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VPRT > SEC Filings for VPRT > Form 10-Q on 31-Jan-2014All Recent SEC Filings

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Form 10-Q for VISTAPRINT N.V.


31-Jan-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This Report contains forward-looking statements that involve risks and uncertainties. The statements contained in this Report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including but not limited to our statements about anticipated income and revenue growth rates, future profitability and market share, new and expanded products and services, geographic expansion and planned capital expenditures. Without limiting the foregoing, the words "may," "should," "could," "expect," "plan," "intend," "anticipate," "believe," "estimate," "predict," "designed," "potential," "continue," "target," "seek" and similar expressions are intended to identify forward-looking statements. All forward-looking statements included in this Report are based on information available to us up to, and including the date of this document, and we disclaim any obligation to update any such forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain important factors, including those set forth in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factors" and elsewhere in this Report. You should carefully review those factors and also carefully review the risks outlined in other documents that we file from time to time with the United States Securities and Exchange Commission. Executive Overview
For the three and six months ended December 31, 2013, we reported revenue of $370.8 million and $645.9 million, respectively, representing 6% and 8% revenue growth over the same periods in the prior year. Our constant-currency revenue growth of 6% and 7% for the three and six months ended December 31, 2013 continues to be lower than our historical growth but consistent with our near-term expectations. Diluted earnings per share (EPS) for the three and six months ended December 31, 2013 increased to $1.18 and $1.20, respectively, as compared to $0.66 and $0.61 for the three and six months ended December 31, 2012, respectively. This increase was driven primarily by growth in revenue and better leverage of our advertising and operating expense activities. For the remainder of fiscal 2014, we expect to continue to deliver increased net income margin as a percentage of revenue and EPS improvement relative to our fiscal 2013 performance, as we realize the benefits of our recent investment strategy and operating expense efficiency. Our profitability improvement and lower revenue growth is partly the result of improvements we are making in our European customer value proposition and marketing execution. The changes create near-term revenue headwinds but we believe these are important to our overall strategy, as well as near and long-term profitability.
Our second quarter has historically been our strongest revenue and earnings period during the course of a fiscal year, due to the sale of seasonal products such as holiday cards, calendars, and photo books. This typical seasonality was a significant driver of our stronger revenue performance in the second quarter of fiscal 2014 compared to the first quarter of fiscal 2014. Revenue from seasonal products, which was a material portion of our total revenue in the second quarter of fiscal 2014, does not repeat during other quarters of our fiscal year.
Our long-term goal is to be the leading online provider of micro business marketing solutions for businesses or organizations with fewer than 10 employees. Additionally, we plan to continue to focus on key market adjacencies where we believe we can drive long-term growth by employing our unique business model and customer value proposition. These adjacencies include digital marketing services, new geographic markets, and personalized products for home and family usage.
The strategy for growth in our core micro business marketing opportunity is to make investments and drive success in the following areas:
Customer Value Proposition. We believe our average customer currently spends only a small portion of their annual budget for marketing products and services with us. By shifting our success metrics from transactionally focused profit measures to longer-term customer satisfaction and economic measures, we believe we can deliver improvements to our customer experience and value proposition that will significantly increase customer loyalty and lifetime value. Examples of these programs include improving the customer experience on our site, such as ease of use, less cross selling before customers reach the checkout, expanded customer service, and pricing transparency. While we serve customers across the spectrum of micro businesses with fewer than 10 employees, our strength has traditionally been in the smallest and most price sensitive of these customers rather than those with more sophisticated marketing


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needs and higher expectations. We believe the customer value proposition investments we are making will be foundational to our ability to support the needs of these higher expectations customers. We believe that a majority of the value of our core market opportunity is in these slightly larger micro businesses, and over the next several years, we hope to unlock the potential of this market segment while continuing to drive value for the price sensitive customers we have historically excelled at serving.
Lifetime Value Based Marketing. We have traditionally acquired customers by targeting micro businesses who are already shopping online through marketing channels such as search marketing, email marketing, and other online advertising. We believe a significant portion of micro businesses in our core markets do not currently use online providers of marketing services. By investing more deeply into existing marketing channels, as well as opening up new channels such as television broadcast, direct mail and social media, we believe we can drive continued new customer growth and reach offline audiences that are not currently looking to online partners for their marketing needs. Regionally, we have made the most progress executing this strategy in North America, where we have gained significant campaign and channel performance data that are helping us optimize advertising efficiencies. Given our recent revenue performance in Europe, we have made more modest advertising investments in that region, as the current customer economics do not support these higher levels of investment. If we are successful in improving the European customer economics over time, we believe we could then benefit from enhanced advertising investments as we have done in North America.

World Class Manufacturing. We believe our manufacturing processes are best-in-class when it comes to the printing industry. However, when compared to the best manufacturing companies in the world, we believe there is significant opportunity to drive further efficiencies and competitive advantages. By focusing additional top engineering talent on key process approaches, we believe we can make a step-function improvement in product quality and reliability, and significantly lower unit manufacturing costs. We have dedicated resources focused on improving our current processes and developing new and better tools for the future. To date, our execution of this strategy element has been strong, and we believe we have many more opportunities for further enhancements.

Our strategy to drive longer-term growth by addressing market adjacencies is to develop our business in the following areas:
Digital Marketing Services. We estimate that less than 50% of micro businesses have a website today, but digital marketing services, including websites, email marketing, online search marketing and social media marketing, are a fast-growing part of the small business marketing space. We believe there is great value in helping customers understand the powerful ways in which physical and digital marketing can be combined. Our current digital offering includes websites, email marketing, local search visibility, blogs, search engine optimization, and personalized email domain names. In fiscal 2012, we acquired Webs, Inc. ("Webs") to significantly expand our ability to develop and deliver innovative, customer-focused online marketing solutions. During fiscal 2013 we introduced the Webs white-labeled Pagemodo product to Vistaprint customers and began cross-promotional offers of Vistaprint products to Webs customers. During the first quarter of fiscal 2014 we completed the integration of the Webs site builder technology into the Vistaprint website offering, and we expect that it will take several years to realize the full potential of this combination.

Geographies outside North America and Europe. For the three and six months ended December 31, 2013, revenue generated outside of North America and Europe accounted for approximately 5% and 6% of our total revenue, respectively. We believe that we have significant opportunities to expand our revenue both in the countries we currently serve and in new markets. We intend to further extend our geographic reach by continuing to introduce localized websites in additional countries and languages, expanding our marketing efforts and customer service capabilities, and offering graphic design content, products, payment methodologies and languages specific to local markets. Developing a business in emerging markets is complex, and often requires local expertise and presence. To support our expansion into global emerging markets, during fiscal 2013 we launched our new website, customer service and manufacturing facility in India (after acquiring the assets and hiring the team of a local company), and also executed an indirect minority investment in a Chinese printing business. In November 2013, we announced our plan to launch a joint venture in Japan with Plaza Create, a well known retailer in that country, in the second half of fiscal 2014. We plan to continue to invest in these and potentially additional markets in the near term, as they could drive significant growth in the longer term, but expect that these investments will be dilutive to earnings for multiple years and will not become a material source of revenue for the foreseeable future.


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Home and Family. Although we expect to maintain our primary focus on micro business marketing products and services, we also participate in the market for customized home and family products such as invitations, announcements, calendars, holiday cards, embroidered products, and apparel. We continue to add new products and services targeted at the home and family market. We believe that the economies of scale provided by cross sales of these products to our extensive micro business customer base, our large production order volumes and our integrated design and production software and facilities support and will continue to support our effort to profitably grow our home and family business. We expanded our product offerings in fiscal 2012 through the acquisition of Albumprinter, a leading provider of photo books and other photo products in Europe. In fiscal 2013, we began offering Albumprinter white-labeled photo books to Vistaprint customers in Europe. During fiscal 2014, we continue to focus on enhancements of home and family content for our customers by augmenting our already large creative base with more modern offerings and upgraded substrates for key products such as invitations and announcements, as well as improvements for our various photo products.

Results of Operations
The following table presents our operating results for the periods indicated as
a percentage of revenue:
                                                                                   Six Months Ended
                                          Three Months Ended December 31,            December 31,
                                              2013                 2012           2013          2012
As a percentage of revenue:
Revenue                                       100.0  %              100.0  %      100.0  %      100.0  %
Cost of revenue                                32.6  %               32.8  %       33.5  %       33.7  %
Technology and development expense             11.5  %               11.5  %       13.2  %       13.0  %
Marketing and selling expense                  33.5  %               38.6  %       35.1  %       39.1  %
General and administrative expense              8.2  %                7.6  %        8.8  %        8.7  %
Income from operations                         14.2  %                9.5  %        9.4  %        5.5  %
Other expense, net                             (0.9 )%               (0.1 )%       (1.2 )%       (0.1 )%
Interest expense, net                          (0.4 )%               (0.4 )%       (0.5 )%       (0.4 )%
Income before income taxes and loss in
equity interests                               12.9  %                9.0  %        7.7  %        5.0  %
Income tax provision                            1.6  %                2.3  %        1.1  %        1.4  %
Loss in equity interests                        0.2  %                0.1  %        0.3  %        0.1  %
Net income                                     11.1  %                6.6  %        6.3  %        3.5  %

In thousands Three Months Ended December 31, Six Months Ended December 31, 2013 2012 2013 vs. 2012 2013 2012 2013 vs. 2012 Revenue $ 370,807 $ 348,312 6% $ 645,896 $ 599,728 8%

Revenue
We generate revenue primarily from the sale and shipping of customized manufactured products, and the provision of digital services, website design and hosting, email marketing services, as well as a small percentage from order referral fees and other third-party offerings.
We seek to increase our revenue by increasing the number of customers who purchase from us ("unique active customers"), as well as the amount our customers spend on our offerings ("average bookings per unique active customer"). We use the combination of unique active customers and average bookings per unique active customer to describe our revenue performance as this approach is aligned with the way we manage our business and our efforts to increase our revenue. We believe that metrics relating to our unique active customers and average bookings per unique active customer offer shareholders a useful means of assessing our execution against our strategy. Because changes in one of these metrics may be offset by changes in the other metric, no single factor is determinative of our revenue and profitability trends, and we assess them together to understand their overall impact on revenue and profitability. A number of factors influence our ability to drive increases in these metrics:


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Unique active customers. The consolidated unique active customer count is the number of individual customers who purchased from us in a given period, with no regard to the frequency of purchase. For example, if a single customer makes two distinct purchases within a twelve-month period or is a distinct customer purchasing from Vistaprint and Albumprinter, that customer is tallied only once in the unique active customer count. We determine the uniqueness of a customer by looking at certain customer data. Unique active customers are driven by both the number of new customers we acquire, as well as our ability to retain customers after their first purchase. During our early growth phase, we focused more resources on the acquisition of new customers through the value of our offering and our broad-based marketing efforts targeted at the mass market for micro business customers. As we have grown larger, our acquisition focus has been supplemented with expanded retention efforts, such as email offers, customer service, and expanding our product offering. Our unique active customer count has grown significantly over the years, and we expect it will continue to grow as we see additional opportunity to drive both new customer acquisitions as well as increased retention rates. A retained customer is any unique customer in a specific period who has also purchased in any prior period.

Average bookings per unique active customer. Average bookings per unique active customer is total bookings, which represents the value of total customer orders received on our websites, for a given period of time divided by the total number of unique active customers, regardless of brand, who purchased during that same period of time. We seek to increase average bookings per unique active customer as a means of increasing revenue. Average bookings per unique active customer are influenced by the frequency that a customer purchases from us, the number of products and feature upgrades a customer purchases in a given period, as well as the mix of tenured customers versus new customers within the unique active customer count, as tenured customers tend to purchase more than new customers. Average bookings per unique active customer have grown over a multi-year period, though they do sometimes fluctuate from one quarter to the next depending upon the type of products we promote during a period and promotional discounts we offer. For example, among other things, seasonal product offerings, such as holiday cards, can cause changes in bookings per customer in our second fiscal quarter ended December 31.

Revenue for the three months ended December 31, 2013 increased 6% to $370.8 million compared to the three months ended December 31, 2012 due to increases in sales across our product and service offerings. The North American business continued to deliver solid performance with 14% constant-currency revenue growth during our peak holiday season. Our European business delivered results broadly in line with our expectations with a decline in constant-currency revenue of 2% during the quarter ended December 31, 2013, as compared to the prior comparative period. We continue to expect our fiscal 2014 European revenue growth rate to remain below our historical trends as we reduce certain advertising expenditures with lower returns to make more focused investments in the region. Most of World constant-currency revenue growth declined to 6% from 24% in the prior comparative period, because we have reached relative maturity in certain markets that currently comprise a majority of the region's revenue activity. Revenue for the six months ended December 31, 2013 increased 8% to $645.9 million compared to the six months ended December 31, 2012 due to increases in sales across our product and service offerings. The number of consolidated unique active customers increased by 2% to 16.9 million, supported by strong customer retention which contributed positively to our 8% reported revenue growth. The North American business continued to deliver solid performance with 14% constant-currency revenue growth, leveraging successful programs to drive customer value that we started two years ago. During the six months ended December 31, 2013, our European business experienced a 1% decline in constant-currency revenue as we continue to execute marketing improvement initiatives. Most of World constant-currency revenue grew 4% as compared to the prior period. We are implementing changes to our global customer value proposition that we believe will generate higher revenues in the long-term but that create pressure on growth in the near term.
We monitor unique active customers and average bookings per unique active customer on a trailing twelve-month, or TTM, basis. We have historically reported these metrics for our Vistaprint-branded business only; however, in fiscal 2014 we began including the Albumprinter and Webs activity since their respective acquisition dates. We have revised the December 31, 2012 information and presented it on a consolidated basis for comparative purposes. The following table summarizes our consolidated operational revenue metrics for the period ended December 31, 2013 and 2012:


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                                                              TTM Ended December 31,
                                             2013                  2012             % Increase/(Decrease)
Unique active customers                  16.9 million          16.6 million                   2  %
    New customers                        10.0 million          10.5 million                  (5 )%
    Retained customers                    6.9 million           6.1 million                  13  %

Average bookings per unique active
customer                               $            72     $                67                7  %
    New customers                      $            53     $                50                6  %
    Retained customers                 $           100     $                96                4  %

Total revenue by geographic segment for the three and six months ended December 31, 2013 and 2012 is shown in the following table:

In thousands                         Three Months Ended                         Currency           Constant-
                                        December 31,                             Impact:            Currency
                                                                 %                                  Revenue
                                     2013          2012        Change    (Favorable)/Unfavorable   Growth (1)
North America                    $  189,447     $ 167,511       13%                1%                 14%
Europe                              161,031       159,339        1%               (3)%                (2)%
Most of World                        20,329        21,462       (5)%               11%                 6%
Total revenue                    $  370,807     $ 348,312        6%                -%                  6%


In thousands                         Six Months Ended                          Currency           Constant-
                                        December 31,                            Impact:            Currency
                                                                %                                  Revenue
                                    2013          2012        Change    (Favorable)/Unfavorable   Growth (1)
North America                    $ 354,221     $ 311,749       14%                -%                 14%
Europe                             255,735       249,052        3%               (4)%                (1)%
Most of World                       35,940        38,927       (8)%               12%                 4%
Total revenue                    $ 645,896     $ 599,728        8%               (1)%                 7%


___________________


(1) Constant-currency revenue growth, a non-GAAP financial measure, represents the change in total revenue between current and prior year periods at constant-currency exchange rates by translating all non-U.S. dollar denominated revenue generated in the current period using the prior year period's average exchange rate for each currency to the U.S. dollar and excludes the impact of gains or losses on effective currency hedges recognized in revenue. We have provided these non-GAAP financial measures because we believe they provide meaningful information regarding our results on a consistent and comparable basis for the periods presented. Management uses these non-GAAP financial measures, in addition to GAAP financial measures, to evaluate our operating results. These non-GAAP financial measures should be considered supplemental to and not a substitute for our reported financial results prepared in accordance with GAAP. The following table summarizes our comparative operating expenses for the period:
In thousands                   Three Months Ended                             Six Months Ended
                                  December 31,                                  December 31,
                       2013           2012       2013 vs. 2012       2013           2012       2013 vs. 2012
Cost of revenue    $  120,789     $  114,150          6%         $  216,579     $  202,177          7%
% of revenue             32.6 %         32.8 %                         33.5 %         33.7 %
Technology and
development
expense            $   42,874     $   40,045          7%         $   85,121     $   77,702          10%
% of revenue             11.5 %         11.5 %                         13.2 %         13.0 %
Marketing and
selling expense    $  124,128     $  134,364         (8)%        $  226,561     $  234,361         (3)%
% of revenue             33.5 %         38.6 %                         35.1 %         39.1 %
General and
administrative
expense            $   30,494     $   26,712          14%        $   56,704     $   52,213          9%
% of revenue              8.2 %          7.6 %                          8.8 %          8.7 %

Cost of revenue
Cost of revenue includes materials used to manufacture our products, payroll and related expenses for


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production personnel, depreciation of assets used in the production process and in support of digital marketing service offerings, shipping, handling and processing costs, third-party production costs, costs of free products and other related costs of products sold by us. Cost of revenue as a percent of revenue improved during the current three and six month periods due to favorable pricing and manufacturing process efficiencies.
The increase in cost of revenue of $6.6 million for the three months ended December 31, 2013, as compared to the prior period was primarily due to an increase in volumes produced. We incurred incremental shipping expenses of $2.4 million as our customers preferred expedited delivery methods during the fiscal 2014 holiday season as compared to the prior year period. Overhead and other related expenses increased $1.6 million as compared to the prior comparative period and our indirect labor expense grew by $0.9 million due to a prolonged retention period for our temporary labor staff.
The increase in cost of revenue of $14.4 million for the six months ended December 31, 2013, as compared to the prior period, was primarily due to an increase in volumes produced. We incurred incremental shipping and temporary labor related costs of $3.2 million and $2.4 million, respectively. The prior year period included a benefit from a non-cash gain related to a free piece of equipment of $1.4 million in our European operations that did not occur in fiscal 2014 and therefore contributed to the $3.6 million increase in overhead and other related expenses during the six months ended December 31, 2013. Technology and development expense
Technology and development expense consists primarily of payroll and related expenses for our employees engaged in software and manufacturing engineering, information technology operations, content development, amortization of capitalized software, website development costs and certain acquired intangible assets including developed technology, hosting of our websites, asset depreciation, patent amortization, legal settlements in connection with patent-related claims, and other technology infrastructure-related costs. Depreciation expense for information technology equipment that directly supports the delivery of our digital marketing services products is included in cost of revenue.
The growth in our technology and development expenses of $2.8 million and $7.4 . . .

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