Business context and reporting period
The supplied filing is Vistaprint N.V.’s Form 10-Q for the quarter ended December 31, 2010, the second quarter of fiscal 2011, and the six-month period then ended. The filing describes an online provider of printing, marketing products and services, and digital solutions, primarily for micro businesses. The filing names Vistaprint N.V., not CIMPRESS Plc, as the registrant.
Unless otherwise stated, financial figures below are in U.S. dollars; financial-statement amounts are in millions. The second fiscal quarter is seasonally strong, particularly for holiday cards, calendars, and other seasonal products.
Financial performance and position
| Metric | Three months ended Dec. 31, 2010 | Three months ended Dec. 31, 2009 | Six months ended Dec. 31, 2010 | Six months ended Dec. 31, 2009 |
|---|---|---|---|---|
| Revenue | $234.1 | $194.6 | $404.6 | $339.7 |
| Operating income | $38.2 | $30.7 | $50.5 | $45.1 |
| Net income | $34.0 | $26.9 | $44.8 | $39.9 |
| Diluted EPS | $0.75 | $0.59 | $0.99 | $0.89 |
| Operating margin | 16.3% | 15.8% | 12.5% | 13.3% |
| Net margin | 14.5% | 13.8% | 11.1% | 11.8% |
For the quarter, revenue grew 20% year over year (23% at constant currency), operating income 24%, net income 26%, and diluted EPS 27%. For the six months, revenue increased 19% (22% at constant currency), operating income 12%, net income 12%, and diluted EPS 11%. The stronger U.S. dollar reduced reported revenue growth by an estimated 3 percentage points in both periods.
Quarterly cost of revenue fell to 33.7% of revenue from 34.9%, supporting improved operating margin. For the six months, cost of revenue also improved as a share of revenue, but marketing expense rose to 33.2% from 31.4%; operating margin declined to 12.5% from 13.3%. Management cited manufacturing productivity, shipping agreements, seasonal overhead absorption, and product mix as benefits, partly offset by higher marketing investment and the loss of prior-year referral-fee revenue.
Operating cash flow was $92.7 million for the six months, versus $90.3 million a year earlier. Investing cash outflow was $23.0 million, versus $60.5 million, mainly reflecting lower capital expenditures and no repeat of the prior-year Soft Sight acquisition. Financing cash outflow was $61.0 million, primarily due to $55.5 million of share repurchases and $5.2 million of debt repayments. Cash and cash equivalents at December 31 were $173.1 million, with an additional $4.4 million of current marketable securities. The company had no long-term debt outstanding; current assets were $210.5 million and current liabilities $95.9 million.
Material changes versus the prior comparable period
- Revenue growth reflected higher website traffic and conversion rates: quarterly sessions rose 8.9% to 87.7 million and conversion improved 90 basis points to 7.5%. Average order value declined 1.3% to $36.17. Repeat customers contributed 67% of bookings, versus 66%.
- Marketing and selling expense increased 27% in the quarter and 26% for the six months, driven mainly by customer-acquisition advertising, promotions, and expanded staffing. Technology and development expense rose 19% for the six months, including higher staffing and website infrastructure costs.
- The company repurchased 1,294,081 shares during the quarter for $55.5 million, at an average $42.86 per share. Approximately $104.6 million remained authorized under the $160 million program at December 31.
- The final $4.7 million balloon payment on the amended Canadian credit agreement was paid during the quarter. The company reported no remaining long-term debt at period-end.
- Accumulated other comprehensive income improved, with a $12.7 million six-month foreign-currency translation gain; this contributed to comprehensive income of $57.5 million, compared with $41.1 million in the prior-year period.
Outlook, management commentary, risks and unusual items
Management said revenue growth had recently slowed and identified stemming that decline as a near- and mid-term objective. It described plans to broaden products and services, expand localized websites and geographic reach, and improve customer acquisition, retention, and service. No numeric revenue or earnings guidance is stated in the supplied text. Management expected to spend approximately $20 million to $30 million on capital expenditures during the remainder of fiscal 2011 and said available cash and operating cash flow should fund working capital and capital needs for the foreseeable future. It also retained the option to use cash for further repurchases.
Management cautioned that quarterly results are seasonal and variable and that second-quarter seasonal sales do not recur at the same level in other quarters. Key disclosed risks include customer-acquisition costs and effectiveness, intense competition and pricing pressure, foreign-exchange movements, international tax and transfer-pricing uncertainty, dependence on company-operated production facilities and website systems, service interruptions, and changing consumer demand. The company reported that a 10% currency-rate movement could affect near-term pretax income; interest-rate sensitivity was described as immaterial.
Unusual or material matters include a $1.0 million share-based compensation charge associated with the October reorganization; a CFO transition, with a successor appointed effective March 1, 2011; and settlement and payment during the quarter of the Soverain patent lawsuit. A separate ColorQuick patent-infringement case remained unresolved, and the company said it could not estimate a potential loss range. The company disclosed ongoing IRS, Massachusetts, and Canadian tax audits and a $2.2 million liability for unrecognized tax benefits. It also reported $43.4 million of operating lease obligations and approximately $3.2 million of unrecorded construction and equipment purchase commitments.
The company stated that interim results are not necessarily indicative of full-year results. It reported effective disclosure controls as of December 31, 2010 and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the issuer and reporting-period identity: the supplied 10-Q is filed by Vistaprint N.V. for the quarter ended December 31, 2010.
- Assess whether revenue growth and conversion gains can persist, given the seasonal second-quarter contribution, lower average order value, and management’s stated concern about slowing growth.
- Track marketing spend, customer-acquisition efficiency, and operating-margin trends, particularly the six-month margin decline despite revenue growth.
- Review the cash-flow contribution from accrued expenses and liabilities, the planned remaining-year capital expenditures, and any further share repurchases.
- Monitor the unresolved ColorQuick litigation, tax audits and transfer-pricing exposure, and the recoverability and timing of the auction-rate security.
- Consider currency exposure and operational concentration, including reliance on production facilities and website infrastructure without redundant systems in multiple locations.