CafePress Inc. (NASDAQ:PRSS)
Q2 2016 Earnings Conference Call
August 4, 2016 5:00 PM ET
Whitney Kukulka – Investor Relations, The Blueshirt Group
Fred Durham – Co-Founder and Chief Executive Officer
Garett Jackson – Chief Financial Officer
Kip Paulson – Cantor Fitzgerald
Good day ladies and gentlemen. Welcome to the CafePress Second Quarter 2016 Earnings Conference Call. Today’s call is being recorded. At this time, I would like to turn the conference over to Ms. Whitney Kukulka for opening remarks and introductions.
And Ms. Kulkulka, your line is open, please go ahead.
Good afternoon and welcome to the CafePress Second Quarter Financial Results Conference Call. Joining me on today’s call are Fred Durham, Chief Executive Officer; and Garett Jackson, Chief Financial Officer.
Please note, this call is being broadcast on the Internet. A replay of this call along with our SEC filings and earnings release will be available on the Investor Relations section of our website at cafepressinc.com.
I’d like to remind everyone that our remarks today will contain, including without limitations, statements regarding guidance, our strategy to optimize and energize, our focus on customer experience and relationships, expenses, marketing efficiencies and our plans and expectations as to our partners, employees, investments and facilities.
These statements are subject to risks and uncertainties that may cause actual results to differ materially from anticipated results. For more information, please refer to the risks factors in today’s earnings release and in our most recent Form 10-K filed with the SEC. Andy forward looking statements we make on this call are based on assumptions as of today. We undertake no obligation to update them. During this call, we present GAAP and non-GAAP financial measures, reconciliation of GAAP to non-GAAP measures are included in today’s earnings release.
With that, I would like to turn the call over to Fred Durham. Fred?
Thank you, Whitney. Today I will review our Second quarter results, outline the progress that we’ve made in the first in the first half of the year and describe our next steps as we continue to optimize and energize our business for the long term. Then, I will turn the call over to Garett for your financial results, and we will open the call to questions.
Before we get started, I want to quickly touch a few housekeeping items. First on July 20, we have the appointment of Phil Milner as Chief Financial Officer; Phil will join the CafePress team on August 29. He played key financial and operational leadership roles during a period of high growth at Churchill Downs, and previously worked for highly regarded companies such as Ventas and PricewaterhouseCoopers. We expect to benefit from his experience and are very excited to welcome him to CafePress.
And this will be Garett’s last quarterly call with me. Beyond the role of CFO, Garett has been a true partner through a period of significant structural change at CafePress. He was instrumental in the divestitures and shouldered a host of operational items as we have effectively stabilized and optimized our business. He will remain with us through August facilitate a smooth transition.
On behalf of CafePress and our Board of Directors, we thank Garett for his leadership and many contributions, and wish you the best in his future endeavors. Second, we are excited to welcome Mary Ann Arico to the Board of Directors. I would also like to thank Bradley M. Rust for his years of service, dedication, and advice while on the board of CafePress.
Third, as you saw from our news release today, we recorded a goodwill impairment charge of $20.9 million. The goodwill was added to our balance sheet as a result of the acquisitions the company made f through 2012. GAAP accounting rules have led us to record impairment in Q2. I would like to note, this is a non-cash charge driven by accounting rules, and as 100% of the goodwill on our balance sheet final wrap up of the divestitures.
Fourth, we are closing our California office and transitioning most of the remaining jobs to our headquarters in Louisville. A handful of key employees will stay in California working from home. We expect that the transition will create further operational efficiencies after any restructuring charges that will be taken in the second half of 2016. Garett will provide additional detail on the goodwill impairment charge and the office transition shortly
Now, on to our Q2 update. Net revenues were $19.8 million in the second quarter of 2016. A year-over-year decline of 9%. The past four quarters, we reported revenue declines between 21% and 25% year-over-year. As we start lapping, the bold changes that we made a year ago, I believe this is a clear indicator that we are turning the corner.
We held both our gross margin contribution margin at a stable range for the fifth consecutive quarter at 41% and 29%, respectively. In fact, the contribution margin continue to trend higher than anticipated, and we do still plan on investing more back to the growth engine.
We also expect to continue our investment in technology and development with expenses up on year-over-year would. With de minimis cash burn in Q2, we finished the quarter with $38.4 million in cash and short-term investments or $2.29 of cash per share and no debt.
CafePress helps individuals express themselves and connect with others by bringing passion for life and forging meaningful connections through unique items and gifts. And whether you think this election is connecting or dividing us, political season is upon us. And we are starting to see some traction on the revenue front and seeing lift in election centric product categories, like figures and buttons.
We expect to see a solid season with political merchandise sales typically concentrated in the period between the convention and Election Day. While it is certainly clear that these particular candidate draw very passionate – pro and con fan bases that revenue upside is built into the expectation for flat modest growth for the rest of the year consistent with what we communicated last quarter.
We are headstrong focusing on our strategy to optimize, and in parallel energize CafePress. Last quarter we emphasized that we are in the midst of remodeling the store, improving our customer experience, refreshing our branding to be consistent with the new consumer identity, and enhancing our internal systems and processes to better manage our e-tail business.
CafePress customers will notice the improvements we’ve made to our product quality and delivery times, resulting in impressive customer satisfaction, all while maintaining solid margins. With our unique content, optimized product mix, and high-quality merchandise; we are well-positioned to deliver on our mission to have the perfect item for every passion.
We made significant changes to our footprint in the last six to nine months, aligning our facilities and operations with our scale. In the Kentucky headquarters we opened this quarter, the team is surrounded by CafePress products and customer stories to personify and connect with our customers. Our collaborative workspaces are improving communication among the cross functional team we need to complete the hard work of the turnaround.
In working late, we spent the first half of 2016 tuning the manufacturing fulfillment processes that are a consolidated plan for scale. We will be fully ready and excited for the peak holiday season. Projects to enhance our marketing and technology infrastructure to give us better control and optimize our business are in various stages of development and starting to roll out now. Many of these initial projects are not highly visible, but do lay the groundwork for us to have more control over our merchandising. For example, we have rebuilt our catalog infrastructure which has a host of benefits, including allowing search engines to better index our products and content, and stronger management of the product we offer through our retail channel partners.
We have also performed a plethora of user experience tests on desktop and mobile, and have been incrementally improving our site experience and conversion rates. We anticipate steadily locking in additional gain positive momentum as we shift attention from control over cost and quality, back to growth. We will continue to work vigorously on site experience and marketing, but with the peak season fast upon us, we do typically lock the website down for changes and releases. Additional progress may not be very visible for the remainder of 2016.
Net debt, we continue to anticipate revenue pressure in the near-term, but we are tuning the model to drive quality growth and profitability. Investing in growth, we will continue to see elevated expense in both marketing and technology throughout the rest of 2016 and into 2017. Contribution margins are likely to fall, though we anticipate, they should stay at or near the 25% level and correspondingly pressure on our EBITDA margins.
We are still in the turnaround, but I believe were at an inflection point. The CafePress team is optimizing the customer experience and strengthening all aspects of customer acquisition and retention to drive a return to growth. CafePress has a unique position in the industry and a solid value proposition.
We have been aggressive and proactive in implementing significant changes to right the ship. We believe we are making the changes necessary to deliver on our commitment to restore growth and stabilize profitability. We are headstrong with an acute focus on improving operations and customer relationships through technology improvements and smarter marketing. Although many of these key updates behind the scenes, we expect successful deployment and integration will boost audience conversion and drive long term value.
Finally, before I turn the call over Garett, I would like to give you an update on our share repurchase program. In the second quarter, we repurchased approximately 100,000 shares of common stock and will continue to the opportunistic with our ongoing share repurchase program. We are confident that our diligent work revitalizing CafePress will create a substantial opportunity for company, customers, and shareholders.
Garett will now walk you through our results in more detail before we open the call to your questions. Garett?
Thank you, Fred. I will now review our financial results for the second quarter 2016. All comparisons will be year-over-year unless otherwise noted. As in the previous quarters, results from continuing operations include Cafepress.com and our retail partner channels. Retail partner channels consists of our off-site feeds and large corporate shops for license content partners.
The results for our divestitures, including easy prints, art, and mobile sportswear, which closed in 2015 are including in discontinued operations for all periods presented. Okay, let’s start turn to our second quarter results. CafePress reported net revenues for the second quarter of $19.8 million, a year-over-year decline of 9%. While revenues were down versus last year, they were in line with our expectations ahead of consensus and continue to reflect signs of stabilization of our contribution margin levels.
Revenue from CafePress.com was approximately $16.9 million or 85% of total net revenue, representing a decline of approximately 8% year-over-year. As we expected, the top-line decline for CafePress.com has begun to show signs of stabilization as compared to the previous four quarters, and we expect that to continue as we move through the year.
Our retail partner channels, which consists of our off-site feeds and our corporate shops, generated approximately $2.9 million in revenue or 15% of total net revenue and declined approximately 13% over the same period last year. Similar to CafePress.com, the revenue declines in retail park channels have begun to moderate, and we expect that to continue through the year as well.
As you saw on our release, we recorded a goodwill impairment charge of $20.9 million during the quarter. By way of background, the goodwill was originally added to our balance sheet as part of the acquisitions the company made through 2012. The accounting guidance requires companies that operate in one reporting – as we do – to evaluate our goodwill of the market value of their shares off the load carrying value of that net asset.
That was the case was recently, and so we had to perform a test for potential impairment in consultation with third-party evaluation experts and our auditors. The results of that test, indicate a full impairment of the goodwill. This is a non-cash charge and we excluded this charge from our adjust EBITDA and adjusted net loss, as its both non-cash and one-time in nature. This is the last of our divestiture adjustments we expect to make. There will be some additional disclosure on this topic in our form 10-Q.
On a GAAP basis, our second quarter net loss from continuing operations was $23 million, or $1.37 per fully diluted share, compared to a GAAP net loss of $1.1 million or $00.06 per fully diluted share in Q2 2015.
Our second quarter adjusted EBITDA loss was $1 million compared to a positive $.7 million a year ago. As we communicated earlier, higher levels of investment coupled with our lower revenue stream are the key causes of the decline. The optimization phase will be characterized by investments in the business functions that we see as critical for the company in the long run. The heaviest investments are in our technology and development, which will enable us to optimize our customer experience and provide our teams the tools necessary to power our retail business as we position ourselves for the future.
I will now review some key financial metrics for the second quarter. I encourage you to consult the table the company put in our press release for full details. For the second quarter, gross margin on a GAAP basis was 41% flat, compared to the same period last year and held at or near 40% for the past five quarters. The consistency is a result of our focus on stabilizing pricing and promotional strategy along with continuous optimization of our manufacturing processes. These improvements are mainly driven by reductions in materials and commission costs.
We maintained our focus on driving a strong contribution margin. For the quarter, contribution margin was $5.7 million or 29% of revenue, flat over the previous year as we have been able to stabilize both gross margin and marketing efficiency. We have been able to operate at or near the levels for the past five quarters, and we are pleased with the consistency in contribution margins.
To add some color to the progress we’ve made, I will discuss our key operating expense components. We are now beginning to lap the cost-saving practices we applied last year and have found stability in our expenses. Now, it is important that we continue to make the required investments that will enable us to optimize our site experience and prepare us for a return to expansion.
Our second quarter sales and marketing expense on a GAAP basis was approximately $4.3 million or 22% revenue. This represents a $.1 million increase versus the second quarter 2015 and we continue to see consistency in our marketing ROI versus last year. We also saw modest increase in fixed marketing costs with the implementation of our customer database.
Second-quarter technology and development expense on GAAP basis was approximately $3.3 million or 17% of revenue this quarter, representing an increase of $.5 million versus last year. Lower depreciation costs were offset by higher personnel costs from our investments in updating both front and back end technology
For the quarter, our general and administrative expenses on a GAAP basis totaled approximately $3 million or 15% revenue. This represents a $.2 million decrease over the same period last year. The savings are driven by reduction in rent in our California presence and a decline in professional service expenses.
As Fred mentioned earlier, we are transitioning more of the California operation to our headquarters in Kentucky. We anticipate recording some restructuring charges in the second half of 2016, but expect to realize a reduction expense run rate in the long-term. Our second quarter non-GAAP net loss from continuing operations was $1.3 million or $.08 per diluted share, compared to a net loss of $ .5 million or$.03 last year.
Turning your balance sheet and cash flows, we ended the quarter with continued strength in our cash and short-term investments, which totaled $38.4 million or $2.29 per share, down only slightly from $39 million in the first quarter. Our free cash flow, which we define as adjusted, EBITDA less CAPEX reflected a $3.3 million outflow in the second quarter, compared to a $.2 million outflow for the same period last year.
Our capital expenditures for Q2 2016 totaled $2.3 million or 12% of revenue compared to a $.9 million or 4% of revenue Q2 2015, driven mainly by the build out of our Kentucky headquarters. We expect CAPEX to be between 5% and 7% of revenues for the year, with Q3 seeing slightly lower spend levels than Q2 for plant equipment and web development, and Q4 being less than $1 million as we head toward the peak season
Our fully diluted weighted average shares outstanding were $16.7 million. Within the quarter we repurchased approximately 100,000 shares at a market value of approximately $.3 million bringing the total property purchases today to just under $1.1 million shares valued at approximately $4.7 million. We still have $2.4 million shares available under our current authorization and will remain opportunistic as the board and management continue to believe the repurchase program is a good tool to deliver shareholder value.
To summarize, we believe the stabilization phase is nearly complete and the optimization is underway. We will continue to invest in technology and development throughout the remainder of 2016 and into 2017. And we expect sales and marketing investments to ramp up in the second half as well. We do expect to see flat the modest growth in revenues for the second half of year as some of these projects come to completion, as it leads traffic stabilization as the political season unfolds.
Our technology projects and marketing initiatives will continue to impact our EBITDA in 2016. And while this will place some pressure on our contribution margin, we still expect to finish the year at or above 25%. With diligent cash management, we have maintained a strong cash position and hold no debt.
Since the founders have returned to CafePress, we, the business and the team have made many pivotal changes. None of these changes have been easy, and many of them won’t create immediate financial gain, but I believe CafePress is well-positioned to achieve quality growth and scale. The margins are predictable, the operating investments are necessary and showing early signs of success and the team is committed to delivering shareholder value.
I’m happy to have been a part of that story. As my time here draws to an end, it is good to know that the founders some CafePress’ largest shareholders are the helm. I welcome our new CFO, Phil Milner to the team to join them and help navigate CafePress to profitable growth
With that, I will open the call to questions. Operator?
Thank you. [Operator Instructions] We will go to Brian Fitzgerald with Jefferies.
Hi, this is John on for Brian, thanks for taking my questions. First I just want to say good luck to Garett. It’s been a pleasure working with you. And then second, I just want to follow up on the contribution margin, it was 29% above the goal – you know your 29% versus the 25%, you were aiming for. So looking in the second half, is that large decline back down 25%? Is that mainly going to be on marketing spend?
And then just a follow-up to that, would be, what channels are you seeing as most effective recently, and where do you think that you be driving that marketing spend for the second half?
This is Fred, thanks for the question. Yes, it is higher than what we had anticipated as we got some of our tech projects out the door, and as we have kind of experimented with marketing. We are not finding out quickly the place where we really want to invest. So we are still doing the testing and tuning there.
And we don’t want to spend the money, just a pump up revenue. We really are looking for the signal to where it is profitable and sustainable in quality growth. The difference in that marketing is that the contribution margin really is anticipated in our marketing testing budget. And we do think we will find more areas to kind of spend toward growth
We are still probably ironically kind of challenging ourselves to spend enough. I think that really is a testament to the culture shift that happened here at CafePress, where you know – we would rather miss this goal of you know, of spending then – then spend it, just to spend it inefficiently, I guess. So kudos to our team for staying focused. Yes, it is very much on sales and marketing.
Online marketing, search kind of stuff is by far the largest – you know, the SEM and PLA area with Google in particular, the other search engines at little bit will start to shape up in testings. And you know, social advertising, some display, sort of branding and some others types of advertising as well. So these figures are a lot of opportunity as they’re continuing into testing too.
Great, and then you guys also mentioned that the customer database rollout is almost completed. Any key takeaways from that project coming out so far?
Sorry, can you repeat that one more time?
Sure, you mentioned the customer database– the rollout has been completed – just if you had any initial takeaways or how that has kind of a progressed? Thank you.
Yes, so we are kind of right on the cusp. We got the customer database, we matched it to you know, third-party data, and have done the brand study to show who are core customers are. And then, we have started to kind of segment things. And then, we are connecting that to our own internal data about the interest graphs, and the content, type of content, life stage, and we are just kind of getting the tools together where we can come at scale – start to market in a one-to-one fashion. So we see the data now, we understand better where the customers are – the segments, what they’re buying their – you know, if they are conservative or liberal, or if they’re athletic or into video games – and try to figure, "oh – they’ve got a kindergartner," – so we have kind of the dataset.
And these tools that I kind of keep alluding to – as we become sort of the retailer instead of just the facilitator in the marketplace are just kind of coming online. Whereas then we are able to send you emails that are handcrafted, where one or two variances of e-mail messages – being able to really segment hundreds of messages out to specific demographics. Those tools are still – they have got that infrastructure that is kind invisible that I’m talking about. That is coming online now.
It will be useful next year. Yes, thank you.
Thank you. [Operator Instructions] And we will hear from Youssef Squali from Cantor Fitzgerald.
Hi great, thank you. This is Kip Paulson on for Youssef Squali. Just a couple from me. The first orders came in a little better than we expected. We are actually up 10% sequentially. What were some of the key drivers here and how should we think about the sequential growth and in the third quarter and fourth quarter.
And then second, could you give us a sense of customer count and what it did in the quarter? Thank you.
I’ll try to take the first right here and I’ll let Garett take the numbers. The – I do kind of feel like the inflection point is here. So we’ve kind of popped balloon and if you will, and kind of deflated revenues by that 25% range, which we saw down consistently for four quarters in a row. And now that we are kind of popping back, it’s only 9% down year-over-year. We are starting to see where those sorts of activities where we are really tuning the margin and quality product lines; we are really starting to lap ourselves. And I would anticipate kind of as we’ve indicated before, that we are going to see a flattening out, maybe some growth, especially as the political season is upon us.
Getting the tools together, and our strategy really is and we –our goal is growth and 2017, and a return to that. So I think what we are seeing is the shape of the curve bottoming out there
You mentioned customers – as we look at customer count – still, it mostly tracks along the same – as we still don’t have a high repeat rate really – so it tracks very close to orders at this point. And we will continue to look about more and more future.
But the political season as Fred mentioned, it’s one of those areas where you’re seeing, "that’s the impact that hitting us both in orders being up little bit, but our order size being down some," as a Fred mentioned bumper stickers and other things versus some of the bigger products like T-shirts.
All right, great. Thanks guys.
Thank you. [Operator Instructions] And with no additional questions in the queue, I’d like to conference back over to Fred Durham for any additional or closing remarks.
Thank you. I just want to relay that the entire team here at CafePress is feeling very excited and energized right now. I think there is a lot of excitement about revitalizing CafePress to create the sort of customer experience that will inspire repeat customers and unlock lifetime value. I look forward to sharing more progress in the coming quarters and I thank you all for joining us today.
Thank you, ladies and gentlemen. That does conclude today’s conference. Thank you all again for your participation.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: firstname.lastname@example.org. Thank you!