Cimpress Reports a Fourth Quarter GAAP Net Loss of $34.7 Million
VENLO, Netherlands — July 27, 2017 — Cimpress N.V., the world leader in mass customization, announced financial results for the fourth quarter and fiscal year ended June 30, 2017.
"Fiscal year 2017 was important in terms of the evolution of Cimpress," said Robert Keane, president and chief executive officer. "We decentralized our operations, delivered many new capabilities and product offerings, began using our mass customization platform, made strong investments in organic growth opportunities, and completed our largest acquisition to date. Additionally, we continue to improve our understanding of and approach to capital allocation, pushing this understanding deeper into our organization. I describe these subjects in detail in my annual letter to investors which was published simultaneously with this earnings announcement on ir.cimpress.com. We also plan to highlight our progress and fiscal year 2018 plans at our upcoming investor day on August 8, 2017."
Sean Quinn, chief financial officer, said, "Fourth quarter revenue growth decelerated, in line with our expectations. As mentioned last quarter, the timing shift of the Easter holiday from the third quarter in 2016 to the fourth quarter in 2017 created much of this dynamic. Looking at the full year which removes typical quarterly fluctuations, our revenue growth by segment was in line with our commentary at the beginning of the year. As described throughout the year, we continue to see pressure on Vistaprint's gross profit from shipping price reductions and the rapid expansion of product selection and design services as we have prioritized launching and learning about demand levels ahead of in-year profits. We often note that we are not targeting absolute gross margin or even contribution margin increases; we seek to maximize our cash flows over long periods of time. With that said, the Vistaprint business sees opportunities to optimize costs and pricing starting in the upcoming year as we scale these offerings and realize the operational benefits of our recent reorganization."
The following year-over-year items negatively influenced GAAP operating income in the fourth quarter and full year:
- Increased organic investments in fiscal year 2017 compared to fiscal year 2016, which materially weigh on profitability. These investments include costs that impact our gross profit such as shipping price reductions, expanded design services, and new product introductions. For the full year, the increase in organic investments impacted operating income by approximately $45 million.
- Restructuring charges related to the reorganization announced on January 25, 2017. The year-over-year increase was $0.8 million for the fourth quarter and $26.3 million for the full year. In our full-year results, the savings we realized from the restructuring partially offset the restructuring charges.
- A year-over-year increase in acquisition-related charges as follows: First, earn-out related charges primarily associated with the prior year acquisition of WIRmachenDRUCK of $10.5 million for the fourth quarter and $34.0 million for the full year. This increase brings the fair value of the earn-out to the maximum amount of €40 million, with a small time-based discount. Second, an increase in acquisition-related amortization of intangible assets of $2.2 million for the quarter and $5.6 million for the year. Third, the acceleration of the vesting of equity awards from two unrelated acquisition-related employment contracts led to a year-over-year increase in share-based compensation costs of $3.4 million in the fourth quarter and $4.8 million for the full-year. The full-year acquisition-related impacts are partially offset by a year-over-year decrease in impairment charges of $21.3 million related to acquisitions.
- An increase in share-based compensation expense due to the implementation of our previously described long-term incentive program at the beginning of fiscal year 2017. The year-over-year increase was $3.9 million for the fourth quarter and $13.7 million for the full year, excluding share-based compensation related to restructuring and acquisition-related investment consideration, which are included in the respective impacts listed above.
- A profit decline due to the termination of two partner contracts as previously described. The year-over-year impact of this was approximately $1 million for the fourth quarter, and $18 million for the full year.
- Unfavorable year-over-year currency fluctuations that were offset below the line by year-over-year changes in realized gains from hedging contracts in other income, net.
Quinn added, "Including the currency impact, the items listed above weigh on our operating income by over $100 million in fiscal year 2017 compared to fiscal year 2016. We do not ask our shareholders to ignore these costs, but it is important to understand them in order to analyze the underlying operating trends in our business."
For fiscal year 2018, Cimpress expects to achieve year-over-year savings from its recent restructuring, net of charges, as follows: approximately $35 million on a free cash flow basis, and approximately $50 million on an operating income basis. These savings estimates do not include the annualized savings related to the reduction in previously planned hiring that we have achieved in fiscal year 2017 since they do not impact the actual year-over-year savings.
Quinn added, "As we look ahead to fiscal year 2018, we are on track to recognize the financial benefits of our recent restructuring in line with our past commentary. Our businesses are focused on delivering strong returns from past investment spend and, as outlined in detail in our letter to investors dated July 26, 2017, we expect to continue to invest significantly against our organic growth opportunities, albeit at a more modest amount relative to fiscal year 2017. These are among the factors that we expect to result in higher unlevered free cash flow in fiscal year 2018."
Anticipated Sale of Album Printer Business:
Cimpress has recently entered into a definitive agreement to divest its Albumprinter business, including its FotoKnudsen subsidiary. Although Albumprinter’s capabilities clearly fall within the sphere of mass customization, Cimpress believes it can more attractively invest the capital it will free up as a result of this transaction. We expect the sale of Albumprinter to be completed in the first quarter of fiscal year 2018. The assets and liabilities are "held for sale" on our balance sheet as of June 30, 2017.
Consolidated Financial Metrics:
- Revenue for the fourth quarter of fiscal year 2017 was $564.3 million, an 18% increase compared to revenue of $479.2 million in the same quarter a year ago. Excluding the estimated impact from currency exchange rate fluctuations and revenue from businesses acquired during the past twelve months, revenue grew 9% year over year in the fourth quarter. For the full year, total consolidated revenue grew 19% year over year. Excluding the estimated impact from currency exchange rate fluctuations and revenue from businesses acquired during the past twelve months, revenue for the full year grew 8%. Revenue growth for the fourth quarter, and even more so for the full year, was negatively impacted by the loss of certain partner revenue. These terminated partner relationships will not impact our year-over-year growth rates in future quarters because more than four quarters have now passed since the cessation of revenue from these sources.
- Gross margin (revenue minus the cost of revenue as a percent of total revenue) in the fourth quarter was 50.5%, down from 53.7% in the same quarter a year ago due to lower Vistaprint gross margins as a result of planned investments, as well as unfavorable currency changes. For the full fiscal year, gross margin was 51.4% compared to 56.7% in fiscal year 2016, due to the same reasons described above for the quarter, as well as a year-over-year mix impact from recent acquisitions.
- Contribution margin (revenue minus the cost of revenue, the cost of advertising and payment processing as a percent of total revenue) in the fourth quarter was 32.9%, down from 36.1% in the same quarter a year ago. For the full fiscal year, contribution margin was 32.8% compared to 37.9% in the prior fiscal year. Advertising as a percent of revenue was flat year over year for both the fourth quarter and full year; therefore the contribution margin trend was driven by the decline in gross margin as described above.
- GAAP operating loss in the fourth quarter was $9.7 million, or 1.7% of revenue, compared to operating income of $16.0 million, or 3.3% of revenue, in the same quarter a year ago. GAAP operating loss for fiscal year 2017 was $45.7 million, or 2.1% of revenue, compared to operating income of $78.2 million, or 4.4% of revenue, in the prior fiscal year. The drivers of this significant loss are described above, before the "Anticipated Sale of Albumprinter Business" section of this release.
- Adjusted NOPAT for the fourth quarter, which is defined at the end of this press release, was $9.6 million, or 1.7% of revenue, down from $16.9 million, or 3.5% of revenue, in the same quarter a year ago. For the full fiscal year, adjusted NOPAT was $64.6 million, or 3.0% of revenue, down from $139.8 million, or 7.8% of revenue, in fiscal year 2016. The profit impacts described above that also impacted adjusted NOPAT were the increased organic investments, the increase in share-based compensation related to our new long-term incentive program, and the reduction in partner profits. Because the restructuring charges are excluded from adjusted NOPAT, there is a positive impact from restructuring savings during the quarter and year.
- GAAP net loss attributable to Cimpress for the fourth quarter was $34.7 million, or 6.2% of revenue, compared to net income of $16.9 million, or 3.5% of revenue in the same quarter a year ago. For the full fiscal year, GAAP net loss attributable to Cimpress was $71.7 million, or 3.4% of revenue, compared to GAAP net income of $54.3 million, or 3.0% of revenue, in the prior fiscal year. In addition to the impacts described above, GAAP net loss was negatively influenced by year-over-year non-operational, non-cash currency impacts, and positively influenced by a significant reduction in our tax provision in the current period compared to the year-ago period due to our consolidated losses as well as favorable discrete items during the quarter and year.
- GAAP net loss per diluted share for the fourth quarter was $1.11, versus net income of $0.51 in the same quarter a year ago. For fiscal year 2017, GAAP net loss per diluted share was $2.29, versus net income per diluted share of $1.64 in the prior full fiscal year.
- Capital expenditures in the fourth quarter were $17.2 million, or 3.1% of revenue, versus $17.8 million, or 3.7% of revenue in the same quarter a year ago. During the full fiscal year capital expenditures were $74.2 million or 3.5% of revenue, compared to $80.4 million or 4.5% of revenue in fiscal year 2016.
- During the fourth quarter, the company generated $33.1 million of cash from operations and $7.1 million in free cash flow, a non-GAAP financial measure, which is defined at the end of this press release. During the full fiscal year, the company generated $156.7 million of cash from operations and $45.1 million in free cash flow.
- As of June 30, 2017, the company had $37.7 million of cash and cash equivalents (including $12.0 million of cash held for sale related to the planned Albumprinter divestiture) and $876.7 million of debt, net of issuance costs. After considering debt covenant limitations, as of June 30, 2017 the company had $211.8 million available for borrowing under its committed credit facility. Based on Cimpress' debt covenant definitions, its total leverage ratio was 3.45 as of June 30, 2017. The company continues to expect to reduce its leverage ratio approximately to, or below, its long-term target of 3 times trailing twelve month EBITDA by the end of calendar year 2017 through a combination of debt repayment and EBITDA expansion. As recently announced, Cimpress amended and increased the size of its credit facility in July for long-term flexibility.
- Cimpress did not repurchase shares during the fourth quarter. For the full year, Cimpress purchased 593,763 shares for $50.0 million inclusive of transaction costs, at an average price per share of$84.22.
Important Reminder of Cimpress’ Priorities
We ask investors and potential investors in Cimpress to understand the upper-most objectives by which we endeavor to make all decisions, including investment decisions. Often we make decisions in service of these priorities that could be considered non-optimal were they to be evaluated based on other criteria such as (but not limited to) near- and mid-term net income, operating income, EPS, cash flow, EBITDA, and adjusted NOPAT.
Our priorities are:
- Strategic Objective: To be the world leader in mass customization. By mass customization, we mean producing, with the reliability, quality and affordability of mass production, small individual orders where each and every one embodies the personal relevance inherent to customized physical products.
- Financial Objective: To maximize intrinsic value per share, defined as (a) the unlevered free cash flow per share that, in our best judgment, will occur between now and the long-term future, appropriately discounted to reflect our cost of capital, minus (b) net debt per share.
To understand these objectives and their implications, Cimpress encourages investors to read Robert Keane’s letter to investors published on July 26, 2017 at ir.cimpress.com and to review materials that will be presented at our upcoming annual investor day meeting on August 8, 2017.
About Non-GAAP Financial Measures
To supplement Cimpress’ consolidated financial statements presented in accordance with U.S. generally accepted accounting principles, or GAAP, Cimpress has used the following measures defined as non-GAAP financial measures by Securities and Exchange Commission, or SEC, rules: adjusted net operating profit after tax, free cash flow, unlevered free cash flow, constant-currency revenue growth and constant-currency revenue growth excluding revenue from acquisitions made in the last twelve months:
- Adjusted net operating profit after tax is defined as GAAP operating income, less cash taxes attributable to current period operations and interest expense associated with our Waltham, Massachusetts lease, excluding M&A related items such as acquisition-related amortization and depreciation, changes in the fair value of contingent consideration, and expense for deferred payments or equity awards that are treated as compensation expense, plus the impact of certain unusual items such as discontinued operations, restructuring charges, or impairments, plus realized gains or losses on currency derivatives that are not included in operating income.
- Free cash flow is defined as net cash provided by operating activities less purchases of property, plant and equipment, purchases of intangible assets not related to acquisitions, and capitalization of software and website development costs, plus payment of contingent consideration in excess of acquisition-date fair value, plus gains on proceeds from insurance.
- Unlevered free cash flow is defined as free cash flow as described above, plus the cash paid during the period for interest, minus the interest expense associated with our Waltham, Massachusettslease.
- Constant-currency revenue growth is estimated by translating all non-U.S. dollar denominated revenue generated in the current period using the prior year period’s average exchange rate for each currency to the U.S. dollar.
- Fourth quarter constant-currency revenue growth excluding revenue from acquisitions made during the past twelve months excludes the impact of currency as defined above and revenue from National Pen.
These non-GAAP financial measures are provided to enhance investors' understanding of our current operating results from the underlying and ongoing business for the same reasons they are used by management. For example, as we have become more acquisitive over recent years we believe excluding the costs related to the purchase of a business (such as amortization of acquired intangible assets, contingent consideration, or impairment of goodwill) provides further insight into the performance of the underlying acquired business in addition to that provided by our GAAP operating income. As another example, as we do not apply hedge accounting for our currency forward contracts, we believe inclusion of realized gains and losses on these contracts that are intended to be matched against operational currency fluctuations provides further insight into our operating performance in addition to that provided by our GAAP operating income. We do not, nor do we suggest that investors should, consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. For more information on these non-GAAP financial measures, please see the tables captioned “Reconciliations of Non-GAAP Financial Measures” included at the end of this release. The tables have more details on the GAAP financial measures that are most directly comparable to non-GAAP financial measures and the related reconciliation between these financial measures.
Operational Metrics & Financial Tables to Follow
CONSOLIDATED BALANCE SHEETS
|(unaudited in thousands, except share and per share data)|
|Cash and cash equivalents||$||25,697||$||77,426|
|Accounts receivable, net of allowances of $3,590 and $490, respectively||48,630||32,327|
|Prepaid expenses and other current assets||78,835||64,997|
|Assets held for sale||46,276||—|
|Total current assets||246,001||200,768|
|Property, plant and equipment, net||511,947||493,163|
|Software and web site development costs, net||48,470||35,212|
|Deferred tax assets||48,004||26,093|
|Intangible assets, net||275,924||216,970|
|Liabilities, noncontrolling interests and shareholders’ equity|
|Other current liabilities||78,435||22,635|
|Liabilities held for sale||8,797||—|
|Total current liabilities||449,483||335,863|
|Deferred tax liabilities||60,743||69,430|
|Lease financing obligation||106,606||110,232|
|Commitments and contingencies|
|Redeemable noncontrolling interests||45,412||65,301|
|Preferred shares, par value €0.01 per share, 100,000,000 shares authorized; none issued and outstanding||—||—|
|Ordinary shares, par value €0.01 per share, 100,000,000 shares authorized; 44,080,627 shares issued; and 31,415,503 and 31,536,732 shares outstanding, respectively||615||615|
|Treasury shares, at cost,12,665,124 and 12,543,895 shares, respectively||(588,365)||(548,549)|
|Additional paid-in capital||361,376||335,192|
|Accumulated other comprehensive loss||(113,398)||(108,015)|
|Total shareholders’ equity attributable to Cimpress N.V.||74,999||165,725|
|Total shareholders' equity||75,212||166,076|
|Total liabilities, noncontrolling interests and shareholders’ equity||$||1,679,869||$||1,463,869|
CIMPRESS CONSOLIDATED STATEMENTS OF OPERATIONS
|(unaudited in thousands, except share and per share data)|
|Three Months Ended
|Cost of revenue (1)||
|Technology and development expense (1)||64,702||57,546||243,230||210,080|
|Marketing and selling expense (1)||159,622||133,707||610,932||508,502|
|General and administrative expense (1)||57,098||39,376||207,569||145,844|
|Amortization of acquired intangibles||12,603||10,449||46,145||40,563|
|Restructuring expense (1)||810||—||26,700||381|
|Impairment of goodwill and acquired intangible assets||—||—||9,556||30,841|
|(Loss) income from operations||(9,656)||16,030||(45,702)||78,193|
|Other (expense) income, net||(11,473)||18,169||10,362||26,098|
|Interest expense, net||(12,858)||(9,819)||(43,977)||(38,196)|
|(Loss) income before income taxes||(33,987)||24,380||(79,317)||66,095|
|Income tax (benefit) provision||526||7,211||(7,118)||15,684|
|Net (loss) income||(34,513)||17,169||(72,199)||50,411|
|Add: Net loss (income) attributable to noncontrolling interest||(189)||(239)||488||3,938|
|Net (loss) income attributable to Cimpress N.V.||$||(34,702)||$||16,930||$||(71,711)||$||54,349|
|Basic net (loss) income per share attributable to Cimpress N.V.||$||(1.11)||$||0.54||$||(2.29)||$||1.72|
|Diluted net (loss) income per share attributable to Cimpress N.V.||$||(1.11)||$||0.51||$||(2.29)||$||1.64|
|Weighted average shares outstanding — basic||31,195,625||31,418,823||31,291,581||31,656,234|
|Weighted average shares outstanding — diluted||31,195,625||32,996,473||31,291,581||33,049,454|
(1) Share-based compensation is allocated as follows:
Three Months Ended
|Cost of revenue||
|Technology and development expense||
|Marketing and selling expense||
|General and administrative expense||
Note: During the third quarter of fiscal 2017, we changed the presentation of amortization expense for acquired intangible assets. The expense was previously classified within each of the respective expense lines of our consolidated statement of operations and now is presented as a separate financial statement line item, "Amortization of acquired intangible assets". Prior period results have been recast to reflect this change.
Also, given the significance of our third quarter restructuring charges we are presenting these expenses as a separate financial statement line item, "Restructuring expense", in our consolidated statement of operations. Prior period results have been recast to reflect this change.
The preceding press release was provided by a company unaffiliated with Printing Impressions. The views expressed within do not directly reflect the thoughts or opinions of the staff of Printing Impressions.