CafePress' CEO Discusses Q2 2013 Results - Earnings Call Transcript

Jul.30.13 | About: CafePress (PRSS)

CafePress, Inc (NASDAQ:PRSS)

Q2 2013 Earnings Call

July 30, 2013 5:00 p.m. ET

Executives

Alex Wellins – IR, The Blueshirt Group

Bob Marino – Chief Executive Officer

Monica Johnson – Chief Financial Officer

Analysts

Douglas Anmuth – JP Morgan

Brian Pitz – Jefferies & Company

Youssef Squali – Cantor Fitzgerald

Shawn Milne – Janney Montgomery Scott

Aaron Kessler – Raymond James

Operator

Good day ladies and gentleman and thank you for standing by. Welcome to CafePress’ Second Quarter 2013 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, July 30, 2013.

I’ve now like to turn the conference over to Alex Wellins with the Blueshirt Group. Please go ahead, sir.

Alex Wellins

Welcome to the CafePress second quarter 2013 earnings call. Joining me today are CEO, Bob Marino; and CFO, Monica Johnson. This call is being broadcasted over the web and is accessible from the IR section of CafePress’ website.

Before we get started, I need to remind everyone that part of today’s discussion will include forward-looking statements such as statements regarding expansion of our partner network and the effective such partnerships on our business, our expectations as to our future growth and profitability, the potential impact of social media and social programs on our business, the effects of consolidating our manufacturing and (inaudible), our introduction of new initiatives and our performance in the second half of the year, expected financial performance and outlook for the third quarter and full year 2013, and our expectations with regard to our expenses for and potential outcome of shareholder losses.

These statements are based on what we expect as of this conference call as well as the current market and industry conditions, financial and otherwise and we undertake no obligation to update these statements to update the balance, circumstances or changes that might arise after this call. These forward-looking statements are not guarantees of future performance or plans and therefore investors should not place undue reliance on them. In addition, these forward-looking statements are subject to risks and uncertainties which may cause actual result to differ materially. These risks and uncertainties include but are not limited to risks regarding fluctuations in operating results, our dependence on demand for and our sales of user designer products, acquisitions related and litigation related risks and associated expenses and difficulty in estimating impact on cost related thereto, our ability to maintain the proper functioning of our website, our dependence on search and our ability to drive traffic to shops and e-commerce sites including those in our marketplace, the occurrence of an event which negatively impacts our brand, reputation or recognition, the impact of seasonality on our business, and consumer acceptance and new technologies, products, and services.

We refer all of you to our SEC filings for more detailed discussions of the risks that could cause actual results to differ materially from those discussed in these forward-looking statements and that could affect our future operating results and financial conditions. I also want to inform our listeners that we will make some reference to non-GAAP financial measures during today’s call. You will find supplemental data in our press release which reconciles our non-GAAP measures to our GAAP results. Our press release can be found on our website in Investor.press.cafepress.com.

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

Bob Marino

Thank you, Alex. And thank you everyone for joining us on our call today. CafePress had a strong second quarter as we expanded and fulfilled the demand for customized products through our e-commerce site and our expanding network of partners. Our Q2 revenue of $52.4 million reflect solid performance across our properties continued strong progress from corporate partnerships and increases in revenue related social media programs that we have implemented over the past few quarters.

Adjusted EBITDA for Q2 was $1.1 million. During Q2 we invested in the consolidation of several remote manufacturing facilities into our flagship plant here in Louisville that we have described for you previously. This initiative is right on track and we’re pleased to have come in at the high end of our EBITDA guidance range while making prudent investments for long-term growth and profitability.

Turning to our business metrics, orders grew 66% year-over-year to nearly 1.5 million. Average order size was $34.00 a 33% decrease over last year’s Q2 when we factor in the smaller order size of the former EZ Prints Q2B business. As a reminder many of these products are photo related gift items priced at $10.00 or less. Excluding that impact OAS was $52.00 which was flat with last year’s Q2.

Acquisition costs per order was favorably impacted by the consolidation of EZ Prints, now CafePress Services or CP Services for short and their B2B model. As most CP Services orders are transacted through partners they have substantially low acquisition costs per order. The CP Services included are Q2 cost per order was $6.00, which was flat from Q1 and a decrease of approximately $2.00 from a year ago. Without CP Services Q2 costs per order was $10.00. This is up $2.00 year-over-year but consistent with Q1. The increase in acquisition costs from the investment in higher growth product lines such as art and logo sportswear investment in social and international channels and some increased costs of driving traffic to cafepress.com.

I’ll move on to the three key areas of our business starting with our marketplace which represented just over half of our Q2 revenue. The art category was a strong performer for CafePress. The acquisitions and ongoing investment that we have made in the art category continue to produce strong results. In today’s release we noted two new art related initiatives. First we forged a partnership with leading online retailer Hayneedle that added hundreds of GreatBigCanvas gallery wrapped panoramic cityscapes into hayneedle.com’s online retail experience.

Second, we expanded GreatBigCanvas.com’s marketplace internationally to Australia, Canada and the United Kingdom capitalizing on consumer demand in these countries. This geographic expansion was part of our effort to increase international sales. Overall, international revenue was up 3% over last year’s Q2 on a non-adjusted basis and 5% if you adjust for changes in effects. We’re seeing initial improvements in international as we apply focus to this area and begin to introduce new sites internationally.

As I mentioned at the start of the call, we saw a strong increase in revenue related to our social media efforts decreasing our dependence on search is a priority for our company. We are seeing a significant change in online shopping behavior as consumers are shifting from simply typing products or categories into the search box towards discovering new products from their friends and social networks. We have found that recommendations are becoming an increasingly important part of the shopping experience and conversion rates from social channels are significantly higher than those from search.

CafePress is leading forward to capitalize on these trends through a variety of social media programs that we have described to you in recent quarters. While coming off a small base during Q2 revenue from social media activities was up 185% year-over-year. We’re up a similar rate in Facebook likes as we are quickly closing in on the half million mark. We have benefited from enabling login social using social credentials which allows us to curate a shopping experience in ways never before possible. We’re also finding other ways to leverage social. The inclusion of CafePress on Facebook Gifts last quarter was an important first step. During Q2 we expanded our presence on Facebook Gifts by doubling the number of products in their catalogue from April to June and we were pleased to have a product selected by Facebook as a Mother’s Day promotion which expanded awareness of CafePress.

We also launched a highly successful monthly share and win contest resulting in strong gains in social shares in Facebook, Twitter, Pinerest, and e-mail. We started this as a small experiment and we’re presently surprised by the results, a further demonstration of the very attractive attributes of social programs. Additionally, we are piloting a new program to enable designers to socially share their newest artwork with users and we’ll be giving you more in-depth updates on that during our next earnings call.

Finally with regard to social we are pleased that we released the Press it Button during Q2. This is a new blogger and webmaster innovation that enables monetization of blog or websites by taking original text of graphics and immediately turning them into products.

Moving on to Create and Buy, the area of our business where individuals and groups create unique and customized products. This represented approximately 30% of revenue in Q2. During the quarter we added to the base goods available for customization new offerings in categories such as apparel, stationary, and home. In the stationary category, we have significantly improved the creation experience by leveraging the advanced builder software that we acquired from EZ Prints. This forms the back dome of the new stationary offering for both Invitation Box and cafepress.com.

We are also seeing solid gains from logo sportswear. We have learned from this team’s winning strategy for group buying which is unique from the rest of our businesses. Items such as performance wear, hats, and outerwear have been very popular.

Turning now to shops and corporate clients, this area represented just under 20% of revenue in Q2 and we’re pleased by the trends we’re seeing in corporate shops. Last quarter we launched CP Services as an outgrowth of the shops technology we acquired from EZ Prints. Recent developments include the launch of a corporate shop with design studio by American Greetings which resulted in more than 500,000 new products available in the CafePress marketplace.

Launching a new partnership with Molson Canadian, we intend to bring branded apparel and consumer products to millions of fans in a new e-commerce store. And building on the partnerships announced last quarter we expanded our relationship with Marvel Entertainment o launch a collection of gear drawn from the Marvel catalog of comic book characters. This includes the classic X-Men and Spider-Man characters which we announced at the recent Comic-Con.

Our goal is to not only offer the largest selection of customizable products on CafePress.com and our other properties but to par our customization on our partners’ sites across the web. We do this today for companies including Hayneedle and others. This is a growing part of our business and has a measurable impact on our quarterly revenue. During the quarter, we identified and improved the way we deliver our massive catalogue of long tail (inaudible) content to key commerce partners. We offer millions of unique items to line their shelves. It takes time and careful focus to load and characterize our products in the unique taxonomy of each partner’s website. We work to drive conversion with partners based on the key attributes of their sites and make sure that our products are appropriately merchandised according to the unique characteristics of each partner.

During 2013, we have signed and/or started significant new partner agreements with three Fortune 500 companies. These include some programs such as those with Facebook that we’ve launched already and some that are scheduled to launch by the end of the year. Our Q2 revenue results and in part our outlook for Q3 and Q4 reflect the fact that partner revenue growth is not linear. For example the timing and process of how we load products onto partner sites and the timing of when new programs are launch is often not in our control, however, we are improving our strategies and techniques for growing partner revenue and we are excited about the opportunities that these large partnerships represent while recognizing that precise timing is sometimes difficult to predict.

I’ll wrap up with comments on operations and manufacturing. We continue to produce the best-customized products in the industry at an unprecedented scale due to the manufacturing processes and facilities that are unique to CafePress. During Q2 we made significant progress in the consolidation of many of our remote manufacturing operations to our flagship plant in Louisville. We expect this activity and investment will increase in Q3 as we set the stage for the holiday period and we are in line with the $6 million total investment of this process that we have previously outlined.

We believe this will be a significant improvement over manufacturing capabilities and cost structure. We’re excited about the second half of the year and especially for the holiday season. We have a deep product and partnership roadmap and in the coming quarters we will introduce a number of new initiatives including continued site improvements, new base goods, new markets and new partnerships.

As the guidance in our press release noted, we expect to end the year with growth in the range of 14% to 20% and we believe we will exit the year as a stronger company well positioned to continue to lead and grow the category of customized e-commerce. Thanks for your attention today. I’ll now ask Monica to review our financials and guidance before take your questions. Monica?

Monica Johnson

Thanks Bob. I’ll now review our financial results and provide our outlook for the third quarter and fiscal 2013. All comparisons will be year-over-year unless otherwise noted. Net revenues for the second quarter of $52.4 million first and midpoint of our guidance and represented an 11% increase overall. Our Q2 adjusted EBITDA of $1.1 million was at the high end of our guidance and compared to $4 million in the previous year.

As a percentage of revenue, EBITDA declined from 8.5% to 2.1%. As a reminder our adjusted EBITDA guidance for the quarter and year factored in both plant consolidation that is underway as well as the profit seasonality of the CP Services B2B business. Specifically the change in our EBITDA from Q2 2012 to Q2 2013 was a result of the following: first, gross margin on non-GAAP basis was 38.8%, a three-percentage point decline year-over-year of which approximately one percentage is due to lower gross margins associated with the CP Services B2B business. Of the remaining decrease approximately two points was due to the plant consolidation investment that we have discussed. Sequentially gross margin on a non-GAAP basis increased from Q1 ’13 to Q2’13 by 1.3 percentage points. The gross margin increase was across almost all of our properties along site consolidation costs which were flat with the prior quarter.

In addition to the decrease in gross margin as compared to Q2 2012, non-GAAP operating expenses increased by 3.7 percentage points year-over-year, of this increase in our operating expenses 2.3 percentage points was driven by increased sales and marketing and approximately one point of this increase resulted from an increase in net of our higher value or in lieu of our products and the remainder was a result of a higher spend in our base business on current customer acquisition channels as well as new channel development.

On a sequential basis, a variable marketing spend was similar to last quarter with a slight increase of 0.4 percentage points. Our technology and development expenses increased by 1.3 percentage points year-over-year of which 0.7 percentage points came from investments in our cp.com website and the remaining 0.6 percentage points was due to spend on CP Services technology platform.

And finally our general and administrative expenses increased slightly by 0.2 percentage points from the addition of the CP Services business. As a result of these investments Q2 non-GAAP operating loss was $1.1 million compared to operating income of $2.5 million. This non-GAAP operating loss includes depreciation expense of $2.3 million compared to $1.5 million, a 1.2 percentage point increase resulting from a free scalpel spend in both front-end development and data centers.

The resulting Q2 non-GAAP net loss was $0.7 million versus net income of $1.7 million in the previous year and Q2 non-GAAP loss per share was $0.04 compared to income per share of $0.10 in the previous year. On a GAAP basis we closed the loss of $1.7 million or a loss of $0.10 for fully diluted share. That compares to GAAP net loss of $0.3 million or a loss of $0.02 per fully diluted share in Q2 of 2012.

Included within GAAP operating expenses and the accounting for $0.6 million difference in GAAP versus non-GAAP operating income are the following: first, $0.9 million in stock based compensation; second to (inaudible) a $1.2 million, a decrease of 0.9 percentage points; second, $1.3 million in amortization expense compared to $0.9 million. A 0.5 percentage point increase due to amortization of intangible assets from our acquisition of EZ Prints; lastly, a $1.6 million credit in acquisition related costs compared to costs of $0.7 million in Q2 of 2012. The change was due to a $2.6 million reduction in the expected earn-out for EZ Prints. Our second quarter income tax benefit was reported at a rate of 36.6% offset by discreet income tax charge of $0.6 million due to expiring stock options resulting in a tax rate of 2.9%.

Our capital expenditures for Q2, 2013, a $2.6 million increased by $0.7 million compared to the $1.9 million spend in Q2 2012. During Q2, we had free cash flow which we defined as adjusted EBITDA less CapEx of negative $1.4 million and that compared to cash inflow of $2.1 million during Q2 2012. Our Q2 cash flow was impacted by our investments in manufacturing consolidation and the profit seasonality of CP Services as we outlined above. During the quarter, we had an operating cash inflow of $3.4 million compared to operating cash outflow of $0.1 million in the same period last year. That being present operating cash flows of $3.3 million and approximately $6 million was due to positive changes in working capital and that was partially offset by the decrease in EBITDA.

At June 30, 2013, our cash, cash equivalence and short-term investments totalled $25.6 million. We continue to be comfortable with our cash position and we expect to generate significant cash in Vehicles4 as we have historically leaving us with a solid cash balance as we exit 2013. Our basic and fully diluted weight average shares outstanding was 17.1 million.

I’ll now conclude with our outlook for the coming quarter and the full year. As we look ahead our revenue guidance reflects a shift in the historical weighting of our business due to the revenue seasonality of our newly acquired businesses that are more backend weighted as well as the expected ramp of new and interesting partner programs. Our EBITDA guidance matches the seasonality along with the increased investment and consolidation of our manufacturing operations. We believe this investment and others we have made this past year will enable an improved cost structure and also paved the way for growth in the second half of 2013 and beyond.

Taking all of that into account, for Q3 2013, we expect net revenues in the range of $48 million to $52 million, adjusted EBITDA ranging from a loss of $0.5 million to income of 0.9 million, non-GAAP net loss per diluted share of $0.12 to $0.06; weighted average fully diluted shares estimate at 17.2 million, and we assume the tax rate of 33% for the quarter.

Additionally we are reiterating our guidance for the full year which calls for net revenues ranging from $248 million to $261 million, a year-over-year increase of 14% to 20% growth; adjusted EBITDA of $11 million to $16 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 the range of $12 million to $14 million.

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from the line of Douglas Anmuth with JP Morgan. Please go ahead.

Douglas Anmuth – JP Morgan

Thanks for taking the question. I just wanted to ask two things. First just on sort of social and mobile and the link between the two, and you talked about that in the past and seen certainly a pickup here in the second quarter. But can you talk about how you think mobile strategy really plays into the social platforms here and what you can do to even further drive upside from mobile. And then secondly, just trying to get more comfortable with the backend loaded year here, if you could just, you know, sort of lay out I guess, you know, how you think this can ramp in the back half and what gives you the confidence in the 4Q strategy from meeting that full year guidance, if there is anything particular in terms of promotions or, you know, really specific partnerships that we should be thinking about there. Thanks.

Bob Marino

Thanks. First on the social/mobile strategy and you’re right I’ve said for a while now that the two are very much linked especially in the case for CafePress. We get to enjoy participation in your organic conversations happening on social media because social media again is the aggregate of all conversations large and small taking place there. And our graphic art is also the equivalent of that. It has been crowd source from over 3 million artists and represents large and small point of views. So it aligns very nicely. As a result we’re able to do some things with mobile strategy and connect it to social such as allowing artists to really connect with their audience so that as the artist does something new we can push notifications to their followers which is you know something that often times is picked on mobile.

Now we understand that when we do that it’s not really a purchase occasion but it is obviously an occasion to gain mind share. And we have definitely noticed the more we have done of that positive impact in our direct traffic and our repeat weight, both of which are up as we started this social and mobile program.

I think the next part of your question was about the backend weighting of our business. And you know, I’ll remind you that we have been saying all along after the EZ Prints acquisition that the nature of that customer base is more backend weighted. So we have that naturally occurring but we also had spent the year creating new partnerships and the roadmap of those partnerships we’ve been editing them all year but we also notice that we have three significant ones launching between now and the end of the year plus a number of medium size ones as well. So just our examination of our success there and the roadmap with those partners.

Douglas Anmuth – JP Morgan

And just in terms of the consolidation of production capabilities in Kentucky, how should we think about the cost sort of rolling off here. I mean will you be completely done here as you’re going into the holiday season. Will any of this push into 2014?

Bob Marino

I’ll let Monica address the financial side of that. I’ll end with you know some color on where we are in the actual move.

Monica Johnson

Yes, I think the way to think about it is the fact that Q1 and Q2 it’s been about 2 points of gross margin in each of those quarters and what we said last quarter is we expect to see a little bit heavier in Q3. So think about a slightly heavier expense in Q3. And then into Q4, it won’t be sort of full quarter but certainly into October we’ll see some additional costs as well. So I think it’s equally weighted to Q1, Q2 and Q4 and a little heavier into Q3.

Bob Marino

Doug, as we’ve done these calls in the past from our flagship plant here in Louisville which is also our headquarters we normally shut down the conveyer because it makes a little bit of noise but we didn’t have to do that today because the conveyer is actually shut down right now as an indication that we’re now getting ready to connect it to the new areas of the plant that we have just installed equipment. So let’s just go down the list for image kind that was the first plant where we shut down this year. The next plant was Invitation Box out of North Carolina, that’s now shut down and up and running here at Louisville. And in this quarter, the lion’s share of the moves we’re going to make from the Atlanta facility are occurring.

To answer your question, will we be all buttoned up by year’s end, in time for the holiday season? Yes, we’re now deep enough into the integration where I can definitely say that we’ve hit our target and while we still have more to do, we will make it in time.

Operator

Thank you and our next question is from Brian Fitzgerald with Jefferies & Company. Please go ahead.

Brian Pitz – Jefferies & Company

Thanks, guys. When you talk about these three significant deals in the back end of the half, should we, how we should think about size. Are they similar to Marvel and Paramount? And then maybe one follow up after that.

Bob Marino

Yes, so some of the examples that you cited in your question, Brian, maybe be a bit hit driven timed with perhaps movie releases and things like that. I’ve happy to report that these e-commerce partners are really not hit driven but sort of everyday partners. And the magnitude of those partnerships are great and in a range that is at least as significant as we have felt in the past from even the hit driven license content deals.

Brian Pitz – Jefferies & Company

Great, and then maybe any color so far, trends so far this quarter across your different businesses buy in buy, create and buy shops?

Bob Marino

We have seen some changes in the create and buy as we’ve temporarily eased up on the amount of flash sales. I will tell you, you know, we still have the requirement of there needs to be a repeat customer. We need to make money on the first sale. That lead to, you know, a rather small subgroup of products that we would use for those flash sales and that’s mostly wall art. But now with the adoption of our social strategies, we get to participate, and I think what consumer would still view as a flash sale, but the significant difference is that there is no partner to share the revenue with. And so we are slowing reducing the amount of the partner related flash sales as we ramp up the sales and promotions that we offer through social channels.

That’s resulted in a little bit of a slowdown as we made that transition this quarter and we probably will see a bit of a slowdown in Create and Buy in the next quarter but it leads to a much more profitable growth stream for us in the long term.

Operator

Thank you. Our next question comes is from Youssef Squali with Cantor Fitzgerald. Please go ahead.

Youssef Squali – Cantor Fitzgerald

Yes, hi, thank you. A couple of questions, going back to the margin question, maybe can you just walk us through maybe quantify how much of the $6 million in investment is already behind you, how much of it is in front of you. and I guess as a corollary to that Q2 margins look better than expected, maybe how much of that is, you know, just from the beginning of integration efforts starting to impact the numbers or is it just too early for that? And I have a follow-up.

Monica Johnson

Sure, so I think we had talked about at the beginning was, you know, impairment of about $6 million. So last quarter we talked about 2% and that’s about a million. This quarter we talked about a similar impairment of 2% so that’s another million. I would expect that in Q3 we see a heavier impairment and so, you know, that’s going to be upwards of 3% to 4% of gross margin. So, you know a little bit heavier impairment. And then into Vehicles4 we’ll see, you know, similar probably 2% impairment. So that’s how you get to the full year of what we expect to see.

Youssef Squali – Cantor Fitzgerald

Okay, so the improvement in gross margin in Q2 had less to do with that and more to do with just scale benefit and maybe as Bob was talking about fewer flash sales that you guys have this quarter?

Monica Johnson

Yeah. So if we look at the, you know, sequentially what we saw was sort of a consistent impairment but a one point improvement. And what we saw there was, you know, we saw that kind of across the board in terms of some product mix, efficiencies as well. For certain some limit, some gains in some of the areas. So there is a lot going on underneath gross margin right now. We’ve got some things that are improving and some things that are impaired but with certainty some improvement to punch label the point quarter-over-quarter.

Youssef Squali – Cantor Fitzgerald

And so as we look at Q3, what’s baked into your guidance concerning the gross margins? Is it like last year expected to be relatively flat as these increased investments are offset by maybe fewer flash sales or do we see slight sequential improvement again?

Monica Johnson

I expect to see slight sequential decrease quarter-over-quarter. And so, you know, as we talked about heavier impairment in Q3 because that’s where heavier activity is going on in terms of business consolidation. So as we get ready for Q4 we’ll see more impairment so at least another point into Q3 than we saw this past quarter.

Youssef Squali – Cantor Fitzgerald

Okay and lastly, I think Monica, you talked about expected reduction in earn out for EZ Prints. Can you expand on that?

Monica Johnson

Sure. So, with EZ Prints we talked about a $2.6 million reduction in the expected earn out. I think at this point Dan the Q2 are eight months into the earn out and remember it’s a very short earn out as 12 months as we just reported after the first quarter, you know, we’re off to a slow start. And so we took a $2.6 million decrease in the expected earn out. I would add that that is predominantly on what we call the EZ Prints legacy business and so, you know, that was off to a slow start. What we are seeing is, you know, much of what we purchased the company for was for the technology platform. So we continue to see a wider use of that technology, not only in our legacy business but across, you know, a number of parts of CafePress.

Operator

Thank you and our next question is from Shawn Milne with Janney Capital Markets. Please go ahead.

Shawn Milne – Janney Montgomery Scott

Thanks. Monica, could you, you know we sort of have our own estimates and I know it’s not black and white in terms of organic growth, but can you give us a sense for what that was in the quarter. And Bob you talked, you know, about some of the areas of success in the quarter. You did just mention a little bit lower Create and Buy. I’ve just wondering what else the drag in 2012. It looks like organic growth was slower. Thank you. I have a follow up.

Monica Johnson

Yeah, so I think, you know, overall we’re at 11%. I think, you know, organic growth you know we don’t disclose it specifically was, you know, it filtered up to flat. What we saw was, you know, as we break down the three buckets that we talked about before is, you know, largest component was shops and that’s where we continue to see very strong growth since we added the EZ Prints business into it. And again that we saw the most significant growth marketplace is our next bucket and we saw that, you know, really in the single digit strands. And you know, as Bob mentioned Create and Buy was slightly down. And part of that is we’re doing less flash sales that have had, you know, significant revenue share with partners. We’re replacing those sources of flash sales with the social partners. And so you know we’ll continue to focus on that area.

Bob Marino

Just showing the plan that we had with the plan that we get and that lead to investment in these corporate partnerships and social programs. That is paying dividends. As you see in our guidance for the third quarter you’ll see overall growth and indeed organic growth strengthening into the third quarter and achieving double-digits in the fourth quarter. A lot of the investments that we’ve made in social which are working are taking some time to hit scale. And the investments we’ve made in partnerships, well, there is certain, you know, pace at which these partnerships come online. It’s not linear but again given the guidance that we’ve put, given the roadmap that we’re seeing, we’re quite pleased with the progress we’ve made there.

Shawn Milne – Janney Montgomery Scott

Okay. And then have you got (inaudible) EZ Prints one of the key things you talked about was really the solution that they provided and the ability to, you know, leverage that platform to more easily ramped new partners but it sort of sounds like you’re talking about a situation where you’re going after bigger partners that actually take more time and maybe they are more impactful to revenue but am I reading that wrong? I sort of felt like this was going to be more of a once you integrated the EZ Prints business a faster ramp of partnerships, maybe not so impactful, one at a time. Thanks.

Bob Marino

Thanks Shawn. That’s still very much all true. Their technology is much more seamless than the CafePress technology was designed to be resident on our own website. So I think what you’re seeing though is not so much the technology being a bottleneck. It’s not. It’s fluid. But when you approach partners they had a certain roadmap, a certain offering that they were intending, so you’re really waiting for a train seat to get on their roadmap. And that’s really the nonlinear discussion that I meant to convey earlier.

Shawn Milne – Janney Montgomery Scott

Okay. Lastly Monica, I know you won't give guidance for ’14 but can you just describe maybe a little bit more quantitatively how margins should improve x the $6 million investment. And how the cost infrastructure and efficiency should, you know, any kind of parameters around that would be helpful. Thanks.

Monica Johnson

Yeah, so I think you know as we enter into the year we talked about a 3 point impairment to EBITDA and as we exit the year we expect to get that back. Let’s put ourselves on path for further cost improvements. So I think you know our analysis of how much better and how much improvement is still underway as we consolidate, you know, essentially what was fixed different plants and consolidate primarily the majority of that into one. So three points, certainly back on track and then, you know, continue to evaluate how much efficiencies we can get in particular in labor and shipping into to Kentucky plant. And then you know the other area where we’ve seen cost increase is really on the sales and marketing line. That’s really gone after customer acquisition. I think you know what we’ve said about that is that it really depends upon the opportunity. I think we kept sales and marketing expenses flat to last quarter but we’ve seen several point increase year-over-year. We’ll continue to look at what’s the opportunity of customer acquisition and whether we’re going to spend in that area.

Operator

Thank you and our next question is from Aaron Kessler with Raymond James. Please go ahead.

Aaron Kessler – Raymond James

Great. Thank you. A couple of questions, can you give us a, or in terms of the competitive environment, if you could update us there. It looks like it has been a little bit more maybe aggressive with their marketing at least in the San Francisco area. So any change there and I think you cited a change in kind of (inaudible) deal, you situated being, maybe give us a little explanation behind that. And just finally, in terms of the shifting to ad spend a little away from Google, or at least using Google last, are you starting to shuck more money towards either mobile or Facebook specifically. Thank you.

Bob Marino

All right, First of all, on the competitive landscape, based on all the studies that we have commissioned which we received, you know, daily updates on, I would have to say that we are doing quite well compared to the long tail marketers that might exist within our space. And especially better on against the one competitor that you named and I think that might explain a bit about the more aggressive promotions that they're doing. And we’ve also noticed those more aggressive promotions.

On the other fronts, you know, we continue to gain market share against other competitors in the other spaces that we operate in. so I think we're doing quite well there. Could you help me with the second part of your question again?

Aaron Kessler – Raymond James

Yeah just curious in terms of, I think you talked a little about maybe shifting some spend or trying to shift a little bit away from Google. Can you just give a sense, I mean how you started to shift yet, that spend and if so, where is that incremental spend going to.

Bob Marino

We’ve definitely shifted investment into other channels, social, mobile, leads, more of a B2B to C partnership offerings that we’ve had and you do see sales and marketing up also because of those activities. But those activities are designed not so much to shift away from our participation in search but to decrease our dependency on search and to ultimately have additional channels that are more effective at bringing customers. And I think you're seeing, you know, what we're doing with Flash, along the same lines. It’s a good way of gaining new customers but we want to drive efficiency there so we're bringing what we’ve learned to the social channel, which again we don’t to share the revenue with a partner in that.

So all of these things are you know adding up. It’s a multichannel approach and it’s adding up to decrease our dependency on search but not leave search.

Aaron Kessler – Raymond James

And finally can you update us maybe on growth in Europe. I know a couple of quarters ago you had cited some weakness there. How is that performing? Thank you.

Bob Marino

So we're pleased with the progress that we’ve made internationally. We have made several changes to SEO and SEM participation in those regions. And based on the strength of that, and the compelling nature of our GreatBigCanvas offering, we’ve decided to late in the second quarter internationalize that business with the launch of Australia, Canada and the UK. When we do a heatmap study of patrons of art there we noticed that there is actually a stronger affinity for wall art in those markets than in indeed the U.S. market. So those were the next likely markets to go into. And the growth rate of GreatBigCanvas and the manner in which it grows lends itself to this international marketing effort.

Monica Johnson

Yeah and I think you would, as Bob mentioned, we had growth international of 3% adjusted for foreign exchange of 5% and you know, as Bob mentioned much of that growth has been cp.com really going international and I think what this quarter we saw just early days of expanding the Canvas on Demand property into Europe and a couple of other international regions. So we’ve got an early start there but we're encouraged by what we're seeing so far.

Operator

Thank you. And our final question comes from Kevin Kopelman with Cowen and Company. Please go ahead. Kevin, if you would like to ask a question, please press star one again. All right. I guess we have no further questions. Ladies and gentlemen, we thank you for your participation. You may now disconnect.

Bob Marino

Thank everyone for joining us today.

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