CafePress' (PRSS) CEO Fred Durham on Q4 2017 Results - Earnings Call Transcript

CafePress, Inc. (NASDAQ:PRSS) Q4 2017 Earnings Conference Call March 1, 2018 9:00 AM ET

Executives

Whitney Kukulka - IR

Fred Durham - Co Founder, Chairman & CEO

Phillip Milliner - CFO

Analysts

Operator

Good day, everyone. Welcome to the CafePress Fourth Quarter 2017 Earnings Conference. Today's call is being recorded. At this time, for opening remarks, I would like to turn things over to Whitney Kukulka. Please go ahead, ma'am.

Whitney Kukulka

Good morning. And welcome to the CafePress fourth quarter and fiscal year 2017 financial results conference call. Joining me on today's call are Fred Durham, Chief Executive Officer; and Phil Milliner, 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 our remarks today will contain forward-looking statements, including, without limitation, statements regarding guidance; our strategy to turn CafePress to profitable growth, and focus on customer experience; investments; expenses; and our plans and expectations as to our partners, employees 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 risk factors in yesterday's earnings release and in our most recent Form 10-K filed with the SEC.

Any 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 yesterday's earnings release.

With that, I'd like to turn the call over to Fred. Fred?

Fred Durham

Good morning and thank you for joining us on today's call. I'll begin by giving you a high level summary of the financial results for 2017, then highlight some updates on the progress we've made executing on our strategy, and plans for 2018. Phil will then review our financial results in more detail.

Our fourth quarter and full year 2017 results were clearly disappointing. Revenue was down 22% in the fourth quarter and down 15% for the year. We did however see continued growth in the retail partner channel and begin taking orders through walmart.com. Let me remind you as part of this multiyear turnaround strategy, we are modernizing CafePress.com by building new website architecture in the model chain we owned, while cleaning up the very large build up of non active product offerings. The clean up and rebuilding efforts are critical as we continue optimize the business, and our technology to reenergize our customer experience and ultimately return to profitable growth.

The legacy CafePress.com website has not kept pace with change over the years. And even as we made progress on the modernization in 2017, we were not where we needed to be before peak season. Google regularly updates their search algorithms. In the first half of 2017, their update adversely affected our search visibility and traffic through legacy CafePress.com site causing most of the decline in revenue in the last two quarters of 2017 compared to the prior year. This decline was slightly mitigated by the growth in revenue through the retail partner channel. As the gap on the bottom line has widened in recent quarter, we are taking additional cost control step to hasten closing that gap. In January, the company announced certain actions impacting both labor and non labor, taken to drive reduction of approximately $4 million and normalized annual fixed cost which include a 5% reduction in headcount immovable.

Additionally, at my suggestions the Board approved the reduction in my day's compensation from $300,000 to $125,000 per year. The company will continue to align its cost structure, cash balances and operational objective each quarter to maintain discipline while it works to return the company to profitable growth.

Now, I'd like to review key operational progress with respect to our key initiatives. First, completion of the new, modern, CafePress.com. The company remains focused on completing the modernization of CafePress.com and demolishing the old site and has already rolled out significant portions of the modernization in the first quarter of 2018. During early January, we upgraded to a fully encrypted HTTPS website. We've already observed dramatically improved crawl and indexing rates from search engines as a result of this release. We believe improved crawl and indexing rates will lead to higher ranking in traffic and in turn results in revenue growth on CafePress.com by the second half of 2018.

I'm happy to report that we've made significant progress on the new website since we last checked in. As a reminder, development of the new website consists of five phases. Home and Content pages, Search pages, Product Detail pages, Cart page and Checkout pages. The H and Content pages have been released. Our Search pages have been released and are being tested on some of our live domains. We are still reviewing early indicators of improvement in key operational metrics related to the new search pages and will be monitoring the improvements in traffic and revenue from search engine optimization channels related to this very significant piece of development. The team is working diligently to complete the requirements coding, testing of the Cart and Checkout pages, and we anticipate that these will be released in the second quarter of 2018. New product detail pages will begin being released during the second quarter as well. And continue rolling out over the remainder of 2018.

Second, Retail Partner channel expansion into new marketplaces and geographies. As you recall. we launched a limited product catalog into the Walmart marketplace during the last half of 2017. And we are pleased with the early signs of its performance, as it contributed modestly during the holiday season. This channel will grow as we build out the catalog, and learn about how to promote our products. During early 2018, we have secured a listing agreement to enter the eBay marketplace. We anticipate completing our integration and lifting and initial set of products during the early part of the second quarter. Last quarter, we mentioned our expansion within the Amazon Marketplace into additional European domains. We are currently planning a further expansion with Amazon into their Australian domain, and expect to begin taking orders through that domain during the second quarter as well. We will continue to explore and perform diligence as it relates to new marketplaces and expansion into new geographies as we proceed into 2018.

Third, launching fulfillment services. Our quality fulfillment capabilities are valuable asset that we feel can be leveraged to provide new growth opportunity. As such we have performed a significant amount of diligence in the latter part of 2017 and early part of 2018 to understand our readiness and capabilities around providing fulfillment services to third parties. We will launch this line of business with a focus on core competencies of parallel and green ware and will seek to extend this competency to further categories as we build momentum. During the first quarter of 2018, we executed an agreement to reform printing services for a major participant in the custom on demand in e-commerce space. We anticipate the first orders related to this field to be processed in the early part of the third quarter of 2018. We've also begun processing orders during the first quarter of 2018 for several smaller customers.

Phil will now give an explanation of the financial results. Phil?

Phillip Milliner

Thank you, Fred. I will now review our financial results for the fourth quarter of 2017. All comparisons will be year-over-year unless otherwise noted. CafePress reported net revenue for the fourth quarter of $34.2 million dollars, a 22% decline. Continued pressure from organic search drove a 33% decline in visits to CafePress.com contributing to the $9.7 million revenue decline from CafePress.com. The upgrade to a fully encrypted HTTPS site and the rollout of new search pages during the first quarter of 2018 are anticipated to drive a rebound in organic search traffic and conversions.

Revenue from the Retail Partner channel increased $0.2 million and accounted for 32% of fourth-quarter revenue. Although order volume and associated revenue were adversely impacted from the loss of a portion of content sold through one partner during the fourth quarter of 2017, higher average order size driven by a more concentrated effort to optimize margins contributed to higher revenue levels. Additionally, the company began to see early benefits from the contribution of the Walmart marketplace, which launched during the last half of 2017. For the fourth-quarter, gross profit was $13.2 million, a decline of $3.6 million. As a reminder, in 2016 we benefited from a one-time reduction in commission expense of $0.1 million related to the establishment of a commission forfeiture program.

I will now go into more detail about our key operating expense components on a GAAP basis. Total fourth-quarter operating expense was $13.4 million, a decline of $1.1 million. As a reminder, in 2016, we recorded $1.1 million of restructuring costs associated with the closure of the California office. Additionally, operating expenses during 2016 benefited favorably by $1.2 million related to one-time items, including a $0.7 million dollar write-down of achievement and sales tax liabilities, and $0.5 million impact from a change in our paid time off policy. Fourth quarter fixed costs increased $25 million, excluding the impact of the one-time items, fixed costs declined $0.7 million. The primary drivers of this reduction in fixed costs were lower headcounts, lower cost of business insurance, and lower technology infrastructure expenses.

Our fourth-quarter sales and marketing expense was approximately $8 million which was a $0.7 million improvement. As a percentage of net revenue, these expenses were 23.4% this year compared to 20% in the prior year. The higher percentage of net revenue reflects a decline in net revenue from the prior year. Variable marketing expenses declined $0.5 million which was driven primarily by lower customer service labor and merchant processing fees consistent with lower revenues. For the quarter, our general and administrative expenses totaled approximately $2.3 million, an increase $0.6 million. General and administrative expensive in the prior year included the aforementioned one-time reduction and cost of $1.2 million, excluding the impact of these one-time items, general and administrative expenses declined $0.6 million.

We continue to benefit from lower professional services particularly legal fees as we further improve processes around mitigating the risk that content infringes on intellectual property rights. Our fourth quarter GAAP net loss was $0.1 million or $0.01 per fully diluted share, compared to GAAP net income of $2.9 million or $0.17 per fully diluted share. For the fourth quarter, non-GAAP cash contribution margin was $6.6 million or 19.4% of net revenue, a decline of 3.2 points. The pressure from organic search was a big driver of the margin compression, as well as less efficient paid search to acquire traffic.

Our full quarter non-GAAP adjusted EBITDA was $1.5 million compared to $4.9 million. We continued to do a good job controlling fixed costs to help offset the challenges we faced with cash contribution margin from organic search this quarter.

Turning to our balance sheet and cash flows. We continue to maintain a strong balance sheet and ended the year with $32.4 million in cash, cash equivalents short-term investments and restricted cash, which is $1.92 on a per share basis. Our non-GAAP free cash flow which we define as cash flow from operating activities like capital expenditures reflected an $ 11 million outflow for the year ended December 31st, 2017 which is $2.6 million higher than the $8.4 million outflow in the prior year. Lower capital spending and restructuring payments of $2 million and $1.2 million respectively only partially mitigated higher cash outflows associated with the decline in business volumes.

Our capital expenditures totaled $4.5 million or 5.3% of net revenue down from $6.5 million or 6.4% of net revenue. Our priorities within capital expenditures continue to reflect develops technology, as well as investment in plant equipment to improve quality and efficiency. Last year included the build-out of our corporate headquarters in Louisville. Our fully diluted weighted average shares outstanding were 16.9 million.

To summarize, our fourth quarter results reflect the decline in organic search impact CafePress.com, partially offset by another quarter of growth in our Retail Partner channel. We displayed discipline in managing fixed costs that enabled us to mitigate some, but not all of the cash contribution margin decline that flowed through to negatively impact adjusted EBITDA. We continue to remain focused on optimizing our customer experience by developing and releasing more of the site improvements during the first quarter of 2018 which will lead to a rebound in traffic to CafePress.com. We are also committed to gaining traction with the expansion in the Retail Partner channel. These initiatives combined with the impact of our cross reduction initiatives, and the launch of our fulfillment services will contribute to our goal of returning to profitability.

Let me turn it back to Fred for some final remarks. Fred?

Fred Durham

While we are not giving guidance, I would like to share some directional thoughts on 2018. We believe that the new website is rolled out, crawled and pages are indexed by the search engines, we will see higher traffic and rankings which will result in revenue improvement for the CafePress.com search engine optimization channel in the second half of 2018. Additionally, we expect growth in the Retail Partner channels from further optimization of existing partners, as well as the contribution of new partners and expansion into new geographies. Finally, the launch of fulfillment services will drive modest growth during the last half of 2018. From a margin standpoint, we will leverage new equipment and modified workflow at the plant to drive efficiencies in the cost of production. We also will benefit from $4 million of reduced fixed costs related to cost out initiatives previously mentioned.

Our primary goal is to return to profitability and generate positive cash flow. Phil and I will make ourselves available for follow-up conversations, if necessary. If you have any questions, please don't hesitate to contact us. We look forward to sharing more information about our progress in the coming quarters. And I thank you for joining us today.

Question-and-Answer Session

Operator

Q -

Operator

And that does conclude today's conference. Again, thank you all for joining us. You may not disconnect.