confirms the valuation, the customer is invited to accept and receive instant payment to their bank or PayPal account within minutes, which they can then use to pay for their shopping. The phones acquired are then transferred to musicMagpie.
Oliver says he has traded 25,000 phones to date via Asda at an average £273, amounting to almost £7m paid to customers. He adds that the kiosks are part of a wider sustainability partnership with Asda and Asda’s customers can also buy refurbished mobile phones, DVDs and CDs through the Asda website.
Proprietary tech stack
Buying consumer tech to resell at scale is tough but it’s ‘meat and drink’ for musicMagpie. Its internally built technology stack uses a proprietary buying algorithm, ALIVE, to work out if it should buy a particular phone and at what price, based on its current stock holding, number of days forward cover, current and historic selling prices and the price its rivals are selling it for. It also needs to be able to track each phone as it moves through the company. There is also a negative up-front cash outflow from working capital, as it pays the day it receives items and sells later so stock turn is important: Oliver says it turns 50% of what it buys by day 4, 80% by day 14 and c.100% by day 30.
By way of an example, a used iPhone might be purchased for £105 and sold for £150, which after carriage, consumables and platform costs makes for a gross margin of c.25%. However, because musicMagpie enjoys high trust ratings, it’s increasingly able to purchase for less than its rivals, who might lose or damage items or not pay out promptly. Very approximately, refurbishment labour and marketing are c.14% of revenue, with admin at c.6%. In FY20, it saw an EBITDA margin of c.9%. These would have been the type of metrics to shine through going forward, but for a pile of investments going through the business - eg. growth of rental and roll out of kiosks.
£24m cap versus rivals
musicMagpie gives a second life to over 95% of the goods it takes in, with the balance going through breakdown, component reuse and recycling. Phones are a rich source of rare earth metals. Apple has been attracted to the potential as it looks towards its own sustainability agenda and musicMagpie and is its preferred ‘Corporate Partnership Trade-in Partner’ for some devices. Apple also provides it with access to new and also Apple-certified pre-owned products (returns).
musicMagpie clearly operates in a very relevant market and investors have been chucking money at it too: for instance, in January a Finnish company, Swappie, which specialises in refurbishing iPhones, raised €108m and Back Market raised US$450m the same month taking its total raise to US$1bn since 2017. Compare that to tiny musicMagpie, which having seen its share price decimated is worth a paltry £24m and it makes me think this one could catch fire in 2023, particularly as the real gravy going forward becomes the rental revenue stream from its cohort of once-used phones.
‘The game-changer’: rental proposition
So why is the share price on its uppers? UK investors have reacted badly to musicMagpie’s shares because of the cautious behaviour consumers are exhibiting and resultant slower growth of outright sales on the musicMagpie online store and the expansion of other sales channels, including the positive launch on Back Market hasn’t been sufficient to offset this decline. Even so, Oliver says musicMagpie’s H2 will be a big improvement on H1 but August and September were soft.
Investors may also be missing a point. One reason that sales of phones were down is that since Nov ‘20, alongside the option to buy outright, musicMagpie has been giving customers the option to rent - cannibalizing its own sales. “Instead of paying £400 upfront, a customer can rent a phone for a period of a year at, say, £18.99, and if they take a second year’s contract, we reduce the monthly rental to £15.99.”
I suspect 20% of customers are taking the rental option, which has a depressing effect on short run sales because a high ticket sale is replaced with lower run-rate monthly rental payments; the keynote, however, is that the gross and cash margin is considerably higher even after allowing for insurance, credit checks and third party collection. Of course, rental brings new challenges, such as managing non-payments but as Oliver says, the simplest solution when a customer stops paying is to lock out the IMEI number; it’s surprising how quickly they resume payments, he quips.
Active subscribers at the last count of 24,000 provide a highly profitable recurring revenue stream and are growing month on month. musicMagpie had net debt of £7.5m at the end of August reflecting the £7.3m of investments into its phone rental estate. Oliver tells me that 70% of customers roll the contract for a second year too and he has plans to offer contracts of more than one year.
He also adds that phones are depreciated at 33% on a reducing balance basis and given a phone can be used for 7-8 years, those returned almost always can be sold off on a profit. And now bankers at HSBC and Natwest have provided it with a £30m facility so he can go hell for leather to expand its rental inventory.
Extends rental to corporate arena
In April, Oliver extended the rental proposition into the corporate arena with “Magpie Circular,” for companies wishing to rent Apple iPads and iPhones. For the future this will mean much larger bulk subscriptions of higher value handsets, with an entry price of £13/month per device over a 24 month period. Stagecoach is the first big corporate rental client and is renting reconfigured iPads for use by its bus engineers.
Cluster buying by directors
Anyone buying the shares is in good company. Martin Hellawell, previously CEO of Softcat (SCT; 1304p) from 2006-18, is Chair and in September he bought 800k shares, Oliver bought 1.35m and two others bought 175k and 725k at 10.56p-13.76p. Clearly the business is in a state of flux (ebitda is £6.4m climbing to £8.7m next year) but I think this is a very interesting juncture to alight on the story. Although not without risk, I am a buyer.
