VENLO, Netherlands - Cimpress N.V. (Nasdaq: CMPR), the world leader in mass customization, today announced financial results for the three month period ended March 31, 2017, the third quarter of its 2017 fiscal year.
"We continue to execute across a broad spectrum of initiatives as outlined at our August 2016 investor day, including activating additional components of our mass customization platform. Additionally, this was our first full quarter of ownership of National Pen, and our integration efforts to achieve targeted synergies are underway," said Robert Keane, president and chief executive officer. "As previously announced, we also deeply decentralized our operations over the past quarter. We believe this will improve accountability for customer satisfaction and capital returns, simplify decision-making, improve the speed of execution, further develop our cadre of general managers, and preserve and release entrepreneurial energy. We see early indications that this reorganization is helping us move faster and free up capital. We are also pleased that, despite the near-term disruption of the organizational changes, our team members delivered solid operating results for the third quarter."
The restructuring charge booked through our income statement during the quarter was $24.8 million. The restructuring is substantially complete and the company does not expect material charges in future quarters related to these changes. Year-to-date restructuring charges of $25.9 million are lower than the $28 million to $31 million estimate we shared in January, due to changed share price and pension assumptions which decreased non-cash restructuring expense. Of this year-to-date restructuring charge, we expect to pay a total of approximately $19.0 million of cash expense through early fiscal 2018, including $7.5 million paid during the third quarter of fiscal 2017.
Sean Quinn, chief financial officer, said, "Revenue growth accelerated in line with our expectations, both in aggregate due to the addition of National Pen, as well as on an organic constant-currency basis, even though revenue continues to be pressured in the near term by the loss of certain partner revenue and the reduction of shipping prices to Vistaprint customers. Beyond revenue and margin pressure from the shipping price changes, the continued execution of our strategy to invest in the rapid expansion of product selection and design services has contributed to our top-line revenue growth but is weighing down our incremental margin in the Vistaprint business in the near term. We see opportunity to optimize costs and pricing in the future as we scale these offerings."
The following year-over-year items negatively influenced GAAP operating income in the third quarter:
- 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 margin such as shipping price reductions, expanded design services, and new product introduction.
- Restructuring charges of $24.8 million related to the reorganization announced on January 25, 2017.
- A $6.8 million operating loss in our newly acquired National Pen business unit, driven by amortization of acquired intangible assets of $3.5 million, and an anticipated operating loss for the quarter.
- Approximately $5 million of profit decline due to the termination of two partner contracts as previously described.
- An increase in earn-out related charges of $4.0 million primarily associated with the acquisition of WIRmachenDRUCK as a result of its continued strong performance.
Quinn added, "Furthermore, during the third quarter of fiscal year 2017, Cimpress recorded an impairment charge of $9.6 million related to one of our Upload and Print business units. This is similar in nature to the$30.8 million impairment charge recorded in the third quarter of fiscal year 2016 for a different Upload and Print business unit. The performance across our Upload and Print group varies, with some business units performing above the cash flow expectations built into the original deal models, some performing in line, and two for which we have had to reset expectations and therefore impair. To date the aggregate free cash flow of the full portfolio of Upload and Print businesses has exceeded our aggregate deal model plans, and we expect it to continue to do so in the future."
Quinn added, "Looking forward, we continue to expect annualized cost savings of about $55 million to $60 million from our recent restructuring, including about $45 million to $50 million of cash savings and about $10 million of non-cash savings. For fiscal year 2017, we expect the restructuring costs to offset in-year savings, but as we look forward we expect both these savings and the organizational changes to increase our estimated range of steady state free cash flow."
Consolidated Financial Metrics:
- Revenue for the third quarter of fiscal year 2017 was $550.6 million, a 26 percent increase compared to revenue of $436.8 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 11 percent year over year in the third quarter. Though revenue growth improved versus the second quarter of 2017, our previously described loss of partner revenue and the material reduction in shipping prices to Vistaprint customers continue to negatively impact revenue growth.
- Gross margin (revenue minus the cost of revenue as a percent of total revenue) in the third quarter was 51.2 percent, down from 54.9 percent in the same quarter a year ago due to the increased weighting of our Upload and Print business units with a full quarter of WIRmachenDRUCK's results, and lower Vistaprint gross margins due to planned investments in projects that weigh down gross margins, unfavorable currency changes, and product mix.
- Contribution margin (revenue minus the cost of revenue, the cost of advertising and payment processing as a percent of total revenue) in the third quarter was 31.4 percent, down from 36.3 percent in the same quarter a year ago. In addition to the year-over-year reduction in gross margin described above, advertising as a percent of revenue increased 120 basis points, due largely to the acquisition of National Pen which has higher advertising spend as a percent of revenue compared to many of our other business units.
- GAAP operating loss in the third quarter was $41.9 million, or 7.6 percent of revenue, an increase compared to an operating loss of $17.5 million, or 4.0 percent of revenue, in the same quarter a year ago. The drivers of this significant decrease are described above, before the "Consolidated Financial Metrics" section of this release.
- Adjusted NOPAT for the third quarter, which is defined at the end of this press release, was $9.2 million, or 1.7 percent of revenue, down from $24.0 million, or 5.5 percent of revenue, in the same quarter a year ago. The profit impacts described above that also impact adjusted NOPAT are the increased organic investments, National Pen's operating loss, 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.
- GAAP net loss attributable to Cimpress for the third quarter was $42.9 million, or 7.8 percent of revenue, compared to a net loss of $32.7 million, or 7.5 percent of revenue in the same quarter a year ago. 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 $16.6 millionincrease in our tax benefit in the current period compared to the year-ago period due to our consolidated losses as well as favorable discrete items during the quarter.
- GAAP net loss per diluted share for the third quarter was $1.38, versus a loss of $1.04 in the same quarter a year ago.
- Capital expenditures in the third quarter were $20.7 million, or 3.8 percent of revenue, versus $19.1 million, or 4.4 percent of revenue in the same quarter a year ago.
- During the third quarter, the company generated $9.0 million of cash from operations and $(21.3) million in free cash flow, a non-GAAP financial measure, which is defined at the end of this press release.
- As of March 31, 2017, the company had $43.5 million in cash and cash equivalents and $891.5 millionof debt, net of issuance costs. After considering debt covenant limitations, as of March 31, 2017 the company had $200.6 million available for borrowing under its committed credit facility. Based on Cimpress' debt covenant definitions, its total leverage ratio was 3.59 as of March 31, 2017. As previously described, Cimpress expected its leverage ratio to increase in the third quarter due to the typical seasonality of its working capital cycles. The company remains committed to reducing its leverage ratio 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.
Supplemental Materials and April 27, 2017 Conference Call Information
Cimpress has posted an end-of-quarter presentation with accompanying prepared remarks, as well as a guide to reporting changes related to our recent restructuring at ir.cimpress.com. On Thursday, April 27, 2017 at7:30 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 98415047. A replay of the Q&A session will be available on the company’s website following the call on April 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 27, 2016 at ir.cimpress.com and to review materials presented at our annual investor day meeting on August 10, 2016.