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Executives

Robert S. Keane - Founder, Chairman of The Management Board, Chief Executive Officer and President

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

Analysts

Korosh Saba - Stephens Inc., Research Division

Mitchell Barlett - Craig-Hallum Capital Group LLC, Research Division

Kevin Allen - Barclays Capital, Research Division

Mark J. Zgutowicz - Piper Jaffray Companies, Research Division

Vistaprint N.V. (VPRT) Q3 2012 Earnings Call April 26, 2012 5:15 PM ET

Operator

Ladies and gentlemen, welcome to the Vistaprint Fiscal Year 2012 Third Quarter Q&A Earnings Conference Call. My name is Keith, and I'll be your operator for today. This call is being hosted by Robert Keane, President and CEO; and Ernst Teunissen, Executive Vice President and CFO.

Before we take the first call, as noted in the Safe Harbor statement at the beginning of the earnings presentation, comments may include forward-looking statements, including statements regarding revenue and earnings guidance, and actual results may differ materially. Risks that could impact these statements are described in the documents that are periodically filed with the Securities and Exchange Commission. [Operator Instructions] And we'll proceed with the first question.

Question-and-Answer Session

Operator

The first question is from the line of Carter Malloy with Stephens.

Korosh Saba - Stephens Inc., Research Division

It's actually Korosh on the line. Carter and I [indiscernible]. First of all, I wanted to discuss, you're up a little bit there in your outlook given changes in the economic conditions there. Any specific issues in the quarter that was strictly macro-driven?

Robert S. Keane

We do not believe it was something we can ascribe to macro conditions. We grew 18% in constant currency. That was strong given the economy there. We would have liked to see some better growth, but we certainly remain very optimistic about the opportunity there. Our new customer orders in volumes grew very strong -- strongly. And I think the difference we're seeing in Europe maybe versus North America more so than the economy could be ascribed to the fact that the positive results that we're seeing -- started to see in North America from our strategy in terms of how we're going to market, how we're positioning some of the improvements to value proposition are trailing in their impact in Europe because we didn't get to them as quickly. And we are seeing some near-term drag in Europe as expected on revenues from changes we made this year to reduce cross-sell and other improvements to the user interface. Again, I do want to stress that regarding the economy, it's very difficult to ascribe any of the impact the European economy has on our business. And because there are economies there doing very well, and we don't see a big differentiation between those.

Korosh Saba - Stephens Inc., Research Division

And then also any update in terms of strategy around Webs and ability to get those customers to buy into your base or vice versa?

Robert S. Keane

Yes, we're really too early to announce success there. We worked very diligently to host acquisition planning. We had certainly done pre-acquisition planning. But we only, in Q3, have begun limited testing. We do -- and we've started to offer Vistaprint offers to the web subscribers. Likewise, we’ve started offering Albelli photo books to Vistaprint customers, but it's very limited testing. The big impact is going to be after we've had the time to do some of the integration on our software and our technologies. If we look at all the products we sell, we have a much more -- a very material uplift in our ability to cross-sell once we have built the software to automatically match and adapt from one product format to another. That will be quite some time and into the fiscal 2013 before we start rolling that functionality out.

Operator

Your next question is from the line of Mitch Barlett with Craig-Hallum.

Mitchell Barlett - Craig-Hallum Capital Group LLC, Research Division

So first question would be on gross profit margin. It seemed very strong, especially as in the discussion that you provided. You backed out some of the acquisition stuff and it would have been probably one of the best gross margins in -- for third quarter in years. And yet the AOV is down and other impacts, the investment in the substrate. So maybe you could just talk about what's going on in the gross margin and just, kind of provide some commentary there.

Robert S. Keane

Yes, of course. Yes, indeed, our -- if you'd purely look at our organic business without the acquisitions, our gross margin was 66%. So that's quite a positive improvement versus last year. It is obviously down from the previous quarter in which we have a lot of absorption of volume. But even if you just look across a year to now, you see about a 70 basis point improvement. And that is with some headwinds like investments in substrate, as you say. So you do see that we continue with improvement in the way we operate our plans, continued improvement in the way -- with what we achieve in terms of productivity in areas, but also continued absorption of volume. We are growing at 20%, and you see that in our plant as well. So it's a combination of improvements and volume year-on-year, which allows us to get to these improvements.

Mitchell Barlett - Craig-Hallum Capital Group LLC, Research Division

So maybe talk to that, the -- where you are in terms of the absorption of your manufacturing overhead as opposed to last year or recent years? Volume wise...

Robert S. Keane

You mean where we are in terms of capacity utilization?

Mitchell Barlett - Craig-Hallum Capital Group LLC, Research Division

Yes.

Robert S. Keane

So if you look across our different operations, starting in North America, we've done a major increase of our capacity in North America in fiscal year '10. And it will be sometime before we have to make a major investment there. We will make -- start to make a significant investment in capacity in Venlo in the Netherlands for our European plant. And in our Asia-Pacific plant, which is a very new plant, of course, that we've operated now for almost 2 years, we still have some way to go before we reach efficient capacity.

Mitchell Barlett - Craig-Hallum Capital Group LLC, Research Division

So which leads to the second question, which is India. I noticed you said in the prepared remarks you're opening that in the fall. What does that really look like for entail?

Robert S. Keane

Yes. It will be a relatively small operation. Obviously, it's an enormous country, long-term opportunity, but we'll be starting on a relatively small basis. So we haven't -- we've had service operations in India for more than a year in our embroidery business, but we actually, in the last several quarters, have opened up a Mumbai-based operations, which is for the management to go after India as a market as opposed to do service for other markets. Related to that, we will start manufacturing in India over the next year. But it will be nothing of the scale of our other plants simply because we're in a much more of a startup mode there. The realities, given the cost structures in India and given the tariff barriers to bring things into India, the only way we're going to be competitive there is to produce in India. And we're very comfortable that we can be competitive, so we're excited about that. But I would stress that this is a foundation for future growth. It won't to be a material impact on our CapEx or on margins or other aspects because it is in a startup mode.

Operator

Your next question is from the line of Kevin Allen with Barclays.

Kevin Allen - Barclays Capital, Research Division

You've been testing TV advertising in Europe. Can you give us an update on how that's performing and whether or not you have more plans to invest more heavily there?

Robert S. Keane

Yes, we have been testing TV with an emphasis on the U.K. and Ireland, and we're quite please actually with what we see. We've seen a positive impact on growth in those regions. As a result of that, it's still early days in terms of testing. The budget that we're deploying there for TV advertising is very significantly smaller than what we're doing in North America. So it's -- we're going market by market in testing. So that's where we are. In Europe, we're still testing.

Ernst J. Teunissen

I would characterize it as being about where we were 18 to 24 months ago in the United States when we were speaking a lot to investors in response to questions about our testing and broadcast.

Kevin Allen - Barclays Capital, Research Division

Got you. And then just unrelated follow-up. You talked about delayed expenses. Can you give a little more color there? Is that mainly advertising or something else?

Robert S. Keane

Yes, we have actually moved some advertising budget from Q3 to Q4 because we were -- as we were planning our campaigns, we saw better efficiency in those -- in that quarter, so we've been moving that around. That's the most important. Now there are other OpEx items that have moved into the fourth quarter, but that's maybe the most important one.

Operator

[Operator Instructions] And your next question is from the line of Mark Zgutowicz with Piper Jaffray.

Mark J. Zgutowicz - Piper Jaffray Companies, Research Division

Just a couple of questions. I noticed the returning order growth lagged a little bit. It was up about 16.7%. So I was wondering if you could maybe comment on that relative to last couple of quarters?

Robert S. Keane

Can you just specify what you're talking about, what number?

Mark J. Zgutowicz - Piper Jaffray Companies, Research Division

Just looking at returning customer orders. So in a number that I'm -- that we have calc-ed here, it's roughly up 16.7%, which compares to up 20 -- roughly 25% in December and roughly 19% in September.

Robert S. Keane

Now you're looking at our Slide 16 to where we have the trailing 12-month unique customers, and we break it out between repeating. So we have $4.8 million this quarter versus $3.9 million the prior quarter.

Mark J. Zgutowicz - Piper Jaffray Companies, Research Division

Well, we've -- we have our...

Robert S. Keane

We're trying to connect the data that you're asking about.

Mark J. Zgutowicz - Piper Jaffray Companies, Research Division

Yes. Maybe it’s easier if we take it offline because we have our own calc to get to a total order number. Maybe we can just take that offline. The other question I have is just a mix of ad spend. I mean, you obviously saw some similar trends in COCA. I'm just curious, if you look at the mix this quarter versus last, our impression was that you're going to do a sizable amount more in TV. I was just wondering if that was the case and maybe a mix of online relative to just historical spend online.

Robert S. Keane

So we did indeed spend incrementally more in TV advertising in North America. We spent about $10 million in total in the third quarter in TV advertising, in broadcast. And that's obviously, as a percentage, a lot higher than what we did a year ago.

Mark J. Zgutowicz - Piper Jaffray Companies, Research Division

Okay. And the AOV was up a bit sequentially. I know last quarter you talked about giving the sort of the drop in cross-sell that, that could trend lower. That was obviously up sequentially. I’m just curious, our checks are indicating that there's not necessarily a option to go straight to checkout. Is that something that has been rolled out across all of your customer orders or is that selectively being put in place?

Robert S. Keane

We're test -- we continue to test around the value proposition. I can't speak specifically to that, but that is something that -- there's a lot of work we're doing around improving the user interface to reduce the complexity of getting to the checkout. So I don't know the percentage exactly, but it's certainly something we're moving towards. And it could be 100%. I just don't have that. In terms of the AOV, we were slightly down. If you look at year-over-year, there's some -- we certainly have some seasonality in our business. If you look year-over-year, I believe we're about $36 last year and we're $35.38 this year. So I would call it as roughly stable. It's down in small percentage terms, but it didn't go -- I wouldn't compare it to last December quarter.

Ernst J. Teunissen

Every quarter, there are puts and takes in there. You have currency that moves into that, especially the European currencies move into that AOV number. We have the relative growth though, our digital business and different channels that move into it. So I wouldn't get overly focused on small percentage points of movements. It's moving more or less stable for us.

Mark J. Zgutowicz - Piper Jaffray Companies, Research Division

Okay. Fair enough. One last one. The ad budget push into Q4. I was wondering if you can maybe quantify that to some extent. And I'm assuming that's mostly TV. Is it that you saw sort of better rates in this quarter versus last? I'm just trying to get a sense of what is shifting there.

Ernst J. Teunissen

Yes, in terms of this sort of above the line type of items, advertising was an important part. It's really across the board. It's a mix. It's been across channels that we've been looking at different options there. But that wasn't important above the line impact of shift. We’ve also have more below the line. We've had quite a bit of a tax movement resulting from the Webs acquisition and timing differences there and when we take tax expense. So that's been below the line movements also, between Q3 and Q4.

Operator

And we have no other question from the queue, so I'll turn it back over to Mr. Robert Keane for closing remarks.

Robert S. Keane

Well, thank you, everyone. I do appreciate you joining the call. As we've said in our prepared remarks that we sent out, we were quite pleased with our results. We sustained 20% plus growth. We had very strong acquisition numbers. We had great order volume. And in all our core growth initiatives, we continue to gain headway and momentum. So we have another quarter remaining in the fiscal year. That being said, we are continuing to be confident about the decisions we've made to meet our 5-year goals and targets that we've spoken so much about. We think the organizational changes we announced today will position us well to continue to focus on the scale advantages that are also very inherent in our business and something we’ve spoken about quite a bit publicly. So thank you again for joining us this evening. I look forward to seeing some of you this quarter in our IR [ph] trips and reporting our annual results and our view into next fiscal year during our next call 3 months from now. Operator?

Operator

All right. Ladies and gentlemen, that will conclude today's conference. Thank you so much for joining us, and you may now disconnect. Have a great rest of the day.

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