Vistaprint Reports Q3 FY 2014 Results; Reflects Shift Away From Deep Discounts, Free-Offer Direct Marketing
VENLO, THE NETHERLANDS—April 30, 2014—Vistaprint N.V., a leading online provider of professional marketing products and services to micro businesses and the home, has announced financial results for the three month period ended March 31, 2014, the third quarter of its 2014 fiscal year.
"This is the first quarter in the past 14 years in which our revenue declined year over year," said Robert Keane, president and CEO. "While we are not content with this performance, our underlying value creation was much better than our headline financial numbers. Based upon significant customer research that we have conducted over the past three years we are shifting our value proposition away from the deep discounts and free-offer direct marketing that characterized the Vistaprint of the past toward being simply the best way for business owners to market their business. We are making this shift in order to expand into the large market opportunity that lies beyond our traditional base of highly price sensitive customers."
Keane continued, "This shift has been gaining momentum for more than two years and has created significant near-term revenue headwinds, but we persist in implementation because we believe in the long-term value of the strategy. The most impactful headwinds to date occurred in the past quarter. They were the result of changes to our pricing and marketing practices that we recently rolled out in our largest markets—the United States, Germany and United Kingdom. Since 2012 we have successfully tested similar changes in Canada but, as we described last August at our investor day, these types of changes typically cause an immediate revenue impact, the magnitude of which is difficult to project. In this past quarter, the headwinds were greater in the United States, Germany and United Kingdom, than we had anticipated. We have levers to optimize our results once the changes are released in the market, and post the initial implementation our results improved in these markets as the quarter progressed. We made these changes against a backdrop of other actions to improve the return on our advertising spend. These advertising optimizations negatively impacted our new customer acquisition count, but they increased our projected long-term advertising returns and reduced advertising expense both as a percent of revenue and in absolute dollars. As a result, despite our revenue challenges, we have been able to maintain our profitability and we continue to track toward our margin improvement goals this year."
Keane noted further, "We also continue to move forward with many other improvements to our value proposition beyond our pricing and marketing practices. Examples include better customer service availability, improved product substrate quality, more reliable shipping methods, assistance for graphic design creation, new options for premium finishes, and more SKU choices. These improvements typically come with higher expenses, but we are encouraged by several metrics we see in each market in which we have implemented them, especially when combined with Canadian-style pricing and marketing changes. In Canada our customer retention, gross profit per customer and the return on advertising expenditures have improved significantly. Around the world, we have seen increased average order values, a reflection that we are attracting more valuable customers. And we have seen material improvements to our Net Promoter Score (NPS) in all regions. This is a loyalty metric that we believe to be a leading indicator of customer lifetime value."
Keane concluded, "We believe that we have not yet seen the full financial returns of these NPS improvements and we still have a lot more work ahead of us to reach our customer loyalty goals. However we are confident that when measured over a multi-year period, our marketing shift will deliver higher returns compared to our past marketing and pricing practices, and that significantly higher customer loyalty will eventually translate into renewed organic growth."
Consolidated Financial Metrics:
- Revenue for the third quarter of fiscal year 2014 was $286.2 million, a 1 percent decrease compared to revenue of $287.7 million reported in the same quarter a year ago. Excluding the estimated impact from currency exchange rate fluctuations, total revenue also decreased 1 percent year over year in the third quarter.
- Gross margin (revenue minus the cost of revenue as a percent of total revenue) in the third quarter was 64.7 percent, down from 65.5 percent in the same quarter a year ago.
- Operating income in the third quarter was $5.2 million, or 1.8 percent of revenue, and reflected a 46 percent decrease compared to operating income of $9.7 million, or 3.4 percent of revenue, in the same quarter a year ago.
- GAAP net income attributable to Vistaprint for the third quarter was $1.4 million, or 0.5 percent of revenue, representing a 77 percent decrease compared to $5.9 million, or 2.0 percent of revenue in the same quarter a year ago. During the quarter, we incurred transaction costs of $3.4 million related to two recently-announced acquisitions.
- GAAP net income per diluted share for the third quarter was $0.04, versus $0.17 in the same quarter a year ago.
- Non-GAAP adjusted net income for the third quarter, which excludes amortization expense for acquisition-related intangible assets, tax charges related to the alignment of acquisition-related intellectual property with global operations, unrealized currency gains and losses on currency hedges and intercompany financing arrangements included in net income, and share-based compensation expense and its related tax effect, was $8.3 million, or 2.9 percent of revenue, representing a 51 percent decrease compared to non-GAAP adjusted net income of $16.9 million, or 5.9 percent of revenue, in the same quarter a year ago. The acquisition-related transaction costs noted above are included in our non-GAAP net income for the quarter.
- Non-GAAP adjusted net income per diluted share for the third quarter, as defined above, was $0.24, versus $0.48 in the same quarter a year ago.
- Capital expenditures in the third quarter were $11.8 million, or 4.1 percent of revenue.
- During the third quarter, the company generated $3.1 million of cash from operations and $(11.7) million in free cash flow, defined as cash from operations less purchases of property, plant and equipment, purchases of intangible assets not related to acquisitions, and capitalization of software and website development costs.
- As of March 31, 2014, the company had $46.5 million in cash and cash equivalents and $202.0 million of debt. After considering debt covenant limitations, as of March 31, 2014 the company had $301.4 million available for borrowing under its credit facility. Subsequent to the end of the quarter and after incorporating our acquisitions of People & Print Group and Pixartprinting, we had roughly $150 million available for borrowing under the facility.
Starting in the first quarter of fiscal 2014, all operating metrics reflect the consolidated business including the company's Albumprinter and Webs acquisitions, and post-acquisition prior-period comparisons have been adjusted to reflect the same consolidated view.
Update on Minority Investment in China
Subsequent to the close of the quarter, Vistaprint reached an understanding with Namex Limited that Vistaprint would dispose of its minority equity interest in Namex Limited, as recent discussions with Namex management identified very different visions for the execution of the long-term strategic direction of the entity. Since our initial investment in fiscal 2012, our total capital investment in Namex has been approximately $17.7 million. We expect to sell our 45 percent share investment to the majority shareholder and recognize an income statement loss of up to $14 million in the fourth quarter of 2014 as the carrying value of the investment exceeds the expected proceeds. We expect to exclude this charge from our non-GAAP net income.
Fiscal 2014 Outlook as of April 29, 2014:
Ernst Teunissen, executive vice president and chief financial officer, said, "We are updating our guidance to incorporate the impact of the many moving pieces in our business since we last provided guidance in January. The revenue guidance below incorporates the positive impact from our recently announced acquisitions of People & Print Group and Pixartprinting, our negative third quarter results and a modified fourth quarter outlook. Despite our revenue shortfall, our profits in the core organic business are on track. The GAAP earnings guidance reflects our continued commitment to driving margin expansion in our core business, but includes the negative impact of our expected fourth quarter Namex loss and the transaction costs of the recently announced acquisitions which have already been incurred. Our non-GAAP earnings guidance reflects minimal change since we provided guidance last quarter."
Financial Guidance as of April 29, 2014:
As previously stated, beginning with fiscal year 2014, the company provides revenue and earnings guidance on only a fiscal year basis, not quarterly. Based on current and anticipated levels of demand, the company expects the following financial results:
Fiscal Year 2014 Revenue
- For the full fiscal year ending June 30, 2014, the company expects revenue of approximately $1,250 million to $1,270 million, or 7 percent to 9 percent growth year over year in reported terms and on a constant-currency basis. Constant-currency growth expectations assume a recent 30-day currency exchange rate for all currencies.
Fiscal Year 2014 GAAP Net Income Per Diluted Share
- For the full fiscal year ending June 30, 2014, the company expects GAAP net income per diluted share of approximately $1.00 to $1.15, which assumes 34.5 million weighted average diluted shares outstanding.
Fiscal Year 2014 Non-GAAP Adjusted Net Income Per Diluted Share
- For the full fiscal year ending June 30, 2014, the company expects non-GAAP adjusted net income per diluted share of approximately $2.70 to $2.85, which excludes expected acquisition-related amortization of intangible assets of approximately $13.5 million or approximately $0.39 per diluted share, share-based compensation expense and its related tax effect of approximately $28.7 million or approximately $0.82 per diluted share, tax charges related to the alignment of acquisition-related intellectual property with global operations of approximately $2.3 million, or $0.07 per diluted share, and the expected charge related to our minority investment in China of up to $14.0 million, or $0.40 per diluted share. Based on a recent 30-day currency exchange rate for relevant currencies, we estimate that changes in unrealized gains and losses on currency forward contracts and estimated unrealized currency transaction gains and losses on intercompany financing arrangements will have an impact on our full-year results of approximately $0.9 million, or $0.02 per diluted share. This guidance assumes a non-GAAP weighted average diluted share count of approximately 35.0 million shares.
Fiscal Year 2014 Capital Expenditures
For the full fiscal year ending June 30, 2014, the company expects to make capital expenditures of approximately $70 million to $80 million. Fiscal 2014 capital investments are designed to support the planned growth of the business and will include various investments in new manufacturing capabilities.
The foregoing guidance supersedes any guidance previously issued by the company. All such previous guidance should no longer be relied upon.
Vistaprint N.V. (Nasdaq: VPRT) empowers more than 16 million micro businesses and consumers annually with affordable, professional options to make an impression. With a unique business model supported by proprietary technologies, high-volume production facilities, and direct marketing expertise, Vistaprint offers a wide variety of products and services that micro businesses can use to expand their business. A global company, Vistaprint employs over 4,400 people, operates more than 25 localized websites globally and ships to more than 130 countries around the world.