Earnings Call Transcript - CMPR Q2 2023

Operator, Operator

Welcome to the Cimpress Second Quarter Fiscal Year 2023 Earnings Call. I would now introduce Meredith Burns, Vice President of Investor Relations and Sustainability. Please go ahead.

Meredith Burns, Vice President of Investor Relations and Sustainability

Thank you, everyone, for joining us today. After positive investor feedback from our Q4 FY 2022 public earnings call, we have decided to reinstate quarterly public earnings calls, and we'll continue them as long as they are useful for investor understanding of our financial and operating performance. With us today are Robert Keane, our Founder, Chairman and Chief Executive Officer; and Sean Quinn, EVP and Chief Financial Officer. I hope you've all had a chance to read our earnings document. We appreciate the time that you've dedicated to understanding our results, commentary, and outlook. This live Q&A session will last 45 minutes to an hour, and you can submit questions via the question-and-answer box on the bottom left of the screen. Before we start, I'll note that in this session, we're likely to make statements about the future. Our actual results may differ materially from these statements due to risk factors outlined in detail in our SEC filings and the documents we published yesterday on our website. We invite you to read them. Now I will turn things over to Sean and Robert for some brief remarks before we take questions.

Sean Quinn, EVP and Chief Financial Officer

Great. Thanks a lot, Meredith, and thanks everyone for joining us today. I'm just going to start by highlighting a few key points from the results that we published yesterday, along with our outlook. As we outlined back in our September Investor Day, the fiscal year results for this year will be characterized by margin compression in the first half as we annualized the impact of cost inflation that accelerated in the second half of last year, and we also annualized the impact of last year's investments in Vista. We experienced some unfavorable shifts in our product mix from a margin perspective. We said that as we exit this fiscal year, we expect to be on a path to expanding our EBITDA through margin expansion and revenue growth. All of this remains the case, and our second quarter results reflect this. Our total revenue grew in constant currencies across all segments, including revenue growth from new customers in the Vista businesses last quarter. However, constant currency revenue growth slowed from the first quarter. Revenue from consumer products was down slightly and has a more significant weight this quarter, particularly in November and December. That being said, in January month-to-date, as the mix shifts back, our organic constant currency revenue growth has accelerated back above the 9% consolidated growth rate that we reported for the six months ended December. Over the remainder of the fiscal year, we'll be comping last year's Vista site migrations to our new tech platform in large markets like the U.S., France, and Germany, which we expect to support higher year-over-year growth. From a cost perspective across Cimpress, we see signs that our year-over-year pressure from many input costs is stabilizing, and in some cases, costs are starting to decrease. That said, gross profit did weigh on our year-over-year results and is still impacted by both increased input costs net of the pricing increases we've taken as we're still lapping cost increases that accelerated in the second half of last year, as well as product mix shifts, particularly in the Vista business. If you look at it in total, consolidated gross profit declined year-over-year by $36 million. About $22 million of that decline was from unfavorable currency fluctuations on our gross profit, which are offset throughout the rest of the P&L, including from our hedging gains. Of that remaining $14 million of operational decline in gross profit, that was primarily from our Vista business; all of our other businesses had constant currency growth in gross profit. For Vista, in addition to increased input costs year-over-year, as I mentioned before, gross margins were affected by product mix, as we had constant currency decreases in consumer and digital product bookings, which represented a combined $7 million decline. While we had strong constant currency bookings growth of over $16 million in our promotional products, apparel, and gifts category, which has very strong customer economics, it has lower variable gross margins. Sticking with Vista, our full funnel advertising test that we outlined back in September generated differential performance. New customer count and new customer bookings both grew this quarter overall for Vista, aided by markets where we had been testing mid and upper funnel advertising spend, aligning with one of our specific outcomes we sought to deliver. As previously disclosed, it was always our plan that the spend behind that testing would be front-loaded in the first half of the year, which remains the case, and we'll now use the learnings from this testing to continue to evolve and test our channel mix going forward. In the quarter, we actually decreased our performance advertising spend year-over-year in Vista, including during the consumer-driven holiday peak. Following actions we took to reduce operating costs as we entered the fiscal year, we took further actions this quarter to contain our operating costs. Operating expenses, excluding restructuring charges, were up only modestly year-over-year in constant currencies despite the significant investments we made in Vista throughout last year and despite continued growth in our businesses. On the net income and EPS side, we had sizable losses there due mainly to non-cash drivers, including the establishment of $116 million valuation allowance that drove tax expense in our P&L, but doesn't impact our cash taxes. That was a reversal of a tax benefit that we reported back in fiscal 2020 for net operating losses that will not be available to use until 2025 to 2030. We still expect to use a large portion of those NOLs, but we aren't able to maintain that deferred tax asset based on U.S. GAAP rules. Additionally, given the weakening of the U.S. dollar against our largest currencies since last quarter, we had unrealized losses from currency hedges that flow through our P&L and affect net income. Moving to cash flow, last quarter we told you we increased our safety stock of certain raw materials to mitigate supply chain disruption, especially related to energy risks in Europe. We started to work this inventory down in Q2, and actually we had cash inflows from inventory when we would typically see cash outflows in our December quarter. We expect to continue to work that inventory down in the back half of FY 2023 as well. That said, from a working capital perspective, we didn't see as large of an overall benefit as we have in recent years due to the lower sequential increases in our cost base given some of the actions we've taken. Therefore, we also should not experience a significant outflow as we go into the third quarter. During Q2, we paid $95.6 million to acquire non-controlling interest in our businesses, with $91 million of that for the settlement of a put option for over 90% of the non-controlling interest in our PrintBrothers segment, which has been our fastest-growing segment. Last quarter, we told you we were preparing for that likelihood so that actually happened, and those payments reduced our liquidity, which was down sequentially, although still sufficient at $213 million. Net leverage increased this quarter, as we expected an increase given the lower year-over-year EBITDA. The settlement of the put options and the non-controlling interest payments overall had an impact on our net leverage, driving about half of the increase in that leverage from last quarter. At the end of December, our net leverage was 5.52 times, and our first lien net leverage was 3.34 times. Finally, let me just say a few words about the guidance we provided in last night's release. As I said earlier in our past commentary, we described expectations for margin compression in the first half of the year for all the reasons I outlined, and profitability expansion as we exit the fiscal year, with growth in the years ahead. We are committed to expanding profitability and deleveraging the balance sheet. I previously mentioned that revenue growth in January has accelerated, but we will not rely on revenue growth alone to drive those profit improvements. We've taken multiple steps over the last year to contain or reduce costs, but over the remainder of the fiscal year, we plan to take further steps to significantly reduce our cost base in support of expanding profitability as we exit the fiscal year. As noted in our release last night, in light of anticipated cost reduction measures, we expect to be able to return to our prior fiscal year high adjusted EBITDA of $400 million in fiscal 2024. This higher adjusted EBITDA, combined with the expected free cash flow generation, would bring net leverage levels to approximately 3.5 times or lower. We have a midyear strategy update plan for investors on March 21, where we'll share more details on the steps that we're going to take to drive that profitability expansion, including cost reductions and the associated net leverage improvement.

Robert Keane, Founder, Chairman, and Chief Executive Officer

Thanks, Sean. Good morning to everyone. Given the guidance, as Sean just outlined, I wanted to emphasize the importance of Cimpress overall. When I returned to Vista four years ago, there were challenges but also areas that needed significant attention to transform the business for the coming decades. In January 2019, I expected it would take a couple of years to establish strong foundations for Vista's future and then pass the baton to Vista's next CEO. The pandemic slowed down our progress for a time, and we have focused on multiple significant multiyear investments. These included replatforming the Vista technology, positioning that had heavily depended on deep discounts, better serving higher-value customers, and laying the groundwork upon which we can revitalize Vista's traditional strength in design and service. Thanks to the great talent that Vista already had, new talent we've attracted over the last four years, and the contribution from our team, Vista is ready to run, and that certainly remains true today. Notwithstanding the fact that macro conditions are causing us to look at significant cost reductions for the coming months, Vista will be able to improve how it serves customers, thanks to the solid foundations we've built across technology, data and analytics, market, product ranges, and the beginnings of a full spectrum of design capabilities. That's why at this juncture, it's the right time for me to pass the baton to Vista's new Chief Executive Officer; Florian Baumgartner. Under Florian's leadership and his strong executive team, I expect that we will steadily progress towards our North Star of being the design and marketing partner for small businesses while delivering the financial results necessary to support what Sean has outlined.

Meredith Burns, Vice President of Investor Relations and Sustainability

Great. Thanks, Robert. So as a reminder, you can submit questions during this webcast via the questions and answers box at the bottom left of the screen. Some of you have already found that. Thank you very much. We received a significant number of pre-submitted questions as well, which we appreciate. There are some overlapping areas, which is good. Therefore, I will ask a representative question that we have received from multiple people, and our answers will do our best to cover everyone's questions. We'll get to as many as we can, ensuring we cover a variety of topics on people's minds. So let's take our first question, which was pre-submitted: in the last earnings document published in October, you wrote, 'as we publish this, our customer demand picture remains strong across Cimpress.' However, organic constant currency growth has slowed materially from the mid to high teens to the mid-single digits. What happened in November and December that caused things to change for the worse?

Sean Quinn, EVP and Chief Financial Officer

Yes, I'll take that. Exactly right. A lot of that impact is from Vista. And so in October, we had stronger month for Vista than we did in November and December. One of the big drivers there is mix and in particular, the mix of consumer. To put that in perspective, consumer in our October bookings was about 13% of our overall bookings. In November, it was 31% and December reached 38%. So you can see the weight ramps up throughout the quarter. This does have an impact on overall growth month by month, especially given that the consumer category declined slightly year-over-year. I think it's worth noting that from an advertising perspective in Vista—this is also in our results from last night—our performance advertising was 13% of revenue this quarter, compared to 15% last year. We made choices, including during high volume weeks, to operate with tighter payback thresholds and adhered to that. In October, we were at full pace for our full funnel testing with testing in particular, mid and upper funnel categories where we were testing in certain markets.

Meredith Burns, Vice President of Investor Relations and Sustainability

Great, thank you, Sean. So I'm going to stick with you for the next question, which was on revenue growth. Was there a slowdown in growth in the Vista segment revenue excluding consumer products? And another person asked a similar question: what was the constant currency growth rate for the business, excluding marketing products, in the quarter?

Sean Quinn, EVP and Chief Financial Officer

Yes, it did slow slightly. The constant currency growth rate for just the small business products was a little bit lower than Q1; that number was just over 7% growth in those categories, excluding consumer in the December quarter. To bring that all the way forward to today, as I mentioned in the upfront remarks, our constant currency growth in January overall on a consolidated basis accelerated above the 9% year-to-date growth that we reported for the six months ended December; Vista's bookings growth did accelerate in January as well. This is actually one of the biggest components of that acceleration and is also aided by the reduction in consumer in the mix.

Meredith Burns, Vice President of Investor Relations and Sustainability

Great. Okay. Sticking with consumer, this may be one that you both weigh in on, but we'll start with Robert. This is the second year in a row where we have seen poor performance in consumer products, which has historically been an important profit driver for the business. Two questions: does Vista's consumer product offerings still resonate with consumers? If yes, what gives you confidence and what steps are being taken today to avoid another poor seasonal period next year?

Robert Keane, Founder, Chairman, and Chief Executive Officer

Thank you. This is certainly a topic we discuss internally. As you noted, the consumer segment is an important part of Vista's profitability and has traditionally remained that way. To put numbers on it, on an annual basis, it represents roughly 20% of revenues, although of course, it's higher in Q2. Sean, you can jump in to correct me if I'm wrong, but I believe we mentioned earlier that performance advertising was reduced last quarter; it was 13% for the quarter versus 16% the year prior. We have made cuts with tighter paybacks. Beyond that, I think our focus is on small customers, where we have the biggest opportunity, leaving consumer under less focus. We also had to be clear in our small business to move that focus, which has indeed affected aspects like brand messaging, go-to-market strategy, and resource allocation in general. The business, like all of this traditional venture, has been very discount-driven. We've moved away from discounts for consumers, but a shift has occurred. That said, we created a dedicated consumer team to add resources so they can focus on consumers year-round rather than just seeing it as a holiday. This team has already improved the product and service offering this year. We had planned for a flat year overall, although we did that with less advertising spend as I just mentioned. The consumer category should benefit from the improvements we're making, including easing new product launches and enhanced site experiences for conversion, integrating design services, and many other initiatives. We also see promotional products, for example, as interesting use cases for consumers, and they performed well during holiday. That being said, we recognize that consumer remains a base, and we experience competition when the holiday season comes around, with advertising increasing significantly. We did not chase bookings; we intentionally aimed to maintain discipline in our set thresholds. Moreover, we have key products such as holiday cards, invitations, and announcements, and we're observing changes in behavior over time, which likely led to overall market declines. That said, we feel there’s still great opportunity within the consumer category, and we will continue pushing forward.

Sean Quinn, EVP and Chief Financial Officer

Yes, I believe that covers it. Just to touch on part of the question regarding how we approach consumer if we're not solely focused on that, which is not accurate; consumer remains important to us. Everything we’re doing across Vista to support small businesses, how we serve them and partner with them, ultimately increases our overall volume throughout the year in addition to the improvements we can continue to make within the consumer segment.

Meredith Burns, Vice President of Investor Relations and Sustainability

Okay. I will now shift to a couple of questions we received on both pricing and inflation. We'll start on the pricing front. Sean, how much pricing has been taken in Vista and in other businesses? Additionally, how much overall inflationary pressure remains? How much more pricing is there to take over the next 12 to 18 months?

Sean Quinn, EVP and Chief Financial Officer

This is an important question, and frankly, it's one that is difficult to answer precisely because many nuances exist, business by business, market by market. I'll do my best to address it. All of our businesses have seen increased input costs; we've discussed this for the last four to five quarters. Some have been impacted more than others. For example, energy costs have significantly increased in Italy but not in France. The raw material profile for our businesses varies widely in impact. Some businesses are tied to commodity prices, like paper, while others, including National Pen, source from China where we've seen noticeable decreases in inbound freight costs. In our Upload and Print businesses, National Pen, and to some extent, BuildASign, we’ve been able to largely offset those cost increases through price increases, and that has remained the case through Q2. Again, this varies business by business. In Vista, the largest business, we've seen the most net impact, primarily because the ramp-up in those cost increases last year coincided with the technology migration we implemented in some of our largest markets, which delayed our ability to introduce those pricing benefits into the market. We implemented broad-based price increases starting in June and continued desde ahí. We mentioned in our last quarter some of the benefits we are witnessing; those benefits were higher in the September quarter than in December due to a mix of consumer and discount levels during the holiday promotions. In consumer, there’s a price-sensitive customer, leading to lower pricing benefits. In terms of the previous guidance shared back in our September Investor Day, we expected to deliver at least $20 million from pricing changes in FY 2023. Although there are nuances, we're on track for that. We anticipate more benefit as the mix shifts back more towards small business products in Q3. There is still room for improvement, especially on the Vista side, and we continue to optimize pricing actively, with teams focused on this every day. However, I see the pace of changes, especially after this fiscal year, likely to slow. To summarize, the opportunity set is lower than in the last year but still exists and is closely monitored.

Meredith Burns, Vice President of Investor Relations and Sustainability

Great, and this can be a quick follow-up since you’ve already talked a bit about cost inputs lately. Inflation peaked in late summer and has been gradually decreasing, but the gross margin pressure this past quarter was more pronounced than two quarters ago, with 400 basis points of compression this quarter versus 200 two quarters ago. Why is that?

Sean Quinn, EVP and Chief Financial Officer

Yes, we will experience market conditions over time. When it comes to our procurement, we always seek to operate below the market but must adapt over time as the market shifts, especially as it relates to commodity pricing. While we see stabilization, I mentioned earlier, we still don't see overall costs declining substantially at this stage across the key input costs, although reductions in inbound freight have emerged. Those costs had an impact over the last six months. Your question references gross margins in December quarter versus the June quarter, and while costs impacted margins, the shape is improving. Product mix remains a significant driver. In some businesses, gross margins did improve quarter-over-quarter, while in others, they decreased. The Vista sector had the largest influence. Specifically, gross margins in Vista were down about 400 basis points in the December quarter versus June, which can be attributed to three major elements: first, consumer where we've seen lower net pricing due to competitive pricing and consumer price sensitivity. Second, business cards and stationery, a product with high variable gross margins saw a significant concentration in June quarter but lower in December. And lastly, we had a $3.1 million charge in Q2; that contributed an additional 70 basis points to the total 400 basis points delta.

Meredith Burns, Vice President of Investor Relations and Sustainability

Great, thank you. Robert, we continue to grow headcount at a time when results are weak, and other businesses are entering cost-saving mode amid macro uncertainty. Why does it make sense to keep adding staff?

Robert Keane, Founder, Chairman, and Chief Executive Officer

Cost savings do make sense in light of macro uncertainty. We certainly discussed that in our prepared comments released last night. Some of the growth in headcount is due to growth in our Upload and Print businesses. If I focus on Vista, however, there are roles that affect our operating expenses and fixed costs, like in production and customer care, strictly year-over-year in the quarter. We have also significantly curtailed hiring across different roles and Cimpress central teams and even reduced staff back in June. While our data shows headcount is up, it's mainly from staffing for a seasonal peak at the largest production facility in Canada, with these roles classified as permanent. You can see this pattern in the March quarter.

Meredith Burns, Vice President of Investor Relations and Sustainability

Great. I’m going to ask one or two more questions on quarterly results, and then we’re going to shift to a couple of other topics. This question pertains to geographic growth in Vista. Although the economy isn’t what we anticipated, I've been hearing Europe is performing worse than the U.S. Yet, your European business is looking great while the predominantly U.S.-focused Vista is lagging, particularly in gross profit. Can you provide insight into what’s working in Europe versus challenges in the U.S.?

Robert Keane, Founder, Chairman, and Chief Executive Officer

Good question. Our Upload and Print businesses have really pushed for more autonomy and decentralization over the past four-plus years. The teams in both businesses are doing a great job, firing on all cylinders, and we’re truly proud of their accomplishments, showing that this market generally has room for consolidation, and we can lead that effort. In Vista, we’ve observed higher constant currency growth outside the U.S. compared to the U.S. itself. This holds true in Canada, Europe, and Australia. While consumer revenue is down year-over-year, some markets are performing stronger outside of the U.S. Our primary challenge revolves around understanding customer sentiment for certain business-oriented products, which can fluctuate from market to market.

Sean Quinn, EVP and Chief Financial Officer

You covered most of it, Robert. The differential growth in our Upload and Print businesses compared to Vista is largely business-specific, not necessarily market-driven. The speed of operations, the agility in cracking new categories, acquiring new customers over the past two years, and market-specific factors are also involved. In terms of absolute revenue growth, both Europe and North America in Vista were relatively the same in Q2. However, many dynamics are at play, including product mix. The performance of the consumer category carried a heavier weight in the U.S. than in Europe, adversely affecting overall growth. On a positive note, PPAG growth is currently stronger in North America in absolute dollars. All markets remain in focus; there are some European markets, especially France, that have shown strong performance due to full funnel testing.

Meredith Burns, Vice President of Investor Relations and Sustainability

Great. Let’s shift gears to questions on liquidity and capital allocation. First, Sean, regarding the minority interest purchase this quarter, what was the EBITDA multiple of that acquisition, and what effect will that have on our core cash flow moving forward?

Sean Quinn, EVP and Chief Financial Officer

The way this arrangement worked included reciprocal put and call options that use a formulaic valuation with two main inputs: revenue growth and cash flow before tax to establish the value. These businesses had revenue growth over 30% last year, which was the cap for that valuation table. These businesses maintain very high free cash flow conversion, and the valuation formulas included caps on certain cash flow contributions. The multiple we paid for the non-controlling interests was between 8x and 9x the unlevered free cash flow before tax. These businesses continue to grow at rates that are among the highest across Cimpress—specifically, the highest segment with over 20% year-to-date growth. Regarding future cash flow, this purchase means that we will retain nearly all cash flow generated from these businesses, instead of previously retaining only 90%, with the remaining 11% paid as dividends to minority holders.

Meredith Burns, Vice President of Investor Relations and Sustainability

Great. A quick follow-up question: What other non-controlling interests are still available for us to purchase, and what's the materiality of what remains?

Sean Quinn, EVP and Chief Financial Officer

It’s relatively small now. There is a little over 1% of the PrintBrothers businesses remaining. In addition to that, we've settled the put option for non-controlling interest in BuildASign. This is all disclosed in our 10-Q, with a table in the footnotes. The short story is that this is the vast majority of it.

Meredith Burns, Vice President of Investor Relations and Sustainability

Great. Any updates on the liquidity threshold at which the company would consider deploying capital for bond repurchases? We've received several questions on bond repurchases.

Sean Quinn, EVP and Chief Financial Officer

We haven’t provided a specific number and we’ll continue not to give a precise figure. Our focus and priority have been on liquidity, and that remains the case. We previously disclosed the high likelihood of settling that put option that I just discussed, necessitating a focus on liquidity over bond repurchase opportunities. Currently, we don't have active plans for bond buybacks. Liquidity remains our core concern. As we execute the guidance we've outlined and deliver in the upcoming quarters throughout FY 2024, capital allocation opportunities may begin to open up. However, we have no active plans for bond repurchases.

Meredith Burns, Vice President of Investor Relations and Sustainability

Great. A couple of people noted that our first lien leverage was above the leverage test if we were to have any amounts drawn at the end of a quarter. There have been questions regarding our revolver—would we consider extending the maturity of the revolver in the near term? What about amending the credit facility for a waiver?

Sean Quinn, EVP and Chief Financial Officer

No, the short answer to all that is no. The revolver matures in 2026. We aren’t actively looking to extend it. We'll consider doing so as we approach that maturity, but that's in the 12 to 18-month timeframe, not in the next three months. Regarding first lien leverage only applies if we have a drawn balance at a quarter's end. We haven't had that situation, nor do we plan to have it.

Meredith Burns, Vice President of Investor Relations and Sustainability

Great. Robert, I have a question for you. Given increased leverage, will you consider issuing equity or divesting one or more divisions to reduce debt?

Robert Keane, Founder, Chairman, and Chief Executive Officer

First, I want to reiterate what we’ve said about our plan to reduce leverage—our goal is to expand net leverage through adjusted EBITDA growth, returning to high adjusted EBITDA levels, full stop. Regarding divestitures, we would consider that if the right conditions arise and if we believe it would be beneficial. However, this is not a decision we take lightly—divestitures would require significant consideration of Cimpress' long-term capabilities. Given the current environment, I'm not sure it's favorable for divestitures.

Meredith Burns, Vice President of Investor Relations and Sustainability

Great, thank you. Let's tackle one more strategic question before I move to the outlook section. How has the development of the mass customization platform changed your acquisition strategy? It seems your recent acquisitions can quickly implement several MCP products, making acquisitions easier. In future, do you see Cimpress pursuing multiple smaller acquisitions annually instead of one large acquisition every few years as we did from 2016 to 2018?

Robert Keane, Founder, Chairman, and Chief Executive Officer

It's a good question. Let me start by saying we do not anticipate material M&A in the near term because of ongoing commitments to EBITDA expansion and net leverage reduction. However, in the long term, we see many advantages yielding value through tuck-in acquisitions as well as larger acquisitions. Our investments, particularly over the last five years, have been relatively small and have performed well. Regarding MCP, our primary focus is leveraging our existing assets. Recently, Pixartprinting migrated Italy, it's the largest part of our print group, and is performing well, including migrating to MCP’s e-commerce tools. They've already migrated France and Spain, other countries, and the migration is progressing. For now, we’re leveraging MCP among our existing assets. Future M&A initiatives will depend on vertical integration into suppliers and the relative ease of extracting long-term value.

Meredith Burns, Vice President of Investor Relations and Sustainability

Great. Sean, quick one for you—how much cash do you need to run the business?

Sean Quinn, EVP and Chief Financial Officer

We haven’t provided a specific minimum cash number. As of the end of December, we had $230 million of liquidity, which is sufficient, including working capital outflows we typically experience seasonally in Q3. We expect that liquidity to build over time, based on our released guidance.

Meredith Burns, Vice President of Investor Relations and Sustainability

Great. Let's move on to the outlook. You mentioned that overall trends have improved in January. Is there anything more to emphasize there? Can you give insight on how constant currency revenue growth has accelerated relative to the first half of the year?

Sean Quinn, EVP and Chief Financial Officer

Yes, so we didn't give a specific number, but we said it was higher than 9%. We were at 5% consolidated organic constant currency in Q2. So that's the acceleration. It's above 9%. What I would emphasize is that Vista is a significant contributor to those numbers, alongside improvements in other areas compared to Q2. As we track through the March quarter, we have a few factors at play: in the previous January and February, demand experienced quite a bit of COVID impact, especially in Europe, which will impact comparisons. Additionally, we had site migrations in the U.S. market roughly around the third week of February last year. Those migrations have initially affected revenue, but we would grow from there, so we’ll be lapping all that, which should assist in supporting higher growth rates. Also, again, from a mix perspective, Vista accelerated in growth in January, aided by the return towards small business products which have been growing strongly.

Meredith Burns, Vice President of Investor Relations and Sustainability

Great. You have essentially answered the next question regarding previously provided guidance for Vista revenue growth to accelerate in FY 2023 versus FY 2022’s FX neutral rate of 5%. Does that guidance still stand?

Sean Quinn, EVP and Chief Financial Officer

Yes, it does.

Meredith Burns, Vice President of Investor Relations and Sustainability

Excellent. Many pre-submitted questions have come in about the guidance you provided yesterday from an EBITDA perspective. Everyone seems eager for details. How do we achieve our goals in FY 2023 and 2024? What will these cost reductions look like, will they stem from advertising or operational expenses?

Robert Keane, Founder, Chairman, and Chief Executive Officer

Sure, I’ll jump in. Sean, please feel free to add anything as needed. We aim to provide a lot more detail during our midyear strategy update on March 21. We've begun our scenario developments and planning for that, though we haven't completed that work yet. Thus, it would be premature to provide too many detailed answers. However, we see ample opportunities here and will finalize those different scenarios. Substantial revenue growth will be crucial to achieving that $400 million EBITDA target in FY 2024, and it will necessitate significant cost reductions. But the framework we’re using is that we won’t merely cut costs to hit the $400 million goal. We believe we can achieve more with less and drive efficiencies, performance, and simplification.

Sean Quinn, EVP and Chief Financial Officer

Yes, to build on that, March will have a lot more insights, but also regarding why now, impacting profitability due to external factors over the past couple of years necessitates our commitment to expanding EBITDA through things within our control that isn’t solely reliant on revenue growth. So we must prioritize driving this expansion through actions we control and this is the real key aspect of our strategy.

Meredith Burns, Vice President of Investor Relations and Sustainability

Thank you, Sean. Does getting down to 3.5 times net leverage involve actively paying down debt or is it primarily driven by EBITDA expansion and cash generation?

Sean Quinn, EVP and Chief Financial Officer

This involves looking at net leverage rather than active debt paydowns. Increased cash flow, including improved liquidity balances, impacts net leverage as well. So there’s no necessary connection on whether we actively pay down debt. This will also depend on how we evaluate potential strategies, such as bond repurchases. Therefore, the focus will be primarily on EBITDA expansion and cash generation.

Meredith Burns, Vice President of Investor Relations and Sustainability

Some follow-up questions have come through, like noting that we’ve decided to pull back costs. One person is interpreting this view regarding cost cuts driving profit improvement as a sign that revenue growth may be less than previously projected. Can you clarify?

Sean Quinn, EVP and Chief Financial Officer

Well, in terms of this year, there was a previous question related to being above 5% constant currency growth in Vista this quarter, and I confirmed that it remains intact. I wouldn’t view cost reductions as directly correlated to revenue growth. Over time, choices may shift, and cost powers may become significant, but in the short term, the commitment to enhancing EBITDA is key, and we cannot rely solely on revenue growth, which is influenced by external factors.

Meredith Burns, Vice President of Investor Relations and Sustainability

Thanks, Sean. I will attempt to sneak in two more questions before we end this call. This one's for Robert. Given the mix shift in Vista, will Vista margins return to prior levels, or should we expect margins to be lower than previous years even after recouping the higher input costs and currency headwinds due to the mix shift?

Robert Keane, Founder, Chairman, and Chief Executive Officer

It depends. Talking about segment EBITDA, we believe Vista can achieve desirable levels over time. Gross margins have shifted, and we consider those changes more permanent, often coming with higher lifetime value customers. Therefore, we believe this mix is manageable.

Meredith Burns, Vice President of Investor Relations and Sustainability

Okay, Sean, let's return to liquidity as it pertains to outlook. Some have expressed concern that short-term liquidity seems constrained, especially considering anticipated restructuring costs due to announced cost controls alongside a seasonal drop in working capital. Given that Q3 typically experiences around $60 million in working capital burn in addition to regular expenses, does liquidity seem tight for next quarter?

Sean Quinn, EVP and Chief Financial Officer

Yes, certainly. Reflecting on FY 2023, we expected first half leverages to climb and then our EBITDA to pick up as we move forward. We had anticipated that quarterly increases in leverages would occur in the first and second quarters, and we would ultimately begin to decline. We previously outlined that Q3 would be our lowest point for both liquidity levels and leverage, and we expect sequentially higher liquidity as we transition into Q4. This quarter, we do have sufficient liquidity at $213 million at the end of December. Working capital burn tends to be seasonal within Q3, and we have plans to address that. Restructuring costs typically are paid out over time, which implies that we'll be doing so while also beginning to derive benefits from our expected EBITDA improvements; that savings will develop more steadily without major cash outflows in any singular instance.

Meredith Burns, Vice President of Investor Relations and Sustainability

Thanks, Sean. Okay, we are nearing the end of our time. Robert, any last comments?

Robert Keane, Founder, Chairman, and Chief Executive Officer

Thank you to everyone for your time. We appreciate your participation in our quarterly results call and the questions shared today. As we mentioned, we're optimistic about the future of Cimpress and Vista, specifically outlining our opportunity to emerge from this sustained period of investment, ultimately returning to traditional high adjusted EBITDA levels and growth beyond that. We look forward to your presence at the March 21 midyear strategy update. Until then, have a great day and a productive month and a half ahead.

Operator, Operator

This concludes today’s conference call. Thank you for participating. You may now disconnect.