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PRSS > SEC Filings for PRSS > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for CAFEPRESS INC.

Form 10-Q for CAFEPRESS INC.


14-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

You should read the following discussion in conjunction with our condensed consolidated financial statements (unaudited) and related notes included elsewhere in this report. This Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. In some cases, you can identify forward-looking statements by terms such as "may," "might," "will," "objective," "intend," "should," "could," "can," "would," "expect," "believe," "estimate," "predict," "potential," "plan," or the negative of these terms, and similar expressions intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements These forward-looking statements, include, but are not limited to, statements about our plans for future services and enhancements of existing services; our expectations regarding our expenses and revenues; our anticipated cash needs and our estimates regarding our capital requirements and our needs for additional financing; our anticipated growth strategies; our ability to successfully integrate acquired businesses; our acquisition of EZ Prints including the consideration to be paid; our intention to expand our service offerings; our ability to retain and attract customers; our ability to retain and control the costs of suppliers; our ability to increase content licenses; our regulatory environment; our legal proceedings; intellectual property; our expectations regarding competition; and sources of new revenue. These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to, the risks set forth throughout this Report, including under Item 1A, "Risk Factors." These forward-looking statements speak only as of the date hereof. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

Overview

We believe we are a leading e-commerce platform enabling customers worldwide to create, buy and sell a wide variety of customized and personalized products. We serve our customers, including both consumers and content owners, through our portfolio of e-commerce websites, including our flagship website, CafePress.com. Our consumers include millions of individuals, groups, businesses and organizations who leverage our innovative and proprietary print-on-demand services to express interests, beliefs, and affiliations by customizing a wide variety of products. These products include clothing and accessories, art and posters, stickers, home accents, and stationery. Our content owners include individual designers as well as artists and branded content licensors who leverage our platform to reach a mass consumer base and monetize their content. We believe we are a leading e-commerce platform for customization of consumer products based on our more than a decade of experience of providing high-quality customized products in single unit and small quantity orders on a when-ordered basis.

Seasonal and cyclical influences impact our business volume. A significant portion of our sales are realized in conjunction with traditional retail holidays, with the largest sales volume in the fourth quarter of each calendar year. Our unique offering of custom gifts for the holidays combined with consumers' continued shift to online purchasing drive this trend. As a result of this seasonality, our revenues in the first quarter of each year are generally substantially lower than our revenues in the fourth quarter of the preceding year, and we expect this to continue for the foreseeable future. In addition, political merchandise typically represents one of our largest content categories, which may create a cyclical impact on our volume during key election periods.

In April 2012, we acquired substantially all of the assets of Logo'd Softwear, Inc., an e-commerce provider of personalized apparel and merchandise for groups and organizations, in exchange for $7.5 million in cash, 45,060 shares of CafePress common stock valued at $0.8 million, and cash contingent consideration of up to $8.6 million to be determined based on certain operating metrics. In addition, the principal stockholder was granted 235,242 stock options to purchase shares of CafePress common stock with vesting based on the achievement of certain performance milestones. The contingent right to future earn-out payments will expire on March 31, 2016. We may be unable to successfully integrate this business or realize the anticipated benefits of the acquisition.

In early October 2012, we entered into a Merger Agreement with EZ Prints. The merger closed on October 25, 2012. At the effective time of the merger, all outstanding shares of capital stock of EZ Prints held by the EZP Stockholders were converted into the right to receive an initial closing payment in the aggregate amount of $30.0 million in cash, subject to customary adjustments and other transaction expenses. The Merger Agreement also provides for earn-out consideration whereby the EZP Stockholders have contingent rights to receive up to $10.0 million based on achievement of certain performance targets for the acquired business over the 12 months following the closing of the Merger. To the extent that such performance targets are achieved, the first $2.7 million will be paid in either CafePress common stock or cash, at the election of the receiving EZP Stockholders, which election was made prior to the closing of the Merger with 6% of EZP Stockholders electing stock and 94% electing cash. Any remainder of the $10 million, if earned, above $2.7 million would be paid out solely in cash. The Merger Agreement provides that the value of each share of common stock to be issued as part of the earn-out consideration will be $9.24. Accordingly, if the performance targets are achieved in full, CafePress will issue approximately 876 shares of CafePress common stock with an aggregate value of $8,100 (based on the value of $9.24 per share) to three former stockholders of EZ Prints, and the remaining earn-out consideration will be paid in cash. We may be unable to successfully integrate this business or realize the anticipated benefits of the acquisition.


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We monitor several key operating metrics including:

                                  Three Months Ended             Nine Months Ended
                                     September 30,                 September 30,
                                  2012          2011           2012            2011
       Key operating metrics:
       Total customers            679,310       600,013       1,987,019       1,673,059
       Total number of orders     830,819       736,562       2,558,278       2,144,179
       Average order size       $      54     $      50     $        51     $        50

Total customers

Total customers represent the number of transacting customers in a given period based on shipment date. We track the total number of customers by unique member number or email address. As a result, an individual who creates multiple accounts using different email addresses will be counted as multiple unique customers. The total number of customers represents those that are unique to the period specified. Therefore, the total number of unique customers for individual quarters within a year will not necessarily equal the total number of unique customers for the entire year.

We monitor total customers as a key indicator of demand. We seek to expand our customer base through our marketing efforts, expansion of product merchandise, user-generated and licensed content, and acquisitions and through increasing opportunities for customers to create and buy customized and personalized products. We believe the number of customers, both new and repeat, is a key indicator of the growth of our current business.

Total number of orders

Total number of orders represents the number of individual transactions that are shipped during the period. We monitor the total number of orders as a leading indicator of revenue trends. We generally process and ship orders within three business days after a customer places an order. During periods of peak demand, such as the fourth quarter, we optimize our fulfillment operations and resource allocations on a daily basis to maintain process efficiency and high levels of customer satisfaction.

Average order size

Average order size is calculated as billings for a given period based on shipment date divided by the total number of associated orders in the same period. Because we recognize revenues upon delivery, billings may not be recognized as revenues until the following period. We closely monitor the average order size as it relates to changes in order volume, product pricing and product mix.

Basis of presentation

Net revenues

We generate revenues from online transactions through our portfolio of e-commerce websites. We sell a wide range of customized products such as t-shirts, hats, canvas art prints, banners, stickers and mugs, as well as products containing content supplied by the content owner and offered through our e-commerce websites or, in some cases, through feeds from independent third party websites.

We recognize revenues associated with an order when the products have been delivered and all other revenue recognition criteria have been met. Revenues are recorded at the gross amount when we are the primary obligor in a transaction, are subject to inventory and credit risk, have latitude in establishing prices and selecting suppliers, or have most of these indicators. For transactions where we act as principal and record revenues on a gross basis, applicable royalty payments to our content owners are recorded in cost of net revenues.

We have entered into arrangements with certain customers to provide fulfillment services under which we are not the primary obligor. These arrangements have historically constituted a smaller component of our business. We consider that we are acting as an agent in such transactions. The net fees received on such transactions are recorded as revenues.


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Cost of net revenues

Cost of net revenues includes materials, shipping, labor, royalties and fixed overhead costs related to our manufacturing facilities. The cost of materials may vary based on revenues as well as the price we are able to negotiate when purchasing cotton or other such commodities. Shipping fluctuates with volume as well as the method of shipping chosen by the consumer and fuel surcharges. Labor varies primarily by volume and product mix, and to a lesser extent, based on whether the employee is a permanent or a temporary employee. We rely on temporary employees to augment our permanent staff particularly during periods of peak demand. Our royalty expenses comprise fees we pay to our content owners for the use of their content on our products. Certain sales transactions under our Create & Buy program do not incur royalties. For other product sales, royalties vary with volume as well as whether the transaction occurred in a shop or the marketplace. Royalty-based obligations are expensed to cost of net revenues at the contractual rate for the relevant product sales.

Operating expenses

Operating expenses consist of sales and marketing, technology and development, general and administrative expenses, and acquisition-related costs. Personnel-related expenses comprise a significant component of our operating expenses and consist of wages and related benefits, bonuses and stock-based compensation.

Sales and marketing

Sales and marketing expenses consist primarily of customer acquisition costs, personnel costs and costs related to customer support, order processing and other marketing activities. Customer acquisition, customer support and order processing expenses are variable and historically have represented more than half of our overall sales and marketing expenses.

Our customer acquisition costs consist of various online media programs, such as paid search engine marketing, email, flash deal promotions through group-buying websites, display advertising and affiliate channels. We believe this expense is a key lever that we can use to drive growth and volume within our business as we adjust volumes to our target return on investment. We expect sales and marketing expense to increase in absolute dollars in the foreseeable future as we continue to invest in new customer acquisition.

Technology and development

Technology and development expenses consist of costs incurred for engineering, network operations, and information technology, including personnel expenses, as well as the costs incurred to operate our websites. Technology and development costs are expensed as incurred, except for certain costs related to the development of internal use software and website development, which are capitalized and amortized over the estimated useful lives ranging from two to three years. We expect technology and development expenses will increase in absolute dollars as we continue to expand our network operations and personnel to support our anticipated future growth.

General and administrative

General and administrative expenses consist of personnel, professional services and facilities costs related to our executive, finance, human resources and legal functions. Professional services consist primarily of outside legal and accounting services. General and administrative expenses also include headcount and related costs for our fraudulent review organization as well as our content usage review organization. We expect general and administrative expenses to increase in absolute dollars due to the anticipated growth of our business and infrastructure and the costs associated with being a public company, such as costs associated with SEC reporting and compliance, including compliance with the Sarbanes-Oxley Act of 2002, insurance, investor relations fees and similar expenses.

Acquisition-related costs

Acquisition-related costs include performance-based compensation payments, any changes in the estimated fair value of performance-based contingent consideration payments which were initially recorded in connection with our acquisition of substantially all of the assets of L&S Retail Ventures, Inc. and Logo'd Softwear, Inc., and third-party fees incurred in connection with our acquisition activity.

Earn-out payments of up to $9.0 million in connection with our acquisition of Canvas on Demand are payable in installments through 2014. The amounts payable are contingent upon achievement of performance targets and are subject to maximum amounts of $2.1 million, $2.6 million and $4.3 million in each of the 12-month periods ending September 30, 2011, 2012 and 2013, respectively, and, subject to certain exceptions, the continued employment of the two former owners. In addition, if maximum amounts are not earned in each 12-month period ending September 30, 2012 or 2013 but additional specific performance targets are met in 2013, then final earn-out payments may be payable in 2014, with the total additional amounts payable across the remaining three years not to exceed $6.9 million. Through September 30, 2012, $2.6 million has been paid pursuant to the terms of the agreement.


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In each period, we revise our accrual for earn-out payments based on our current estimates of performance relative to the stated targets and, where applicable, additional service provided. The accrual could be adjusted if the achievement of goals results in an amount paid that is different from our accrual estimate.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, we evaluate our critical accounting policies and estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies and estimates are discussed in our Prospectus filed pursuant to Rule 424(b)(4) as filed on March 29, 2012 with the SEC.

Results of Operations

The following table presents the components of our statement of operations as a
percentage of net revenues:



                                                Three Months  Ended                Nine Months  Ended
                                                   September 30,                      September 30,
                                               2012               2011            2012              2011
Net revenues                                       100 %            100 %             100 %           100 %
Cost of net revenues                                59               57                58              58

Gross profit                                        41               43                42              42

Operating expenses:
Sales and marketing                                 28               26                26              25
Technology and development                           8                8                 8               9
General and administrative                           9               10                 9               9
Acquisition-related costs                            3                2                 2               2

Total operating expenses                            49               45                45              44

Loss from operations                                (7 )             (2 )              (3 )            (2 )
Interest income                                      0                0                 0               0
Interest expense                                     0                0                 0               0

Loss before provision for income taxes              (7 )             (2 )              (3 )            (2 )
Benefit from for income taxes                       (2 )             (1 )              (1 )            (1 )

Net loss                                            (5 )%            (1 )%             (2 )%           (1 )%

Effective tax rate 25.8 % 38.8 % 27.6 % 37.0 %

Comparison of the Three Month Periods Ended September 30, 2012 and 2011

                                           Three Months  Ended
                                              September 30,
(in thousands, except for percentages)      2012           2011        $ Change       % Change
Net revenues                             $   43,558      $ 36,574      $   6,984             19 %
Cost of net revenues                         25,541        20,813          4,728             23

Gross profit                                 18,017        15,761          2,256             14

Operating expenses:
Sales and marketing                          12,401         9,368          3,033             32
Technology and development                    3,661         3,043            618             20
General and administrative                    4,003         3,520            483             14
Acquisition-related costs                     1,134           670            464             69

Total operating expenses                     21,199        16,601          4,598             28

Loss from operations                         (3,182 )        (840 )       (2,342 )          279


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                                           Three Months  Ended
                                              September 30,
(in thousands, except for percentages)      2012            2011       $ Change       % Change
Interest income                                   18           12              6             50
Interest expense                                 (46 )        (45 )           (1 )            2

Loss before provision for income taxes        (3,210 )       (873 )       (2,337 )          268
Benefit from income taxes                       (827 )       (339 )         (488 )          144

Net loss                                 $    (2,383 )     $ (534 )    $  (1,849 )          346 %

Net revenues

Net revenues increased $7.0 million, or 19%, in the three months ended September 30, 2012 compared to the same period in 2011. The increase in net revenues was primarily due to an increase in orders, which was attributable to new customer acquisitions and expansion of our merchandise catalog, particularly new clubs and groups, art, and stationery products. In addition, an increase in average order size contributed to the increase in net revenue. This was partially offset by a $0.5 million decline in international revenue. Our revenue growth rates have historically varied from period to period and we expect this trend to continue.

Cost of net revenues

Cost of net revenues increased $4.7 million, or 23%, in the three months ended September 30, 2012 compared to the same period in 2011. As a percentage of net revenues, cost of net revenues was 59% in the three months ended September 30, 2012 compared to 57% the same period in 2011. Within cost of net revenues, content royalty expense decreased by 0.8 percentage points due to an increase in sales of products with lower royalty rates. This was offset by a collective increase in materials, shipping, labor and fixed overhead costs as a percentage of net revenues by 2.5 percentage points due to promotional pricing and changes in the product mix.

Sales and marketing

Sales and marketing expenses increased $3.0 million, or 32%, in the three months ended September 30, 2012 compared to the same period in 2011. Sales and marketing expenses were 28% of net revenues in the three months ended September 30, 2012 compared to 26% in the same period in 2011. The increase in sales and marketing expenses was primarily due to higher variable expenses, including increases of $2.3 million in customer acquisition costs and $0.1 million in order processing expenses. Customer acquisition costs increased primarily due to increased keyword search advertising. In addition, personnel costs increased $0.4 million due to increased headcount to support the growth in our business and a $0.3 million increase in amortization expense of intangible assets related to our acquisitions of Logo'd Softwear, Inc. and InvitationBox.com.

Technology and development

Technology and development expenses increased $0.6 million, or 20%, in the three months ended September 30, 2012 compared to the same period in 2011. Technology and development expenses were 8% of net revenues in the three months ended September 30, 2012 and in the same period in 2011. The increase in absolute dollars in technology and development expenses was primarily due to a $0.3 million increase in personnel related costs to support the growth in our business and a $0.2 million increase in costs related to the transition to a new co-location data center.

General and administrative

General and administrative expenses increased $0.5 million, or 14%, in the three months ended September 30, 2012 compared to the same period in 2011. General and administrative expenses were 9% of net revenues in the three months ended September 30, 2012 compared to 10% in the same period in 2011. The increase in absolute dollars was primarily due to an increase in personnel-related costs related to higher stock compensation expense and additional employees and contractors to support the growth in our business, and to a lesser extent, costs associated with being a public company.

Acquisition-related costs

Acquisition-related costs were $1.1 million in the three months ended September 30, 2012, compared to $0.7 million in the three months ended September 30, 2011. The increase was primarily due to professional fees incurred in connection with the acquisition of EZ Prints Inc. and the accrual of performance-based contingent consideration payments related to our acquisitions of L&S Retail Ventures, Inc. in October 2011, and Logo'd Softwear, Inc in April 2012.


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Benefit from income taxes

The benefit from income taxes was $0.8 million in the three months ended September 30, 2012 compared to $0.3 million in the same period in 2011. Our effective tax rate was 25.8% and 38.8% in the three months ended September 30, 2012, and September 30, 2011, respectively. The effective tax rate was lower in 2012 primarily due to the impact of higher estimated domestic production tax deduction and lower incentive stock option expense in 2012.


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Comparison of the Nine Month Periods Ended September 30, 2012 and 2011



                                            Nine Months  Ended
                                              September 30,
(in thousands, except for percentages)     2012           2011         $ Change       % Change
Net revenues                             $ 130,537      $ 105,945      $  24,592             23 %
Cost of net revenues                        76,015         61,162         14,853             24

Gross profit                                54,522         44,783          9,739             22

Operating expenses:
Sales and marketing                         34,338         26,014          8,324             32
Technology and development                   9,810          9,631            179              2
General and administrative                  12,181          9,654          2,527             26
Acquisition-related costs                    2,508          1,760            748             43

Total operating expenses                    58,837         47,059         11,778             25

Loss from operations                        (4,315 )       (2,276 )       (2,039 )           90
Interest income                                 58             45             13             29
Interest expense                              (146 )         (142 )           (4 )            3

Loss before provision for income taxes      (4,403 )       (2,373 )       (2,030 )           86
Benefit from income taxes                   (1,216 )         (879 )         (337 )           38
. . .
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