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VPRT > SEC Filings for VPRT > Form 10-Q on 30-Apr-2014All Recent SEC Filings

Show all filings for VISTAPRINT N.V.

Form 10-Q for VISTAPRINT N.V.


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 months ended March 31, 2014, we reported revenue of $286.2 million, representing a decline in both reported and constant-currency revenue of 1% over the same period in the prior year. During the quarter we introduced a new pricing strategy in two of our top markets: the U.S. and Germany, negatively impacting our revenue growth in those regions. We expect our near-term revenue growth rates to improve as our customer base adapts to these changes; however, we expect our growth will continue to be lower than our historical levels. Diluted

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earnings per share (EPS) for the three months ended March 31, 2014 decreased to $0.04, as compared to $0.17 for the three months ended March 31, 2013. This decline was significantly impacted by transaction costs incurred of approximately $3.7 million, or $0.11 per diluted share, related to our recent acquisitions of Pixartprinting and People & Print Group, as well as our joint business arrangement with Plaza Create in Japan.
For the nine months ended March 31, 2014, we reported revenue of $932.1 million, representing 5% revenue growth in terms of both reported and constant-currency revenue over the same period in the prior year. EPS for the nine months ended March 31, 2014 increased to $1.24, as compared to $0.78 for the nine months ended March 31, 2013. This increase was driven primarily by growth in revenue and better leverage of our advertising and normal operating expense activities, offset by transaction costs incurred of approximately $5.0 million for our strategic investments. For the full year of fiscal 2014, we continue to expect to deliver increased net income margin as a percentage of revenue and EPS improvement relative to our fiscal 2013 performance, despite the expected fourth quarter impact of the loss on the sale of our Namex investment and the recognition of additional transaction costs. Our profitability improvement and lower revenue growth is partly the result of improvements we are making in our North America and European customer value proposition and marketing execution, as we realize the benefits of our recent investment strategy and operating expense efficiency. 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 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, personalized products for home and family usage and the locally focused customer segment.
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 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. We recently executed a more transparent pricing strategy in select markets in North America and Europe, which has resulted in lower revenue growth during the quarter; however, we believe this will drive long-term customer satisfaction. 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.

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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. 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 each of the three and nine months ended March 31, 2014, revenue generated outside of North America and Europe accounted for approximately 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). During the current quarter, we launched our joint venture in Japan with Plaza Create, a well known retailer in that country. 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.

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.

Locally Focused Customer Segment. Through customer research, we have segmented our market opportunity into three major categories within the large market for marketing products and services used by small businesses with fewer than 10 employees. As described above, Vistaprint has historically gained the most traction in the part of the market with the highest number of small businesses but the lowest per-customer annual spend ("Price Primary" segment). Additionally, via the Vistaprint brand, we actively seek to penetrate the second customer segment of customers with more sophisticated marketing needs who

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choose their marketing providers not solely on price, but on a blend of value, product quality, customer service and overall experience ("Higher Expectations" segment). While we believe the Vistaprint brand can defend its share in the Price Primary segment and is extensible to Higher Expectations customers, we believe the right approach to the third segment of "Locally Focused" customers - those who choose to work with local graphic designers, agencies, resellers and print shops to meet their marketing needs - is through differentiated brands like Pixartprinting and People & Print Group. These brands specialize in serving graphically-enabled customers via an upload and print business model, offering a very wide and deep range of products and attributes that extend beyond Vistaprint's current offerings in categories such as flyers and signage. Though this Locally Focused customer segment is largely composed of offline spend, online companies like Pixartprinting and People & Print Group have been successful penetrating this space in their respective geographic markets. We intend to invest in these companies as distinct brands from Vistaprint, much like we do with the Albumprinter brands today. Results of Operations
The following table presents our operating results for the periods indicated as a percentage of revenue:

                                                                               Nine Months Ended
                                          Three Months Ended March 31,             March 31,
                                             2014              2013            2014          2013
As a percentage of revenue:
Revenue                                      100.0  %           100.0  %      100.0  %       100.0  %
Cost of revenue                               35.3  %            34.5  %       34.1  %        34.0  %
Technology and development expense            14.8  %            14.9  %       13.7  %        13.6  %
Marketing and selling expense                 38.1  %            38.2  %       36.0  %        38.8  %
General and administrative expense            10.0  %             9.0  %        9.1  %         8.8  %
Income from operations                         1.8  %             3.4  %        7.1  %         4.8  %
Other income (expense), net                      -  %               -  %       (0.9 )%           -  %
Interest expense, net                         (0.6 )%            (0.4 )%       (0.5 )%        (0.4 )%
Income before income taxes and loss in
equity interests                               1.2  %             3.0  %        5.7  %         4.4  %
Income tax provision                           0.3  %             0.8  %        0.8  %         1.2  %
Loss in equity interests                       0.4  %             0.2  %        0.3  %         0.1  %
Net income                                     0.5  %             2.0  %        4.6  %         3.1  %
Add: Net loss attributable to
noncontrolling interest                          -  %               -  %          -  %           -  %
Net income attributable to Vistaprint
N.V.                                           0.5  %             2.0  %        4.6  %         3.1  %

In thousands Three Months Ended March 31, Nine Months Ended March 31, 2014 2013 2014 vs. 2013 2014 2013 2014 vs. 2013 Revenue $ 286,185 $ 287,684 (1)% $ 932,081 $ 887,412 5%

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

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overall impact on revenue and profitability. A number of factors influence our ability to drive increases in these metrics:
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 March 31, 2014 decreased by 1% to $286.2 million compared to the three months ended March 31, 2013 due to a decline in sales across our product and service offerings. During the third quarter, we rolled out significant pricing changes in two of our top markets: the U.S. and Germany. These changes are designed to help us improve customer lifetime value and loyalty over time, but created meaningful near-term revenue headwinds in North America and Europe this quarter. The North American business delivered constant-currency revenue growth of 3% from the prior comparable period. Our European business experienced a decline in constant-currency revenue of 7% during the quarter ended March 31, 2014, as compared to the prior comparative period. Additionally, 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 grew by 10% from the prior comparative period.
Revenue for the nine months ended March 31, 2014 increased 5% to $932.1 million compared to the nine months ended March 31, 2013 due to increases in sales across our product and service offerings. The number of consolidated unique active customers declined slightly but was offset by a 7% increase in our average order value for the period, contributing positively to our 5% reported revenue growth. The North American business delivered a solid performance with 10% constant-currency revenue growth, leveraging successful programs to drive customer value that we started two years ago. During the nine months ended March 31, 2014, our European business experienced a 3% decline in constant-currency revenue as we continue to execute marketing improvement initiatives. Most of World constant-currency revenue grew 6% 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 March 31, 2013 information and presented it on a consolidated basis for comparative

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purposes. The following table summarizes our consolidated operational revenue metrics for the periods ended March 31, 2014 and 2013:

                                                                  TTM Ended March 31,
                                                2014                    2013             % Increase/(Decrease)
Unique active customers                     16.8 million            16.9 million                  (1 )%
    New customers                           9.8 million             10.5 million                  (7 )%
    Retained customers                      7.0 million              6.4 million                   9  %

Average bookings per unique active
customer                               $            73          $                68                7  %
    New customers                      $            53          $                50                6  %
    Retained customers                 $           101          $                96                5  %

Total revenue by geographic segment for the three and nine months ended March 31, 2014 and 2013 is shown in the following table:

In thousands                         Three Months Ended                          Currency           Constant-
                                          March 31,                               Impact:            Currency
                                                                  %                                  Revenue
                                     2014           2013        Change    (Favorable)/Unfavorable   Growth (1)
North America                    $   166,118     $ 163,029        2%                1%                  3%
Europe                               104,177       108,255       (4)%              (3)%                (7)%
Most of World                         15,890        16,400       (3)%               13%                10%
Total revenue                    $   286,185     $ 287,684       (1)%               -%                 (1)%

In thousands                         Nine Months Ended                         Currency           Constant-
                                         March 31,                              Impact:            Currency
                                                                %                                  Revenue
                                    2014          2013        Change    (Favorable)/Unfavorable   Growth (1)
North America                    $ 520,339     $ 474,778       10%                -%                 10%
Europe                             359,912       357,307        1%               (4)%                (3)%
Most of World                       51,830        55,327       (6)%               12%                 6%
Total revenue                    $ 932,081     $ 887,412        5%                -%                  5%


(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                             Nine Months Ended
                                    March 31,                                     March 31,
                       2014           2013       2014 vs. 2013       2014           2013       2014 vs. 2013
Cost of revenue    $  100,903     $   99,107          2%         $  317,482     $  301,284          5%
% of revenue             35.3 %         34.5 %                         34.1 %         34.0 %
Technology and
expense            $   42,434     $   43,004         (1)%        $  127,555     $  120,706          6%
% of revenue             14.8 %         14.9 %                         13.7 %         13.6 %
Marketing and
selling expense    $  109,118     $  109,966         (1)%        $  335,679     $  344,327         (3)%
% of revenue             38.1 %         38.2 %                         36.0 %         38.8 %
General and
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