Robert Keane - Chairman of the Board, President, Chief Executive Officer
Wendy Cebula - Chief OperatingOfficer, Executive Vice President
Anne Drapeau - Executive Vice President and Chief People Officer of VistaPrint USA
Harpreet Grewal - Chief Financial Officer
Janet F. Holian - Chief Marketing Officer, Executive Vice President
Jennifer Watson - Goldman Sachs
Youssef Squali - Jefferies & Company
Mark May - Needham & Company
Scott Devitt - Stifel Nicolaus & Company, Inc.
VistaPrint Ltd. (VPRT) Q2 2008 Earnings Call January 24, 2008 5:00 PM ET
Ladies and gentlemen. Thank you for standing by. Your presentation will begin shortly. We appreciate your patience. Thank you for standing by. We will begin shortly. Thank you.
Ladies and gentleman, welcome to the VistaPrint Q2 2008 Q&A earnings conference call. My name is Mike and I will be your operator for today. This call is being hosted by Robert Keane, President and Chief Executive Officer and Harpreet Grewal, Chief Financial Officer. 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 those statements are described in the documents that are periodically filed with the Securities and Exchange Commission. Ladies and gentlemen, to queue for a question, please key Star followed by 1 in your touchtone phone. If your question has been answered or you would like to retry your question, you may do so by keying Star 2. Please be advised that this call is being recorded for replay purposes.
Our first question comes from the line of Jennifer Watson with Goldman Sachs. Please proceed.
Hi. Thank you. Can you give us some description of the drivers of the international acceleration in the quarter and if you see those factors continuing to work in your favor. Were there any countries of note that showed particular strength?
This is Robert speaking. It was really an across the board success in all the markets. Our largest markets outside the US are France, Germany, the Netherlands and the UK, not necessarily in that order and the order can change quarter to quarter. But geographically, it was very strong on a smaller basis than APAC but the primary driver was APAC, being Asia Pacific, but the primary driver was our Western European market which I believe was hit on all cylinders across the board and really were a result of the investments we have been making in the European market office in the Barcelona office.
Okay great. I have one more question. What are you seeing so far in the third quarter that led to raising the revenue guidance to the back half of the year?
Sorry Jennifer, could you just repeat the question.
What kinds of trends are you seeing so far in Q3 that led to your raising revenue guidance by about $10 million to the back half of the year?
Well, again, I think the primary factor is not just the first twenty days of the quarter but the fact that we have a highly visible business based on millions of individual orders and we can understand the great detail, the spend patterns of customers both in the first ninety days or 120 days after they order with us. It was a trend out repeat rate of existing customers and we just look at the underlying economics of the business and the strength we are seeing and feel confident enough to raise our guidance.
Okay great. Thank you.
And our next question comes from the line of Youssef Squali with Jefferies & Company. Please proceed.
Thank you very much. A couple of questions. First, there is obviously a fair amount of chatter out in the market about just how small business creations typically subsides during economic downturns. And your performance of this quarter points to anything but that so I was wondering if you could just explain what it is that causes that you are into it. I certainly cannot understand how the European business from a small base continues to accelerate but the domestic base also grew very, very fast. Is it the value proposition, is it the brand now that is getting traction? Is it some of these partnerships that you are starting to talk about? And then, I have a followup.
Sure Youssef. I do not need to give a broad answer but I will start with and then is perhaps not specific enough but again it is taking on all cylinders and I think that it summarizes that the value proposition is getting better and stronger every quarter. And it can be our investment in service operations in the time services, in new products, particularly, in the US market, before talking about non-US markets, and its products, services, the marketing improvement we have done on the user interface as it has been helping our conversion rates and certainly the partnerships we are developing. And it really is a multi-faceted strength. And then in Europe, again, I think, we just mentioned in the previous response, it is very multi-faceted and a lot of different zoners that are firing at one time.
Okay and then turning to the numbers, you raised your revenue guidance for the rest of the year. You even put out '09 ETS guidance but your ETS guidance for the rest, for '08 is slack. Can you maybe harp/address the reason? I saw your gross margins bit by about a 100 basis points versus expectations out there so I was just wondering if you can address that.
Sure. I think the guidance strategy that we have is reflected in what we publish today, which is, we have often said, and consistently said that we started graphs as AVPN targets in this case, for fiscal year '08. Going back to January 2007, we noticed 40%-50% ETS growth for fiscal year of '08 and the notion being that if we have potential to grow over and above those rates, we will reinvest back in the business to support the additional growth and to facilitate for the additional even further incremental growth. And so I think the guidance here reflects that strategy, which is we are on the top line doing, performing well and while the opportunity, should we want it to, take a leverage in the business is not our stated intent so are we investing the best of earnings potentials, just as we did last year, the rates consistent with the previous year as well. In terms of gross margins, I mean the primary
Regarding the Intuit and Office Max, we did expect a potential amount of investment with the expectation that the returns would be solid and once again we have planned and we continue to execute well to the plans on the business solution so I think the last update we provided was again, with my queing provide an update and I think at that point he did indicate that we were getting to sole traction and talked about some of the quantifiable aspects but beyond that, we are not disclosing anything additional.
Okay and then earlier when you said at this time whether you are planning on revenue growth exceeding earnings growth in fiscal year 2009?
Well, we are certainly are not doing anything other than what we said in the press release and in the prepared remarks. All right. Thanks a lot, Gus.
And the next question comes from the line of Mark May with Needham and Company. Please proceed.
Oh, thanks for taking my questions. I wanted to ask a little bit more about the Intuit deal. If you can kind of explain the economics there and imagine they were a little different than Office Max which is wholesale pricing but through the absence of some marketings and talk a little bit that and obviously, fewer people you are trafficking through the Intuit platform than Office Max that a lot more targeted, I am just wondering is the, through testing with Intuit, do you it could be a larger revenue contributor than Office Max?
We believe that at the margin structure questions to harp in a second but I would like to reiterate that we will be embedded into the software future versions of Quickbooks and small businesses than multiple hours per week, I do not know maybe per day. I do not the exact number but a lot of time working in Quickbooks. It is often their dashboard for running their business and so I would not object to the Intuit.com website using the software as well. So, there it is a more intensive relationship. We are sitting in our home office or in our business office and the business center running our business using the software.
At a deal, would it be larger than office Max based on your testing, given what you just said?
We have not been able to test ahead of time but we think this has potential to be similar to the office Mac agreement. Your longer term growth will depend on how many products and services we can generally offer and we are very optimistic that as we brought our product and service portfolio, we will be able to add substantially to the range of services we are offering through this partnerships but I did not get a similar potential and then it is like going to depend of execution of each partner if the same which grows bigger.
And then I think I will go on the economics of the transaction, why there is a different sort of it online relationship relative retail relationship; the economics were actually from a high level somewhat similar in the whole sale relationship. Gross margins will tend to be lower but in terms of external marketing, there is very little that we will be spending on that external marketing lines. The contribution margins will tend to be higher than our core business and therefore it leads us to the bottom line, all things being equal, so to that extent the economic rate has been similar to the dynamics and framework of Office Max and the recovery relations we established there.
Okay. With full revenue which is noticeably lower in what you would think of be as seasonally strong quarter and given all the new customers in this units that you did it in the quarter, maybe if you could shed some light on that and then the last question will be when I am looking at the average advertising spent per order, one way of looking it maybe an acquisition type cost, you have been able to really keep in a very tight range for quite a while. What gives you confidence if you will be able to maintain the certain level of customer acquisition and cost that you have been able to maintain?
Let me take the referral revenue question and so you are right that our referral revenues in December quarter were 6.3% of revenues on a year-to-year compared to 6.9%. For the December quarter, it generally tends to be lower than other quarters but I think the other part that we did talk about in the prepared remarks in the presentation is we are seeing seen and referral revenues that they are coming down at the percentage of revenues and that overtime we do act that we cannot see for a variety of reason for which I think is fairly cover and they were prepared remarks. Our trend as potentially to referral revenues with a percentage of revenues in the next few years, the 18 to 36 mark could be in the 2 to 5 percent claim was the most dramatic decrease coming from reduction as a result of reduction membership or word referral revenues and key trends that are leading to that is that we already seen accelerate growth in Europe which tend to have lower referral revenues as a percentage to revenues. We do not offer membership rewards in New York through many size. Secondly, we are finding that as we move to more strategic referral revenue partners like Intuit that started as the referral partner and became a strategic partner now and others that we worked with like Pitney Bowes and Google and the like.
We are allocating more of that as well as the real estate and some of the potentially strategic partners. And in doing so many of them have lower returns on impressions in some capacity even though the returns over the long term are going to be more significant from our perspective and the third is, as we continue to build out a greater product portfolio, and what we expected to do in the 6 to 12 months, this is good as web real estate but then we talked about we will be allocating a little more towards these products and away from referral partners, particularly membership rewards, so I think you are right in saying that being that there is trend down and it is the trend that we continue to expect but with very defined reasons that we think are very positive to the business.
Yes, okay. That makes a lot of sense. It suggest the effectiveness of your marketing channels maybe and some of the more mature channels that you are using and…
Sure Mark and I will take that and let me talk about specifically then step back and give it more generally. But certainly as we grow, we certainly have become more efficient and we benefit from a lot of skills-based advantages in purchasing marketing, for example being a preferred partner for Bach and De Vino to select channels more opportunistically. And it is definitely leverage in the marketing side of our business once in awhile. He never allows us to flow through to the PNO. Right now, we are re-investing and we are being candid that Coke is in a very tight range. Now if I were to step back, I think one of things that I believe is very characteristic. VistaPrint is disciplined in operation, regular across the value change. It is certainly in the manufacturing and software engineering, in financial strategy with EPS or otherwise but the marketing trend is a highly analytically driven fact-based decision-making culture here at VistaPrint and we manage those tightly and I do not think it is not a fluke of luck that it has been very stable for a long time.
And our next question comes from the line of Robert Peck with Bear Stearns. Please proceed.
All right. Glad to hear you are feeling better.
Thanks a lot.
I would like a subject turn to free cash flow. Your free cash flow actually was stronger than we had expected. Could you comment a little bit about what was driving that and then if they were to give in us any sort of feel for free cash flow for the full year, what was the leverage there driving it?
In fact, when we talk of the cash flow, we are awfully quiet. I mean, I think that the question was asked and I noted that we somewhat expected a strong free cash flow in the December quarter and through the year, to be positive. I would say, let me talk with what based on the guidance, that I cannot be too specific but based on the general guidelines given for the year, and given that we have two quarters to increase guidance. I think you can generally expect free cash flow to be breakeven, maybe slightly positive and the driver that does the Q2 uptake are a couplefold, I mean, you certainly have the uptake for the potential increase in revenue and the positive trends based on how we collect money based on the use of credit card as a proponent working to outflow impact and we continued to get leverage on the capex side so, for example, last year for the same quarter, we expect about $16 million in capex this year. We spent $18 million but the revenue base obviously grew from $64 to $105 million, so to that extent, we have all been talking about that, how CapEx have moved very much growth-oriented and they are, they can be lumpy as we build facilities and buy land, but there is inherently leverage in capex. And I think those are the key drivers of working capital capex leverage and I think you should expect a breakeven in the second half.
One just followup if I can. Obviously the referral is dropping as a percent of revenues but it is obviously still growing on the absolute basis. I think that was up somewhere around 50% year over year. Can you just talk about the impact on the margins and where you see it going forward?
Sure, though, I mean I think we have in the past talked about the fact that referral revenues generally tend to be on the gross margin line, very quite possible that is very little associated. We have often said that below the gross margin line, we do not have a sense of the possibility precisely and there are certain direct and indirect costs associated with it. As referral revenues decrease, we are obviously replacing it and while we are talking about all of the products, we will be introducing other products. They will have different variability in them, but at the end of the day, I think what we are looking at is as we make the strategic decision to allocate more of the web space to some of these more strategic referrals are our partners and as we focus on international growth that has less of a membership component to it that we still will be able to balance all of that and deliver against very aggressive ETS growth targets as we are doing in fiscal year our non growing gap ETS 30% to 40%.
Hello, this is Robert speaking again. I just want to thank you all for your interest in VistaPrint. I think it was a phenomenal quarter for VistaPrint. We cannot stress enough how we feel we executed exactly on our plans that we have talked about for many quarters in the past to set very strong and, rather, EPS targets to deliver on those, and then to re-invest back into business to make it stronger, more competitive, and more valuable over the longer term. So, we appreciate your support of the company and we look forward to speaking with you again soon. Thank you.
Ladies and gentlemen, this does conclude the presentation. You may now disconnect. Thank you very much, have a great afternoon or a great evening. Thank you.