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CafePress (NASDAQ:PRSS)

JPMorgan Global Technology, Media and Telecom Call

May 15, 2013 01:30 PM ET

Executives

Bob Marino - CEO

Monica Johnson - CFO

Analyst

Unidentified Analyst

Thanks everyone for being here today. So, it’s our pleasure to have CafePress. So, we have CEO, Bob Marino and CFO, Monica Johnson. So, Bob has been CEO since April of 2011, prior to that has served as President and COO and VP of operations and joined the company in 2005. He’s also the CEO of Cuisine Innovations, Food Manufacturer. Monica also joined in 2005 as CFO.

So, CafePress is a leading platform for customers looking to buy design and sell customized products, has strong network effects has broader selection of content attracts more buyers and a broader audience of buyers attracts more unique designs from content owners.

So, with that I think we’ll let Bob give a couple minute sort of introduction and overview of the business. Just raise your hands or go to mikes and we’ll get them into.

Bob Marino

Thank you Doug. So CafePress 101. We have world class frontend website operation, we also have a world class manufacturing operation. You see, we only make money one way by shipping delight in a box and the delight that we put in the box is custom gear, ranging from t-shirts and even all the way up to a custom GPS system. And we get to do this down three major channels on marketplace which is the collection of websites that we operate. The create and buy activity that our customers come and create their own and also shops where these individual artists as well as corporate shops can use the choice engine that we’ve created to put custom product solutions and choices in front of their traffic.

Unidentified Analyst

So, lets break those out a little bit. So, in term of the marketplace shops created by maybe just give the view from the consumer side what they’re seeing, how those differ as you go to the site and what percentage of the business those actually account for? Monica why don't you give a quick percentage or add some color.

Monica Johnson

Sure. The way we like to breakout the business because they were all about providing custom product to the consumer and we go about that in a number of ways and probably the best way to break that out right now is first off is just over half our business is our marketplace and so that’s where we provide hundreds of millions of user generated content from head topics to long tail to the consumer and CafePress.com is really our flagship website for that and again that’s over half our business and that’s been grown about 15% this past quarter.

And then the next largest content or segment is our create and buy and that’s just about under a third of our business has been grown about 40%. and create and buy is really about the consumer brining their own content whether it’s a photo or their logo to the product uploading that and then purchasing that and you know, that’s been a very good growth business, it’s really been fuelled by our logos sports ware business as well as our canvas and more our business and that’s growing about 40%.

The third segment which is one that's about just under 20% of our business is what we call shops, and it’s really our platform business and so why we’re really excited about right now in terms of we’ve just doubled the size of that with our acquisition of EZ prints. So the shops' business is all about providing platform for CafePress to work with large partners so that they can provide and enable customization on their brands.

Bob Marino

Two examples of that we’d like to talk to would be abc.com. We provide all of the fan inspired merchandise as well as the standard merchandise as well as the standard merchandise that is available for sale on their site. and when people begin their search there they wind up navigating over to our marketplace and check out there. Another example would be National Geographic, we have all this great photography from hundred years' worth of expedition and we can create custom wall art with that photography on demand on their website and check out over there. We do whatever the customer, in this the corporate clients would require. We have built features for create and buy on corporate websites as well so that their visitors can also create their own custom product right where they’re looking.

Unidentified Analyst

So, let's talk a little bit about the addressable market. You’re obviously operating in a few different segments of e-commerce essentially but how do you think about the total addressable market and where we are in terms of online penetration, what you can penetrate going forward?

Bob Marino

CafePress exists at the cross roads between self-expression and technology. So when we look at the total addressable market, we are really eyeballing first the consumer goods that are sold online and in the U.S. that’s number approaching $200 billion. CafePress’ sales while substantial, we start with an M, we are in the millions. So we see plenty of runway in front of us and our strategy is to examine those products that are selling everyday online and finding ways that are here too for not been offered to allow those products to be customized and bring those on to our platform. And we accelerated the pace at which we have done that. Last year alone we have added 200 new base goods to our offering. We expect to continue to do that and drive forward into other areas and complete product categories for the next three years.

Unidentified Analyst

So let’s talk about base goods a little bit, help frame a bit more, so maybe you can help break out the business a little bit in terms of sort of the bigger categories in terms of products and then talk about what you have added, sort of what’s been hard over the last year, as you continue to expand base goods and also as you have done some acquisitions as well.

Bob Marino

As you can tell, we tend to look at products as both a create and buy opportunity and also a find and buy opportunity. In 2009, Monica and I joined forces to run the front end of our business before that I was just running backend of our business. Since 2009 we have really brought on more and more products both for create and buy and find and buy, the first large category that we have brought on, we did by acquisition, we acquired canvas on demand. As the name implies, we are making wall art but in this case it was create and buy. People would bring their photograph and we have created into a poster or stretch canvas what have you.

That business has grown very-very nicely over the years and this has a very substantial category for us but we also brought to it the elements that are special about CafePress. We brought a portfolio of content, so that the finding buy for canvas and other wall art also grew and in fact it’s now growing even in the creating buy area. So wall art is a very big category for us. As we went to market, we would enjoy these consumer sales but inevitably we would find that about 70% of the time, somebody in that household we just deliver the product to was an influencer and what we called CGO-clubs, groups or organizations including small business and it was important for us to service that segment of the market better. So about a year ago, we acquired logosportswear.com that really brought out the gear that these groups require and that business is growing very-very nicely as we have brought traffic from CafePress over to it and also put those products into the marketplace. So gear for groups is the next big one.

And then your question is what’s recent, recently we have brought more and more home product forward some of which are things like shower curtains for example, we saw that there is a great many shower curtains that are sold online. so we developed the way to customize those and if you want to change the look and feel of the room there is no more impactful way to do it than put a shower curtain in the bathroom and more and more products for the home as we complete that offer.

Unidentified Analyst

And historically, T-shirts were bigger part of the business, you've obviously seen faster growth in other areas more recently. What are T-shirt now as a percentage?

Monica Johnson

So, just a few years, the apparels were about 80% of our business and while we still see nice growth in apparels it’s now about 50% of our business and so we really feel that it nicely with as Bob mentioned the wall art and the home categories and others. So it’s a still nice category for us and it's still very much of a sweet spot but it’s about half our business.

Bob Marino

And then I may just add on T-shirt itself, when we started I think we did about five colors of T-shirts only and now just in the T-shirt category alone we have about 400 different choices.

Unidentified Analyst

So can you talk a little bit about what types of content people are creating in the marketplace, what types of things drive content creation, how it’s impacted by social, political other road events, little bit more on the sort of the use case here from the consumer side.

Monica Johnson

So, I think if you’ve go on our site, you can find content for any imaginable topic from some of the more popular items to the long tale of any sort of pet type that you can even imagine, certainly politics is a big category for us every four years and even on the election years, it’s still fairly big topic. I think if you look on our site today another area of content you will see which we have really grown and it goes along with our shops category. It’s really you see more license content on our site. so Iron Man 3 is on our site today and there are certainly number of other hot properties like Big Bang Theory and et cetera and what you see there is a scrolling that license content, it’s not about offering what the studios offer, it's about offering what we get a license with these properties and then our user community and design community can then design around it. so we call these our fan portals and we go license with some of these major properties and then our community then designs around it and so then it’s an inventory less model for these studios to offer hundreds of thousands of designs for specific property, so I think that's certainly something if you look in our site in the past year you will see more of.

Unidentified Analyst

And what percentage of marketplace is licensed content now?

Monica Johnson

We usually do about 10% is our content licensed so it's an interesting topic for us and it gets us certainly a lot of brand recognition but it doesn't overwhelm the content that we have.

Unidentified Analyst

You mentioned Iron Man, what else is hot right now in content? I mean in the past you have had 100 games; still do. What kinds of things, I know you have this sort of insanity, craze a couple of years ago which showed up on your site a lot.

Monica Johnson

Right any of the certainly newer movies, we'll go after some of those properties; we have had Hunger Games, Hunger Games will come back again this year. World War Z is another movie that's coming out. but it's not just this latest popular movies, another there was just some of this ones that have an ongoing interest, so I don’t know if anyone has seen the Princess Bride but that's decades old. We still sell a lot of Princess Bride, people just love that property and so we really try and go after a wide range of topic that's popular today as well as in the past; Peanuts is another big category for us as well.

Bob Marino

Thanks for mentioning the Princess Bride because I think that's a very good example of just how the corporate shops serves us. The sales that we get to enjoy on the Princess Bride are not because someone woke up and said I should go to CafePress and check and see if they have Princess Bride content. As we put our offering on the property, The Princess Bride which is the logical place that fans of that property would look and then that gives us, (audio gap) pushes our brand there and allows us to have very efficient customer acquisition.

Unidentified Analyst

All right, so let's talk about traffic and marketing, how you drive traffic to the site in the marketplace business but then also how that works in terms of create and buy and also shops because there are some sort of key distinctions in there.

Bob Marino

Again we have no physical finished goods but we virtually have 430 million finished products and that gives us a key word universe which I am not sure anybody rivals. And we market these key terms both with SEO, SEM other channels as well. And this would be terms like robots and doughnuts on a clock. Right, I don’t know why someone needs robots and doughnuts on a clock but 20 people currently did in the last year and we have that and we are able to produce that. So a very efficient way of marketing the long tail. As Monica has pointed out, we also now branch out into the head tail riding the code tails of some of these media properties.

We have also begun to branch out into branded base goods so that we can; there again on the base good ride the code tails of those brands and develop a following. As I mentioned earlier, when we go to corporate shops, we really don’t have to think too hard about how to drive an audience there. After all that's why we did the partnership with corporate shop. What we would have to do there is to provide to them what they can't get anywhere else. And what we can get to provide to them is this choice engine where designers from all over the globe can create products that celebrate that property or designs for that base good. And they can rely upon us and we are uniquely trusted to do this; to protect their brand away from offensive content or other things that would be contrary to their brand. And it's indeed Monica's group that does that. I think you should tell him about how you do that.

Monica Johnson

One thing that helps us really work closer with these other big brands is that we have a group that literally reviews all content that goes onto the site and so when you are working with another major brand or studio, they are very protective of their brand and what could possibly be put on another side. and so the service that we offer is that we'll work closely with these partners like in ABC and say okay, what you will allow and what you will allow and which product will you allow that on and which you will not and so we filter all of that content first and so we are reviewing each image on specific products before it goes onto the site and that's what helps us work with these major studios and properties and entrust their brand with us.

Unidentified Analyst

So how'd you think about sort of customer acquisition costs and ROI lifetime value of the customer?

Bob Marino

First, every channel that we participate in, even flash sales, we require two things, that we will make money on the first sale and that it will be a strong repeat rate for us down that channel. By doing that, we know that the lifetime value equation for us is favorable. By introducing these brands on our site, by introducing more and more content on our site, we have found a stronger repeat rate, that's specially reinforced by all the new products that we bring to the site. Giving people more reason, to come back, different purchase occasion, support it, so that is very helpful to lowering the cost of acquisition.

Now having said that if you looked at our first quarter you noticed that our sales and marketing cost in fact increased. They increased by almost $2.50 but about $2 of that were in the area of art and in the area of groups and both of those business have outsized growth and a strong AOS and a very strong repeat rate so we are quite justified to step on the gas there.

Now as we do more of these partnerships, as we do more of these products we represent that better on our website and our website has become from really the funny t-shirt company to this marketplace for cool and custom gear. This place where you begin your search for those types of products and that of course is very favorable to the acquisition cost. I think at some point we'll get into also our opportunity in social which will allow us to decrease those costs further.

Unidentified Analyst

Let's talk about it now.

Bob Marino

Great, so for us social and mobile are really hand in hand, we see the opportunity for CafePress as really unique in the world of social media, if you think about what social media is, it's the aggregate of all these organic conversations, it's not really a participation, they're there to socialize, if you think about the content library of CafePress that has been crowd sourced for over a decade it really is the graphic art representation of so many interesting points of view, and our opportunity and our challenge is to take that content and bring it to social media in an organic way, in a way that's germane and complementary to the conversation that’s going forward. Now we've added some staff over the last couple of quarters to help us do that, the first thing we did was we put social handles on all the content in our property so that people, even if they're not buying, can like it, they can want it, they can share it and really be an ambassador for CafePress and bring that content into social media and that's working very nicely. we see social interaction continue quarter over quarter to increase.

We're also looking at the social login which we introduced just last quarter but right now it's at the end of the funnel. Our mission is to drive it forward to the mouth of the funnel where much more traffic is and the crawl into the organic conversation. Now we know again it's not a participation but it is an opportunity to gain mind share and to spread brand awareness and that is unique to CafePress because what other company is sitting there with all the content that is required to join those conversations.

Unidentified Analyst

Just while we're on the topic of social, you've also joined Facebook gifts

Monica Johnson

Yes, we talked about social where it says, we I think there's still a lot of in the early stages of how to monetize social and we’ve tried a number of different avenues down that and we talked about the social logon, we do Facebook ads, Facebook gifts is our latest venture and one that we're really pleased with in our early stages and that’s where we can provide a group of products and content that is more specific to what's going on, so for example Mother's Day we had a couple of very specific items that sold really well and I think what we're trying to do is, again people (inaudible) on Facebook but if you can get in front of them at the right time I think it’s a really great offering, certainly I look at Facebook gifts and the person is able to purchase a gift and send it to that person that day and so that seems to be a really good opportunity for the last minute purchase or potentially from others I don’t know what it was but I think we had really great content for Mother's Day and we really saw a nice pick-up in sales, so it’s all about getting in front of them with the right content at the right time.

Unidentified Analyst

What kinds of products were those that were particularly hot?

Monica Johnson

I'd say certainly that we had a mug that something about being the favorite child was the topic and a number of other products, maternity shirts, we've just so to that point we started out with some very basic products and we just add apparel to it. and so it's not about pushing the long tail necessarily on that right away but to define some of the more popular content for that time.

Bob Marino

And I would say we're interfacing with really seriously intelligent people over there at Facebook and they understand the opportunity in front of them, when I look at the brief amount of time that we've interacted with them and how far we've gone I think they understand the mission very, very well. they understand that they want products that are going to be complementary to all the conversations possible out there and so each week we're seeing more and more content, more and more product being launched and I got to imagine it’s not just with us, it's with others and so there' s much more to come on their roadmap than so far has been released.

Unidentified Analyst

Smaller individual seller shops, so you can talk about some of the dynamics there.

Monica Johnson

Shops is really sort of the two tails there with us, so the company was originally founded on a shops platform so it was all about late 1999 where people were just getting on the web and wandering website and we create an opportunity for them to link up with their own content, so that's how the company was founded and that business grew nicely but over time we've seen slowdown in what we call sort of the small shop or the weekend entrepreneur and so what we've done really over these past couple of years is start with the larger shops, and that's really partnered with some of these larger companies or media platforms and enable them to (audio gap) base of our business and then really a high growth in terms of our corporate shops. And so that is the shops’ platform and on top of that with EZ prints acquisition was not only the shops but a platform underneath it. That’s really a software platform that we can then go plug and play with large corporate partners.

Bob Marino

So when we say that the small shops has decelerated, really talking about revenue, we are not actually talking about people participating and members coming in starting a shop. So what’s really happened is as search has become more competitive and more complicated, it becomes not rational to believe that our 3 million shop members are going to be expert enough to stay, highly ranked in Google searches. So what we use, (audio skip) they can bring to us. And we take that art and we bring it forward for them to the various corporate sites that we have partnered with.

Unidentified Analyst

Maybe you can talk a little bit more about the EZ prints acquisition, how it impacts your business and how it may impact the metrics as well that you report?

Bob Marino

Yes, so EZ prints, we acquired in October of last year, but prior to that for one year we had an operating agreement. We had already enjoyed enough success in corporate shops to know that we wanted to do a great deal more of it. But each one of our corporate shops installations was a one-off engineering effort because none of the tools or features of CafePress was ever built to actually exist beyond our private shops network.

So EZ prints had technology that allowed their customization to be offered on other websites. The management that is there came about two and a half years ago and realized that they didn’t have the content that CafePress had. They didn’t have the great array of base goods that CafePress had. So they lacked real stickiness with customers. So to counteract that one, which plugs and plays very simply, quickly and robustly, on whole range of architecture; and they developed quite a sizable corporate shops list just for creating by on rather vanilla items. So we realized that by acquiring them we could put our rich feature set on top of that, and leverage up their corporate shops and also accelerate the growth of our corporate shops. And that’s what’s been occurring since the fourth quarter and the first quarter of this year.

Then the impact on metrics has been interesting because it’s more of a wholesale engagement. So you are seeing gross margin be smaller. But the offset is much improved sales and marketing therefore more efficient customer acquisitions. Some of the unique qualities of CafePress, it was always a white label engagement. We are not looking to grow that. We are looking to do exactly what we have always done, 100% of our corporate shops are actually co-branded.

And so going forward that is the strategy and it’s a true blending of the DNA, another impact on metrics; besides average order size because of their kind of vanilla products that will grow over time as they adopt more and more of our products then. But another metric that needs some explanation now would be customers. We get thousands of orders from these corporate shops but the customer is one. Right, and so we pass the analyst to look at our order growth as a true reflection of our progress.

Unidentified Analyst

Can you talk about the competitive landscape, assuming we think about (inaudible), potentially others, how do you think you guys are positioned here and some of the key differences?

Bob Marino

So, in 2009 when Monica and I joined forces on the frontend, one thing was apparent that we really were for the first time facing competition. And that competition was only in the marketplace finding by area, and we really felt that in order to be everything that CafePress (audio skip) invite even more competition by participating in other channels. So I will go channel by channel.

First with the marketplace, and I guess our primary competitor there would be a front end company like (inaudible) they have a lot of content on the front end. But there is clear distinction between us and them on the backend, in terms of efficiency, in terms of product quality and things like that. We also do a far greater range that's probably the right way to look at that. They are created by the companies mostly, that is, their customers come to them and they say, here is my content, please print this out, whether it be (audio gap) shop sale whether it be a market place sale, is find by someone falling in love with the treasure that a designer, an artist has left there for market and it's really a different business. But I do get the comparison because they both have terrific front ends and terrific back ends just like we do.

And in the area of art, right, this business we started now 2.5 (audio gap) really enjoyed the growth rate that we've achieved over those years. And more recently we've invited competition of custom ink by doing the acquisition of logo sportswear and again, the story there is also the same, we very much enjoyed the growth rate that we’re able to achieve with the CafePress traffic and now we’ll leverage (audio gap).

Question-and-Answer Session

Unidentified Analyst

One sort of big initiative this year is your plant consolidation. So, if you could just provide some background on why you’re doing that? Why it’s strategic now? What the urgency is? How much it will cost you this year where you are in terms of those economics? And sort of what you look like when you come out the other side?

Bob Marino

CafePress has grown consistently over the years and we (inaudible) around capital being about 5% of our total capital spend and that’s almost equally split on the frontend and the backend. So, we are not facing any stare step capital (inaudible) is simply to help us become more profitable and also to help us grow. So, by acquisition we wound up with a number of plants and is now time to consolidate those plants. We’ve already closed the one on the west coast. We will be closing this quarter a plant in North Carolina and by the end of the year we will close 90% of the manufacturing in the Atlanta plant that EZ prints add, leaving only a highly automated line and therefore very little hourly workforce there.

The two other plants that we’re touching are growing so much, the group’s plant in Connecticut and the art plant in North Carolina, they’ve actually overflowed their footprint and we need to bring that into Louisville. And as we do that Louisville is more and more utilized, plant cost get better but I also mentioned it’s going to help us grow, now here is how it helps us grow.

We’ve already begun to put extra products now on our other sites. Now they don’t just offer canvases on demand they also offer some lower priced items so that we can up sell, sell other things have a lower hurdle rate and that’s been very, very helpful. By making all those products in one plant, we’re able to margin issue of two freights or the conversion issue if you are going to ask the customer to pay for two freights out of different factories. So, we’re doing it this year, I don’t think that there was a sense of urgency that necessitated that we do it this year, it make sense for us to do it this year.

We’ve just come off last year where we concentrated more on create and buy business and this is the year, now we’ve got that done, this year we can focus on the backend and bring in some of the cost there.

Unidentified Analyst

And within this plant, how does this build out your capacity? At what point going forward you need to look at expanding more potentially, I know we talked in the past about opening something more on the west coast, we’ve talked about shutting one down that might not have been necessarily been exactly …

Bob Marino

The west coast plant again brought by acquisition was a tiny thing and in really not the right area to want to sink more money in. so the west coast operation will at some point be a necessity for us as we see enough critical most to justify more overheads.

Unidentified Analyst

I guess the timing really in terms the exiting capacity.

Bob Marino

So, what we did, first of all Louisville becomes the flagship plant and the reason for that is it’s geography, it’s favorable cost from Louisville you can hit two thirds of the American households in a two day ground trip. So, it just has a very favorable geography but also we were able to get economic incentives offered by the state plus the naturally low cost base of just working there and we were able to double the size of our (audio gap) plant it in the capital which again we stay within 5% as we go forward. And that footprint as long as we continue to spend like we spent will enable us to at least double, if not triple our revenue within that footprint.

Unidentified Analyst

And with sort of backend operations in Louisville can you talk just a little bit about – you obviously getting some cost benefits from that but at the same time can you talk about the environment in terms of hiring developers as you need to there and then also where people are located between the bay area (audio gap).

Bob Marino

I'll tell you a short story about how we hired in Louisville and I’ll let Monica talk about where everybody is located. That was always our fear, could you get sort of the marketing folks, internet marketing folks, can you get some of the top level engineering talent in Louisville, Kentucky?

Well UPS has been there long enough where it has attracted every discipline to city of Louisville. Now, if you are a programmer or if you are into internet marketing and all of a sudden CafePress moves its headquarters there, something good just happened for you. It might be tight for other folks to find talent but we did a (inaudible) event and overnight we become the coolest and hippest company for those disciplines in Louisville and we were able to basically collect on anyone’s resume at that event that we wanted.

Monica Johnson

[Audio gap] footprint California, where we have got some of our corporate operations and then our retail team for CafePress.com. so that team remains in California and we are able to attract the people there, now Kentucky where we initially had manufacturing where we really expanded, it's over half the company, not only is it advantageous to have our production people there but it’s also been very advantageous from a cost and retention standpoint, to have a number of other functions there, certainly all of our backend engineering there and IT and net office and some of our other functions, that it’s good to be close to the product and (Audio Gap).

North Carolina, we had two acquisitions there and so that’s really where we focus most of our wall art and paper production. We purchase that logo sportswear the company operates well up there and it’s very much focused on that CGO market. So that’s the bulk of where our people are.

Bob Marino

In summary I think you can look at each of the individual businesses to maintain but the big initiatives are driven by the engineering staff in Louisville.

Unidentified Analyst

Okay, great. I think we are going to leave it there. (Audio Gap)

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