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CafePress, Inc. (NASDAQ:PRSS)

Q4 2012 Earnings Call

February 13, 2013 5:00 PM ET

Executives

Alex Wellins – IR

Bob Marino – CEO

Monica Johnson – CFO

Analysts

Kaizak Aline – JP Morgan

Shawn Milne – Janney Capital Markets

Brian Fitzgerald – Jefferies & Company

Youssef Squali – Cantor Fitzgerald

Aaron Kessler – Raymond James

Andrew Merrick – Cowen and Company

Chris Donnelley – SeedRock Capital

Operator

Good day, ladies and gentlemen, thank you for standing by. Welcome to the CafePress Fourth Quarter in Fiscal Year 2012 Earnings Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions)

This conference is being recorded today, Wednesday, the 13th of February 2013. I would now like to turn the conference over to Alex Wellins from the Blueshirt Group. Please go ahead.

Alex Wellins

Thank you for joining us on today’s call. With me today, our CafePress’ CEO, Bob Marino and the company’s CFO, Monica Johnson. After the market close, CafePress announced results for the fourth quarter of 2012. Today’s call has been broadcast live over the Web and can be accessed on the investor relations page of CafePress’ website at CafePressInc.com.

During the course of this conference all, the management may make projections or other forward-looking statements which are made pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involved risks and uncertainties that could cause the actual results to differ significantly from those projected.

Your cost is not place [ph] under reliance from the forward-looking statements which speak only as to the date of this call. A detailed discussion of the material factors that may cause results to differ from the statements can be made – can be found, for example, in the Risk Factor section of CafePress’ filings with the SEC.

Certain supplemental financial measures that may be used on this call such as adjusted EBITDA and non-GAAP operating income are expressed on a non-GAAP basis. Definitions and calculations of these financial measures and in the cases of adjusted EBITDA and non-GAAP operating income, a GAAP to non-GAAP reconciliation can be found in the earnings release.

These financial measures are not intended to replace any GAAP financial measure. You should rely primarily on our GAAP results, adjust EBITDA and non-GAAP operating income considered only as a supplement to our GAAP results.

With that said, I’ll turn the call over to Bob Marino. Bob?

Bob Marino

Thanks, Alex, and thanks to everyone for joining us today. CafePress kept off 2012 with a strong holiday period resulting in Q4 revenue that was slightly above the upper end of our guidance and adjusted EBITDA at the high end of a range.

Net revenue for Q4 was $87.2 million, an increase of 25% over Q4 of 2011. Revenue was driven by strong demand for customized products and strong performance across all of our retail properties. It’s positive to note that we exceeded our overall revenue guidance without a significant contribution from EZ Prints as this speaks to the strength of our core business.

Adjusted EBITDA was $9.4 million. A generally strong EBITDA performance was somewhat offset by expenses related to the expansion of our manufacturing operations and the initial stages of the consolidation of several of our plans into our flagship operation in Kentucky that we discussed with you last quarter. Our execution on products, partnerships and acquisitions combined with the enforcement strategic moves in social, mobile and corporate shops are all on track and position as well for 2013 and beyond.

Let’s dive into our Q4 results. I’ll provide you with some overall color on the quarter before framing my comments around the three main elements of our business, the marketplace, Create & Buy and shops. First, CafePress had a very strong holiday season and customization was a key team driving consumer interest during the holidays.

We saw record numbers of consumers coming to our website to purchase an amazing variety of personalized products across a wide array of categories including apparel, home, travel and accessories, where there are consumers came to CafePress directly through the search engines, or via social media from their mobile devices or through e-commerce partners level of browsing, shopping and engagement were high. Consumers came to our site, they loved it, they found what they were looking for.

Second, as we have done for the last several years, we were able to raise pricing during Q4 while still enjoying a strong year-over-year increase in sales. We believe that this speaks very well to the breadth and uniqueness of our content and product offerings which is a significant competitive advantage for CafePress. Average order size or a less rose $50 during Q4, an increase over the same period last year and the average cost per order was down versus Q3 at $8.50.

Third, we continue to see increases in customer receive rates. Total customers increased to $1.2 million in Q4 and orders grew to $1.6 million. Our manufacturing operations were efficient and smooth during the holiday peak and our operational expertise in the Kentucky location allowed us to shift products later into the holidays than most online retailers.

And finally, we saw a continued growth across all of our retail brands driving strong results across multiple product categories. We saw exceptional results in corporate shops which I’ll cover in a few minutes along with more color on EZ Prints.

I’ll now turn to our marketplace where buyers and sellers connect to be a massive CafePress collection of crowd source content that easily unfolds to reveal a unique merchandise selection for each customer. The strong performance of the marketplace during Q3 continued in Q4 representing approximately 60% of our revenue. The social and mobile strategies introduced in the second half of 2012 helped to overcome the erosion in referral traffic from small shops that negatively impacted our results in Q2 and Q3.

Q4 was a breakout quarter for social media activities and results. In fact, revenue from the social channels is up approximately 100% year-over-year with attractive margins. These results along with our unique content catalogue which contains something for everyone reinforce our belief that CafePress is well-positioned to succeed in social media.

One example of this capability is our Facebook likeable gift service that we launched in Q4. It searches your Facebook friends’ profiles and suggests relevant and fun gifts base on their interest. Another is our present functionality and press boards which are increasingly popular ways for our users to share the designs they loved. Additionally, the remarkable variety of CafePress content is very popular on Pinterest and other social sharing sites. During Q4, we ran many successful promotions on Facebook and other social platforms that generated high ROIs.

As a result of these innovative programs, we continue to add new Facebook fans at a strong clip, up another 65% sequentially in the last quarter. This is good progress but it is only the beginning of a strong product roadmap for social media.

Mobile has been another key area of our focus and during Q4, we continue to enhance and streamline the mobile experience across all of our properties. Revenue from phones was up more than 140% and tablet-related revenue was up more than 80%. We launched MyInstaCard.com, a site that connects mobile, social photo sharing apps to custom stationery merchandise. This is one example of a powerful tools and apps that we have deployed to enable our users to quickly and easily create CafePress products.

Another element to our growth strategy is to continue to enhance the user experience across our e-commerce sites. The evolutionary changes we are making to CafePress’ homepage are improving conversion while contributing to customer discovery of our other brands. We have begun to create a more cohesive search and shopping experience across all of our brands and the initial results have been encouraging. You should expect to see ongoing progress in unification across all of our brands as we moved through 2013.

I’ll move to Create & Buy where individuals and groups create unique and customized products across more than 500 based goods. This represented approximately 25% of revenue in Q4 driven by great new product introductions across our retail brands such as outerwear, jewelry and travel items.

Getting new innovative based goods for on-demand customization across multiple product categories is a key part of our merchandising strategy. During the holidays, diverse products ranging from our custom iPhone 5 cases to customizable shower curtains for strong sellers, each demonstrating the importance of product innovation speed to market and the potential we recognized by widening our product categories.

I’ll also note that we’re excited about the ongoing group buying trends from LogoSportsWear. Sales for our groups property were up approximately 80% year-over-year on a pro forma basis. By exposing logo brand on CafePress, we have helped to accelerate the growth of this already strong business.

Turning to our shops business, as predicted, we continued to see the revenue and referral traffic from our smaller shops declined while our corporate shops have grown dramatically. While small shops are less relevant from a revenue and traffic standpoint, the designer behind each shop remains critical as they contribute a wide array of designs that propels our long tail marketplace marketing. As such, we streamlined content contribution by allowing marketplace designers to bypass the shop creation process through our design and list function.

Turning to corporate shops, we are very pleased by 70% year-over-year increase in revenue from this channel. New corporate shops launched during Q4 include the ESPN fan portal, [inaudible] and picture store, Michaels the craft experts and a great new store in partnership with the popular e-commerce site, ThinkGeek.

Additionally, we drove strong results from our unique licensed properties including the Walking Dead, Big Bang Theory, the ever popular Princess Bride movie and many others.

The performance of our corporate shops has been further strengthened by the EZ Prints acquisition which allows us to accelerate this area of our business. EZ Prints gives us a deployable Web-based solution to launch new shops allowing CafePress to reach new customers and channels across the Web and accelerate customer discovery complimenting social and mobile strategies I discussed earlier.

Starting in Q1 2013, all new corporate shops are being launched using the EZ Prints technology and we have begun to migrate our existing corporate shops to this new platform. Since EZ Prints is now being completely integrated to become our shops platform, it moves and combines their Create & Buy DNA to CafePress’ Find & Buy DNA. Revenue from the strategic hybrid cannot be broken out separately in 2013.

EZ Prints contributed revenues of $7.6 million in Q4. This was below the range we had anticipated, however, the large partnerships and shops we acquired performed well and most of the weakness came from non-strategic legacy areas that are not part of our focus moving forward.

Looking forward, the corporate partnerships Fight Line is robust and thanks to EZ, we have both the platform to serve them and the sales team to close them. Based on the work we have already done together, we believe the strategic underpinning of this acquisition will be highly beneficial to CafePress.

I’ll wrap up my comments by outlining our top three priorities for 2013. The first is growth. As you’ve seen from our press release, we are forecasting annual growth of 16% at the midpoint of a range. We expect to see growth across all of our brands and properties and to set the stage for an acceleration of growth trajectory in the future.

This growth will be supported by our ongoing expertise in Long Tail Marketing and search optimization supported by meaningful progress in the social and mobile programs that we have described in the last two quarters. These successful programs grow our audience and have a positive impact on customer acquisition expenses.

We will continue to fuel the growth of the marketplace with the addition of millions of pieces of broad user-generated content that make CafePress relevant for any consumer interest. We will continue to add interesting new based goods to enable people to create unique personalized items that have meaning to them and therefore carry a high value.

It is now time for us to go deep in product categories not just wide. A strategic benefit afforded by the additional space in Kentucky is the creation of an enhanced product lab to reinvent and improve the way we manufacture our top selling products.

As previously noted, we will rationalize our manufacturing, bringing more production to livable [ph] which will reduce margins in 2013 as we remove redundant operations. This will require an investment of approximately $6 million of profit during 2013 which is reflected in the adjusted EBITDA forecast we gave you today, but we’ll set the stage for operating strength and margin expansion in the future.

Our Louisville location provides strategic advantages for CafePress due to its privileged geography, low cost and our proprietary manufacturing processes which comprised our secret sauce. I encourage the analysts and investors that have not yet visited our headquarters to do so.

And the final priority is to drive partnerships and corporate shops to power customization across the web. We will accelerate from our strong foundation of corporate e-commerce shops for ABC and Paramount Pictures as well as our unique licensing deals where we allow consumers to personalize content from leading diverse properties including the Big Bang Theory and the US Army.

With these partnerships our content products and the CafePress brand itself will be discovered in more places across the web. Consumers will have the flexibility to purchase products directly from our partner’s sites or by linking directly to the CafePress marketplace.

In summary, we are pleased to have delivered a solid Q4. We had a great holiday season mitigated issues with our small shop’s channel created new social and mobile programs that expanded awareness and drove sales. We are encouraged by the growth of these strategic channels plus that of our corporate shops all of which are of significantly over 2011.

I’ll conclude by saying that customization is a mega trend that will drive e-commerce for decades. CafePress is the leader of the industry we created and we are just in the early innings of a long ball game.

With that said, I will ask Monica to review our financials and guidance before taking your questions. Monica?

Monica Johnson

Thanks, Bob. I will now review our financial results and provider outlook for the first quarter in fiscal 2013. Two quick notes before I begin. First I will be breaking out some of the elements of EZ Prints contributions for our business this quarter. However as Bob said, we do not find them doing so going forward since it have become an integrated part of our shop platform. Second, all comparisons will be year over year unless otherwise noted.

Net revenues for the fourth quarter were $87.2 million representing a 25% increase overall. Within this total, revenue from the EZ Prints business was $7.6 million. Excluding the EZ Prints contribution, we are encouraged by the performance of our domestic business which grew 17% during Q4.

Although our international business continued to experience some weakness and declined 2%, we did see improvement of the quarter progress. I will now review our metrics.

We have excluded the legacy EZ Prints financials from our metric given the B2B [ph] nature of that business. During the quarter 1,245,000 customers generated 1,601,000 orders had an average order size or AOS of $50. This represented customer growth of 9%, order growth of 14% and a 2% increase in AOS.

Alongside the 2% increase in average spent, we’re also encouraged by a 4% increase in orders for customer in our consumer business during this important fourth quarter. For the full year 2012, net revenues were $217.8 million or 24% over last year.

A Q4 adjusted EBITDA was $9.4 million and that compared to $11.5 million in the previous year. As the percentage of revenue EBITDA declined from 17% to 11%. A changing EBITDA was a result of the following.

First, gross margin on non-GAAP basis was 39.7% of revenue and that was a 4.3 percentage point decline year over year of which 1.3 percentage points were due to the initial plan consolidations efforts already underway that Bob discussed.

In addition, as we discussed in the last call, the legacy EZ Prints B2B business typically nets to a lower gross margin which had a minus 0.06 percentage point impact.

The remainder is primarily result of mix and pricing from promotions through entering the quarter. Additionally non-GAAP operating expenses increased 1.7 percentage points, those primarily due the first 1.1 percentage point increase in sales and marketing, that was led by our investment and customer acquisition.

This resulted in variable cost per order of $8.50 which resulted a dollar year over year within our art and group businesses which both have higher average order values and higher growth.

For the quarter overall, promotions continued for those note [ph] as a reduced level sequentially as both cost per order declined, $1.50 and our sales and marketing as a percentage of revenue declined 5.6 percentage points compared to Q3.

Second, technology and development related cost increased by 1 percentage point due to our data center investment as well as the addition of the EZ Prints technology group. These increases were partially offset by a 0.05 percentage point decline in G&A expenses due to lower professional fees and to get some scaling of the fixed cost base.

For the full year, our adjusted EBITDA was $17.6 million or 8% as the percent of revenue compared to 18.7% or 11% in fiscal 2011. Q4 non-GAAP net income was $5.4 million resulting in Q4 non-GAAP diluted earnings per share of $0.31. And for the full year, Q4 non-GAAP net income was $8 million which represents net income for diluted share of $0.48.

On a GAAP basis for Q4, include within GAAP operating expenses and accounting for the $3.2 million difference in GAAP versus non-GAAP are the following. A $1.1 million in stock base compensation, that’s compared to $0.7 million of 0.03 percentage point increase primarily due to acquisition related stock grant, next $1.2 million of amortization expense and that’s compared to $0.8 million overall a 0.02 percentage point increase goes to the amortization of intangible assets from our acquisitions of both LogoSportsWear and EZ Print. And lastly $0.9 million of acquisition related cost which was a 0.04 percentage point decline.

We posted GAAP net income of $3.1 million for the quarter of $0.18 per fully diluted share and that compared to GAAP net income of $5.1 million of $0.32 per fully diluted share in Q4 ‘11. For the full year, GAAP net loss was $0.1 million or $0.01 per diluted share.

Our Q4 effective tax rate was 28% compared to 34% and that was due to the changes of the stock compensation and manufacturing deductions which causes our non-taxable items primarily an exemption from domestic manufacturing have a larger impact on our effective tax rate.

Our capital expenditures for Q4 2012 of $3.5 million compared to $0.3 million in Q4 2011. The increase over the prior year was due to the timing of the completion of our newest data center that we recently opened in Kentucky.

For the full year, our capital expenditures totaled $11 million or 5% of revenue of which $3 million was from finance software capitalization, $5 million was invested in our data centers and the remaining $3 million invested within plant expansion.

During Q4 we had free cash flow which we defined as adjusted EBITDA with capital expenditures of $6 million and that compared to $11.3 million during Q4 of 2011.

Our Q4 free cash flow is impacted by the later timing of our CapEx spend this year as was previously mentioned. We also generate $18.4 million on operating cash flow during the quarter. The increase was largely due to our working capital changes associated with the EZ Prints B2B business as well as our flash [ph] and partner businesses.

As of December 31st, 2012, our cash and equivalents and short-term investments totaled $40.6 million. This reflects $30 million in cash used at the closing of EZ Prints (inaudible) at the end of October.

During Q4 our base of weighted average shares outstanding was $17.1 million and our fully diluted weighted average shares outstanding was $17.3 million. For the full year, our base of weighted average shares outstanding was $16.4 million and a fully diluted weighted average shares outstanding was $16.8 million both lower than Q4 due to the timing of our APO.

Lastly, we finish the quarter with 834 employees compared to 674 at the end of Q3 with 122 of the increase coming from our acquisition of this expense. We’ll now conclude with our outlook for the coming quarter and the full year.

Our revenue guidance reflects both growths in our core business and the integration of EZ Prints with our existing corporate shop’s platform. Our EBITDA guidance includes the consolidation of manufacturing operations into our Louisville plant which will result in an impact of approximately 2 percentage points for the year.

We expect this integration to be the higher gross margins as we exit 2013. So for Q1 2013, net revenues are expected to be in the range of $44 million to $48 million, adjusted EBITDA ranging from a loss of $1.5 million to earnings of $0.2 million. Non-GAAP net loss per diluted shares of $0.15 to $0.08, weighted average fully diluted shares estimated at $17.5 million. We assume the tax rate of 33% for the quarter.

For the full year 2013, net revenues ranging from $246 million to $259 million, a year-over-year increase of 13% to 19% growth. Adjusted EBITDA of $11 million to $15 million, non-GAAP net income per diluted share of $0.07 to $0.22, weighted average fully diluted shares of approximately $17.7 million and total capital expenditures in a range $12 million to $14 million.

With that we’ll turn it over to the operator for questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question comes from the line of Douglas Anmuth with JP Morgan. Please go ahead.

Kaizak Aline – JP Morgan

Great. Thanks for taking the question. This is Kaizak, I’ll fill in for Doug. I’m just wondering if you could give us an update on the European business what you’re seeing in terms of traffic given some of the Google changes?

And then second I was wondering if you could also talk about the deceleration and average order size, maybe talk about some of the mixed impact or anything else that might be impacting that number. Thank you.

Bob Marino

Sure. I’ll take the two topics and I’ll have Monica do some clean up afterwards. The international traffic was impacted last year for the same reasons that the small shops of our domestic ecosystem were impacted.

We have learned from that and placed countermeasures against that. And as Monica pointed out, we’re now starting to see that rebound through the fourth quarter. And in fact that improvement has continued on into the first quarter where we are seeing both revenue and traffic exceed prior year. So we do believe that we have corrected that situation that we build from there.

In terms of, I think the rest of your question was about AOS, keep in mind that we’ve, again, introduced 100 new products into the ecosystem. They’re not all priced the same and so we’re going to, as we’ve been saying for some time, exceed some fluctuation at AOS as a result of that.

Monica?

Monica Johnson

Yes. I think I’d just like to add, again, it’s international. We’re down 2%, that was an improvement over Q3 and we did see that improve as we’ve got further into the quarter.

With AOS, I’d admit two things. One, if you look at our year-over-year basis, we are up about $1. So when you look at sequentially it’s down. That sequential decline really comes from what I call a (inaudible). We actually have a fairly broad AOS if you look at our different businesses. And in the Q4 period, we tend to be much heavier on our tp.com [ph] and well, AOS was not down there. It’s just a bigger part of our mix overall.

So we already as most properties were up sequentially but the mix was different.

Kaizak Aline – JP Morgan

Thank you.

Operator

Thank you. Our next question comes from the line of Shawn Milne with Janney Capital Markets. Please go ahead.

Shawn Milne – Janney Capital Markets

Yes. Thanks for taking my questions. And I apologize to both of you. I just have multiple calls. Can you walk me through your EBITDA guidance? I’m sure you’ve gone through this, but EBITDA guidance for ‘13 and the integration cost of EZ Print as well as other facilities just so I can understand sort of the ongoing structure of the business.

Bob Marino

Again, I’ll do the broad strokes, speak to the expenses related to the consolidation and I’ll let Monica clean up from there. We’ll be shutting down two of our satellite plants this year and reducing significantly the footprint of EZ Print manufacture this year as well. And finally the growth that we’ve seen with Canvas On Demand and LogoSportsWear in particular, those plants will remain, but they’re at the point now where they will overflow.

In fact both of them have to outsource production for the fourth quarter. And so we’ll be creating the manufacturing sales necessary to bring that overflow volume here. Now, when you make products on demand as we do, though we see this consolidation effort coming, there is no finish goods that I could put into inventory to help us with the transition. Every order is unique and different and we obviously couldn’t predict what image this people would buy.

So you have simultaneous operations. You therefore have a situation where your quarters will contain at some point during the year products that are coming from one plant and another plant and therefore there are two freight bills that we’re only asking the customer to pay once.

So a significant amount of the $6 million dollars that we forecast of additional cost to do this consolidation comes from that. Now, about 20% of our products are fully automated, but that means 80% still require an artisan at some point during the manufacturing process. And so what you’ll have is as you wind down operations in one plant where the learning curve is (inaudible) in the rearview mirror, you are winding up with folks that are still in their learning curve and therefore there’s less efficiency and higher scraps so that it will hit the labor and the material’s numbers.

But having done all that, when we get through this process, we will have lower cost not just through dilution of effort, of overhead, but also because of purchasing power, the efficiency we gain, by having it all in one location. But we will also be able to grow faster because we’ll be able to more conveniently add the products that are selling to all of our properties so they can all come out of one plant on the same box and therefore reduces the friction and the conversion funnel.

Monica?

Monica Johnson

Yes. And I would just add. So I think what you’ve seen is and we’ve talked about this on the call last time is we have doubled the footprint of Kentucky in terms of the space we took. We used some of that during the fourth quarter, but we intend to use a significant portion of that over the course of the next three to four quarters.

We’ve got six manufacturing locations right now. We’re going to consolidate parts or sum of four of those [ph] into Kentucky over the course of this year. And so with that, we’ve taken about 2.5 points of gross margins or as margin is down too low for the cost to do so.

Shawn Milne – Janney Capital Markets

That’s helpful. Did you reiterate or would you reiterate your target as potentially reaching double digit margins back into fiscal ‘14? And then I got one more follow up.

Bob Marino

Yes, Shawn. That is our plan. And we believe that the consolidation effort allows us to get to that.

Shawn Milne – Janney Capital Markets

And then Bob on the growth front, I mean the initial fiscal ‘13 guidance points to reasonable growth. I mean is it still through a mid-single digits organic plus easy plants, what you’re seeing in the market it does appear, and this may have been asked, it does appear that maybe one of your competitors is getting more aggressive and did drive a little bit better traffic growth. Any color around that? Thanks.

Bob Marino

First, on the growth, we know that last year we were bolstered by really three acquisitions, two made that year and one made late the year prior. And so that helped the growth rate last year. But when we look at the pro forma growth last year, we did see the slowdown in the second and especially the third quarter that we have previously addressed on these calls.

We saw an acceleration of that pro forma growth in the fourth quarter. And in fact if you look at this year, we’re calling it for less growth by acquisition and more growth from pro forma, more growth from organic pro forma growth compared to the lead in of previous two quarters that we’ve had.

So I think directionally we’re going in the right way. In terms of competition for traffic, we always remind people that traffic does not necessarily equal sales. And based on the competitive information that we have, we try to get our traffic very filtered and therefore highly converting. And every external metric that we can look to within the (inaudible) is in fact the case.

Shawn Milne – Janney Capital Markets

Okay.

Monica Johnson

I would just add. I mean I think with our range, our expectation is that increases sequentially to get throughout the year. I think Q1 has been of a tougher comp given some of the timing to promote the Hunger Games we had in Q1 last year and one (inaudible) and where Easter falls as well as we are really working diligently to integrate this platform of EZ Prints into our corporate job business. So we’d expect deceleration as the year progresses.

Shawn Milne – Janney Capital Markets

That’s helpful. Thank you.

Operator

Our next question comes from the line of Brian Fitzgerald from Jefferies & Company. Please, go ahead.

Brian Fitzgerald – Jefferies & Company

Thanks guys. Sales and marketing was a little down than we expected and we had talked kind of last quarter about dialing up promotional activity to express the lifetime value to customers. Can you give us some color about how that progressed through Q4, maybe what your outlooks are for ‘13? Thanks.

Bob Marino

So we have in aggregate brought down the sales and marketing this quarter but within certain properties such as Great Big Canvas and LogoSportsWear, we’ve actually accelerated spend there and we’ve seen a real response to growth rate there for having done so.

I think the reason we were able to achieve more efficiency in sales and marketing in our other properties because of the focus that we had put forward a couple of quarters ago on increasing the repeat rate which again we saw which therefore drives a greater lifetime value with the customers. So we have really progressed through where we had hoped we would a nice balance between new customer acquisition and controlling those expenses a bit more and also repeat cultivation.

Brian Fitzgerald – Jefferies & Company

Thanks.

Operator

Youssef Squali with Cantor. Please go ahead with your question.

Youssef Squali – Cantor Fitzgerald

Thank you. Good afternoon, guys. A couple of questions. I guess, Bob, going back to a comment you made and you put [inaudible] marks around EZ Print, I think you said something to the effect that the $7.6 million in revenues came in a bit lower than expected on some non-strategic legacy business. Can you maybe just expand on that and just broadly speak on where are you in the integration process.

And then I guess on the M&A front, historically, you’ve been a big proponent of maybe making this kind of tuck in acquisitions to help you grow. You seem to be now favoring more organic growth, and so I was just wondering what the M&A appetite is for 2013. Thank you.

Bob Marino

Thank you, Youssef. So first on the performance of EZ in the fourth quarter. As you know, the acquisition was finalized in the middle of the fourth quarter, so that’s the busy season for us. It’s also a busy season for them. So no meaningful integration steps were going to take place during that quarter. They began really post Christmas and through now.

The reason for their miss are really as follows; we had rationalized a way what we considered the non-strategic sales already. But that really is leaving both strategic accounts – those are the accounts that already used the technology that EZ Prints has – the reason we acquire them and all of those accounts that are already on that technology, all their legacy accounts, they in fact, grew. It is the ones that were not yet there that did have some shrink during the fourth quarter. But when we look at why they went down, they didn’t lose any business there. They still have those accounts and in fact, they have a very different growth rate now that we’re experiencing with them into the first quarter.

But you see, EZ doesn’t have the breadth of product range that CafePress has. So as a result, their clients don’t just use EZ Prints, they also use some other suppliers. And EZ Prints was disadvantaged this year when those clients selected products to promote in the fourth quarter that in fact came from another supplier. We’ve already see, because of the integration efforts underway, that their clients more normally come now to CafePress at the exclusion of other suppliers because we have a greater range of products that can all be incorporated in the same shipment.

So expect going forward that to completely reverse itself, and why again why we’re very optimistic on the EZ front.

On M&A, I think, yes, you sensed right that for now my focus is on digesting the important acquisition of EZ Print because it is not just a tuck-in like the others were. It doesn’t simply give us new product categories like the other operations did. This is truly an intertwining of their create-and-buy DNA with our find-and-buy DNA and making that now this new offering on their technology platform for all corporate jobs.

And I believe we need to digest that a bit through this year, monitor how that performance is going, making sure it’s living up to our expectations before we get further down the pipeline of potential acquisition.

Youssef Squali – Cantor Fitzgerald

And just one last perhaps for Monica. On that $6 million of increase spent for the integration, is there any component there for the increase in the size of the distribution centers or any kind of thing that could actually be appreciated or amortized over time or are we just talking about P&L impact and there is more to it that doesn’t run through the P&L that runs through the balance sheet.

Monica Johnson

I think that’s a piece of it. So the $6 million really is P&L of which some of its facilities and depreciations or some of it is facilities related but a lot of what that speaks to is increases in sort of the personnel and the material side. In terms of what’s not there is as we look at our CapEx spend for next year, we expect to be on the same range of 5% but we actually expect that spend that to actually shift more towards back in flat, and that as we settle a bit more in terms of the backend operation.

So, yes, in theory, we have about 5% of spend and it’s split between front end and back end. Last year, you saw it probably more 70% front end, whereas, I expect that mix will shift more towards the back end as we increase that portion there. So that’s the other side of it but both within the numbers we talked about.

Youssef Squali – Cantor Fitzgerald

Okay. Thanks a lot.

Operator

Aaron Kessler with Raymond James. Please, go ahead with your question.

Aaron Kessler – Raymond James

Hi, guys. A couple of questions. First, can you provide us an update maybe the revenue mix between find-and-buy, create-and-buy and shops and where you see that going. And if you have it maybe if you can give us or if you have logoed revenues and invitation [ph] box revenues as the [inaudible] maybe just EZ Prints, maybe just general revenue expectation for 2013. Thank you.

Bob Marino

All right. I’ll just hit where we’re heading and I’ll let Monica follow up with the precise information you asked for. The EZ Prints acquisition, the technology there allows us to accelerate, bringing our core competency to all destinations. Our core competency is of course this great wealth of content that speaks to every occasion and the ability to reproduce that content on a dazzling array of base goods, on demand, beautifully, profitably and affordably.

Now, those competitive advantages don’t need to just reside on our side. In fact, with the EZ Prints technology allows for us to do is to reach other e-commerce players, other media sites and provide their audience a tremendous choice engine. So you will see over time the growth of our business will be more from that empowerment of partner sites than even our own site.

Monica?

Monica Johnson

Yes, so, [inaudible] one is in terms of the breakout of the three business components, so the market place, there was no find-and-buy. That was about 50% of our business for the fourth quarter. The create-and-buy portion was roughly 25% and the remainder was the shop portion on both our legacy shops, corporate shops and then we’re now starting to include the EZ Print portion there as the remaining, approximately 15%.

So that was mix was like 54 [ph], going as far as we expect to see something sweeten that shop portion as we fill the corporate shops both with the EZ Print acquisition and integration into our own corporate shop business.

And then, yes, about Logo, that’s one piece of business that is still within the one year and that business or what I would entire CGO or Clubs Group and Orgs business has really shown growth. It’s about 80% for the quarter and I would note that’s both from sales on the LogoSportswear.com but also sales that when customers comes to CP.com site, we’re sending them over to them as well. That was just over $5 million for the quarter and that again was about 80% growth.

Aaron Kessler – Raymond James

Are there any expectations for EZ Prints maybe for 2013 or how should we think about revenue there?

Bob Marino

So EZ Prints, even their legacy customers will enjoy now the product range of CafePress and the find-and-buy business. And of course, go forward, they will no longer exclusively sign deals that are white label and create-and-buy. The offering we go forward with is again this mix high brand. So we can’t call out for you growth for EZ separate from growth of all of CafePress.

Aaron Kessler – Raymond James

Got it. Thank you.

Operator

Keven Kopelman with Cowen and Company. Please, go ahead.

Andrew Merrick – Cowen and Company

Hi, this Andrew Merrick, on for Kevin. I just had two quick questions. Could you tell us anything about Q1 trends you’re seeing to date across your different properties especially in the run up Valentine’s Day here? And did you see any seasonal election benefit in Q4 from the October month right before the presidential election? Thank you.

Bob Marino

I’ll let Monica handle the trends that we’re seeing in Q1. I’ll speak to the fourth quarter election benefit. You know politics, separate, different than elections has always been a great area of business for us and it remains that way as it was last year. What we just didn’t get last year was any meaningful incremental lift from the election.

Monica Johnson

Yes, and I think, as Bob said, politics is still our biggest category overall but last year was very similar to the year before. So while a good segment for us, we did not see the election lift that we saw in 2008.

And then secondly, in terms of the Q1, Q1 is progressing, let’s say, as we expected. Certainly, we have some year-over-year bumps that we feature for Valentine’s Day, and are probably not only with CP.com but also in our photo-related and canvas offering. And so we’re seeing that at a pace that we expected so far this quarter.

Andrew Merrick – Cowen and Company

Okay. Thank you.

Operator

(Operator Instructions) Our next question comes from Chris Donnelley [ph] with SeedRock Capital [ph]. Please, go ahead.

Chris Donnelley – SeedRock Capital

Thanks for taking my question. One quick question and then I have a couple of follow-ups. As it relates to EBITDA guidance for this year, I mean, given that EBITDA is a non-GAAP measure, why the decision to exclude the 2 percentage points from the consolidation. And I just say that in the context of it makes comparisons for people that are out on the street and building models. It makes it look like you’re off target. So just question about the decision to exclude that, please.

Monica Johnson

I think it’s included in our guidance. So I think what we’re trying to do is call it out specifically so you can understand what the impact is but in terms of our guidance for EBITDA for the full year, we have included that amount.

Chris Donnelley – SeedRock Capital

Understood. I’m just saying that if you include that back in, it makes it look more favorable. It’s a non-GAAP measure. I’m just trying to understand the decision to include that but that’s fine.

I have also a question about accounts receivable. How do I think about the jump in accounts receivable in the quarter?

Monica Johnson

So it’s two areas; one is EZ Prints is a be-to-be [ph] business. With that comes some additional accounts receivable that we didn’t have in the prior period. But also as we do more partner type deals and have some flash component of our business, we see that increase as well. So those are really the two drivers of the AR increase and again, that was from both the acquired business as well as our base business.

Operator

And this concludes the question and answer session. Please, go ahead with any final remarks.

Bob Marino

Thank you all for joining us today.

Operator

Ladies and gentlemen, that concludes this conference call for today. Thank you for your participation. You may now disconnect.

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