CafePress Inc. (NASDAQ:PRSS)
Q2 2014 Results Earnings Conference Call
August 12, 2014; 05:00 p.m. ET
Fred Durham - Chief Executive Officer
Garett Jackson - Chief Financial Officer
Alex Wellins - Investor Relations
Youssef Squali - Cantor Fitzgerald
Brian Fitzgerald - Jefferies
Aaron Kessler - Raymond James
Good day, and welcome to the CafePress, Second Quarter 2014 Earnings Conference Call. Today’s conference is being recorded.
At this time I would like to turn the conference over to Alex Wellins in Investor Relations. Please go ahead sir.
Thanks for joining the call today. With me on today’s call are CafePress’s CEO, Fred Durham; and CFO, Garett Jackson. This call is being broadcast live on the web and a replay of this call, as well as our press release can be found on our Website at investor.cafepress.com.
Before we get started, I need to remind everyone that part of today's discussion will include forward-looking statements, including statements regarding among others, changes in strategy given changes in the senior management of the company, the planned consolidation, manufacturing processes and expenses related thereto, impact of our mobile and social programs, growth strategy and the realignment of our investments, our plans for certain partners and opportunities with partners and large retailers, our investment in products, technology and operations to drive our business; our position related to our current cash and yields and our outlook for the coming quarter and full-year, including the underlying assumptions and specifically as to net revenues, adjusted EBITDA, non-GAAP net loss per diluted share, GAAP net loss per diluted share, weighted average fully diluted shares, assumed tax rate, capital expenditures, deferred tax assets, GAAP income tax benefits and GAAP tax expense.
These statements are based on what we expect as of this conference call, as well as current market and industry conditions, financial and otherwise, and we undertake no obligation to update these statements to reflect events, 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 could cause actual results to differ materially. These risks and uncertainties include, but are not limited to risks regarding fluctuations in operating results, litigation-related risks and associated expenses, and difficulty in estimating the impact and costs related thereto, our dependence on search and our ability to drive traffic to shops and e-commerce sites, our ability to provide accurate search results and recommendations across our long-term marketplace catalogs, fluctuations in the revenue contribution between our various e-commerce properties, and risks and uncertainties related to our growth.
We refer you to our annual report on Form 10-K for the year ended December 31, 2013 as filed with the SEC on March 31, 2014 and our other SEC filings for a 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’ll find supplemental data in our press release, which reconciles our non-GAAP measures to our GAAP results.
With that said, I'll turn the call over to Fred Durham. Fred.
Great. Thank you Alex. Hello everyone. I’m really happy to be speaking with all of you today. I co-founded CafePress in 1999 along with Maheesh Jain who re-joins me as CMO. We’re both really excited to get back into our old roles.
Before we jump over to the company, I’d like to pause and say thank you to Bob Marino for his years of hard work and dedication to CafePress and to wish him the absolute best in the next stage of his career.
Now, let me start by giving you my perspective on the company and my initial priorities. I just came back a week ago, so I’ll be brief. I’ll then turn the call over to Garett Jackson, who will take you through the operational progress and financial results for Q2, then open the call to questions after that.
Garett has already proven himself to be a valuable partner to me and I’m happy to announce that we have removed the Interim from his title. He is now the CFO. Thank you, Garett.
Maheesh and I created CafePress based on the idea that individuals and communities wanted to express their affiliations and passions, but they often wanted to do this through products, the physical things in their life and that marrying customization and e-commerce could unlock creativity and expression. We enable people to make products personal and meaningful, without the burden of sourcing, manufacturing the fulfillment.
While e-commerce and the web have come a long way since 1999, our original thesis has only been born out, but stands truer today than ever. Here the big exciting business opportunity in empowering consumers to customize and personalize products in ways that are meaningful to them and their families.
CafePress has maintained leadership in this category over the years, even if that road had not always been a smooth one. CafePress has an attractive set of assets that we believe are undervalued.
Over the past few years we’ve acquired a number of very quality businesses. But in our zeal to cover multiple verticals, I believe that we have at times lost focus on providing the best consumer experience. Some of our growth strategies have not produced the profits we would have liked; paid traffic, promotions, third party flash sale have become increasingly expensive and less responsive at the same time.
While we have made progress in social and mobile, I believe that we need to do better to capitalize on these trends and opportunities. I’m excited to be back as the CEO and I intend to bring a lot of energy and focus to the job. My first step will be to intensely study every aspect of our business, so that I can lead our management team in making thoughtful decisions regarding the directions that we will take.
That said, at a high level I do have three immediate top priorities: Number one, to do fewer things, but to do them much better; number two, to focus on growing the profits, and number three, to ignite the passion, to reignite the passion for consumers and provide them with a better experience. I would love to share more details of these plans with you today, but it wouldn’t be prudent before I’m able to get a more thorough review of the business.
As you may know, we engaged a financial advisor to review strategic alternatives several months ago. That process is ongoing. We’ve learnt a lot so far, such as highlighting some of the complexities of managing multiple verticals and balancing consolidation with empowering the teams to make the right decisions for the long term growth of their own lines of business. We may need to make changes to our business and operations in order to better focus on what we do well and what drives profitable growth.
In my first week, I’ve met with the leaders of our individual business units and many, many members of the CafePress team. We have many challenges at CafePress. I am thrilled that the quality and commitment of the team is not one of them. I’m sure that with a little more clarity and purpose and of mission we will get a lot done together.
As you’ll notice in today’s press release, we’ve made the decision to discontinue issuing guidance at this time. In addition, the company’s withdrawing our previously issued guidance for full year 2014.
I am quite confident about the future of CafePress and believe sunnier days are ahead. However, given the change in leadership and the ongoing evaluation of strategic alternatives, we want to maintain flexibility in making the right long term decisions for the business.
The Board has brought the founders back. This is a clear statement that we intend to return to driving profitable growth and do it as quickly as possible. As two of the biggest shareholders in the company, Maheesh and I are well aligned with our fellow shareholders. We intend to move aggressively, yet thoughtfully and we look forward to keeping you updated on our progress.
I’d now like to ask Garett to review our results before we take your questions.
Thank you, Fred. I’m excited about my appointment as Chief Financial Officer of CafePress and look forward to partnering with you and the rest of the team. I’ll now review the results of our operations for the second quarter. All comparisons will be year-over-year unless otherwise noted.
Net revenues for the second quarter of $51.4 million was the upper-end of our guidance range and represented a year-over-year decline of 2%. Strength from our Art and Groups properties, as well as from strategic partners within CP Services partially offset a decline in CafePress.com revenues.
Mobile revenue continues to increase as mobile revenue growth again outpaced mobile traffic growth. International revenue was also a bright spot within Q2, as revenue grew 11% over last year and comprised of 11% of total revenue.
Our Q2 adjusted EBITDA was negative $248,000 compared to a positive $1.1 million in 2013 and was also above the midpoint of our guidance range. As a percentage of revenue, EBITDA declined from 2.1% to negative 0.5%.
Reviewing our key metrics, average order size was $39, an increase of 14% year-over-year. During the quarter we shipped nearly 1.3 million orders, a 14% decrease over last year.
Acquisition costs per order was $7, up $1 from a year ago. Order count in the second quarter decreased largely to changes in the legacy partner’s roadmap related to photo prints, which carry a lower AOS. This was a contributor to an overall mix change, which produced an increase in AOS.
Turning to revenue our various lines of business, as a reminder from Q1 call, we’ve stated discussing the company in terms of our consumer businesses, which are CafePress.com, Art and Groups, and our partners business, which we call CafePress Services. I’ll quickly review second quarter financial with highlights for each of these areas.
CafePress.com represented little more than 50% of our revenue and declined to 8% year-over-year. Sales in our marketplace were negatively impacted by the ongoing shifts in traffic towards lower conversion mobile traffic, as well as decreases in small shops and Flash within the create-and-buy category.
We are happy we are offering exclusive licensed products that consumers could customize based on two of the two recent movie titles, Guardians of the Galaxy and Divergent. Our range of comic, television and move titles and characters allow CafePress to capitalize on the range of interests these passionate consumers possess.
Our Art properties performed well this quarter and represented approximately 25% of our revenue, with 11% year-over-year growth. In particular, we continue to be pleased with the results from Great Big Canvas, which had strong growth this quarter, driven by strength in international, commercial accounts and the launch of a commercial décor page.
CanvasOnDemand introduced a new app like mobile interface that is well liked by consumers. We are also seeing a strong improvement in mobile voucher redemptions on CanvasOnDemand, where customers can use their SmartPhones to make a redemption.
Groups comprised 10% of our revenue and grew 25% this quarter, due in part to site enhancements that improves conversions, as well as the continued success of TFUND, our apparel fund raising platform. We like TFUND, because it’s also very social and mobile usage by allowing users to create their own campaign and share them socially. TFUND has gone from a think-tank project to a solid contributor of revenue for our Groups business and we see other applications for this platform.
Finally, CafePress Services represented approximately 15% of our Q2 revenue and grew 4% versus last year. Mixed results in the partner channel were driven by strong growth and strategic partners, while we continue to experience some weaknesses within the legacy photo gift business.
I’ll now review some key financial metrics and encourage you to consult the tables accompanying our press release for full details on our results.
On a non-GAAP basis our Q2 net loss was $1.8 million or $0.11 per diluted share, compared to net a loss of $700,000 or $0.04 last year. Gross margin on a non-GAAP basis was 37.1%, a decline of 1.7 points versus last year.
We continue to see benefits of the planned consolidation through improvements in labor efficiency. However, within the CP.com shifts in product mix and the impact of promotional activity on pricing in the core business are causing us to experience lower margins than a year ago.
As Fred mentioned, we will be carefully analyzing the business strategy that we hope will provide profitable growth along with an excellent consumer experience. I look forward to working with him and Maheesh to help execute these strategies.
Within non-GAAP operating expenses, sales and marking expenses declined by 0.9 percentage points versus last year on favorable mix shifts to higher ROI channels. General and administrative expenses increased 1.4 percentage points, as we continue to see some headwinds from legal fees. Technology and development spending also increased by 0.9 percentage points, due primarily to lower levels of website capitalization.
Our Q2 non-GAAP effective tax rate was 35.6%. On a GAAP basis we posted a loss of $3.6 million of $0.21 per fully diluted share. That compares to a GAAP net loss of $1.7 million or $0.10 per fully diluted share in Q2 ’13.
Turning to our balance sheet and cash flows, as of June 30, 2014 cash, cash equivalents and short-term investments totaled $19.9 million. We remain comfortable with our cash position and have an unused $5 million line of credit currently available to us.
Our capital expenditures for Q2 totaled $1.5 million compared to $2.6 million in Q2 2013. We continue to make prudent investments in our business to fuel long-term growth. The year-over-year comparison reflects higher levels of investment in the planned consolidation last year.
We have free cash flow, which we define as adjusted-EBITDA less CapEx of negative $1.7 million compared to negative $1.4 million last year. Also during the quarter we had an operating cash outflow of $600,000, compared to an operating cash inflow of $3.4 million in the same period last year.
Lastly, our basic and fully diluted weighted average shares outstanding were $17.3 million. To reiterate Fred’s earlier comments, we are not providing guidance on the third quarter and withdrawing guidance for the full year due to the timing of the leadership change.
With that said, we’ll turn it over to the operator for questions. Operator.
Thank you. (Operator Instructions). We will first go to Youssef Squali from Cantor Fitzgerald.
Youssef Squali - Cantor Fitzgerald
Yes, hi. Thank you very much. I guess just two related questions. Maybe Fred, can you just help us expand on the range of options that you have at your disposal as you think through this restructuring or reorganization, just so that we know what the potential outcomes are, understating that you obviously can’t really be very – go into too much detail.
And then in terms of timing, how long do you give yourself to try to kind of figure this out. Is this a three-month kind of issue, where by the time you come out with Q3 results you’ll have kind of flush-out strategy or is this a multi-quarter kind of phenomenon. Thanks.
Thanks Youssef, great to speak with you. I think with regards to the process, it’s obviously hard to speak with too much detail about it. With it ongoing -- I’d love to tell everyone more and I’d love to discuss all the details, its very prudent to not say too much, while its still under ways and so you alluded to and understand.
The best I can do is to offer up that – I think in the beginning when we started this, we said it was an open process and that we were considering many strategic alternatives and we really didn’t mean that. I think its sometimes, “is meaning selling the company” and that is just one of many alternatives that we continue to explore and it is ongoing.
Given that I’ve been in this job now, I came back last Monday, knowing exactly how long the process will go on is difficult to predict. I understand – wanting to understand how long it may take, but additional time is needed for me to get a good handle on how long that might take. I look forward to updating probably more on that process by the next call, when I’m better in the seat.
Youssef Squali - Cantor Fitzgerald
Okay, and then I guess just broadly speaking as you look at the business, you guy started it back in ’99 as a really more consumer facing business and then a little by little you’ve added partners and the story got a lot more interesting in a way, but also much more comp alluded. As you look at the business going forward, is there a preference as you see it today. Maybe its too early, between is there a preference to be more consumer facing or more kind of we’ll call it B2C or B2B even.
Yes, thanks. So, as I’ve kind of tried to forecast in my comment, B2C I think is the place to go. So even when we went more B2B and went through the channels, the spirit was we have this awesome product that speaks to people. People are passionate about it, its expressive and as we kind of saw search volume changing, peoples behaviors changing, things that we are seeing such as the social and mobile behaviors, people just looking for different things in retail and technology changing, we felt we wanted to take what we had to offer people for self expression, out to them, everywhere it would be and that was a wonderful thesis.
What we’ve kind of discovered in that process and from a high level is it looses something in translation. So by the time it goes through intermediaries, its still a very interesting product, but its not the same special, personalized sort of thing that we could have with a one-on-one relationship with customers and I think we really want to reignite that passion in a one-on-one with the individual consumer. That’s where my head is at.
Youssef Squali - Cantor Fitzgerald
Okay. Well, that’s helpful. Thanks and best of luck.
And we’ll take our next question from Brian Fitzgerald from Jefferies.
Brian Fitzgerald – Jefferies
Thanks guys. Maybe a couple of questions on the quarter, a little bit of a clarification. What portion of the 14% decline in orders was the result of the roadmap change from your legacy partner related to the photo prints and can you give us more color on that and what was the specific impact from this partner in terms of average order size and then I got a couple of other ones if I could. Thanks.
Sure. Nearly all the change was related to the legacy partner change. The majority of the orders down were related to that. That also is the majority of the change that happened from the average order size standpoint. Those were photo print, white-label product on strategic for us.
We talked about it for the last couple of quarters as a same partner of roadmap change that we’ve talked about in that photo printing area, and as that’s out at closer to a $10 average order size, we’ve also seen the growth in our other partner areas that’s actually outpaced that this time around.
So last time we talked about CP Services were down in total as a percentage year-over-year in the last quarter. Now we’re actually up about 4% year-over-year in that channel and that’s including some of the legacy partner changes that we just talked about. So we are seeing that the growth in Art, the growth in Home, in some of our larges AOS categories, coupled with the decrease in the low AOS photo gift type business is what’s created the mix shift for us.
Brian Fitzgerald – Jefferies
Great. And then I guess if you had to think about the quarter, could you single out maybe one or two categories where you saw the highest competitive pressure and did you or did you not result to doing increased promotional activity in the quarter and maybe how that – I want to be respectful of your guidance comments, but how is that same comment panning out in Q3 with respect to the competitiveness and promotional activity. Thanks.
Sure. Well, I’m going to probably let Fred chime in a little bit with where we’re trying to look, but I think as we started to look at this quarter, yes we did, we were promotional. We had some pressures there from an AOS standpoint or AUR as we started to try to get our promotions in line and looking at how that impact is on our product side. We see that in the gross margin line a little bit. But as far as what we’re doing now and what we’re doing, looking at as far as vision, I’ll kind of let him talk a little bit about our vision on profitability and pricing.
Yes, to hit your question about the competitive landscape, from what I can see so far, there is direct competitive, that’s there for sure. But merely it’s a broader set of competitive pressures for pricing, some of which your seeing a kind of post group on. The consumer seems to be trained to a higher level of promotion in general across all retail, every place. There are pressures to strike out and behave slightly differently because of that.
In terms of direct head-to-head price shopping, I want to go here versus there; I think that’s a minor component of the competitiveness versus some other forms of competition. We are seeing search traffic, web based browser find sort of behaviors, they are not – be growing at the rate that they were in the hay-day. And so that’s causing pressure on us competitively if we want to grow, to try to soak more out of that channel. Promotion and purchasing and advertising has been increasing to try to grab more share from that and that’s foreseeing sort of competition as that pond is shrinking more or less.
And then competitively we are competing with ourselves a bit, because we’ve started this sort of discounting campaigns, one of these new steeper discounts years ago and so as we annualize them, we find in order to try to turn them into growth strategies that you have to increasingly make your promotion stronger and stronger, to best last year. So the competitive nature of the discounting I think is large macro trends and a little bit self-inflicted, more than head-to-head.
We’re interested at growing profits and strategically we are reviewing very carefully our marketing behaviors, the (inaudible) and already starting to make changes, with the thought that growth is great, but only profitable growth and that’s really where we want to focus fewer things that are profitable.
Brian Fitzgerald – Jefferies
Got it. Thanks Fred, thanks Garett.
And we’ll now move to Aaron Kessler from Raymond James.
Aaron Kessler - Raymond James
Yes. Hi guys, thanks. A couple of questions. First up for Garett. Just on the gross margin, I think you mentioned some decline due to product mix and discounts, but those are the same factors that led to I guess the roughly 1% sequential decline that we saw. And then for Fred or Maheesh, in terms of the marketing, I think you mentioned kind of social mobile, some room to do better. Any other initial thoughts on just kind of the marketing strategy of CafePress? Thanks you.
As far as gross margin, yes we did see some of the mix that we were talking about there. We had a little bit more with the smaller products kind of coming out. We had that kind of, those material costs are lower and higher cost goods kind of covering in the Home and the Groups business.
We have seen some of the consolidation improvements like I mentioned. Labor efficiency is still there, but we’ve also seen on the pricing and promotion side some of the impact that Fred just talked about a little bit, impact us on a top line, a little bit more than what we could make up on the cost side.
And then on your question on social, mobile, other branding or marketing efforts, great question. If we are going to back off of some of the promotion and pricing for growth, then where will it come from; and our products are inherently social and mobile and expressive in and of themselves.
People get our products – essentially CafePress is the place where people have the most meaningful, otherwise not really useful things that they would ever buy. These are the favorite t-shirts that people may never wear. This is really about sharing and connecting and gift giving and that’s where the real core spirit of CafePress is at and we’re seeing this happen when they have been the most viral. We are going back to that and we think we could take advantage of social and mobile in very different ways from how we’ve been doing it.
This isn’t just about a shift from web to mobile web. This is a shift in behavior and how people share and connect and I think we can take better advantage of that. We are also putting the consumer upfront and center and we are more focused on data mining for each individual customer and looking not at conversion rates and AOS and AUR, but about purchases per year. We think we can raise the lifetime value by providing a better experience and more value to customers and that’s where our focus is going to be on.
Aaron Kessler - Raymond James
Great, and can you just update us, I know your not giving guidance, but just in terms of the manufacturing, planned consolidation, if that’s on track through the rest of the year and if any impact on the quarter from Pandi on some of your, the smallest sites you work with. Thanks.
The consolidation is on track and we’re going to be examining exactly what we are doing with the consolidation in some places in order to free up the other business lines and units to run faster. We’re going to try to re-balance what we mean by consolidation. We’re going to be looking at it heavily over the next couple of months. Whatever changes we make, its going to be focused on what helps us grow profits, so we are re-evaluating some of those initiatives and as far as Pandi goes, I think your referring to some Google algorithm changes and how that protected us.
We think we’ve seen positive impact. Nothing’s blown the roof off, so that it’s like obvious, but its better, but we think we’ve seen positive. We’ve certainly to my knowledge haven’t seen anything particularly bad. So that net’s slight positive I believe.
Aaron Kessler - Raymond James
Great, thank you.
And that is all the time we have for questions today. I’ll turn the conference back over to management for any additional or closing remarks.
I want to thank everyone for calling in today. I’m really excited to be back as the CEO and I look very forward to updating our progress once I’ve been here a little bit longer and I look forward to working with everyone in the future. Thank you.
This concludes today’s presentation. Thank you for your participation.
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