Cimpress N.V. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended March 31, 2018. The filing is unaudited and reports in U.S. dollars; financial amounts below are in millions unless otherwise noted. Cimpress operates online and through a decentralized portfolio of customized print, signage, apparel and related product businesses, including Vistaprint, Upload and Print, and National Pen.
Financial performance
| Metric | Three months ended March 31, 2018 | Prior-year quarter | Nine months ended March 31, 2018 | Prior-year period |
|---|---|---|---|---|
| Revenue | $636.1; up 16% reported, 8% constant currency | $550.6 | $1,961.4; up 25% reported, 20% constant currency | $1,571.1 |
| Operating income (loss) | $16.6 | $(41.9) | $135.9 | $(36.0) |
| Net income (loss) attributable to Cimpress | $(2.3); $(0.07) per diluted share | $(42.9); $(1.38) per diluted share | $51.0; $1.58 per diluted share | $(37.0); $(1.18) per diluted share |
| Cash provided by operating activities | Not separately reported for the quarter | Not separately reported for the quarter | $144.6 | $123.6 |
| Free cash flow, non-GAAP | Not separately reported for the quarter | Not separately reported for the quarter | $116.6 | $37.9 |
Quarterly gross margin was approximately 49.8% of revenue, compared with 51.2% a year earlier; operating margin was approximately 2.6%, versus a loss margin of approximately 7.6%. The gross-margin decline reflected the Albumprinter divestiture and a greater revenue mix from Upload and Print, which has a higher cost-of-revenue ratio. Nine-month net income included a $47.5 million gain on the Albumprinter sale; the filing also reports a $48.4 million combined gain on purchase or sale of subsidiaries in its segment reconciliation.
At March 31, 2018, cash and cash equivalents were $49.9 million, total debt was $820.2 million excluding debt issuance costs and discounts, and net debt on that basis was approximately $770.3 million. Current assets were $247.8 million and current liabilities were $461.6 million. The company reported $438.6 million available under its senior secured facility after covenant and other borrowing limitations, and stated it was in compliance with debt covenants.
Changes and business drivers
- Quarterly revenue growth reflected continued growth across businesses and favorable currency effects, partly offset by the loss of Albumprinter revenue following its August 2017 sale. Excluding acquisitions and divestitures, constant-currency revenue growth was 11% for the quarter and 11% year to date.
- Vistaprint quarterly revenue grew 11% reported and 7% constant currency; segment profit rose to $57.7 million from $37.6 million. Management attributed profit gains to restructuring savings and revenue growth, while noting lower new-customer bookings in the quarter, partly associated with reduced advertising spend in certain channels.
- Upload and Print revenue grew 29% reported and 12% constant currency for the quarter; segment profit increased to $17.4 million from $13.0 million.
- National Pen quarterly revenue grew 39% reported and 30% constant currency, with segment profit of $0.4 million versus a $3.2 million loss. Year-to-date comparisons are substantially affected by its December 2016 acquisition and the partial prior-year comparison.
- All Other Businesses revenue declined 33% in the quarter, primarily due to the Albumprinter divestiture. Excluding that divestiture, constant-currency revenue grew 53%; the segment continued to report losses.
- Quarterly operating income improved by $58.6 million year over year. Cimpress cited $22.5 million lower restructuring charges, approximately $17 million in related operating-cost savings, growth and currency benefits, and the absence of prior-year impairment and earn-out charges. These benefits were partly offset by $5.6 million of incremental share-based compensation for supplemental performance awards.
Cash flow, capital and unusual items
Nine-month investing cash flow was positive $14.0 million, compared with a $277.5 million outflow a year earlier, including $93.8 million of net Albumprinter sale proceeds; the prior-year period included substantial acquisition spending. Financing used $152.2 million, including $94.7 million of share repurchases and debt repayments net of borrowings. Cimpress also received $35.4 million from selling a minority interest in WIRmachenDRUCK and paid the WIRmachenDRUCK earn-out, including amounts reflected in operating and financing cash flows.
Management’s non-GAAP free cash flow measure includes a $49.2 million add-back for contingent consideration in excess of acquisition-date fair value. Accordingly, reported free cash flow of $116.6 million should be considered alongside operating cash flow of $144.6 million, capital spending and the earn-out payment.
Outlook, risks and contingencies
- Management said cash, operating cash flows and committed financing should be sufficient for liabilities and planned investments for at least the next 12 months. Its fiscal 2018 capital allocation priorities include organic investment, share repurchases, acquisitions or similar investments, and debt reduction; no specific earnings or revenue guidance was provided.
- Management expects National Pen revenue growth to moderate in future periods, partly because prior-period marketing reductions made current growth comparisons more favorable. It expects All Other Businesses, including newer growth initiatives, to continue incurring significant operating losses over the next several years, as planned.
- Interest expense was $12.7 million for the quarter and $38.3 million year to date, above prior-year levels. Management expects higher interest expense due to higher rates and increased capital-lease obligations. A 100-basis-point rate increase, after swaps, was estimated to add about $4.0 million to interest expense over the next 12 months.
- Currency and derivative movements remain volatile: other expense, net was $25.6 million for the nine months, versus other income of $21.8 million in the prior-year period. Most currency contracts are not hedge-accounted, which can create GAAP earnings volatility.
- U.S. tax reform contributed $4.7 million of tax expense year to date. The company noted that tax estimates may change as guidance and interpretations develop; tax examinations and uncertain tax positions could affect results or cash flows.
- Other key risks include high leverage and covenant restrictions, seasonality (especially the holiday-heavy second fiscal quarter), execution of the mass-customization strategy, customer acquisition and marketing effectiveness, competition, cybersecurity and privacy, cross-border trade and Brexit uncertainty, and integration and returns on acquisitions. The company disclosed no material legal proceedings and said it was compliant with debt covenants.
Investor verification priorities
- Reconcile reported revenue growth with constant-currency and acquisition/divestiture-adjusted growth, particularly National Pen’s partial-year comparison and Albumprinter’s removal.
- Assess the quality and sustainability of earnings by separating recurring operations from the Albumprinter gain, restructuring charges and savings, acquisition-related items, and share-based compensation.
- Review cash conversion and the non-GAAP free-cash-flow calculation, including the $49.2 million earn-out adjustment and capital spending.
- Monitor debt, facility availability, covenant headroom, variable-rate exposure and planned capital allocation, including share repurchases.
- Track Vistaprint customer acquisition, National Pen growth and margins, and continuing losses and investment needs in All Other Businesses.
- Evaluate currency-hedging volatility, tax-reform estimates and open tax exposures, and the effect of future accounting changes.