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

Q2 2018 CafePress Inc Earnings Call

San Mateo Aug 1, 2018 (Thomson StreetEvents) -- Edited Transcript of CafePress Inc earnings conference call or presentation Wednesday, August 1, 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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(technical difficulty)

Please go ahead.

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Scott Graff, [2]

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Good morning, and welcome to the CafePress Second Quarter 2018 Financial Results Conference Call. Joining me 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 filing 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 anticipated results. For more information, please refer to the risk factors in yesterday's earning 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 obligations to update them.

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

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

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

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

As we stated in our last update, our first priority is to return to profitability and begin generating positive cash flow. The actions we took in the first quarter to strengthen the business resulted in improved gross margins, a significant reduction of net loss and a return to positive adjusted EBITDA in the second quarter, which has not happened since 2015.

The bottom line improved despite revenue declines that continued in the second quarter at a rate similar to previous quarters on CafePress.com. This was partially offset by continued growth in revenue from the Retail Partner Channel.

Our second highest priority remains 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 second quarter of 2017 adversely affected our search visibility and traffic causing a portion of the decline in revenue during the second quarter of 2018 compared to the prior year.

Late in April, we released new search pages to our primary U.S. domain. With the release, we have seen mixed results thus far. Coinciding with the new search pages we released, we're seeing a strong uptick in indexation rates, but a further drop in rank, traffic and revenue, which has rebounded sequentially, though slowly. Though the results remain mixed and challenged, the positive signs we do see make us believe finishing the work on the site will lead to improved results.

New cart and checkout pages have been released to our international domains and will be released to our primary U.S. domain in the early part of third quarter. The final large piece of the puzzle is the product detail pages, which is in development, and we anticipate they will be released in the third quarter.

Finishing the modernization of CafePress.com is a top priority because we believe it is key to achieving our next and third priority, returning to top line revenue growth. In addition, the CafePress.com, our second focus is Retail Partner Channel, which grew 22% during the second quarter. During Q2, we saw continued growth through Amazon domestically, as well as new growth from expansion into Amazon internationally. Approximately 9% of the Retail Partner Channel growth came from expanding the catalog on Walmart.com. We've added tens of thousands of listings and aim to grow it further before 2018 peak holiday season.

During the early part of the second quarter, we completed our integration with the eBay marketplace and launched an initial catalog, which we aim to build out further prior to our peak holiday season. We launched another new marketplace in the early part of third quarter and will continue to explore new marketplaces and geographies as we proceed throughout 2018.

Our third revenue focus is the launch of fulfillment services. In February, we told you we performed diligence, and we're ready to launch a new line of business by providing fulfillment services to third parties with a focus on our core competencies in apparel and drinkware.

During the second quarter, we continued work to bring online and launch fulfillment services for a major participant in the custom on-demand e-commerce space. We are on track to process the first orders for this customer during the third quarter of 2018.

Phil will now give you an explanation of 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 second quarter of 2018. All comparisons will be year-over-year, unless otherwise noted.

Our second quarter results reflect the decline in traffic impacting CafePress.com , partially offset by another quarter of growth in our Retail Partner Channel. Actions we took during the first quarter to strengthen the business mitigated the loss in revenue and resulted in a reduction in net loss and positive adjusted EBITDA during the second quarter.

CafePress reported net revenue for the second quarter of $14.4 million, a 19% decline, which is slightly lower than the 20% decline we experienced during the first quarter of 2018. Net revenue from CafePress.com was $9.4 million, declined by 32% and now accounts for 65% of our revenue.

Continued pressure from organic search drove a 40% decline in visits to the website. We are monitoring what we believe is a further temporary decline in visits and revenue to CafePress.com related to the release of the new search pages early in the second quarter. We remain confident that the new and modern CafePress.com will ultimately drive a rebound in traffic and conversions.

Revenue from the Retail Partner Channel increased $0.9 million and accounted for 35% of second quarter revenue. We continue to benefit from growth through Amazon, both domestically through investment and sponsored advertising and disciplined catalog management as well as from international expansion. Additionally, the company benefited to a lesser extent from the contribution of the Walmart and eBay marketplaces, which drove approximately 13% of the Retail Partner Channel growth as those catalogs continue to be built out.

For the second quarter, gross profit was $6.5 million, a decline of $0.5 million on a higher gross margin of 5.9 points. Lower material and labor costs drove this improved efficiency as the new printing platform that was put into service late last year is driving lower consumption a pretreat and ink materials as well as lower labor. Additionally, changes in our production schedule to more closely align to order demand drove further improvements in the efficiency of our labor.

I will now go into more detail about our key operating expense components on a GAAP basis. Total second quarter operating expenses were $8 million, a decline of $2.2 million. The 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 second quarter sales and marketing expense was approximately $3.6 million, a decline of $1.2 million. As a percentage of net revenue, these expenses were 25.2% this year compared to 26.8% in the prior year. Variable marketing expenses declined $0.7 million compared to the prior year, which was driven primarily by lower page 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 $2.3 million, a decline of $0.8 million. For the quarter, our general and administrative expenses totaled approximately $2 million, a decline of $0.4 million. These declines were primarily driven by lower headcount attributable to the restructuring initiative completed during the first quarter.

Our 2Q GAAP net loss was $1.4 million or $0.8 per fully diluted share compared to a net loss of $3.2 million or $0.19 per fully diluted share in 2Q 2017. Actions taken during the first quarter to reduce costs mitigated the decline in revenue.

For the second quarter, non-GAAP cash contribution margin was $4.1 million or 28.4% of net revenue, an increase of 6.5 points from a year ago. The margin growth is directly attributable to improved production efficiency related to our new printing platform.

Our second quarter non-GAAP adjusted EBITDA was $0.2 million compared to the negative $1.5 million. The restructuring initiatives executed during the first quarter as well as improved production efficiency drove the $1.7 million improvement and mitigated the revenue challenges we faced from lower traffic on CafePress.com this quarter.

Turning to our balance sheet and cash flows. We continue to maintain a strong balance sheet and ended the quarter with $22.7 million in cash, cash equivalents, short-term investments and restricted cash, which is $1.33 on a per-share basis. Net cash used in operating activities was $9 million during the first 6 months of 2018. However, $8 million of the cash used occurred during the first quarter of 2018 as a result of seasonality of the business. The $2 million decrease in cash used in operating activities for the first 6 months primarily reflects benefits related to the restructuring initiative completed during the first quarter of 2018 as well as an improved management of inventory levels and decreases in software license renewals.

Our non-GAAP free cash flow, which we define as cash flow from operating activities less capital expenditures, reflected a $10.1 million outflow for the 6 months ended June 30, 2018, which is $3 million lower than the $13.1 million outflow in the prior year. Improved adjusted EBITDA, lower capital spending and improved working capital management partially related to controlling inventory levels and lower spending on software licenses, all contributed to the improvement. As a remainder, changes in working capital during the first 6 months drive significant cash outflow due to the seasonality of the business.

Our capital expenditures totaled $1.1 million or 3.8% of net revenue, down from $2.1 million or 5.8% of net revenue. Our priorities within capital expenditures during the first 6 months reflect investment in our developed technology. Last year included investment in the new printing platform. Our fully diluted weighted average shares outstanding were $17 million.

As I said initially, our second quarter results reflect a decline in traffic impacting CafePress.com, partially offset by another quarter of growth in our Retail Partner Channel. Actions we took during the first quarter to strengthen the business resulted in improved gross margins, mitigated the loss in revenue and drove a significant improvement in adjusted EBITDA.

We continue to remain focused on optimizing our customer experience by developing and releasing the remainder of the site improvements during 3Q 2018, which we believe will lead to a rebound in traffic to CafePress.com. We are also committed to continue traction with the expansion in 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 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 nears completion, we continue to 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 of catalogs of current partners as well as the contributions from new partners and expansion into new geography.

Finally, the launch of fulfillment services will also drive modest additional growth in the second half of 2018. New equipment and continued improvements in workflow at our plant will drive the efficiencies in the cost of production and result in improved margins, as we saw during the second quarter.

Let me remind you that free cash flow for the full fiscal year 2017 was negative $11 million. We remain on track towards saving $7 million fixed cost and software development spend related to the first quarter restructuring. We invested $2 million in the new printing 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 of returning to profitability and generating positive cash flow. Reiterating, our primary goal is to return to profitability and generate positive cash flow.

The company will continue to align it's cost structure, cash balances and operational objective each quarter to maintain discipline while it works to return to profitable growth. Furthermore, consistent with its fiduciary duty, our Board of Directors and management team will continue to carefully consider all options to enhance shareholder value.

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 on this call today.