Cimpress N.V. — Form 10-Q summary
Reporting period: Fiscal second quarter and first six months ended December 31, 2018 (quarter ended December 31; fiscal year ends June 30). Financial figures below are in U.S. dollars; “Q2” means the three-month period. Cimpress operates a decentralized portfolio of mass-customization businesses, including Vistaprint, Upload and Print, National Pen, and All Other Businesses.
Financial performance
| Metric | Q2 FY2019 | Q2 FY2018 | Six months FY2019 | Six months FY2018 |
|---|---|---|---|---|
| Revenue | $825.6m | $762.1m | $1,414.5m | $1,325.3m |
| Operating income | $90.6m | $72.7m | $84.6m | $119.3m |
| Net income | $69.0m | $30.6m | $54.0m | $54.0m |
| Net income attributable to Cimpress | $69.0m | $29.9m | $54.4m | $53.3m |
| Diluted EPS | $2.17 | $0.93 | $1.70 | $1.65 |
| Cash from operating activities | Not presented by quarter | $205.5m | $176.7m | |
| Free cash flow | Not presented by quarter | $144.8m | $119.7m |
Q2 revenue grew 8% as reported and 11% at constant currency; constant-currency growth excluding recent acquisitions was 6%. Six-month revenue grew 7% as reported and 9% at constant currency, or 7% excluding acquisitions and divestitures. Q2 operating margin was about 11.0%, versus 9.5%; gross margin was 50.2%, versus 52.7%. For the six months, operating margin was about 6.0%, versus 9.0%, and gross margin was 49.5%, versus 51.4%.
Q2 operating income increased despite lower Vistaprint segment profit. Contributors included a $15.4m reversal of previously recorded supplemental performance-share expense, $12.0m lower National Pen direct-mail expense in the quarter due to revenue-standard timing, lower restructuring charges, and BuildASign profit. Six-month operating income fell primarily because the prior-year period included a $47.5m gain on the Albumprinter sale. Adjusted net operating profit, a non-GAAP measure, was $115.1m in Q2 (versus $93.7m) and $120.4m for six months (versus $104.1m).
Cash, debt and liquidity
- Cash and cash equivalents were $48.3m at December 31, 2018, compared with $44.2m at June 30, 2018.
- Total debt, excluding debt issuance costs and discounts, was approximately $1,060.3m, up from $839.4m at June 30. The balance included $650.1m under the secured credit facility, $400.0m of 7.0% senior notes due 2026, and $10.2m of other debt. The company reported compliance with its debt covenants.
- Unused borrowing capacity under the credit facility was $423.9m at December 31. On January 7, 2019, the facility was expanded from $1,113.2m to $1,613.2m; the company said incremental term-loan proceeds were used to repay part of its revolving borrowings.
- Six-month investing cash outflow was $349.5m, mainly reflecting $289.3m of acquisitions. Financing cash inflow was $149.9m. Capital expenditure was $38.8m and capitalized software and website development costs were $21.9m.
- Management said cash, operating cash generation and committed borrowing capacity should be sufficient for liabilities and planned investments. A 100-basis-point rate increase, after swaps, was estimated to add about $3.5m to interest expense over the next 12 months.
Material changes, outlook and risks
- Acquisitions: Cimpress acquired about 99% of BuildASign for $275.1m on October 1, 2018, and about 73% of VIDA for $19.9m net of cash acquired on July 2, 2018. BuildASign contributed $4.6m of Q2 segment profit. All Other Businesses remained loss-making overall, with a $7.6m Q2 segment loss.
- Segment trends: Q2 Vistaprint revenue grew 3% at constant currency, but segment profit declined 15% to $83.8m. Upload and Print revenue grew 9% at constant currency, with segment profit roughly flat. National Pen revenue grew 7% at constant currency; Q2 segment profit rose to $24.9m, while six-month segment profit declined 64% to $6.8m.
- Management outlook: Cimpress gave no quantified consolidated revenue or earnings guidance in the provided filing text. Management expected Vistaprint revenue growth for the remainder of the fiscal year to be flat to negative, citing weaker holiday consumer-product sales and planned reductions in advertising spend. National Pen reduced direct-mail prospecting plans after customer acquisition payback fell short of expectations. Management described continued investment and losses in early-stage All Other businesses as planned.
- Accounting and unusual items: Cimpress adopted ASC 606 on July 1, 2018 using the modified retrospective method. Direct-mail costs are now expensed when sent rather than capitalized and amortized, creating quarterly earnings timing volatility; management said the standard has no cash-flow impact and should not significantly affect annual results. Q2 reported net income also benefited from a $3.5m Italian Patent Box tax benefit. Six-month tax expense included a $5.6m discrete deferred-tax-asset reduction related to IRS guidance on executive compensation deductions.
- Subsequent event: On January 29, 2019, Vistaprint’s CEO was removed from the role, with Cimpress CEO Robert Keane serving as interim Vistaprint CEO. Cimpress estimated approximately $6.5m of pretax restructuring charges in the quarter ending March 31, 2019, including about $3.5m non-cash share-based compensation and $3.0m cash severance.
- Key risks: Competition, paid-search and paper costs, seasonal demand, weaker Vistaprint consumer-product performance, foreign-currency and interest-rate volatility, acquisition integration and returns, and significant leverage. The filing also notes possible tax exposures; management reported no material current legal proceedings.
Important facts for investors to verify
- Whether Vistaprint’s expected flat-to-negative remaining-year revenue growth and advertising reductions affect consolidated growth and margins.
- How much reported profit improvement reflects recurring operations versus the supplemental-PSU reversal, tax benefits, and ASC 606 expense timing.
- BuildASign and VIDA integration, performance, and returns relative to acquisition costs and added debt.
- Debt capacity, covenant headroom, cash generation, and exposure to variable interest rates and currency movements.
- The final valuation of BuildASign’s acquired assets and liabilities, and the timing and amount of announced restructuring costs.