Cimpress Reports Fourth Quarter and Fiscal Year 2017 Financial Results
Thursday, July 27, 2017
Press release from the issuing company
VENLO, Netherlands - Cimpress N.V. (Nasdaq: CMPR), the world leader in mass customization, today 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 millionfor 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 millionrelated 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 millionon 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 Albumprinter 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 percent 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 percent year over year in the fourth quarter. For the full year, total consolidated revenue grew 19 percent 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 percent. 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 percent, down from 53.7 percent 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 percent compared to 56.7 percent 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 percent, down from 36.1 percent in the same quarter a year ago. For the full fiscal year, contribution margin was 32.8 percent compared to 37.9 percent 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 percent of revenue, compared to operating income of $16.0 million, or 3.3 percent of revenue, in the same quarter a year ago. GAAP operating loss for fiscal year 2017 was $45.7 million, or 2.1 percent of revenue, compared to operating income of $78.2 million, or 4.4 percent 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 percent of revenue, down from $16.9 million, or 3.5 percent of revenue, in the same quarter a year ago. For the full fiscal year, adjusted NOPAT was $64.6 million, or 3.0 percent of revenue, down from $139.8 million, or 7.8 percent 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 percent of revenue, compared to net income of $16.9 million, or 3.5 percent 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 percent of revenue, compared to GAAP net income of $54.3 million, or 3.0 percent 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 percent of revenue, versus $17.8 million, or 3.7 percent of revenue in the same quarter a year ago. During the full fiscal year capital expenditures were $74.2 million or 3.5 percent of revenue, compared to $80.4 million or 4.5 percent 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, Cimpressamended 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, Cimpresspurchased 593,763 shares for $50.0 million inclusive of transaction costs, at an average price per share of $84.22.
Supplemental Materials and July 27, 2017 Conference Call Information
Cimpress has posted an end-of-year presentation with accompanying prepared remarks, as well as our annual letter to investors at ir.cimpress.com. On Thursday, July 27, 2017 at 7:30 a.m. (EDT) the company will host a live Q&A conference call with management to discuss the financial results, which will be available via webcast at ir.cimpress.com and via dial-in at +1 (844) 778-4144, conference ID 36574151. A replay of the Q&A session will be available on the company’s website following the call on July 27, 2017.
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.
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