USell Update: Ramping Up For A Strong 4Q And An Insightful Management Interview

Opening:

USell (USEL), an online re-commerce marketplace connecting buyers and sellers of smartphones, has made strides forward following our initial comprehensive report on the company.

First Half Of 2014 Was a Solid Turnaround Period For The Company:

USell continues to grow as the 1H of 2014 was a solid turnaround period for the company. During the period, uSell’s stockholder’s defect of ($666,000) on December 31, 2013 increased to stockholders’ equity of $809,000 on June 30, 2014. The company also became more efficient with its cash, as cash used in operations was (964,000) for the six months ending June 30, 2014 compared to the six months ending December 31, 2013.

Turning to operations, the company saw a 57% increase in orders placed through the system to 230,897 for the six month period ending June 30, 2014 from 147,343 for the year ago period. Completed orders rose to 109,089 for same period compared to 62,106 orders completed in the year ago period, an increase of 76%. On the top line, revenue increased to $2,715,000 for the six month period ending June 30, 2014 from $2,271,000 in the year ago period.

More Specifically - 2Q 2014 Was A Record Quarter:

USell has spent the past few quarters and years perfecting their marketplace operations. These beneficial platform changes are evident with the company’s strong 2Q results. The company increased revenue to $1,709,250 for the quarter, up 40% Y/Y. This was along with gross margins staying above 90%. The company also increased prices offered to sellers that resulted in higher conversation rates and throughput. Further, $5,780,877 in gross merchandise value for the 2Q of 2014 was processed. This metric has not been used in past, so there is no current comparison.

USell introduced a change to its business model in March, 2014. With the new model, buyers pay the company a commission only when they pat a seller for a received device. This new model lowers risks for buyers, provides buyers with more competitive prices, allows buyers to offer higher prices to sellers, increased conversation rates and throughput and increased uSell’s revenues and cash flows. The evidence of the platform changes’ benefits are evident with the company’s record results in the 2Q 2014.

USell’s Competitive Advantages Have Surfaced:

In our original report, we noted how uSell’s competitive advantages over the company’s various competitors in the marketplace will allow it to grow past its peers. These competitors included ecoATM, Gazelle, eBay and Carrier trade in programs. USell’s competitive advantages in the face of one of these competitors has surfaced.

Gazelle is uSell’s closest competitor in the reCommerce space. On uSell’s top fifty products, taken on September 8, 2014, Gazelle only had offers for 38 products. This speaks to uSell’s more comprehensive SKU library. Further, on the 38 products that Gazelle did have offers on, uSell’s prices were 58% higher on average. This speaks to uSell’s competitive advantages in the marketplace - mainly since the company does not have to hold any inventory, unlike Gazelle. This makes for a more efficient operation for buyers, sellers, and the company’s operations. USell also recently completed a price elasticity analysis to optimize its pricing model and saw an increase in orders by over 20%.

YouGov, a third-party market research firm that provide national panel data, revealed that uSell outperformed several of its e-commerce peers. The  concluded that 3.7x more respondents felt that uSell offered good value versus Gazelle, 3x the number of brand aware respondents felt that uSell represents good quality versus Gazelle and 21% more respondents were willing to recommend uSell to a friend over Gazelle.

USell’s pricing model over Gazelle and brand awareness data point to the competitive advantages we originally outlined in our first report. Offering higher prices may seem to be just one data point, but it is much more important at a longer term glance. Being a more efficient marketplace and offering buyers and sellers higher prices will drive uSell well above its peers and offer the impetus to grow the company well beyond other re-commerce marketplaces.

Ramping Up For A Strong 4Q:

With over $2.7M in revenue for the 2Q 2014, uSell is certainly ramping up it’s operations based on its platform enhancements and marketing strategies. We believe that these two data points, coupled with Apple’s (AAPL) release of the iPhone 6 will lead to an exceptional 4Q for the company. Although uSell will likely have a solid 3Q, due to the lead time to recognize revenue under the company’s new model, trade-ins linked to the iPhone 6’s launch will likely be recognized in uSell’s 4Q 2014 results.

The launch of a new iPhone is extremely important for uSell. For example, the company has seen iPhone order volume increase 133% since the start of the year, and they are expecting a larger spike once the announcement is made. The company expects values to decrease by roughly 20% during the launch, although their pricing optimization model will ensure that customer can get more money by selling on uSell compared to the company’s competition. The release of the iPhone 6 will increase orders placed through the company’s marketplace and will be recognized mainly in the 4Q of 2014.

With the launch of the new iPhone and other devices, many users are eligible for device upgrades. The reason why these launches are so beneficial to uSell are two prong in nature. First, the company does more business as users want to sell their old devices to buy the newest smartphone. 

Secondly, uSell simply offers sellers more money for their devices, so they are more competitive than their peers. Lets assume a customer owns an iPhone 5 that they have had for the past two years, and are now eligible for an upgrade through Verizon. For a good condition 16GB iPhone 5 through Verizon, uSell will offer $211. Now, the user can buy the new $199 iPhone 6 with their upgrade, and nearly break even. This is not including taxes or upgrade fees. Gazelle will only offer $160 for the same device in the same condition and Verizon comes in at $175.

Insider Buying:

Since our initial report on uSell, insiders have been purchasing shares at a rapid pace. This is in addition to new holders in the company. Specifically, Robert M Averick, has purchased a total of 75,000 shares in the past two weeks. This is in addition to Director Peter Benz’s purchase of 35,511 shares, CEO Daniel Brauser’s purchase of 7,100 shares and Director Michael Brauser’s purchase of 5,100 shares. Insiders and new investors see the current share price as an attractive entry point moving forward, which is evident through their purchases. 

Up-listing:

USell has stated in our interview that they are continuing to pursue an up-list to the NASDAQ exchange. Although the timing of this is uncertain, it will benefit shareholders and act as a positive catalyst.

Potential Buy Out Target:

The concept that uSell could be a potential buy out target has been outlined recently. This is a very real possibility as the company’s efficiency as a re-commerce marketplace for smartphones is unmatched. The company’s numerous competitive advantages over it’s peers are evident, and a company such as eBay (EBAY) or another suitor, could benefit from purchasing uSell. More favorable to the company is its small $15M market capitalization. This allows for large premium to be paid for the company above its current market capitalization, while still being a small purchase for a larger company. Further, uSell already has a partnership with Staples, and can also look toe expand and partner with other retailers moving forward.

Conclusion:

USell is making strides forward not only as a business, but in the face of it’s competition. The company’s recent results have been strong, and the 4Q should provide for an excellent quarter. It is worth noting that uSell could generate positive cash flow today if they found it strategically worthwhile. Instead the company is postponing profitability to invest more in marketing to grow the business, much akin to Amazon’s (AMZN) model. 

We are bullish on the company, and recommend investors read our below interview with uSell’s CO-Founder and COO Nik Raman and our initial report on the company.

Management Insight, An Interview With uSell CO-Founder and COO Nik Raman can be read here.