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Vistaprint Limited (VPRT)

February 26, 2013 4:20 pm ET

Executives

Meredith Mendola

Ernst J. Teunissen - Chief Financial Officer, Executive Vice President and Member of Management Board

Analysts

Andrew Ruud - Morgan Stanley, Research Division

Andrew Ruud - Morgan Stanley, Research Division

So we'll go ahead and get started. My name is Andrew Ruud, the small-cap e-commerce analyst at Morgan Stanley. And I'm joined by Ernst Teunissen, CFO of Vistaprint; as well as Meredith Mendola from IR. Thank you very much. I'm going to read a quick Safe Harbor Statement from Morgan Stanley, and then Meredith has one of her own.

Please note that all important disclosures, including personal holdings disclosures and Morgan Stanley disclosures, appear on the Morgan Stanley public website at morganstanley.com/researchdisclosures or at the registration desk.

Meredith Mendola

And from Vistaprint's perspective, I know you all know that there are risks to investing in stocks. Vistaprint is not excluded. And we cordially invite you to read all of our SEC documents, which can be found on our website, to understand those risks better and understand why some of the things that we have said in the past or may say today may turn out differently than what we're saying.

Question-and-Answer Session

Andrew Ruud - Morgan Stanley, Research Division

Thank you. So if we could just rewind the clock back to the end of fiscal 2011, you guys articulated a 5-year plan for -- a 5-year CAGR of 20% growth both on top line and EPS for your core business. We're now a little bit beyond 1.5 years into that. I just wanted to kind of get your take in terms of what's gone well and what you think there's room for improvement as we go towards the -- towards your Analyst Day at the end of fiscal '13.

Ernst J. Teunissen

Absolutely. So there are a few things that worked really well compared to our plans and are more or less on track, and I want to highlight a few. One is the success we've had in our North American business. So if you look at our North American business and the amount of change we've gone through in defining our customer proposition there, launching new advertising channels, like TV advertising, and substantially repositioning how we interact with our customers, that has gone very well. If you look at our revenue growth in that area and the profitability we get from that growth, it's gone more or less according to plan. Obviously, there are always puts and takes but more or less has gone according to plan. If you look at what we've been able to achieve on our manufacturing side, that has gone true to the plan as well. We've publicly said we're targeting our COGS as a percent of revenue to go down with a few percentage points in the course of this 5-year horizon, and we've been tracking nicely to that. In every quarter, since we announced that strategy change, we've seen a year-on-year improvement in our gross margins. In the December quarter, which just finished, we had a year-on-year improvement of 40 basis points on our gross margin. That was 90 basis points compared to the year before that. So that has all gone very well. We're very pleased with that. We're pleased with our progress in emerging markets. We've made the investment in India, a minority investment in China. We're pleased with how our development with our acquisitions has gone, how Albumprinter is developing, how Webs is developing. So that's all going good. The one part that has not worked out according to plan has been Europe, and our European growth rate has been significantly -- has been decelerating significantly, starting really in the last part of our previous fiscal year but continuing into the first half of this year. And we've seen that the changes that we've been making to our strategy have worked out really well in North America but have not worked as well as -- in Europe. And we believe that is -- [indiscernible] to the question, how much of it is the macro, that we think the macro is likely to have some, the influence. But we think it's -- if we look internally, it's largely how we've been executing on our strategy in Europe. So we think it's the right strategy. We think Europe is an attractive market for us, and there's no reason for us to be growing slower than we're growing in North America for a number of reasons I can go into. But that has been lagging behind, and we're working hard to make sure that we turn that around.

Andrew Ruud - Morgan Stanley, Research Division

Sure. So if we just go into that a little bit more, you cited it's probably more about execution. How do you guys think about the business differently in North America versus internationally that provide you with that opportunity to increase execution abroad?

Ernst J. Teunissen

So what we have done really well in North America is what we expected as part of our strategy is we've expected to create [indiscernible] because we have been changing how we sell to our customers on our site, being more focused on an easier experience rather than on maximizing the total number of products that customer went away with. We've been taking our gas -- our foot off the gas a little on how much we wanted to discount to get a customer to repeat after its first purchase in the months following but have been a little bit more patient in the way we've communicated to our customers. But that has created some headwinds and immediate repeat order frequency as well. And what we did really well in North America is counterbalance some of these effects and get the positive as well from -- as the headwinds. And the positive has been a real change in the clarity at which we price in North America, for instance, therefore, less focus on discounting on the product and more focus on an overall balance of the price, playing more with shipping, reducing, for instance, what we charge for uploads, making it much more transparent, communicating in a very different way. Our TV advertising, although it's a direct response spot, is really focusing on the brand attributes that we want to promote. So that has, in financial terms, meant that although we did see the headwind of repeat order growth slowing, we saw, for instance, our average order value meaningfully improve in North America over the period. So if we go to Europe, we just have not been as effective in making all these additional changes. And in fact, we've, in Europe, seen our average order value decline in the period rather than go up like we've seen in North America. So what we're really focused on right now is making sure that the many things that we were able to do right in North America, that we implement those best practices and adopt them as well as necessary in the European market, and we're working very hard on that. At the moment, we've made some important management changes as well in the process of that. And we feel the market is structurally very attractive, and we'll get through this, and we'll get this business to improve. It may take a little bit of time before we're actually through it. So if we look, for instance, at the back half of this fiscal year, between now and the end of June, we believe that the growth rates are still going to be subdued in Europe, single-digit type of growth rather than the full potential that we think the world trades [ph] and the markets can have.

Andrew Ruud - Morgan Stanley, Research Division

Okay. And so as we think about the way that you choose to spend on advertising in both markets, I know that you don't break out your cost of customer acquisition between the 2 regions, but is there a different strategy that you've taken in North America versus in your international markets?

Ernst J. Teunissen

No, the underlying decision model is very similar. So how we think about how we deploy advertising is we look at the cost of end channels that we invest in as a COCA, cost per customer acquired, and then we look at the predicted lifetime value of a customer, and we look at the implied return we, therefore, make on that customer. And that's how we prioritize our investment spend across different channels, and we want to have an overall profile, with a large part paying back earlier and therefore, high return profiles. And the smaller part paying back over a longer period. So that's been very similar across 2 markets, the 2 markets. What's been different across the 2 markets is that the prediction of lifetime value now looks a little bit less favorable in Europe because of the order values are coming down or have to come down. And therefore, how that feeds into your predictive model actually shows up as a predicted lower lifetime value based on these current levels. So on a relative basis, some of these investments that look on the margin still attractive in Europe may look less attractive going forward. So we're going to trim in Europe to that reality and trim our advertising spend to that reality.

Andrew Ruud - Morgan Stanley, Research Division

So it sounds like a little bit of an issue around the customer retention rate after the first year. There's improvement that could be made there. But can you talk a little bit about how thereafter those cohorts performed just so that we have a little bit better of an idea, maybe longer-tenured Vistaprint customers are, in fact, much stickier?

Ernst J. Teunissen

Yes, it is. So if you look at the typical cohort, what you see is 2 things. You see a typical decay path. And if you look at the highest churn, it actually happens in the -- after 6 to 12 months of a customer being with us, and then you see another significant drop in the 1,000 customers that you had in this -- the 6 to -- 12 to 18 months period. And after that, it's actually become quite sticky and becomes today that, that decline of the curve becomes much flatter. And so if we are able to maintain that customer in that sort of 18-month period, the customer is likely to be quite sticky. The other thing that we've seen in each cohort is that the customers that stay with us tend to spend more over time as well, more in their second year than their first year, more in the third year than their second year. And the other trend we've seen across cohorts is that every year, cohorts tend to spend a little bit more than the cohort before, they spend more earlier than one before, and that's been translating to a positive trend in our revenue per customer. Europe has -- recently, that's been a trend -- has been a break in the trend in that respect.

Andrew Ruud - Morgan Stanley, Research Division

Are there any opportunities for you to really drive an innovation cycle in your products, and perhaps, that might be able to help retain customers and bring the ASP up?

Ernst J. Teunissen

So we have -- if you look at the products and innovation, as we are putting quite a bit of emphasis on the digital innovation at the moment and ultimately, on the integration between digital and physical products and what was behind our acquisition of Webs, was very much to stay at the forefront for our customer base, developments in digital and innovation in digital. So one of the products that Webs successfully developed and we're now actually selling through our Vistaprint base, as well as the product called Pagemodo, which is a Facebook builder. It's been a very innovative product that we've been able to apply to our customer base, for instance. The -- with -- through the acquisition of Webs, we've also been able to substantially upgrade the website builder, our own website builder, and we're in this year integrating the Webs website builder into our own Vistaprint engine, so we can have the same for our customer base. And so that -- about $70 million of Vistaprint digital revenues -- it's excluding Webs, but Vistaprint has about $70 million of digital revenue. That's a very important source for us we want to innovate around and integrate around because as we look towards the future, increasingly, it will be -- also for our customer base be important to be relevant in both the physical and the digital side. So we see it as a product innovation in that area. And we see smaller sets of innovation across our existing products. We continue to innovate around textiles. So we have introduced embroidered textiles, for instance, over just the printed textiles, which was a huge technology innovation on our part, as we very cost-effectively offer 1 or 2 embroidered polo shirts, where typically that can only cost-effectively be done at 20 or 30 or 100 polo shirts. So we see innovation on a product basis as well that we continue to target.

Andrew Ruud - Morgan Stanley, Research Division

So how should we think about Webs and the opportunity there? It seems like once you lay the foundation and you spend on tech, the incremental margin on that business should be pretty high. What sort of growth should we be thinking about for that business over the longer term?

Ernst J. Teunissen

So we -- it is a very, very attractive part of our business. It has a very high gross margin. And within Vistaprint, we've been fortunate to be able to offer it to our existing customer base. So it's been, as I said, having a high gross margin. It's also been -- has high operating income impact, so advertising spend in our Vistaprint business has not been as high. So we really have a 2-pronged approach at the moment to customer development. With Webs, we operate a premium model, so we acquire millions of new customers on the premium model that convert to a small percentage actually in -- via revenues. And we see that, within the Vistaprint context, as another way of acquiring a lot of micro businesses for us. So we have -- through our business card product within Vistaprint, we have this leading-edge product, so this tipping -- a leading-tip product in which we can acquire a lot of customers. And we believe that we can create an additional customer acquisition engine through the website and through our premium model. So it's important for us from that perspective. And then the monetization across becomes very important, so how do you then monetize even the customers that don't convert to a premium Web package to a physical product, for instance, is what we're focused on. So that's one importance. But equally important to us, or perhaps more important, is that we really want to stay for our customers at the cutting edge of having a really cutting-edge product, both in Webs, as well as in our own Vistaprint offering, and make sure that we keep innovating there and keeping -- being at the forefront and keep being relevant because, as I described, for our Vistaprint customers, it's -- we have a relatively easy in with the digital product because we have a captive audience. And so the way to move forward there is to stay relevant and not be product the reason for people to switch, and that's what where these investments are.

Andrew Ruud - Morgan Stanley, Research Division

Okay. Just to give us an idea about the customer overlap or revenue overlap, and you said $70 million of Vistaprint revenues on the digital side, what sort of overlap is there with the customers?

Ernst J. Teunissen

Between Webs and...?

Andrew Ruud - Morgan Stanley, Research Division

Well, I thought that part of the digital revenue is...

Ernst J. Teunissen

Oh, if there's overlap?

Andrew Ruud - Morgan Stanley, Research Division

Yes, a part of that digital revenue is a high overlap.

Ernst J. Teunissen

Yes, a very high overlap. There's very high overlap. It's just most of our digital revenues are from customers who also buy physical products from us within the Vistaprint portfolio.

Andrew Ruud - Morgan Stanley, Research Division

And is -- how strategic has Albumprinter been for you? You acquired that around the same time as Webs, and so that's kind of exposed to that weaker European region. So has -- is that going to continue to be a place where you're going to invest for growth?

Ernst J. Teunissen

Albumprinter has actually done very well. It grew -- in last quarter, it grew 22% year-on-year, very nicely in a difficult European environment. It's been going -- it's going very well. The strategic reason for us to buy that is the consumer adjacency, it's very important for us, particularly in Europe. And we make a significant amount of our annual revenues, but particularly our December revenues, in Europe from the consumer segment. And we have a number of products that are very competitive in that segment. In Europe, in particular, we do very well with photo calendars, for instance, in a December quarter, and also with Christmas cards. The product that we didn't have was a photo book product. And so with the strategic relevance for Albumprinter for us has been is that, one, it's been filling in a product that we didn't have. In the last December quarter, for instance, we now have been offering really as Vistaprint is -- Albumprinter has white label for Vistaprint, so under the Vistaprint brand and integrated in our website. We've been selling the Albumprinter photo books produced by Albumprinter to our customer base. And so we have that product capability. But we also have an additional brand now in Europe, which we think is very powerful. We have the more rational Vistaprint brand, which is more price-oriented. And we have the -- Albelli value brand under Albumprinter, which is -- so the higher-end brand, different high-touch relationship with our customer. And so we think that combination really solidifies our position in consumer in Europe. We're by far the largest consumer player in pan-European -- in Europe, and we believe this acquisition is going to help us stay ahead of the pack in essence.

Andrew Ruud - Morgan Stanley, Research Division

If we adjust your kind of trailing 12 month CapEx for the improvements you've made in your manufacturing facilities, you guys have pretty good free cash flow. So is there an opportunity there to really kind of grow that business to scale? If we look at what Shutterfly has done here in the U.S, they've finally got to scale and are consolidating the industries here. Is there an opportunity for that there?

Ernst J. Teunissen

So we do really feel that we are benefiting from the scale advantages that we create and we see continued opportunity to continue to move that scale advantage forward. So if you look at our core market, our core micro business market is we're by far the largest player in that area globally, but also within North America or in Europe. And we see significant scale advantages for that. We see scale advantages in our manufacturing, so we enjoy 65% gross margins, which we believe very few of our more smaller competitors in the small business market can achieve on the print side. And we have significant advantages in manufacturing, and we keep investing in manufacturing. We have significant advantages in our ability to amortize our software development cost across $1 billion plus of revenues, which many of our competitors don't have. So we really feel we have a scale business, and that's -- it's creating a big competitive mode for us, and we plan to continue to invest in our business to create and to continue that process.

Andrew Ruud - Morgan Stanley, Research Division

So with the excess cash flow, are there any sort of opportunities you see?

Ernst J. Teunissen

So what we have seen in the last 18 months is 2 opportunities. One is to do some M&A that particularly positions us well in some of the adjacent areas. And we've defined the most important adjacent areas to us to our core as the consumer business and the digital business and the -- and new markets, particularly emerging markets. And so what you've seen us do over the last 18 months is make acquisitions in each of them, so smaller scale but, for us, important movers in those elements, so Albumprinter in the consumer; Webs in the digital space; investments -- a small investment in India and a minority investment in China and the other markets. So that's been part of our excess cash, but also are -- where we use our balance sheet. And then we've seen interesting opportunities to improve the way we deploy our capital buyback -- buying back shares. So where 18 months ago, we were a company that had -- was cash-rich on its balance sheet and had no debt. We've taken on debt. At the end of December, we had $230 million of debt that we had drawn on our credit facility. And we used that for acquisition, but we also used that for buying back shares. We've bought back more than 10 million of our shares in the last 18 months. And we continue to be interested in looking at opportunities to deploy our capital that way as well. We think that is going to be attractive for our shareholders over the long term as our earnings improve. And hopefully, our share price will improve as well.

Andrew Ruud - Morgan Stanley, Research Division

So I mean, management owns about 8% of the company, and we are in a low rate environment. It -- from what you say, it seems that you believe your share price is undervalued. Is there an opportunity for a little bit more of a substantial leverage recap or even possibly taking the company private?

Ernst J. Teunissen

So we have been -- I don't know what you would call substantial, but we have -- we've switched in 18 months from a position where the profit's large, if it's as if you have around $1 million -- $1 billion market cap. We were roughly $200 million in negative debt cash. And we're now in a position where we're roughly in the same amount of debt, so we've had an important switch in terms of our leverage. We have a credit facility in place that allows us to go to $500 million total credit facility, $100 million of which is a term loan and $400 million is a revolving credit facility. We've drawn $230 million of that $500 million, so we have some powder left. And so to answer your question, yes, we have seen and continue to see interesting opportunity to use our balance sheet in a way that we think will maximize the shareholder value for our existing shareholders.

Andrew Ruud - Morgan Stanley, Research Division

Okay. And I'd like to go to the audience to see if they have any questions.

Unknown Analyst

Hi. You guys mentioned on the last earnings call that you were going to cut back a little bit on just some of the investments and you'd have more to say at the Analyst Day. Can you give us any sense now, though, what type of correlation we might be looking at in terms of the revenue? If you cut back on marketing advertising spend, how should we think about maybe the top line near-term potentially being impacted by that? And then secondly, just why does the CapEx guide remain -- or the CapEx spending remain so high as you're cutting back in other areas?

Ernst J. Teunissen

So on advertising is -- the way we look at the revenue growth in advertising, and then I talked about the year before as if we do see that the returns are not what we expected it to be. It will lead us to reassess the returns that we will expect we can make in advertising. So our per-customer returns in Europe are not what they were before. Some of the advertising expense that we were planning, we may prefer to not do until those economics have been improving. So that's one part of it. We're talking about advertising that is by definition then has payback periods beyond 12 months. So the near-term effect of pulling back on some advertising is a further reduction actually of revenue growth. Good [ph] advertising does directly impact the top line. But it is -- it has a positive impact on the bottom line by nature of these payback periods being longer than 12 months. The other thing that we have been doing in response to our revenue being lower this year than we originally anticipated is we slowed down some of our OpEx growth. So we've slowed down some of our hiring not just in Europe but also just in our larger G&A pull and OpEx pull. We've slowed down the hiring of our engineers, slowed down the hiring of -- for general admin folks. We slowed down some of our travel expense really in response to -- to stay at a similar profit path despite the lower revenue. So -- and this is slower growth rather than OpEx reductions in any way, and it's not endangering the long-term prospects so we felt we could trim and hit our profit targets quite well. And the advertising pullback that we have experienced this year and experience this year, it's -- I don't want to exaggerate it, it's I call the trimming. It's a trimming. It's not that we sequester advertising budgets, we're just adjusting it on the margin, where because of differing order values that we see, it makes less sense. So the bulk of our advertising still makes perfect sense, and we continue to spend that.

Meredith Mendola

I think it -- I just think it's important to add that we're already working on a path towards margin expansion in FY '14. So it's not like we had a situation where we said we're going to have 5% margin in perpetuity, and now all of a sudden, we change that strategy. There -- our plans call for margin expansion next year. Yes, we started a little bit earlier, and maybe we're trimming a little bit more than we already would have, but we are going to slow down the hiring and G&A expenses and some of the technology expenses. So it's just a little bit sooner.

Unknown Analyst

Got you. Okay. Is mid-single-digit revenue growth in Europe still a reasonable assumption then in the next year?

Ernst J. Teunissen

So we've made some forward-looking statements about the rest of this year, so the -- until the end of June, and we said we have this 1% year-on-year growth in the first quarter, in the September quarter, and then 9% growth in the second quarter. And the 9% was positively influenced by the -- just the importance of consumer, so consumer grew faster than small business in that quarter, so grew about 9%, and small business is a little bit below and -- below that growth of 9%. And so we've said for the rest of the year, somewhere in between is sort of what we're working with. If things go well, it's at the higher end of that. If things don't go well, it's at the low end of a single-digit number. But a single-digit number -- a mid-single-digit number is what we think is possible in -- for this year. For next year, we haven't yet given any guidance. We're really working hard through making the changes now, and we'll have much more visibility as we go -- come toward the end of the year.

Andrew Ruud - Morgan Stanley, Research Division

Okay. Well, I think...

Unknown Analyst

Just one, if that okay. Just on the -- back on Europe. Was there something, aside from the environment not being very helpful, that caused it to lag North America or is it just kind of the -- you got your acts together in North America before Europe? Was there something that happened that caused, I guess, missed [ph] execution -- management?

Ernst J. Teunissen

There was nothing specifically that caused -- the fact is -- the underlying fact is, is that Europe is a much more complex market for us, is that we are operating in 17 different markets within Europe. And so that has, I guess, contributed to the fact that it wasn't as easy to do, but we believe really that we could have done a much better job, and it's mostly down to how well that team was able to execute versus the team in North America.

Unknown Analyst

You spoke of some management changes that you made in Europe. I'm wondering if you believe that, that may help the execution in that geography?

Ernst J. Teunissen

Yes, we do. So the most important change we made is we asked -- back in July, we asked our head of North America, Trynka Shineman, to take responsibility for revenues and marketing for not just North America but for both geographies. And Trynka's moved to Europe since, and she's very focused on that. She's very heavily engaged with the team on the ground in Europe and making some changes there as well. And so we very much believe that change in management, as well as applying best practices from North America, which the change in management facilitates, is the key to improving things.

Andrew Ruud - Morgan Stanley, Research Division

If there are no more questions, we'll end it. Thank you very much for joining us.

Meredith Mendola

Thank you.

Ernst J. Teunissen

Thank you for having us. Thank you, everyone.

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