Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

VistaPrint Ltd. (NASDAQ:VPRT)

F1Q09 Earnings Call

October 28, 2008 5:00 pm ET

Executives

Robert Keane - President and Chief Executive Officer

Mike Giannetto - Chief Financial Officer

Analysts

Domenic LaCava - Canaccord Adams

Mitch Bartlett - Craig Hallum

Randy Hugen - Piper Jaffray

Mark May - Needham & Company

Jim Friedland - Cowen and Company

Jennifer Watson - Goldman

Youssef Squali - Jeffries & Co.

Lance Mark - Wells Capital

Scott Berg - ThinkEquity

Atin Agrawal - Longbow Research

Operator

Welcome to the VistaPrint fiscal 2009 first quarter earnings presentation. With us today are Robert Keane, our President and Chief Executive Officer and Mike Giannetto, our Chief Financial Officer.

Before we get stared please note that our comments include forward-looking statements including statements regarding revenue and earnings guidance and actual results may differ materially. Risks that could actual result to differ materially from those statements are described in the documents that we periodically file with the Securities and Exchange Commission including our Form 10-K for the fiscal year ended June 30 2008 and our other SEC filings which are available on the Investor Relations page at www.vistaprint.com.

Now I would like to turn the presentation over to Robert Keane; Robert.

Robert Keane

Thank you Peter and welcome to everyone joining us. VistaPrint turned another strong quarter with both revenues and earrings per share inline with our guidance. I will start my presentation with an overview of the first quarter’s solid performance and operating highlights.

These will demonstrate that our business remained very healthy in the first quarter with 44% revenue growth. VistaPrint delivered these results in spite of strong headwinds from both a rising U.S. dollar and economic weakness in all our markets. Given these factors are likely to persist; we are updating our revenue guidance for fiscal 2009, which I will go over momentarily. Then for those of you who maybe new to VistaPrint, I will review our mission, vision and strategy.

Lastly I will touch on some of our key recent and ongoing investments intended to maximize our value proposition, competitiveness, growth, and profitability. Then Mike will deliver his comments on the quarter and our guidance. Later at 5:00 pm Eastern we’ll hold a separate question and answer session that you can access through a link in the Investor Relation section of www.vistaprint.com. Now, let’s review the quarter’s key metrics.

VistaPrint posted solid financial results in the first quarter reporting revenue of $114.2 million representing 44% growth year-over-year and GAAP net income of $8.3 million. GAAP earnings per share of $0.18 were at the high end of our stated guidance. Non-GAAP adjusted net income of $14 million which excludes share based compensation expense equated to non-GAAP net income per share of $0.30 which exceeded the upper end of our guidance range.

Our Q1 operating metrics were also solid. We acquired approximately 1.2 million new paying customers with stable per customer acquisition costs and generated about 66% of bookings from repeat customers, up slightly year-over-year and sequentially. We produced approximately 35,000 orders per day equal to 3.2 million orders in the quarter and we generated 38% of our revenues from non-U.S. websites despite the significant appreciation of the US dollar during the quarter.

Our business is very healthy and we continue to expect solid profitability with revenue and earnings growth during the rest of the fiscal year. However, the economy has entered a slowdown of unknown length and VistaPrint’s revenues will be significantly impacted by currency movements. While we hope these conditions will be temporary given the significant uncertainty in the economy at large, which is impacting almost all businesses globally, we think it is a prudent time to reduce our guidance.

Our revised guidance for the full fiscal year calls for revenues ranging from $475 million to $515 million, down $60 million at the mid-point from our prior guidance and reflecting 18% to 28% growth year-over-year. Our full-year GAAP EPS is now expected to be $0.93 to $1.5, down $0.16 at the mid-point and reflecting 7% to 21% growth year-over-year. Our full-year non-GAAP adjusted net income per share is now expected to be $1.36 to $1.48, down $0.13 at the mid-point and reflecting 15% to 25% growth year-over-year.

Lowering guidance is not something we take lightly. During the last few years VistaPrint has articulated and explicit EPS focused financial strategy that has helped set realistic profitability expectations during our high growth period. We continue to believe that VistaPrint remains at the early stages of a long growth opportunity and that the dislocations in the global economy and in currencies that we’re facing this year do not reflect a change in either our long-term market opportunity or our competitiveness.

As such, we believe that the best course of action for our customers, employees and shareholders is to continue to run the company for the long-term and to maintain our focus on reinvestment to maximize our long-term growth and profitability, while at the same time recognizing the current conditions made persist. In light of these realities, we have decided to slowdown our reinvestment program to maintain strong profitability.

VistaPrint has been consistently reinventing in all aspects of our operations for many years. This has left us well positioned against a highly fragmented competitive landscape and has provided us with a superior value proposition and a number of well-developed competitive advantages.

Now, in light of current global economic conditions and our profitability objectives, we continue to fund growth investments, but at recalibrated levels. This spending builds on many well-developed competencies, while seeking to achieve revised profitability objectives.

As we have said many times, we remain focused on recruiting and retaining our talent and continue to attract expert engineering, marketing, finance, legal and service personnel in increasing numbers. In the quarter that just ended we added over 150 employees globally to meet the current and anticipated demand for offerings and to continue expanding our value proposition. In light of current conditions, we expect to continue recruiting headcount growth during the remainder of fiscal year, but at revised levels.

We continue to expand our product portfolio and expanded our Signage offerings in the quarter with the introduction of Lawn Signs. We now provide a range of Signage options including Car Door Magnets, Window Decals and Lawn Signs that use our matching content and apply the identities of our customers, which they are developing in formats that meet their demands.

We have a number of new products and product enhancements underdevelopment and we expect to continue to add to our product and service portfolio in the coming year. We continue to work on the second expansion of our Windsor plant, since the opening of the facility in late 2005. Once complete, we will have almost 300,000 square feet of space in Windsor. We have also expanded our Venlo and Lexington facilities substantially in the last few years.

We have begun planning and architectural work on a new larger customer service center in Montego Bay, Jamaica. We continue to monitor and review our plant capital expenditures and we’ll investment appropriately based on demand and our profitability objectives.

We announced plans to improve and expand our service based offerings and these remain a priority; however, based on lower expected staffing levels, we now planned to push out the introduction of some of our European service initiatives while implementing others as appropriate. We believe that these changes will allow VistaPrint to maintain strong profitability during the slowdown, while continuing to fund numerous ongoing initiatives that continue to enhance our value proposition and improve our competitive advantages.

Stepping back a bit, for those who maybe new to our story, I’ll briefly touch on our corporate mission, vision and strategy. As we stated during our fiscal 2008 year-end presentation, we seek to build and an enduring business institution and we understand the success requires the support of three interdependent groups; our customers, our employees and our shareholders. We believe that the more we satisfy all three, the more successful we will become.

For our customers, we seek to continuously improve and expand our value proposition, which is to transform small business marketing. Serving our customers helps us meet our employees’ needs by offering rewarding career opportunities, personal growth and competitive remuneration. In doing so, VistaPrint seeks to be an employer of choice, who demands excellence in return.

We believe that satisfying our customers and employees is required to run a healthy business that build lasting shareholder value. One expression of the health of a business is its ability to generate cash. Our business has generated excess cash while funding substantial growth and reinvestment programs.

As a result on October 12, we announced our first share repurchase authorization, amounting to as much as $50 million through February 2010. We intend to opportunistically return excess capital through our shareholders and we believe that we can reinvest to maximize our competitiveness while continuing to generate excess cash going forward. While, we did not repurchase shares during the first quarter, we have repurchased shares during the second as Mike will explain.

To realize our mission, we’ve been developing a vision that is to transforms small business marketing and to help small businesses convey a professional successful and trustworthy image to the world. Executing to this vision has led to the introduction of a wide variety of new products and services which address an increasing subset of our customers’ total marketing spend.

Shareholders who have been following our progress for several years may remember that we first introduced this type of chart in November 2006. It represents the breakdown of spending categories in our customers marketing wallet, where they purchase not only from VistaPrint, but from other companies as well.

As recently as 2006 VistaPrint sold only products that were print product and we were only just beginning to scale our smaller business holiday product line. Since then we’ve steadily developed and launched new products and services that broaden our market reach. Not long ago, we were limited to market categories that accounted for slightly more than half of our customers marketing spending. Now, thanks to the rapid-fire introduction new product and services; we address a significantly greater percentage of their market spend.

In the last 18 months, we’ve expanded our scope of services to include apparel, promotional products, calendars, creative design services, mailing services, signage and website design and hosting. We’ve successfully entered new product categories and launched new products by leveraging our cross-selling expertise, our powerful content matching technologies, our advanced production facilities, our sophisticated server technology infrastructure and our high volume customer service operations. Our value proposition continues to evolve and to impress our customers.

Our vision is to transform the ability of small businesses to design and procure coordinated, cohesive and highly effective marketing products and services across many different categories. Because of this unique value proposition and because of continuous improvements in our more established product lines and capabilities we have continued to rapidly and profitably increase our market share and our competitive advantages. We believe that we have gotten bigger, faster than any of our competitors.

Stepping back, one can see how this vision supports an expensive customer focus strategy that has grown from simply saving our customers on their print spending into a larger and stickier relationship. Moving from saving customers money on print to providing business identities was a critical step. Now, for many of our customers VistaPrint is their marketing partner providing marketing expertise including design, content and advice that can help our customers be more successful.

Expanding our customer relationships allows us to address a larger share of their spending and as a foundation for sustained growth and it forms a more defensible position against single product or solely price based competitors. VistaPrint performed well in Q1, but looking forward its clear that current global business conditions have changed; fortunately we believe that our market opportunity is unchanged. We still target tons of millions of small businesses against a highly fragmented, competitive landscape.

We are adapting to the current environment and taking steps to maintain profitability margins while investing appropriately to achieve our long-term goals. Consequently we are revising our targets for the current fiscal year. At the same time we plan to continue to funding our range of investment at appropriate levels while focusing on operational efficiency. This strategy is intended to sustain our growth, maximize our competitiveness and position us for even greater success when economic conditions improve.

We are running the business for the long-term and expect to emerge from this period linear, more competitive and well positioned to continue transforming the way small businesses market themselves.

Now, I’ll turn the presentation over to Mike; Mike.

Mike Giannetto

Thanks, Robert. As Robert stated VistaPrint turned in a solid quarter despite challenging economic conditions in most of the markets we operate and an adverse impact on revenue and EPS related to the strengthening U.S. dollar relative to European currencies.

We met our revenue and exceeded our EPS targets, our gross margin showed stability while our cash flows and operating and EBITDA margins increased from Q1 of fiscal year 2008. However, we believe that widespread economic weakness and the strengthening of the US dollar, which had an adverse impact on aspects of our performance in Q1.

Looking forward to the second quarter and the remainder of the fiscal year, these conditions may persist and could possibly worsen. We are also mindful of the risk of an impact on our seasonal holiday related revenues much of which is discretionary consumer spending.

While we do gain some gross margin benefits from a weaker Canadian dollar, we expect the net impact of currency fluctuations in economic weakness to be negative on both revenues and earnings. Consequently, we are adjusting the revenue growth and earnings expectations.

Before I review Q2 and full-year guidance, I will review the quarter in detail. As Robert mentioned, VistaPrint generated revenues of $114.2 million in the first fiscal quarter, a 44% increase over the first quarter of the prior year. All of our geographies performed well and revenue from websites targeting non-U.S. markets comprised 38% of total quarterly revenues. Non-US revenues increased 62% nominally year-over-year; excluding impact of currencies non-US revenues increased 56% year-over-year. Revenues from our US website increased 35% year-over-year.

During Q1 fiscal 2009 before revenues were 6.1% of total revenue, 250 basis points lower than year ago levels and decreased 30 basis points sequentially. VistaPrint continues to benefit from a diversified set of channels and in aggregate we generated bookings from more than 20 channels and partnerships in Q1. As noted approximately 66% of bookings came from repeat customers. The largest channels for repeat customer’s remains our own outbound permission based email which is also one of our lowest cost channels.

New customers represented 34% of bookings which is down slightly on a sequential and year-over-year basis. Bookings from repeat customers increased as a percentage due to success in increasing repeat customer revenues and a slowdown in new customer acquisitions that we believe relates primarily to global economic conditions and a shift in marketing spending. Page search represented about 16% of total revenues consistent with previous quarters.

VistaPrint acquired approximately $1.2 million new customers during the quarter, which has been approximately flat in absolute terms since the third quarter of fiscal 2008. Our new customer acquisitions growth rate has declined going from approximately 60% year-to-year in the second quarter of fiscal 2008 to a bit more than 20% in the quarter just ended.

We attribute this slow down to a number of factors including adverse economic conditions and lower marketing spending. We do not believe that slowdown in new customer acquisitions represents a reduced long-term growth opportunity and we expect to increase new customer acquisitions, when conditions improve.

During the quarter our non-U.S. revenues were 38% of total revenue, down slightly on a sequential basis and up from 34% a year ago. This increase was driven by our Spanish based European marketing team, our Dutch based manufacturing team and the U.S. dollar which despite strengthening during the quarter, weakened in comparison to the same quarter of last year.

Web sessions increased to $46.7 millions in Q1 2009, a 4.7% increase versus the $44.6 million generated in the first quarter of the prior year. Conversion rates increased to 6.9% in the first quarter of fiscal 2009 from 5.4% in the first quarter of fiscal 2008.

Higher conversion rates can be attributed in part to a higher percentage of bookings from repeat customers who tend to convert at higher rates. Average order value was $33.79 in Q1 of fiscal 2009, an increase of almost 7% over the $31.71 recorded in the prior years first quarter. Higher average order values can also be attributed in part to a higher percentage of bookings from repeat customers whose orders tend to have higher average values.

As we have noted in the past each of these metrics will vary up and down based on a number of factors including new product introductions, product mix, geographic expansion, mix of consumer and small business customers, channel mix, marketing campaign testing, seasonality and the like. As such they should be considered together by looking at the product of the three factors, not individually.

Now to gross margin, which we define as revenue minus the cost of revenue, gross margin in the first quarter was 60.7%, it reflects a 10 basis point sequential increase and a 190 basis point year-over-year decrease. Gross margin changes were primarily influenced by the following drivers.

On a year-over-year basis quarterly gross margins were adversely impacted by product mix, lower referral fees, currencies, higher pass-through postage revenues related to mailing services and higher shipping cost. These factors were primarily offset by improving labor efficiencies and lower overhead costs. On a sequential basis quarterly gross margins were impacted by a number of largely offsetting factors, which produced a net 10 basis point improvement.

Our GAAP net income margin for the first quarter was 7.2% compared to 8.7% in the prior years first quarter. Our non-GAAP adjusted net income margin for Q1 declined to 12.2% versus 12.6% during the first quarter of fiscal year 2008 reflecting slight margin compression year-over-year due partially to non-operating currency reevaluations, which reduced our Q1 net margin by approximately 80 basis points.

Looking at our Q1 income statement versus the same quarter a year ago, one can see that as a percentage of revenue, cost of revenue increased by 190 basis points due to reasons previously discussed. Marketing and selling expense decreased by 260 basis points to 30.5% driven primarily by lower advertising expense and continued efficiency improvements.

Technology and development expense increased by 60 basis points to 12.1% reflecting ongoing investments and efficiency, new product development, our usual experience reliability and other areas. General and administrative expense increased by 30 basis points due to the reallocation of certain personnel expenses from other departments as part of the transition to the business unit structure.

In addition, quarterly expenses also increased due to the prior CFO’s transition agreement and incremental legal expense due to previously announced litigation. Operating margins decreased by 10 basis points due to lower gross margins, higher general and administrative and higher technology spending which were partially offset by lower marketing and selling expenses.

Below the operating line other income was negative due to the revaluation of non-U.S. denominated currency assets related to the appreciation of the U.S. dollar. Our total currency loss in the quarter exceeded $940,000, which compares with a loss of approximately $2000 in the first quarter of the prior year. Tax expense increased to 10.4% of pretax profits versus 10% in the first quarter of the prior year.

Looking sequentially at our Q1 income statement versus the prior quarter Q4 of FY ’08, one can see that as a percentage of revenue, cost of revenue decreased by 10 basis points due to reasons previously discussed. Marketing and selling decreased by 10 basis points to 30.5% driven primarily by lower advertising expense. Technology and development expense increased by 10 basis points to 12.1% due to reasons previously discussed.

General and administrative expense increased by 190 basis points due to reasons previously discussed including the shifting of certain personnel expenses to G&A from other departments as part of the transition to the business unit structure. In addition, cost related to the prior CFO’s transition agreement and incremental legal expenses due to previously announced litigation also increased reported expenses.

Operating margin decreased by 170 basis points due primarily to higher general and administrative spending and again below the operating line other income was negative due to revaluation of currencies related to the depreciation of the U.S. dollar.

Our total currency loss in the quarter exceeded $940,000 which compares with the loss of approximately $340,000 in the prior quarter. Tax expense increased to 10.4% of pretax profits versus 9.3% in the prior quarter.

Share-based compensation expense including tax effects increased to $5.7 million during the first quarter of 2009. Excluding share-based compensation expense charges related to the prior CFO’s transition agreement, share-based compensation expense for the quarter would have been $5.2 million.

Our balance sheet remained strong with cash and short-term equivalents of approximately $142.4 million as of September 30. During the quarter VistaPrint generated $28.6 million in cash from operations and made capital expenditures of approximately $14.2 million or about 12% of revenue. Free cash flow was $12.8 million in the quarter, an increase of $16.4 million with a negative $3.6 million in the same quarter in the previous fiscal year.

On a trailing 12-month basis, non-GAAP return on invested capital or ROIC, excluding share-based compensation expense as of September 30 remained high at 34.9%. During the quarter we authorized and announced a $50 million share repurchase program. VistaPrint did not repurchase shares during the quarter; however, following the close of the quarter VistaPrint repurchased 503,398 shares for $13.9 million at an average price of $27.52 per share.

During the quarter, the company spent $14.2 million in capital expenditures, which equates to 12.5% of quarterly revenues. Quarterly CapEx breaks down as follows: 8% of capital went into presses, 50% into facility expansion in land purchases and the remaining 42% went for other uses. Our Q1 capital expenditure spending was lower than our previous guidance in expectations due to the timing of payments related to our Windsor expansion and other manufacturing assets.

Reviewing our seasonal patterns can provide some insight into our guidance. Our holiday products drive our sequential growth in the fiscal second quarter, which ends in December. Holiday products also support new customer acquisitions during the second quarter, which help to drive revenues during the second half of the fiscal year. Third condition suggests that this years holiday season is relatively uncertain given our dependence on discretionary consumer purchasing in the quarter.

As we guided to you in the last earnings call, we could see revenues decline on a sequential basis depending on the relative strength of our current holiday quarter versus our third quarter, when our core SOHO business typically shows the strongest sequential growth.

The seasonality also has an impact on our quarterly earnings which as our guidance indicates, we expect to rise significantly in our second quarter and then to trend lower during the remainder of the fiscal year. As with revenue, we still expect to see year-over-year EPS growth throughout fiscal 2009.

Our product and consumer mix provide another view of our seasonality, which we expect to shift appreciably in the second quarter compared to the first quarter of fiscal 2009, depending on the strength of the holiday season, which as noted is relatively uncertain given current economic conditions. An implication of this chart is that although our SOHO business continues to grow throughout the year, the typically strong step up in Q3 to be masked by the decline in holiday revenues.

As Robert mentioned, as a global company, we are exposed to currency fluctuations. We generate 38% of revenues outside the U.S. in the quarter just ended and the US dollar has just appreciated substantially versus the Canadian dollar, the euro, the British pound and the Australian dollar in the last three months. If sustained these fluctuations will adversely impact on our full fiscal year revenues; however, our earnings are someone hedge by costs in euros and Canadian dollars.

As well as the Canadian dollar moves inline with our other major currencies, but the impact of strength in US dollar on our earnings will be muted. However, if currencies where we have few costs like the British pound and early Australian dollar weaken independently versus the US dollar, the impact to earnings would be negative.

In addition, if currencies where we have costs such as the Canadian dollar strengthen independently versus the US dollar, then there will likewise be a negative earnings impact, but thanks to our global operations, our exposure to currency fluctuations it somewhat hedged.

Now, let’s go over our financial guidance as of October 28, 2008. This guidance reflects our current view of our market opportunity, profitability objectives, ongoing commitment to growth investments in current global business conditions. Both foreign currencies in economic conditions may continue to fluctuate and VistaPrint’s specifically disclaims any obligations to update any forward-looking statements, which should not be relied upon as representing our expectations or beliefs as of any date subsequent to October 28, 2008, the date of this presentation.

With this in mind, our expectations for the second quarter in full fiscal year 2009 are as follows: Revenue is expected to be in the range of $122 million to $134 million, an increase of 16% to 28% year-over-year. GAAP EPS on a fully diluted basis is expected to be between $0.26 and $0.31 based on about 45.8 million weighted average shares outstanding. Capital expenditures in the second quarter are expected to be approximately $30 million to $35 million.

For the full fiscal year ending June 30, 2009 we expect revenue to be $475 million to $515 million, an increase of 18% to 28% year-over-year. Full fiscal year a GAAP EPS on a fully diluted basis is expected to be between $0.93 and $1.05 on about 46.1 million weighted average shares outstanding. Capital expenditures for the year are expected to be approximately $70 million to $87 million reflecting a similar percentage of revenues as in fiscal year 2008.

We are providing the assumptions noted on our guidance slides to facilitate comparisons with non-GAAP adjusted net income per fully diluted share. Based on these assumptions for Q2 of fiscal 2009, non-GAAP EPS excluding share-based compensation is expected to be $0.36 to $0.41 based on an estimated share based compensation expenses of $5.2 million. Full fiscal year 2009 non-GAAP EPS, which excludes share based compensation expense, is expected to be between $1.36 to $1.48 based on estimated share-based compensation expenses of $21 million.

Now let me turn the call back to Robert.

Robert Keane

VistaPrint performed well in Q1 and this showed the great strength of our business model, but looking forward, its clear that the global business conditions has changed faster than any one could have imagined, just three months ago.

Fortunately, we believe that our market opportunity is unchanged and fortunately, VistaPrint is a company with a strong culture of profit discipline. As such we are adapting to the current environment and taking the steps to maintain profitability margins, while investing appropriately to still achieve our long-term goals.

We plan to continue funding a range of investments at appropriate levels, while focusing on operational efficiency. This strategy is intended to sustain our growth, maximize our comparativeness and position of ourselves for success when economic conditions improve. We are running VistaPrint for the long-term and expect to emerge from this period linear, more competitive and better positioned to continue transforming a way small businesses market themselves.

Lastly, I’d like to remind you, our upcoming Investor Day, which will be held in New York City on December 10. Please conduct Angela White in our Investor Relations Department for details. Now we’d like to thank you for your time and attention and say that we look forward to your questions and comments on our live call at 5:00 pm Eastern Time.

Operator

That concludes our prepared presentation. Please click on the Investor Relations section of www.vistaprint.com to listen to the live Q-and-A session which starts at 5.00 pm on October 28, 2008. Thank you for your interest in VistaPrint.

Question-and-Answer Session

Operator

Ladies and gentlemen, welcome to the VistaPrint fiscal year 2009 first quarter Q-and-A earnings conference call. My name is Krista and I will be your operator for today. This is call is being hosted by Robert Keane, President and CEO; and Mike Giannetto, Executive Vice President and CFO.

Before we take the first call, as noted in the Safe Harbor statement at the beginning of the earnings presentation, comments may include forward-looking statements including statements regarding revenue and earnings guidance and actual results may differ materially. Risks that could impact those statements are described in the documents that are periodically filed with the Securities and Exchange Commission.

Now I’ll proceed with the first call.

(Operator Instructions) Your first question comes from Youssef Squali - Jeffries & Company.

Youssef Squali - Jeffries & Co.

Robert I have a couple of question for you. You often talked about your focus on the small business and really more on the micro business as a way of effectively saying that in a weakening environment you’re a little less or you’re a little more immune to what’s going on, because these micro businesses or sole proprietorship and to not be as affected.

Can you talk about what you’ve actually seen in October in the business? I’m trying to figure out whether, you’re airing on the conservative side not knowing what’s going to happen with the economy or are we already seen in the weakness that’s already setting?

Robert Keane

Consistent with our guidance, we are seeing some October numbers which are challenging and that’s why we came out with the revised guidance. As to the resistance of these micro businesses and recessions we do believe that they are relatively resistant. In the past we said that SOHO formation may increase the recession and we also think that we are clearly the low cost marketing services providers to these small businesses; however, Q2 is our holiday quarter and we have a large consumer segment there and also SOHO holiday spending which is uncertain.

Also we do see some relative strength compared to other companies to focus on larger businesses, but as to whether SOHO’s marketing budgets increase or decrease their recessions, we don’t know, we’d like to be pleasantly surprised.

Youssef Squali - Jeffries & Co.

Okay, I guess as a follow-up, how do you know that the slowdown in your customer acquisition does not represent a reduced long-term growth opportunity? And for Mike, what exchange rate is baked into your’09 guidance please?

Michael Giannetto

Youssef I’m not getting into the exact FX rates that we’ve used. It’s been very challenging as the rates have moved so drastically over the last even 10 days to put together of our forecast and some guidance here.

I’d say from a FX standpoint, we looked at it as of last week, we tried to close this often in terms of guidance. There’s been a little weakening or strengthening in the U.S. dollar, since then. Within the range of the guidance in revenues we’re trying to consider potentially additional fluctuations, volatility in exchange rates, but in terms how we’re looking at it internally and implicit in our guidance, we are looking at recent rates I’d say as of last week.

Robert Keane

And Youssef as to your question, I’d say first of all we are still very bullish long-term. We don’t leave that long-term opportunity, is it all diminish. There are sales literally 50 million micro businesses in our current market. Is hyper fragmented competition with the largest player by far and we have a clearly superior value proposition.

We are guiding to revenue growth rates which depending on where you look at it, we’re guiding to 20% to 30% annual growth rate in our revised guidance. If you would put that in the currency impact and actually look at volume, we are growing significantly faster than that, especially in local currencies.

So we wish we didn’t have to have this environment around, but we are in that environment. That being said, we feel very comfortable with our long-termed vision. If you exclude currency rate was growing that rates, which are very, very high and we would love to grow higher, we think we will in better economic times.

Operator

Your next question comes from Jennifer Watson – Goldman.

Jennifer Watson - Goldman

Can you talk a little about the recession to pull back on some of the reinvestments, if you sill feel very confident about the long-term growth of the business and then also I guess similarly on the CapEx side, is the reduction reflective of currency fluctuations on a stronger dollar, so on an absolute basis it looks like you are spending a lot, but you’re still going forward with the same plans?

Robert Keane

Okay, to answer the first part of the question, we are calibrating our investments because we are committed to showing strong profitability. The discussion internally about how much should we pullback on investments without damaging the long-term opportunity ahead of us; in the past we’ve often talked about accelerating investments in order to take advantage of the long-term opportunity, when we have the earnings power, and we just believe its part of good earnings discipline to be able to modulate back and forth and we’ve spoken about that in the past.

We don’t believe, especially given the economic environment that we are going towards a danger zone in terms of cutting back on investments. Cutting back should be used carefully, the term we’re reducing the growth rate of our investments, but our investments still are growing year-over-year.

Mike Giannetto

Jen it’s Mike. In terms of the CapEx, we certainly have revised our forecast for the latest exchange rates, but from a non-exchange rate perspective, we have changed some of the CapEx plans and we have reduced to down a bi, so you’d see some I would say volume CapEx changes within the fiscal year as well.

Operator

Your next question comes from Jim Friedland - Cowen and Company.

Jim Friedland - Cowen and Company

A couple of questions; first in terms of, customer acquisition, you noted that customer acquisition costs are relatively flat. Are you seeing any change in the rates that you are paying? Are they becoming more favorable given the market conditions both or you cold answer that offline and for online just talking about the offline channels like OfficeMax and the upcoming deal with into it. You said that you were encouraged by sort of the long-term pipeline. In a weaker environment, do you think that companies will be more willing to do these types of kiosk deals or sort of white labor on my deals or unless like likely? Thanks.

Robert Keane

Taking the second question, first I don’t want to top speaks specifically about opportunities, but I do believe that in the challenged economic times our opportunity for partnerships only increases. I mentioned, that we are continuing to invest heavily. If you look at our capital expenditure budget, our technology budget, we are talking $50 million of technology development, $70 million plus of CapEx this year alone. Even for a large company that’s a lot of money and that’s just what VistaPrint is spending this year.

So, I think in a tougher economic environment, we can look to partners who would want to, they might normally think about trying to do something themselves and I think we have a better opportunity to convince them. They should leverage off of the investment that we’re already making.

In terms of COCA, why don’t I turn that over to you Mike?

Mike Giannetto

Yes, Jim we haven’t seen anything. You’re correct COCA over the last few quarters have been relatively stable. In terms of the underlying marketing cost, we haven’t seen anything meaningful change with respect to the marketing costs.

Jim Friedland - Cowen and Company

And just one last one; on the new website service that you launched, I think it was back in April or May. Could you provide us any color with what the uptake event has been like and it basically will take anything you’re willing to give us?

Robert Keane

Sure, of course we can’t give specific details about any individual product line. That being said, we are happy with websites. They are certainly meeting our plan, we’re happy with them and we think there will be a significant growth for us many years into the future and other than that I wouldn’t want to get into more detail.

Jim Friedland - Cowen and Company

And actually just one more if I could. In terms of free cash flow on a year-over-year basis, I know guys don’t give free cash flow guidance, but you still believe that, would you think cash flow in fiscal 2009 will be greater than versus fiscal 2008?

Mike Giannetto

Jim, we don’t give specific guidance on it. We do expect positive free cash flow for the year. I don’t want to get into it too much compared to last year. We have a fairly wide range that we’ve guided to. I’d say we are planning within our guidance’s embedded the fact that we will have positive cash flow for the year.

Operator

Your next question comes from Randy Hugen - Piper Jaffray

Randy Hugen - Piper Jaffray

What specifically have you seen in some of the internal business matrix that’s changed your expectations for the remainder of the year?

Robert Keane

Randy, I’d say that, we’re looking at a lot of metrics and we don’t publicly discuss all of them. I think one that we certainly talked about to some extent in the prepared remarks is the new customer acquisitions which have been flat as we noted for the last three quarters at about 1.2 million customers, but in terms of our year-over-year growth rate, we have seen a decline since Q2 of last year of over 60%, to the current quarter just over 20%.

New customer, as we’ve talked about is fueled for the company’s revenue growth and its one metric that we’ve looked at, that from a macro economic standpoint we do believe that there’s some impact. I’d say that’s the certainly one metric that we have discussed publicly that leads us to that thought.

Randy Hugen - Piper Jaffray

And how did that trend during the quarter?

Mike Giannetto

We don’t get into month-by-month metrics. We do have seasonality in the summer were things are slower in July, so we tent to see things pickup as people get back from the holidays. So, I don’t want to get into specifics on month-by-month, but we did some seasonality we have seen before, which is very slow in the beginning of the summer month this quarter and it did pickup later in the quarter.

Randy Hugen - Piper Jaffray

Okay and then I guess a little bit bigger terms. It’s always been my impression that when revenue growth started to slow for you guys, we would see margins expand, obviously there are some sub macroeconomic things going on right now, but longer-term should we still expect to see margins expand?

Robert Keane

Yes, absolutely. I think we certainly did not expect either the currency or the other factors in the economy to come to play and to have such a rapid reduction on our growth rates, but we absolutely believe there is leverage in the model. A lot of that leverage comes in place of like G&A or amortization of overhead and manufacturing or technology, which we can grow into, but when the deceleration in our growth rates happens as abruptly as we see it happening, the leverage doesn’t show up. We are certainly showing very good margins in our revised guidance, but you’re not seen leverage immediately. We still feel very comfortable for the long-term.

Operator

Your next question comes from Mark May - Needham & Company.

Mark May - Needham & Company

First question has to do with the currency. It wasn’t clear in the impact on revenue from currency fluctuations from when you provided guidance. So, I think there was a $940,000 figure in the prepared remarks, although I think that was a net income impact. What was the revenue impact?

Mike Giannetto

Mark this is Mike, let me explain. In terms of are you referring to the full-year guidance, when you say currency impact?

Mark May - Needham & Company

Yes and also where you came out in the quarter versus your guidance, when you provided guidance.

Mike Giannetto

As far as the revision of the full-year guidance we did mentioned, it’s approximately $35 million annual change given the movement in the foreign exchange rates. When we gave guidance in July, for example the euros about 157, we’ve seen it comedown to about 125 at this point. So, we’ve seen about an 18% US dollar strengthen in above three months, since we gave guidance.

So, as we mentioned it’s approximately $35 million of the revenue change. The 940 you referred to was in Q1 naturals, we had a below the operating line foreign exchange loss due to currency revaluations of assets, basically a mark-to-market to quarter end spot rates, which hit us pretty hard to the tune of the $900,000, so kind of unrelated in terms of the currency movement, but one is on revenue, one is on assets.

Mark May - Needham & Company

Okay and then given that you did hit your first quarter revenue guidance, but you’re lowering the guidance for the full-year. Is that you have seen significant falloff in the first few weeks of October or did you see a very strong July and August and then the weakness started and in September, just curious of the timing of when you really start to see a slowdown in that.

Mike Giannetto

Committing on what we’re seen quarter to-date and October we’ve got about three weeks in, it was slow start to the quarter, it’s our big holiday quarter, it’s a significant growth quarter for us and we weren’t seeing necessarily what we expected to see in the first three weeks, which gave us some pause in terms of how we think about, how we were thinking about the quarter and the full-year.

In terms of what we saw in Q1, I do comeback to the new customer adds, in terms of the growth rate slowing down. In terms of Q1 as I mentioned earlier there is seasonality in the September quarter. July is a slower month, we did see that, things did pick seasonally, so we did post a pretty solid result at the 142 that we feel pretty good about, but specific to what we’ve seeing so far in October it is slower than what we would have anticipated.

Mark May - Needham & Company

And would you guys mind addressing this issue that’s come up recently about affiliate marketing, your use of affiliate marketing channels. What is your view on this recent report that was written?

Robert Keane

Sure, I’ll be back to talk about it. We certainly aware of the articles that come out and for the people who are on the call who are not familiar with it; there is a article about a pervasive called out of few types of affiliate actions that are not in either our interest or the customers interests and it involves affiliates claiming credit for sales that they don’t in fact assist getting for us and directing traffic to our sites using unauthorized approaches and I’m assume that’s what you’re talking about Mark, right?

Mark May - Needham & Company

Yes, I’m just wondering if that is in fact an issue, if so what’s your view on it?

Robert Keane

We do monitor and manage our affiliates and partners, there always will be some who will engage in unethical activities for financial gains. When we identify that actors we remove them from our programs, but I will not say that we’re ready, so that was material impact on our forecast going forward. It wasn’t part of the reason we looked at revised guidance.

Operator

(Operator Instructions) Your next question comes from Mitch Bartlett - Craig Hallum.

Mitch Bartlett - Craig Hallum

I’m just curious whether your forward guidance apart from the currency effect, the forward guidance for the revenues for the year assumes a deceleration in your advertising spending?

Mike Giannetto

This is Mike. No, it is not assumed specifically that now that we give guidance around that, but we’re not assuming a deceleration in marketing spending.

Mitch Bartlett - Craig Hallum

No, from your guidance previously, that’s what I was hoping to say?

Robert Keane

As a percentage of revenues, we think it’ll be pretty stable. I think, Mike please correct me if I’m wrong. If revenues comedown, we tend to manage it to a percentage of revenues. So, the absolute dollars would comedown, but in terms of percentage front advertising will be pretty stable.

Mitch Bartlett - Craig Hallum

Okay and I presume you target a cost of new customer acquired type of figure. Are you seeing that hit a band that you are not excited about?

Robert Keane

Absolutely not. We talk about the cost of customer acquisition or COCA and the majority of our acquisition and certainly the average of our acquisitions. We actually have a positive contribution to the bottom line, when you think revenues minus cost of acquisition, minus costs of goods sold and other variable costs and if we believe that the theoretical approach to it and which we would not be happy is where the cost of acquisition relative to the future cash flows of that customer don’t produce a positive net present value and we are nowhere near that right now.

However, because we do have a very strong profit genes or DNA in our corporate culture, we modulate our investments in any other area including advertising in function of our ability to get profits that we’re trying to achieve and so, although we could accelerate the number of customers and still have a positive return on investment, we believe that given our intent to deliver on the EPS we are not availing ourselves of those opportunities.

Operator

Your next question comes from Domenic LaCava - Canaccord Adams.

Domenic LaCava - Canaccord Adams

You mentioned that some consumer softness is creeping into the December quarter, expectations. Can you talk a little bit about whether the percentage of your total revenues you’re expecting that to be more or less. I know you’ve done played it in the past, but how can we view that now in light of the current economic situation?

Robert Keane

To put it in perspective and to define that in term, first of all we get about 10% of our revenues from consumer over course of the year. However, that is skewed towards this current December quarter, when many people purchase for the holidays. So, in that quarter, it goes up to, if you can combine both consumer and holiday related business purchases rates of the business who’s sending out holiday cards in their customers it goes up to a much higher percentage and so we are more dependant on consumer holiday in this December quarter and then other quarters.

As anyone in this market in holiday, we’re depended on a very peak period, which is really in the month of November and we have a ramp up which Mike alluded to, which is looking a little soft in that area, but the real cash will be all next month or so. We do however, look at consumer confidence studies, we look at the general economy and we look at what the other people in the consumer markets are seeing and we believe there is a reason for concern and we’d rather at a low-end of our guidance range be prudent and conservative given the uncertainties in the economic environment.

Domenic LaCava - Canaccord Adams

Okay, fair enough and then on the core market, the SOHO market, are you seeing what you would have expected with micro businesses that they realize that they can see an up-tick in turbulent times like we’re seeing right now? Are you seeing an up-tick that you might have expected or is that maybe that lagging more than you may have thought?

Robert Keane

Yes, it’s too early to tell. I think that the studies do show that often in turbulent times micro businesses are created as people look for additional supplemental income, but we are really early in that and I think it will take a few quarter of retrospection to really see what happened.

We are not happy to lower our guidance and so its clearly relative to where we thought. Mike mentioned the FX impact, but even if you restrict that out, there is a shaving of our guidance by about $20 million, $25 million and so that is reflective of general weakness beyond the current season and some of that is consumer, but we want to be prudent because we believe that some of that could be in the SOHO and we have to work through that to be able to say for sure.

Domenic LaCava - Canaccord Adams

Sure, but there is a good change here that nobody wants this soft economy to persist, but if it does there is some of the SOHO activity that could certainly pick beyond current expectations?

Robert Keane

Yes, absolutely. All companies have a little bit going on at this time or being prudent. That being said, we are the low cost provider in this market. We are taking share very quickly even at these reduced rate and we are very comfortable that we will work through this.

Domenic LaCava - Canaccord Adams

And then one housekeeping question. I had to cut off the call and may have missed it, referral fee revenue did you mentioned with that was?

Mike Giannetto

Yes Dom it was $7 million for the quarter and 6.1% on revenues

Operator

Your next question comes from Scott Berg – ThinkEquity.

Scott Berg - ThinkEquity

Just two quick questions here; one was a follow up on the new customer addition question that was asked earlier, would you say that more of the weakness in that area is attributed to the U.S. market or overseas?

Mike Giannetto

Nothing specific on that. We have seen I’d say the slowing growth rate in both geographies; it hasn’t been specific to one or the other. Besides growth rates, we don’t get into much more specifics in terms of the geographies, but I’d say we have seen it on in most markets.

Scott Berg - ThinkEquity

No, that’s fine I just couldn’t remember if commented on that maybe before. Alright and that and my last question was with regards to the Windsor facility; have you given a time limit here on nearest to when that might be in operational production and I guess kind of a follow-up to that; will part of it be operational before its completely ready to go?

Mike Giannetto

Yes, so actually some of it is operational right now, we are using it during this quarter, we’re using it more from a billing, shipping areas as opposed to heavy duty manufacturing, that depresses are still in the existing building, so we has started to use a portion of it. We expect to complete the building and the expansion of the building in the January timeframe, at which point we could move for presses etc and cutting equipment into the new space.

Operator

Your next question comes from Atin Agrawal - Longbow Research.

Atin Agrawal – Longbow Research

Could you give some more color on if there are any new product launches in the pipeline? You mentioned about reducing the reinvestment plan, but I was just wondering if there is any product that’s going to be launched in the near future?

Robert Keane

We don’t preannounce any individual products or launches, but when I talk about calibrating or reducing the level of investments, the rate in which we introduce new products will not be materially impacted. So, we do believe that we in the pipeline we’ve got some very interesting products that are coming out.

The calibration of investments are in areas like the capital expenditures and some of the hiring plans that we have in some of our customers service expansions, but we serve a lot of people who was in product marketing and manufacturing and technology developing working on new products and you’ll definitely see some more things coming out in the relatively distant future, we just don’t preannounce.

Atin Agrawal – Longbow Research

Can you provide some specifics on what percentage of SOHO marketing budget, are you currently addressing?

Robert Keane

Well, we often and for most of the years have shown a pie chart based on the average of our customer base and where they spend their money to market the business and in that presentation, which is in our investor presentation available for download in our website, we’ve certainly gone around the vast maturity of that wheel. That being said we are reflecting for a total into each one of those market, even in one of our most traditional markets.

Business cards, we don’t make all types of business cards, we have a few formats in paper types. So, we are playing in the vast victory of market, apparel, signage, mailing services, website, traditional print products, holiday cards, but we believe that they are within our promotional products, but within those markets we have a number of additional products coming out and I think that’s just because they are a very, very large markets individually.

Operator

Your next questioner comes from [Lance Mark] - Wells Capital.

Lance Mark - Wells Capital

I just have a quick question; you quantified the revenue impact from currency and you said that the net income tax was negative, can you quantify that for us Mike?

Mike Giannetto

Yes I’d say it’s immaterial; I’d quantify in a $0.03 to $0.06 range.

Lance Mark - Wells Capital

$0.03 to $0.06 for the year?

Mike Giannetto

Yes.

Operator

Your final question comes from Mark May.

Mark May - Needham & Company

Just a housekeeping question for Mike. It looks like that the accounts payable was up meaningfully in the quarter; could you provide some color on that?

Mike Giannetto

Sure, Mark we most of that increase is driven by some of the construction process we have going on up in Windsor and some presses as well that at the end of the quarter it just hadn’t been paid yet, so it’s saying in AP a lot of that will allow come down as we actually cut the checks and make the payments this quarter.

Operator

At this time we have no further questions. I will turn the conference back over to Robert Keane.

Robert Keane

Well thank you everyone for the time and interest in VistaPrint tonight. As I said we have not lost any confidence in the long-term opportunity that VistaPrint has in front of us. We have a very competitive position in the market. We all wish in the economic times and uncertainty we see around us weren’t happenings, but they are and we remained committed to investing while modulating those investments to make sure that we still deliver good strong margins and costs and moving forward we look forward to a very good fiscal year and hopefully better times ahead. Thank you very much.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: VistaPrint Limited F1Q09 Earnings Call Transcript
This Transcript
All Transcripts