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Edited Transcript of PRSS earnings conference call or presentation 3-May-18 1:00pm GMT

Q1 2018 CafePress Inc Earnings Call

San Mateo May 9, 2018 (Thomson StreetEvents) -- Edited Transcript of CafePress Inc earnings conference call or presentation Thursday, May 3, 2018 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Fred E. Durham

CafePress Inc. - Co-Founder, Chairman & CEO

* Phillip L. Milliner

CafePress Inc. - CFO

* Scott Graff

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Presentation

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Operator [1]

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Good day, everyone. Welcome to the CafePress First Quarter 2018 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn things over to Scott Graff. Please go ahead, sir.

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Scott Graff, [2]

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Thank you, Kaliyan. Good morning, and welcome to the CafePress First Quarter 2018 Financial Results Conference Call.

Joining on today's call are Fred Durham, Chief Executive Officer; and Phil Milliner, Chief Financial Officer. Please note, this call is being broadcast on the Internet. A replay of this call, along with our SEC filings and earnings release, will be available on the Investor Relations section of our website at cafepressinc.com.

I'd like to remind everyone our remarks today will contain forward-looking statements, including, without limitation, statements regarding guidance; our strategy to return CafePress to profitable growth; our focus on rebuilding the user experience and the impact thereof; Retail Partner Channel expansion, third-party printing and fulfillment; maintaining financial discipline; our plans for enhancing existing services, including our website rebuild; and thoughts on the possibility for higher traffic and better search engine optimization. These statements are subject to risk and uncertainties that may cause actual results to differ materially from the anticipated results. For more information, please refer to the risk factors in yesterday's earnings release and in our most recent Form 10-K filed with the SEC. Any forward-looking statements we make on this call are based on assumptions as of today. We undertake no obligation to update them.

During this call, we present GAAP and non-GAAP financial measures. Reconciliation of GAAP to non-GAAP measures are included in yesterday's earnings release.

With that, I'd like to turn the call our to Fred.

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Fred E. Durham, CafePress Inc. - Co-Founder, Chairman & CEO [3]

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Good morning, and thank you for joining us on today's call. I'll begin by giving you a high-level summary of the financial results for the first quarter, then highlights and updates on the progress we've made executing on our strategy and plans for the remainder of 2018. Phil will then review our financial results in more detail.

As we stated in the last update, our top priority is to return to profitability and begin generating positive cash flow. During the first quarter, we took actions to strengthen the business by simplifying the organization and reducing normalized annual fixed costs and software development spend by $7 million. In the first quarter, revenue continued to trend like the previous 3 quarters, holding its steady rate lower than the prior year, mainly attributable to the drop in SCO revenue to Cafepress.com. This was slightly offset by growth in revenue from the Retail Partner Channel. The effect of the net loss was mitigated by the decisive cost reduction action taken in the first quarter, and we actually saw an improvement in adjusted EBITDA versus last year.

Now, I would like to review key operational progress on our top 3 initiatives. First, I'd like to give an update on CafePress.com and website development. As a part of the multi-year turnaround, the company remains focused on completing the modernization of CafePress.com and demolishing the old site. The legacy CafePress.com website has not kept pace with change over the years, and previously mentioned Google algorithm updates in the first half of 2017 adversely affected our search visibility and traffic, causing most of the decline in revenue in the first quarter of 2018 compared to the prior year. We are pleased to report that a critical milestone was reached in April having released the new search pages to our primary, U.S. domain. We have seen improved call and indexing rates on our international domains that received the updates last year and earlier in Q1 and expect to see similar improvements for our us.com website.

The team is working diligently to complete coding and testing of the remaining pages, including the product detail, cart and checkout, and we continue to anticipate that these changes will be released during the second and third quarters of 2018.

Second, I would like to give an update on Retail Partner Channel expansion. As you recall, we offered an initial limited catalog through the Walmart marketplace during fourth quarter of 2017. During the first quarter, we've expanded the catalog by hundreds of thousands of listings and aim to grow it further before our 2018 peak holiday season. Approximately 40% of the growth in our Retail Partner Channel is attributable to this expansion of the catalogs on Walmart.com.

During the early part of the second quarter, we completed the integration with eBay marketplace and have launched an initial limited catalog. We anticipate growing this catalog significantly during the second quarter. In February, we mentioned our expansion with Amazon marketplace into their Australian domain and are happy to report that we are a quarter ahead of schedule, having gone live in the first quarter, and are generating orders and revenue. We are planning to add Amazon Mexico during the second half of 2018.

During April, we have seen double-digit growth in the Amazon marketplace as a whole, half of which has come from these international domains. We will continue to explore new marketplaces and geographies as we proceed throughout 2018.

Third, we are launching fulfillment services. In February, we told you that we performed diligence, and were ready to launch a new line of business providing fulfillment services to third parties with a focus on our core competency in apparel and drinkware. During the first quarter, we continued work to bring online, as a customer, a major participant in the custom on-demand e-commerce space. We are pleased to report that we remain on track to process the first orders related to this deal during the third quarter 2018.

Phil will now give you an explanation of the financial results.

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Phillip L. Milliner, CafePress Inc. - CFO [4]

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Thanks, Fred. I will now review our financial results for the first quarter of 2018. All comparisons will be year-over-year unless otherwise noted. Our first quarter results reflect a decline in organic search impacting CafePress.com, partially offset by another quarter of growth in our Retail Partner Channel. Actions we took during the first quarter to restructure the company mitigated the loss on revenue and drove an improvement in adjusted EBITDA. CafePress reported net revenue for the first quarter of $14.6 million, a 20% decline, which is lower than the 22% decline we experienced in the first -- in the fourth quarter of 2017. Net revenue from CafePress.com was $9.8 million, a 28% decline. Continued pressure from organic search drove a 38% decline in visits to the website. We previously announced to upgrade to a fully encrypted HTTPS site and the rollout of new search pages that went live on our U.S. domain in April are anticipated to drive a rebound in organic search traffic and conversions. Revenue from the Retail Partner Channel increased $0.1 million and accounted for 33% of total first quarter revenue. Although order volume and associated revenue were adversely impacted from the removal of licensed content from one partner during all of the first quarter, international expansion contributed to higher revenue levels. Additionally, the company benefited from the contribution of the Walmart marketplace. We are pleased to report that the licensed content previously mentioned has returned to partners within the Retail Partner Channel as of April.

For the first quarter, gross profit was $5.4 million, a decline of $1.6 million on a lower gross margin. Although we were more efficient with production labor related to our cost reduction initiative, fixed costs, such as depreciation and overhead, were 0.8 points higher as a percentage of revenue due to the revenue decline.

I will now go into more detail about our key operating expense components on a GAAP basis. Total first quarter operating expenses were $9.1 million, a decline of $1.3 million. We reported $0.6 million in restructuring expenses related to severance costs as we seek to improve business performance, profitability, cash flow generation and productivity. This fixed cost component of operating expenses improved by $1.6 million, primarily driven by lower headcount attributable to the restructuring initiative completed during the first quarter. Our first quarter sales and marketing expense was approximately $3.6 million, a decline of $0.8 million. As a percentage of net revenue, these expenses were 24.6% this year compared to 24.1% in the prior year. The higher percentage of net revenue reflects the decline in net revenue from the prior year. Variable marketing expenses declined $0.3 million compared to the prior year, which was driven primarily by lower paid search advertising costs and customer service-related expenses consistent with the decline in revenue. Fixed marketing expenses declined $0.5 million. For the quarter, our technology and development expenses totaled approximately $2.5 million, a decline of $0.5 million. General and administrative expenses totaled approximately $2.4 million, a decline of $0.6 million. These declines were primarily driven by lower headcount attributable to the restructuring initiative completed during the first quarter.

Our 1Q GAAP net loss was $3.6 million or $0.21 per fully diluted share compared to a net loss of $3.4 million or $0.20 per fully diluted share in the first quarter of 2017.

Actions taken during the first quarter to reduce costs mitigated the decline in revenue. For the first quarter, non-GAAP cash contribution margin was $3 million or 20.6% of net revenue, a decline of 2.9 points from a year ago. The pressure from organic search was a big driver of the margin compression as well as less efficient paid search to acquire traffic.

Our first quarter non-GAAP adjusted EBITDA was negative $1.7 million compared to negative $1.9 million. The restructuring initiative executed during the first quarter drove the $0.2 million improvement and mitigated the challenges we faced with cash contribution margin from organic search this quarter.

Turning to our balance sheet and cash flows. We continued to maintain a strong balance sheet and ended the quarter with $23.9 million in cash, cash equivalents, short-term investments and restricted cash, which is $1.41 on a per-share basis. Our non-GAAP free cash flow, which we define as cash flow from operating activities less capital expenditures, reflected an $8.6 million outflow for the year ended March -- for the quarter ended, excuse me, March 31, 2018, which is $1.6 million lower than the $10.2 million outflow in the prior year. Improved working capital management partially related to controlling inventory levels along with improved adjusted EBITDA and lower capital spending all contributed to the improvement. As a reminder, changes in working capital during the first quarter drive significant cash outflow due to the seasonality of the business. Our capital expenditures totaled $0.6 million or 4.1% of net revenue, down from $1 million or 5.7% of net revenue.

Our priorities within capital expenditures during the first quarter reflect investment in our developed technology. Last year included investment in new and printing equipment for the plant. Our fully diluted weighted average shares outstanding were 16.9 million. As I said initially, our first quarter results reflect a decline in organic search impacting CafePress.com partially offset by another quarter of growth in our Retail Partner Channel. Actions we took during the first quarter to restructure mitigated the loss in revenue and drove an improvement in adjusted EBITDA. We continue to remain focused on optimizing our customer experience by developing and releasing more of the site improvements during 2Q 2018 that will lead to a rebound in traffic to CafePress.com. We are also committed to continue traction with the expansion in the Retail Partner Channel. These initiatives combined with the impact of our cost reduction initiatives and the launch of fulfillment services will contribute to our goal of returning to profitability.

Let me now turn it back to Fred for some final remarks. Fred?

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Fred E. Durham, CafePress Inc. - Co-Founder, Chairman & CEO [5]

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While we are not giving guidance, I would like to share some directional thoughts on the remainder of 2018. As the new website continues to be rolled out, we believe there are gains in conversion and SCO traffic to be had that will result in growth from our current position during the second half of 2018. We expect continued growth in the Retail Partner Channel from further optimization to existing partners as well as the contribution of new partners and expansion into new geographies.

Finally, the launch of fulfillment services will also drive modest additional growth during the second half of 2018. New equipment and continued improvements in workflow at the plant will drive efficiencies in the cost of production and result in improved margins. Let me remind you that free cash flow for the full fiscal year of 2017 was negative $11 million. The first quarter restructuring will drive $7 million of reduced fixed costs and software development spend. We invested $2 million in a new print platform at the plant last year that we do not expect to recur. These factors, along with improved efficiency in production, will be integral in us achieving our goal to return to profitability and generating positive cash flow. Reiterating, our primary goal is to return to profitability and generate positive cash flow.

I believe that we have reset the company in Q1, while smaller than a year ago, our ability to generate positive adjusted EBITDA is actually stronger, and we see ample growth prospects ahead that will provide continued improvements from here. The company will continue to align its cost structure, cash balances and operational objectives each quarter to maintain discipline while it works to return to profitable growth.

Phil and I will make ourselves available for follow-up conversations, if necessary. If you have any questions, please don't hesitate to contact us. We look forward to sharing more information about our progress in the coming quarters. And I thank you for joining us today.

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Operator [6]

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That will conclude today's conference. Again, we do thank you all for joining us.