Earnings Call Transcript - CMPR Q4 2025

Meredith Burns, Vice President of Investor Relations and Sustainability

Good day, and thank you for standing by. Welcome to the Cimpress Q4 Fiscal Year 2025 Earnings Call. I will now introduce Meredith Burns, Vice President of Investor Relations and Sustainability. Thank you, Ari, and thank you, everyone, for joining us. With us today are Robert Keane, our Founder, Chairman and Chief Executive Officer, and Sean Quinn, our EVP and Chief Financial Officer. We appreciate the time that you've dedicated to understanding our results, commentary, and outlook. This live Q&A session will last about 45 minutes or so, and we'll answer both pre-submitted and live questions. You can submit questions live via the question-and-answers box at the bottom left of the screen. Before we start, I'll note that in this session, we will make statements about the future. Our actual results may differ materially from these statements due to risk factors that are outlined in detail in our SEC filings and the documents we published yesterday on our website. We also have published non-GAAP reconciliations for our financial results on our website, and we invite you to read them. So now I will turn things over to Robert.

Robert S. Keane, Founder, Chairman and Chief Executive Officer

Thanks, Meredith. Thank you to all our investors for joining us today. Yesterday, we published two documents, our Q4 and FY '25 earnings document as well as our annual letter to investors. Sean is going to cover details of the earnings document. I will start with a quick review of that annual letter. To start off, Cimpress is a profitable global company that helps millions of businesses build brands, stand out, and grow. Our consistent investment for the long term has led to production capabilities in technology and service capabilities that surpass other firms in the printing or related industries, and no competitor has our scale, our global reach, or Cimpress' wide array of products. The biggest near-term challenge we face is that we are in a major transition in terms of what product categories drive our success. This transition dilutes our near-term growth rate and profit percentage margins, but we believe it will lead to a future of steady growth in gross profit dollars and much higher per customer lifetime value. In summary, we are succeeding in this transition. Since at least 2022, in our Annual Investor Days and in other investor forums, we've discussed key components of this transition. First, the large opportunity for categories like packaging, promotional products, apparel, labels, signage, booklets, catalogs, magazines, and books. These can more offset the maturation of categories like business cards and other legacy products. Second, we've spoken about how we have been consistently investing in manufacturing and new product introductions in design enablement, technology, and, importantly, in an improved customer experience, all of that investment designed to capture the opportunity I just described. Third, the value and profit growth of high-value customers across Cimpress has been something we've described, including, for example, speaking about the top several deciles of Vista's customers. That being said, we do recognize that many investors don't fully appreciate either this transition's success to date or its promise for tomorrow, and that we've failed to give specific enough data to model its impact. That's why in this year's letter to investors, we provide quantified examples of the successes we've been delivering in large, new elevated product categories. Yesterday's letter also includes a table of revenue share, revenue growth, and variable gross margins by product category for fiscal 2025, which should help you model our business. The examples of the data in that letter illustrate that Cimpress is successfully building on our long-term foundational capabilities, which have traditionally addressed only a small portion of our total addressable market via our legacy products. Thanks to our continuously expanding product range and our investment in an improved customer experience, we are successfully earning customer trust for a much larger share of their print and promo wallet, and they are becoming much higher lifetime value customers for Cimpress. This expansion of our capabilities in elevated products and, importantly, the associated rise of lifetime value promises to extend Cimpress' multi-decade market disruption. That disruption is transforming a fragmented traditional print and promo landscape, which has tens of thousands of small job shops and small distributors, into a future with a limited number of larger firms, of which Cimpress is the clear market leader who masters mass customization and web-to-print. As we've conveyed many times before, we estimate that our total addressable market in Europe, North America, and Australia exceeds $100 billion per year, and that more than 60% of that market value is still served by those traditional suppliers. Within this context of market opportunity, this year's annual letter discussed the strategic and financial logic, which led us to invest in fiscal '25, and why we plan to invest in fiscal '26 at the levels of capital expenditures and capitalized software that are well above maintenance levels. In brief, we believe that these investments will not only accelerate our momentum in elevated products and in higher lifetime value customers, but we also believe that they will allow us to deliver cost reductions worth about $70 million to $80 million of incremental annualized adjusted EBITDA improvements by the end of fiscal '27, above and beyond what we would otherwise do. On top of our well-established traditional legacy products, we see that Cimpress' successful expansion to elevated products and higher-value customers offers a future of significantly increased cash flow per share, yet our equity valuation does not reflect that perspective. Now we certainly seek to close that value gap over time by delivering revenue and profit growth, by being rigorous in our capital allocation, by clearly communicating to investors tangible examples of progress and return on investment, and providing disclosure that allows you to track and understand this progress. In the meantime, if our shares continue to trade at these levels, we see this as an opportunity to take advantage of the price-to-value gap through share repurchases like we have just done in the past quarter, even as we maintain a strong balance sheet. Now I'll turn things over to Sean to discuss the financial results and the outlook commentary.

Sean Edward Quinn, EVP and Chief Financial Officer

Great. Thanks a lot, Robert. And I just want to, again, thank everyone for joining today. Just to start with a brief overview of our financial results. Our consolidated Q4 revenue grew 4% on a reported basis and 2% on an organic constant currency basis. For the full year, we grew 3% on both a reported and constant currency basis. At Vista, organic constant currency revenue grew 4% for the quarter, fueled by continued strength in promotional products, apparel and gifts, signage, packaging, and labels, all of which grew significantly again in Q4. We go into further detail in Robert's annual letter, but these products are helping to attract and retain higher-value customers and improve per customer profitability, which is a trend that we have seen for several years now, but was definitely notable again in Q4. Organic constant currency revenue growth in European markets remained strong, at 7% for Q4, while year-over-year growth in North America improved sequentially to 3%. As noted in Robert's annual letter, legacy products such as business cards, stationery, and holiday cards are experiencing declining market demand, which shows through in our consolidated results, with business cards declining 6% during Q4. The mix shift from these legacy products to the higher-value elevated products does weigh on our gross margins, but we remain optimistic, as Robert talked about, about our ability to drive profitability growth as these higher growth categories continue to scale. One good example of that is Vista's revenue in the promotional products, apparel, and gifts category for the full fiscal year, which grew 18%, and that's now on a base of revenue over $300 million. Importantly, not only did we grow 18% in that category, but our estimated variable gross profit in that category grew 27%. Turning to profitability, adjusted EBITDA increased by $3.1 million year-over-year, but declined $35.5 million for the full year. In Q4, our profit trend improved compared to earlier in the year despite a tariff impact of about $3 million net of pricing offsets. Most of this impact on tariffs happened during the heightened tariff rates in May and was primarily, as we called out in the earnings document last night, at our National Pen business. As tariff rates then came back down in June, we were able to fully offset the impact through pricing mitigation, coupled with all the things that we were doing from a sourcing perspective. Gross margin was impacted by our ongoing product mix shift. Gross profit dollars grew year-over-year in Q4 despite the 110 basis points of gross margin compression, which includes the $3 million of tariff impact. As we've described in the past, we expected advertising efficiencies in Q4, and that's what happened. Consolidated advertising as a percentage of revenue declined 120 basis points to 11.3%. Importantly, contribution profit grew 5%, and contribution margin improved slightly. Currency fluctuations had a $3.6 million benefit to adjusted EBITDA during the quarter as well, given most notably the strengthening of the euro. And from a full year perspective, I won't recap the full year again, but the year-over-year decline in adjusted EBITDA was primarily driven by the December quarter, with a number of benefits from fiscal '24 that didn't repeat. There were several one-time negative items in FY '25 that combined drove a significant portion of that decline, but the performance in the second half of the year was improved, and we importantly feel confident about continuing that improvement in fiscal '26, as is represented in the outlook that I'll go through momentarily. On the tariff front, we updated our overview of impact in the earnings document. Our exemptions and exclusions remain the same as what we discussed in our Q3 earnings release. The majority of impact continues to be on our promotional products that have a Chinese country of origin. Outside of the period of the heightened tariff rates in May, we were able to offset tariff impacts at Vista and National Pen through pricing actions and also the work that we've done from a sourcing perspective. Generally speaking, there's been a lot of work done there, and our mitigation plans remain on track. Turning to our guidance, we've set our guidance for fiscal '26 at a level that we believe incorporates continued uncertainty from the trade and macroeconomic environment. In fiscal year 2026, specifically, we expect revenue growth of 5% to 6% or 2% to 3% on an organic constant currency revenue basis. We expect net income of at least $72 million and adjusted EBITDA of at least $450 million when taking into account the impact of additional startup costs in our Pixartprinting U.S. facility and other manufacturing projects connected with our higher expected capital expenditures in fiscal '26, which we believe, as Robert outlined earlier, will drive material financial benefit in fiscal 2027. We'll also have about $14 million of annualized savings from cost reduction actions that we implemented in the back half of fiscal '25, which will help to reduce operating expense growth next year. We expect operating cash flow of $310 million and adjusted free cash flow of approximately $140 million. We expect the year-over-year impact of currency on EBITDA to be slightly favorable in fiscal '26, and we expect CapEx to be approximately $100 million and capitalized software to be approximately $70 million, again, well above maintenance levels. We expect cash taxes to increase to $55 million to $60 million as we receive tax refunds in fiscal '25 that won't repeat. We'll also have the impact of profit growth. Lastly, we expect net leverage to decrease slightly by the end of fiscal '26. We remain committed to reaching our leverage target of 2.5 times our trailing 12 months EBITDA as defined by our credit agreement. With that, Meredith, why don't we open it up for questions?

Meredith Burns, Vice President of Investor Relations and Sustainability

Thanks, Sean. As a reminder, you can submit questions during this webcast via the question-and-answers box at the bottom left of the screen. We have received both pre-submitted questions, and we also have a bunch of live questions coming in now, which is great. So we will make sure that we get to as many of your questions as we possibly can. In places where we have some overlapping topics, we may combine some of the questions just to get everybody's thoughts out. So I'm going to start with Sean first, the first question that was pre-submitted last night. So FY '26 guidance implies free cash flow conversion of EBITDA at 31%. Historically, you have talked about a conversion rate of 45% to 50% with some fluctuations from year to year. But FY '26 will be the second year in a row of free cash flow conversion in the low 30% range. Is the 45% to 50% conversion ratio still in effect on a normalized basis? When should free cash flow conversion return to that 45% to 50% level? I understand that CapEx is going to be a bit higher this year, but I would think that whatever weighed on the conversion in FY '25 should start to bounce back and help to offset that.

Sean Edward Quinn, EVP and Chief Financial Officer

Okay. Great question. Thank you. Maybe just to start, I just went through the free cash flow guidance for next year, and free cash flow is expected to be slightly lower in fiscal '26 than it was in fiscal '25 despite the fact that we do have EBITDA growth implied in the guidance. So there are a few factors there. CapEx is expected to be higher, and so if you take this together, that's about $40 million of year-over-year impact on cash flow versus fiscal '25. In terms of the free cash flow conversion, we do have confidence that the 45% conversion rate is a more normalized level. In our annual letter that we published last night, but also as Robert remarked earlier, we talked about a few of the factors that we think will drive increased free cash flow, including higher EBITDA through the COGS and operating efficiencies that we can deliver through that CapEx as we exit FY '27. We don't expect that the level of CapEx that I just outlined in the outlook will be sustained on an ongoing basis. So there's slightly elevated maintenance CapEx, both in FY '25, but also in FY '26 as part of those numbers. Working capital is also an important factor. That's going to fluctuate from year to year. I think the last two years are good examples of that. In fiscal '24, working capital was a very significant inflow. In fiscal '25, it was a small outflow. On a normalized basis, we expect that to be an inflow and contribute to free cash flow conversion as well. So in summary, yes, we believe that the 45% to 50% conversion rate in a normalized environment is achievable for the reasons just outlined. That won't be the case in fiscal '26. But as we realize the financial benefits of that higher CapEx coming in FY '27 and reach more normalized levels of CapEx, we would expect that to track back to that range.

Meredith Burns, Vice President of Investor Relations and Sustainability

Thanks, Sean. Your audio was breaking up just right at the end of the answer to that question, but we understood what you were saying. All right. I'm going to move on to a question for Robert next. We appreciated the detail on Page 20 of the investor letter around product categories. What is the go-forward revenue growth expectation in percentage terms generally, or high-level for the legacy products and elevated products? Are there any changes in expected variable gross margin as these categories grow or decline as compared to what was provided for FY '25? We obviously recognize it's hard to give specifics, but even high-level guidance by category would be greatly appreciated, if possible.

Robert S. Keane, Founder, Chairman and Chief Executive Officer

Well, thanks for the question. As you know, it is hard to give specifics, and we aren't going to provide product-specific growth or decay rate projections or variable gross margin targets. But I will try to frame this for you in a way that I think should be helpful. The products that we called out in that table as having declined in fiscal '25 will continue to decline in those categories. For business cards, that rate of decline is similar to FY '25, and for holiday cards and mugs and home decor, there might be slight improvements since there were some specific drivers in those categories in fiscal '25. Business cards represent the largest impact at 13% of our revenue last year. Most of that is in the Vista Business, and we're only one month into the year. So far, we are on track to plan. Let me just step back a little bit regarding that business card shift. We see the market being soft overall. If you go to our site and look at our communications, we've increased our focus on these other products, taking a significant amount of shelf space away from business cards, which were the primary focus of what you would see on the Vistaprint site previously. In terms of the growing categories, we are expecting additional growth in coming years. The fastest-growing products, such as Vistaprint promotional products and apparel, should shine through on our consolidated results. The variable gross margins should improve as we've shown historical improvements. We specifically gave the example of one of our high-volume product categories, business cards, where variable gross margins grew from about 55% at the time of our IPO in 2005 to about 74% today. While we don't promise 20 points of gross margin out of every product category, we do see meaningful improvement across many products over time. In summary, we believe there's an opportunity to improve like-for-like variable gross margin percentages on our elevated products.

Meredith Burns, Vice President of Investor Relations and Sustainability

Excellent. Thank you, Robert. I'm going to stick with you for this next question, because it's actually a really nice follow-on. Is the 2% to 3% FX adjusted growth rate expected for FY '26 the new steady-state growth rate? Or do you aspire to get back to at least the mid-single-digit percentage growth or higher over time? And if so, how do you get there?

Robert S. Keane, Founder, Chairman and Chief Executive Officer

It's definitely the latter. We aspire to get back to at least mid-single-digit percentages over time. We do think we can grow faster, as doing so really depends on successfully executing our plans regarding the growth in elevated products and high-value customers, while overcoming some headwinds in our legacy products and channels. If you make your own assumptions over the next few years using the fiscal '25 table we published in my letter last night, and if you base your scenarios on the strong growth in elevated products we've highlighted, you can see why we should be able to move back to mid-single-digit growth rates. That's not guidance, but it does provide a useful framework for thinking about top line growth. As mentioned, you can and should layer in assumptions regarding gross margin percentage changes and the impact on advertising costs and contributions.

Meredith Burns, Vice President of Investor Relations and Sustainability

Great. Thank you, Robert. We did receive a couple of questions from folks regarding a recent Schedule 13D filing by one of our shareholders. While we appreciate that this is a topic of interest, we're not going to comment on investor filings since Cimpress is not the one that filed that document. So I will move on to another question. This one is going to be for Sean. Sean, has your maintenance CapEx, including capitalized software expense, increased meaningfully as a result of your recent investments? As I read it, your estimate of organic growth investments indicates that it has, as I am looking at the trend in total CapEx and capitalized software versus the trend in the difference between estimated impact of growth investments on EBITDA and free cash flow.

Sean Edward Quinn, EVP and Chief Financial Officer

Yes, you're right to call this out. Our maintenance CapEx did increase this fiscal year and will be more elevated in fiscal '26 as part of the guidance we provided as well. That's not due to our recent investments. It's more related to two specific factors, primarily on the CapEx side rather than capitalized software. For capitalized software, there are always waves we go through regarding maintenance capital. For example, if we happen to be in a year where we're replacing several offset presses that have a long life, it could explain a larger outlay in one year versus another. FY '25 was a larger year of maintenance CapEx, and when we do that, we are replacing existing equipment. This year of maintenance CapEx happens to be above what we have seen in fiscal years '21 through '24. On the capitalized software side, our financial metrics have improved as we brought down the percentage of our mass customization platform spend considered to be growth investment. We've seen more of our capitalized software expenditure growing, but the growth investment for that area has stayed flat. Therefore, the maintenance portion has also grown, but we are operating at the higher end of that range. While there are benefits in terms of increased efficiency and throughput from these higher CapEx levels, the increase is primarily for replacement and not new growth.

Meredith Burns, Vice President of Investor Relations and Sustainability

Thanks, Sean. I'm going to stick with you for the next question as well. So the outlook notes that net leverage will decrease slightly over the course of FY '26. Should we take this to mean that the company will be repurchasing more shares during FY '26? If my math is correct, absent share repurchases or other uses of cash, net leverage would decline to about 2.7 times trailing 12-month EBITDA by the end of FY '26.

Sean Edward Quinn, EVP and Chief Financial Officer

Yes. That math is directionally correct. There are nuances regarding how exactly EBITDA is calculated based on our credit agreement, but that math gets you close. Generally speaking, we aren't forecasting a certain amount of share repurchases for a year because those are price dependent. However, we noted in Robert's letter last night that we would expect to repurchase shares if the price remains at the attractive levels we've seen recently. The expectation that net leverage will decrease slightly by the end of fiscal '26 allows room for share repurchases and/or small tuck-in M&A. Our approach in setting that outlook intentionally allows for this space. As we discussed in the last quarter, we expect our recent investments and those made in fiscal '26, particularly the increased capital expenditures, to have a more meaningful positive impact on profitability in fiscal '27, which can positively impact net leverage at that time. Just to reiterate, we remain committed to the 2.5 times net leverage target as defined by our credit agreement.

Meredith Burns, Vice President of Investor Relations and Sustainability

Thanks, Sean. Okay, we had a series of live questions come in around the topic of tariffs. So we'll try to take these as they come here. So the first one is, what is the risk that the informational product exemption ends?

Sean Edward Quinn, EVP and Chief Financial Officer

Yes, I can take that one. There is some risk there. A little background: the informational materials exclusion that exists under IEEPA is a matter of statute, not something that has recently been initiated. It so far accompanies the authorities granted under IEEPA by which tariffs have been imposed. Therefore, there is always a risk that statutes could change, but we don't have a view on the likelihood of that risk. We talked about this last quarter, and we have benefits from various exemptions and exclusions, not just the informational materials exclusion. Other exemptions like the de minimis exemption exist, although that will eventually be phased out regarding China. We also have a significant coverage percentage under USMCA, which covers the vast majority of our imports from Canada and Mexico. Ultimately, we feel comfortable with our response and work to mitigate risk and feel we incorporated the uncertainty connected to tariffs in our outlook to the best of our ability.

Meredith Burns, Vice President of Investor Relations and Sustainability

Thanks, Sean. So another tariff question. Do you think that there was a pull forward in demand during Q4 due to tariffs?

Sean Edward Quinn, EVP and Chief Financial Officer

We really have not seen any indication of that. The average order sizes across our businesses in the regions impacted are not significant enough for people to think ahead and pull demand forward. We did not see signs of a demand pull forward.

Meredith Burns, Vice President of Investor Relations and Sustainability

Great. And then what about the magnitude of the price increases taken during the quarter? Which segment did you take the most price? What was the volume growth in the quarter?

Sean Edward Quinn, EVP and Chief Financial Officer

Generally speaking, there were no notable large price increases, just a normal mix of adjustments as we continually test across our businesses. Price wasn't a significant driver, except concerning tariffs. Most of the tariff impact was in our National Pen business and in the promotional products category for Vista. We did seek to offset cost impacts, but I won't provide specific percentage increases. Our focus was primarily on offsetting those costs, and we felt we managed that well without major impacts on demand.

Meredith Burns, Vice President of Investor Relations and Sustainability

Super helpful. Thanks, Sean. Okay. I've got a fun accounting question for you now. Can you please explain the other income net line item? What derivative contracts led to such a drag on earnings this quarter?

Sean Edward Quinn, EVP and Chief Financial Officer

Sure. Yes, we have an active currency hedging program, which reduces volatility in our contracts. Our largest currency exposure in terms of adjusted EBITDA is the euro, and unsurprisingly, that's where we have the highest notional value of contracts. To achieve hedge accounting, we would have to accept suboptimal economic conditions, so we don't use hedge accounting in the same way some companies do for that program. What happens is the derivative contracts get marked to market every month and float up and down, and when they roll off, they match against the underlying operating activities they were hedging. Therefore, it may look like we're experiencing unrealized gains or losses, largely caused by fluctuations due to the euro, but they may be offset by favorable activity that comes through our P&L. This isn't something that we consider alarming; it's part of our proactive risk management.

Meredith Burns, Vice President of Investor Relations and Sustainability

Thanks, Sean. So next question, a quick one. How much of this FY '26 EBITDA guide is benefiting from currency?

Sean Edward Quinn, EVP and Chief Financial Officer

Yes, as we indicated, there’s a favorable impact on EBITDA amounting to a few million dollars.

Meredith Burns, Vice President of Investor Relations and Sustainability

Thanks, Sean. Another quick one. How has July trended so far?

Sean Edward Quinn, EVP and Chief Financial Officer

We typically don't comment on interim months. As of the time we provided the guidance heading into Q4, we didn't have specific guidance. Overall, we're tracking with our plans, and that's important for gross margin evolution.

Meredith Burns, Vice President of Investor Relations and Sustainability

Thanks, Sean. All right. We're going to turn this next question over to Robert. So great to see the rapid growth in promo products, and thank you for quantifying this to $300 million. In this market, U.K. listed 4imprint reports $1.3 billion of revenues, and they have grown nicely for a long time. Is it correct that you are well behind 4imprint in this market? And how direct and tough is this competitor?

Robert S. Keane, Founder, Chairman and Chief Executive Officer

Okay. Thanks for the question. First of all, just to clarify, the $300 million comes only from Vistaprint. National Pen and Upload and Print bring our total to over $700 million, which is above 20% of our revenue. 4imprint is a great company that exemplifies the shift towards web-to-print and mass customization, but we have different focuses in that we appeal to smaller businesses while moving up to higher-value customers as well. Although 4imprint is the online leader in the U.S. promotional products space, we expect both companies to gain market share. We have been growing faster than the overall market, which has seen a decline, and our focus on small businesses has increased our reach. We've made substantial investments in technology and infrastructure to better serve this growing market.

Meredith Burns, Vice President of Investor Relations and Sustainability

Thanks, Robert. That is the last live question that we had on the call. So I'm going to turn it back over to you to wrap this up.

Robert S. Keane, Founder, Chairman and Chief Executive Officer

Well, thank you, everyone. I really hope you found today's conversation informative. I hope you followed the letter last night as well and our release. From a shareholder perspective, our equity value is below what we believe to be its intrinsic value. To change that, we continue to focus on the execution of the plans that we've described for the past several years. The examples in our letter illustrate that these initiatives are building tailwinds that should soon overcome the headwinds we've seen from our legacy products. We are excited about the progress we're making across Cimpress. We are building best-in-class capabilities and competitive advantages to serve our customers better and continue our multi-decade disruption of the massive $100 billion-plus fragmented market for print and print-related products. We are focused on helping our customers look professional, which reflects the core value we've maintained for 30 years. Financially speaking, we believe this will translate into a continuation of our history of growing cash flow over the long term, especially on a per share basis. So I'll finish up by saying thank you again to all of you who've joined the call, and thank you to our investors who continue to entrust us with your capital. Have a great day.

Operator, Operator

Thank you for your participation in today's call. This does conclude the program. You may now disconnect.