Earnings Call Transcript - CMPR Q1 2024

Operator, Moderator

Welcome to the Cimpress Q1 Fiscal Year 2024 Earnings Call. I will introduce Meredith Burns, Vice President of Investor Relations and Sustainability.

Meredith Burns, Vice President of Investor Relations and Sustainability

Thank you, Tanya, and thank you, everyone, for joining us. 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 published yesterday. We appreciate the time you have dedicated to understand our results, commentary, and outlook. This live Q&A session will last 45 minutes to an hour, and we'll answer both pre-submitted and live questions. You can submit questions live via the questions and answers box at the bottom left of your 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 in the documents we published yesterday on our website. We also have published non-GAAP reconciliations for our financial results and outlook on our IR website. We invite you to read them. And now I will turn things over to Sean for some brief remarks before we take questions. Sean?

Sean Quinn, EVP and Chief Financial Officer

Thanks a lot, Meredith, and thanks to everyone who has joined us today. Before we take questions, I'll just highlight a few key points from the financial results and also the updated outlook that we published yesterday. First of all, we delivered solid results in the first quarter. Consolidated revenue grew 8% on a reported basis and 4% on an organic constant currency basis. Growth did vary by segment and it was also reduced by approximately 200 basis points from year-over-year revenue timing changes. Consolidated profits were very strong. Adjusted EBITDA grew $43 million year-over-year in Q1 to $89 million. Adjusted EBITDA margin was up from 6.5% last year to 11.7% this year. This benefited from gross margin expansion from leverage in advertising spend and reduced operating expenses. Adjusted EBITDA expansion over the last three quarters has been very significant. Our trailing 12-month adjusted EBITDA at the end of September was $383 million, and that compares to $228 million at the end of December, a 68% increase in just nine months and still with a significant benefit from our prior cost reductions yet to impact those reported results. Adjusted free cash flow for the quarter increased significantly year-over-year by just over $63 million with a higher adjusted EBITDA and also a significantly more favorable net working capital compared to the year-ago period, which was helped by returns to more normalized inventory patterns. I won't go through all of the segments here today, but given the significance of the profitability expansion in Vista, let me just share some highlights there. Revenue grew 6% on an organic constant currency basis. Overall, revenue growth was driven by approximately even contribution from growth in orders and then higher average order values. The higher average order value is driven by both product mix and pricing. Revenue grew across geographic markets and across product lines with the fastest growth continuing to come from our promotional products, apparel and gifts category, signage, packaging, and labels. There's a lot of investor focus on Europe these days, and I'll note that for Vista, growth in Europe was quite strong in Q1. Vista segment EBITDA grew $44 million versus last year, which, similar to last quarter, was driven by a balanced mix of revenue growth, gross margin expansion, lower advertising spend as a percentage of revenue, which decreased, and materially lower operating costs as a result of the cost reductions that we announced back in March. Importantly, in Vista, we're also seeing continued improvements in per-customer value, which is a trend that's been in place for the past several years. But we're now also doing that while growing the customer base year-over-year, which grew by more than 100,000 customers in the first quarter. That was primarily driven by new customer growth, and those new customers generated record levels of in-quarter variable gross profit per customer when compared to past Q1 new customer cohorts. There are many small improvements that contribute to this, and there remains a lot of opportunity for more of these improvements, which can have a meaningful impact on our overall customer experience, conversion rate, and financial results, and that's where our focus is. From a balance sheet perspective, we ended the quarter with cash and marketable securities of $148 million, even after we purchased $21 million notional value of our 7% senior notes for just under $20 million. Net leverage decreased sequentially to just over 3.5 times trailing 12-month EBITDA as defined by our credit agreement. As we talked about on recent calls, from a balance sheet perspective, we've been prioritizing reduction in net leverage, and that's happening at a good pace. Moving to our outlook. Given our strong Q1 profitability and cash flow performance, we're raising our FY 2024 adjusted EBITDA guidance to at least $425 million, and we continue to expect that to convert to free cash flow at approximately 40%. Our organic constant currency revenue guidance of at least 6% remains unchanged. We recognize there's some macroeconomic uncertainty in most parts of the world, and we'll of course be monitoring that as it relates to future revenue commentary. Our expectation is still to end the year with net leverage that is below 3.25 times. So that also remains unchanged. And with that, Meredith, why don't we open it up for questions?

Meredith Burns, Vice President of Investor Relations and Sustainability

You bet. Thanks, Sean. So we'll get to as many questions as we can and ensure we cover a variety of topics. The first question is for Sean. On a reported basis, Vista Europe grew by 17% year-over-year, which we believe translates to 8% to 9% after accounting for foreign exchange effects. Are we considering this correctly? If so, what is fueling the quicker organic constant currency growth in Europe compared to North America?

Sean Quinn, EVP and Chief Financial Officer

Yes. Thanks. Just so everyone knows on the call, we publish financial and operating metrics each quarter, which we post on our Investor Relations site, and that's where the data is that would have prompted this question. The constant currency revenue growth in Vista Europe was actually just above 10%. So it was a little higher than the math that whomever asked the question was doing. And that was indeed higher than North America, but both regions performed well. I would say that even beyond just the revenue growth in Europe being just above 10%, gross profit grew at a higher rate there, and contribution profit grew at an even higher rate. And so, again, overall, a very strong quarter for Vista, but also in particular in Europe. At a category level, there are two areas to call out in terms of where the performance was or growth was higher in Europe, and that would be in packaging and labels and also in marketing materials. Those two categories happen to be the ones that benefit the most from leveraging new product introduction from fulfillment from other Cimpress businesses in Europe, which there's not that same opportunity in North America. The combination of the technology migration that we did last year, which just to keep in mind, the latest markets to be migrated were a few of our large European markets. So, kind of the benefit of that is a little bit delayed. And there's also organizational changes that we put in place back in March. I think the combination of technology migration and those organizational changes has allowed the team to have more focus in Europe and also to move more quickly to have customer impact in those markets versus a year ago. There were pretty meaningful improvements in customer credit rates that was notable in Europe due to a lot of the work of our customer care teams that's beneficial to revenue. That was also a good trend in North America, just a little bit better in Europe. And then I would say we've also been able to take the learnings from other markets, both from an advertising spend perspective, but also in areas like pricing, or how we're thinking about promotionality, and bring those to some of our European markets in ways that we haven't before, and that is definitely having an impact. So, in general, I would say it's primarily micro factors rather than macro factors that delivered the differential performance.

Meredith Burns, Vice President of Investor Relations and Sustainability

Great. Thank you, Sean. All right. So, we're going to stick with revenue here and we've had several questions trying to really sort of pick apart the differential growth rates by segments, and some of the timing impacts there. So, I'll ask one question and touch on the other questions that came in on this and you can cover all of them at once in detail. So, in a lot of ways, it was a strong quarter, but revenue growth rates declined sequentially in all segments and are lower than your annual growth expectation. What were the key contributing factors to that? And given your continued confidence in the annual growth rate, was the decline this quarter expected? And then the other questions around this are really getting at, the growth rates in our Upload and Print businesses, and why there was a difference between those two groups?

Sean Quinn, EVP and Chief Financial Officer

Yes. Okay. I'll do my best here. Yes, first of all, agree with the overall sentiment we believe that it was a strong quarter. Profitability and cash flow were quite strong. But there was some variability in the revenue growth. So, I'll dive into that. There's, as I mentioned in the opening remarks, about 200 basis points of timing impacts that are a drag on consolidated growth rate. Over half of that will benefit revenue in the remainder of the year. As backlog normalizes, there's really nothing to that other than timing. So, just know that that had some impact. And then I would also just keep in mind that the expectations that we set coming into the year was that we were going to have lower growth, and particularly in our Upload and Print businesses as we lap pricing changes from last year and so on. In terms of how we performed versus our expectations, generally speaking, let's say Vista was right on plan, other than the timing impact that I outlined, we feel good about the quarter there. The fact that per-customer value continues to improve while customer counts also grew, as I noted, I think is a good signal as well. So, System was right on track and solid quarter. And Upload and Print, those, both of those segments within Upload and Print, each grew over 20% in Q1 last year in constant currency. So, we're lapping that, we're lapping pricing increases. So, it's still a tough comp. But relative to expectations, there, I'd say it's a little bit more of a nuanced story, and you kind of have to get down to the country category channel level to better understand that. There are, in certain markets, we're seeing either stable or increasing orders, but some indication of customers purchasing lower quantities per order in some categories. So, a little bit of a trade-down there in some categories. We also saw softer revenue trends in our reseller channels, which just from an overall Cimpress perspective, is relatively small. It's roughly mid-single-digits percentage of revenue overall for Cimpress, but it does impact the growth for some of these businesses in the Upload and Print group. And that's one reason that growth was lower for the print group. Within Upload and Print just because there's more concentration on a relative basis in the reseller channel, especially in France. That is a trend that's been present for some time. It's a trend that has benefited Cimpress overall in the long-term. A bucking way on growth in the near term for some individual businesses to have more concentration there. So, we do expect that will continue to be somewhat of a headwind to near-term growth for those businesses that have more concentration and resellers. I think it's important to note that, in Upload and Print, despite lower overall growth segment EBITDA still grew year-over-year, and that was helped by lower input costs that we've experienced so far this quarter. And we expect that to be a feature for the remainder of the year as well. I'm not going to get through all the other segments. I think those are the most notable takeaways. As we've mentioned in the question, we held our revenue guidance for the year. There will be variability as we go throughout the year in terms of growth rates by quarter as we lap pricing and also as we previously said, we expect the growth rate in the December quarter in Vista to be weighed down somewhat by consumer concentration during the holiday peak. But based on what we've seen, we still felt confident leaving the revenue guidance untouched.

Meredith Burns, Vice President of Investor Relations and Sustainability

Thanks, Sean. I have one more quick question regarding revenue. Can you explain the backlog that resulted in a $4.3 million decline in revenues for the quarter? Was this issue specific to one product category or was it more widespread outside of Vista?

Sean Quinn, EVP and Chief Financial Officer

Yes. We always have fluctuations in the backlog, which is the orders that we've received, but we haven't yet shipped. There's really nothing to read into on that one and not specific to a category. Those fluctuations have to do with things like, what's the last calendar day of the quarter end, but also things like timing of promotions as we cross the quarter end or seasonality, and we don't try and manage that in any natural ways as we as we end the quarter. From an economic standpoint, all that really doesn't matter. In Vista, we receive the cash upfront from customers. And it's just that there was a higher level of orders not yet shipped in the last day of the quarter. So, that'll come into revenue when they do ship, and that's really it. But it does impact growth rate year-over-year.

Meredith Burns, Vice President of Investor Relations and Sustainability

Thanks, Sean. Okay. Let's get Robert involved here. And we've got some questions on the Vista customer additions. So, the 100,000 customer additions referenced in the earnings document, could you add some additional context such as what the percentage increase was, what the percentage of the total? And then, very similar question you specifically noted that Vista grew its customer base year-over-year by more than 100,000 customers. Does this represent a recent quarterly high for new Vista customer additions? What is the size of the total Vista customer base currently?

Robert Keane, Founder, Chairman, and Chief Executive Officer

Okay. Well, thanks for the question. First of all, two words were used there. One is customer base and customer additions. So, it really is customer base that we referred to, repeat customers plus new customers or, in other words, plus customer additions. So, it was good growth. New customers drove that growth. The number of new customers grew 13% versus the same quarter of the prior year. Repeat customers were still down slightly year-over-year, but that is a trailing metric after the new customer acquisitions. And the trend in repeat customer count also improved sequentially. So, we have overall growth in the customer base. We don't go into a lot of the details that you asked about specifically, but let me give some additional context. First of all, it's very important to keep in mind the customer count on its own is not the metric we seek to grow. We certainly want to grow, but it's not the only metric. It's important to know that we care most of all about the profitability per cohort and to get to that you need to also look at how much gross profit per customer we are generating, what's that worth over the life of a customer expressed in NPV terms, and what's the cost of customer acquisition relative to that lifetime value. So, it's a factor in the equation, but it's not the top number we're looking at. And that focus on economic value holistically, is why compared to going back five years or so in our history, for the last multiple years, we have seen a reduction in customer count as we've moved away from the prior value proposition, which was based on very deep discounts towards higher value customers. In some of our multiple investor days over the last couple of years, we've shown charts and data showing how we've greatly reduced economically negative results in our lowest decile or deciles, and we've strongly grown gross profit customer overall and in our top deciles, and very much driven by our top deciles. We also over that multi-year period have really reduced value destructive advertising. We've greatly reduced discounting, and we have focused on higher value products, not just price increases, but even more so, we've moved to higher value products before price increases. Q1 was a continuation of all those trends. Gross profit per customer in this most recent quarter's acquisition cohort was higher than it ever has been in the first quarter of any year. The improvement in repeat customers, of course, helps, and we're happy about that. We are also focusing on driving repeat business by giving better value to these customers. Finally, in terms of increasing the number of customers going forward, we're optimistic about this. There's a lot that's gone into this. It's not just what we've done in the past one or two quarters. It goes back to the multi-year repositioning of the brand, the increasing awareness of our product breadth, accelerating into growth areas of higher value products like promotional products, and improving the customer experience. They've had an earlier impact on value per customer, but they clearly now are improving our ability to acquire more customers. And so we're looking forward to seeing that continue.

Meredith Burns, Vice President of Investor Relations and Sustainability

Thanks, Robert. Really exciting development in Vista. All right, Sean, next question for you. We thought our Upload and Print businesses were nearing the end of an investment cycle, but we were surprised to see the uptick in capital expenditures this past quarter. What investments are we making here? And do we expect these to moderate?

Sean Quinn, EVP and Chief Financial Officer

Yes. Yes, this is a good question. The growth investment in our Upload and Print businesses in recent years has been relatively low, but you're right to note that this past quarter from a CapEx perspective, it was definitely a high CapEx quarter for these businesses. And that's not a new run rate. The equipment purchases that we make in those businesses. In particular, in the Print group, which is more vertically integrated than the Print segment, can be a little bit lumpy over time. And there happened to be some large pieces of equipment that were purchased this quarter. There was also within that about $2 million of facilities related CapEx, which that doesn't occur often, and so that's sort of a one-off. But the rest of it is Print Production Equipment. Those are investments that have clear payback and return thresholds that have to be met. Some of that's maintenance CapEx as well. So, it wouldn't necessarily be captured in the growth investments that we outlined each year. So, yes, higher intensity CapEx quarter for these businesses. That's not a new run rate, and there is some lumpiness there. There's no change to our CapEx guidance for the year. And so that might be helpful in terms of when you look at the CapEx guidance that we provided for the full year and back off Q1, it would imply that the rest of the year does not have that level of intensity. And so the quarterly run rate for the next three quarters will be lower.

Meredith Burns, Vice President of Investor Relations and Sustainability

Thanks Sean. And also thanks to the person who asked that question, who is clearly looking at the detail in our financial and operating metrics that we posted on our website. All right. Next question, Sean, input costs are trending better than expected. Any additional color to share, where are you seeing the biggest benefits?

Sean Quinn, EVP and Chief Financial Officer

Yes. In general, the input cost environment definitely continues to improve. We talked about this back at Investor Day a bit. I would say even since then, it's improved some. Paper costs have been coming down after what was very sharp increases that we experienced over the last two years. That's happening more quickly in Europe. The pace of the decrease is happening more quickly in Europe than in North America, and that's definitely benefited gross margins. In markets where energy costs have really spiked last year, those costs are down meaningfully. As a point of reference, in Italy, which was one of the countries where there was the most intense increase, the cost per kilowatt hour is less than half of what it was in Q1 last year. So, down quite a bit. Inbound freight costs are down meaningfully as well. So, those are probably the three that I would highlight. But, as we noted in the release, the changes have been slightly more favorable than what we had planned for at the beginning of the year, and that's also now incorporated into our guidance.

Meredith Burns, Vice President of Investor Relations and Sustainability

Great, thank you. All right. One quick one here, and then we'll move into some outlook questions. So, can you provide an update on the cost reduction initiatives, Sean?

Sean Quinn, EVP and Chief Financial Officer

Yes, we gave quite a bit of detail back in March in our call back then and when we had made those changes. Just for recall, the total benefit that we had expected from the cost reductions was about $100 million. Some of that we got in FY 2023. There's another $75 million of that $100 million, which was a year-over-year benefit that we expected to get this fiscal year, which is roughly evenly split between the first three quarters. We're on track with what we previously outlined. As we entered the year, the changes as related to any headcount impact, those changes had already been made prior to the beginning of the year. Any decisions on things that were non-compensation reductions, those decisions were also made. So, it's really just a matter of the passage of time for us to see the remaining benefit over the next two quarters. So, maybe just to put it plainly, we're on track.

Meredith Burns, Vice President of Investor Relations and Sustainability

Great. Thank you. All right. Sean, a few quarters ago, we talked about how the consumer category remained important for Vista so much so that a dedicated team has been formed to focus on the category. With the all-important holiday season around the corner, can you please give us an update on the outlook for consumer? We actually did have multiple questions on holiday outlook and that one is representative.

Sean Quinn, EVP and Chief Financial Officer

Yes, sure. So I'll give some overall comments here. We're not going to give a specific holiday outlook, but it's an important part of the year. From a consumer perspective, it has come down overall in the mix, Cimpress overall to less than 10% of our overall revenue. But the December quarter is an important one from a consumer perspective, particularly in Vista, but then also in BuildASign as well. In Vista consumer revenue has declined in the last few years, and some of that is just from behavior change that happened through the pandemic, especially in invitations and announcements; that's probably the most pronounced. What we've said recently is that the profit pool for consumer in Vista is a very important one, and it's one that we definitely want to protect. While there's opportunity for growth there, first and foremost, we want to protect that profit pool. I think the question referenced a dedicated team. We've always had a team focused on that category. But over the last year, we've also added some specific product teams there so that they can continue to make focused improvements in the experience and also drive new product introduction that's targeted at that customer segment. We've talked at our Investor Day about just the pace of new product introduction overall starting to increase. Many of those products are relevant for consumer use cases as well; they just need different content or different merchandising like in drinkware or apparel. The category will benefit from overall new product introduction and improved experience on the site. As noted in our prior remarks, we're seeing that happen, and that will benefit consumers as well. Many of the new products that we've launched, especially in photo products, home decor, some of our apparel gifts are showing nice growth. Although in Q1, our consumer overall was basically flat year-over-year. We do expect that from an overall perspective in the December quarter, consumer will still put some pressure on the Vista growth rate, as we mentioned back in Investor Day. But there's a lot of improvements that we've been able to make over the last year. The team has done a really nice job there in the planning; I just had a review the other day on all that work and the client for the peak season basically starts now. While consumer is not our primary focus from a brand perspective, it is still really important. We're also uniquely equipped to serve customers across both small business categories and consumer categories. When we look at our customer value metrics, those hybrid customers, small business and consumer, are very valuable for us. There's a lot of creative that we've used in our mid and upper funnel channels that we're repositioning this time of year to be relevant for consumer again. Just like we were doing for all of our brand advertising, we're really trying to demonstrate the breadth of the product offering. You should see that over the next few weeks and months here through the holiday season. We feel good about our plans. We've made a lot of improvements, and we're excited about the weeks ahead.

Meredith Burns, Vice President of Investor Relations and Sustainability

Thanks, Sean. All right. Robert, a question for you. Have you seen any signs of prices softening in any of your end markets?

Robert Keane, Founder, Chairman, and Chief Executive Officer

No, nothing broad-based. All of our businesses are constantly testing pricing. So, there are some places where prices decreased; there are also areas where they went up. So, I'd say no, this is normal in the course of testing and optimizing at this point.

Meredith Burns, Vice President of Investor Relations and Sustainability

Thank you. All right, Sean, to give the market increased confidence in achieving a 2024 EBITDA guidance, are there any KPIs that you'd be willing to share?

Sean Quinn, EVP and Chief Financial Officer

Yes, sure. Well, I'm not sure what KPIs would be helpful in that regard. Hopefully, even throughout the call so far, there's been more granularity provided that is helpful and provides confidence. We don't normally give such specific guidance like we have in the last quarters. But back in the March quarter, we provided guidance, which we beat. Then we raised the expectation for the June quarter, we exceeded that, and we increased our guidance for FY 2024. We just delivered strong Q1 EBITDA results, also cash flow results and increased our guidance for the full year. Hopefully, you should get confidence from that as well. But I think it's not KPIs, but here's the math that I would focus on in terms of confidence in the full year guidance. As I said in my opening remarks, as of September, we have $383 million of FY 2024 adjusted EBITDA. I said in a response to an earlier question that we're on track with the cost reductions that we previously outlined. So if you do the math on that, those cost reductions, we said $75 million of benefit in FY 2024, roughly ratably over the first three quarters. There's still $50 million to come a benefit that will come into the run rate over the next two quarters. We said that we have currency headwinds this year of about $20 million for the year. $3.5 million of that was in Q1, so there's $16.5 million left to go there. If you just add all that up, we need to deliver just under $10 million of the EBITDA expansion over the remaining three quarters of the year from the flow-through of growth to get to at least $425 million. That's not KPIs. But basically, in order to be confident in our guidance, you need to believe that we can deliver just under $10 million of improvement outside of cost reductions that we announced in March and outside of currency impact, whether that be from growth or efficiency, and so on. We remain confident. Obviously, that should hopefully be understood from the fact that we increased our guidance. But that’s the math that I would do to get comfortable.

Meredith Burns, Vice President of Investor Relations and Sustainability

Thank you. I have a couple of questions, one pre-submitted and one live. Sean, could you explain the factors influencing the FY 2024 guidance, which includes at least 8% year-over-year reported growth and 6% year-over-year FX-neutral growth, and what macroeconomic factors are factored into this guidance? Additionally, I'm trying to understand how the constant currency revenue growth for the full year reaches 6% when 1Q was 4%, and Q2 is presenting a tough comparison. For the second half of the year, the calculations suggest a need for a 16% constant currency comparison in Q3 and 9% in Q4. Could you clarify what I might be missing? It's positive to see the EBITDA guidance raised by $5 million, but did 1Q exceed expectations by more than that amount? Were there any expenses from 1Q pushed to the later part of the year?

Sean Quinn, EVP and Chief Financial Officer

Okay, there's a lot to cover. Let's address everything. Regarding the factors influencing our financials, I just detailed how we reached our EBITDA guidance, and our cash flow guidance is directly linked to that as it represents cash flow conversion from EBITDA. From a macro standpoint, we don’t provide specific forecasts and honestly, our ability to predict macro trends is on par with everyone else on this call. I suggest starting from the bottom of the Profit and Loss statement and working upwards to understand the FY 2024 guidance and macro influences. Beginning with operating expenses, after last year's cost reductions and investment focus, we are satisfied with our current OpEx levels, which are well managed. With respect to advertising spending, we made strategic choices last year and continue to explore new approaches, all of which we can control. Regarding the cost of goods sold, the situation with input costs is getting better, and we expect that improvement to continue throughout the year. The primary concern is revenue, and we intend to be realistic about the challenges we face. There are always some macro risks involved. Concerning the calculations needed to achieve 6% constant currency growth, the question pertains to our comparisons for the rest of the year. We anticipate some pressure on Vista growth from consumers, which we’ve mentioned, but there is nothing new expected in the December quarter. I won’t go through specific revenue guidance or segment details for each quarter, but we are confident in reaching that target. Remember that there are timing impacts in the first quarter, with more than half of that expected to convert into revenue later in the year, which is beneficial. As we progress towards the end of the year, we will face easier comparisons in certain parts of our business, affecting growth rates positively. Is there a risk? Yes, there always is due to macro uncertainties. We strive to have realistic expectations and believe our recent performance reflects this awareness. While circumstances can change, we will keep everyone informed on our progress relative to these expectations.

Meredith Burns, Vice President of Investor Relations and Sustainability

Thanks, Sean. All right. A question on Vista profitability. With Vista, adjusted EBITDA margins coming in at 19% for the quarter, how should we think about the potential upside to your previously provided color at Investor Day, which calls for 16% to 18% margins in FY 2024?

Sean Quinn, EVP and Chief Financial Officer

Yes. The Q1 results position us well within the context of that range that we talked about. I think the one variable, just to keep in mind there is advertising spend as a percentage of revenue was at the low end of the range that we had provided in terms of annual spend. I think it was a little bit under 15%, 14.5% or so. And so that's one variable just to take into account from a margin perspective. We do expect that will fluctuate quarter-to-quarter. Yes, I think the Q1 results position us well within the context of that range.

Meredith Burns, Vice President of Investor Relations and Sustainability

Thank you. All right. Question for you, Robert. What percentage of annual revenue or EBITDA is from business cards only, excluding stationery and everything else, just business cards? Not much of the market still thinks of Cimpress as the business card company. I know it's been decreasing, and I hope that the asker knows that's as a percentage of revenue. So, I believe it's helpful to disclose that. It's literally the first question I get when I bring up Cimpress.

Robert Keane, Founder, Chairman, and Chief Executive Officer

Thank you for the question. To clarify, variable gross profit, gross profit, and contribution profit after advertising for business cards have all increased in absolute dollars compared to fiscal year 2018, prior to our transformation of Vista. These metrics reached all-time highs in fiscal year 2023 and were also at historical highs in Q1 of this quarter. Revenue figures show some differences, particularly since we included stationery in our Investor Day discussions. However, focusing solely on business cards, the revenue and gross profit have grown in absolute dollar amounts, consistent from fiscal year 2023 compared to fiscal year 2022, and also this past quarter compared to the first quarter of fiscal year 2023. The growth rate has been in the low single digits annually, and we expect that to persist. While we're aware that the overall market is declining, we are capturing market share. In previous years, we invested in advertising to reinforce the Vistaprint brand rather than Cimpress, which created a perception that we were a discount printing business. We've shifted away from that perception over recent years, though some investors still hold onto it. While we don't provide EBITDA by product, we do keep track of the gross profit and contribution profit figures I mentioned earlier. It's important to note that within Cimpress, Vista generates the largest revenue and gross profit from business cards, accounting for around 25% of our revenue, aside from a decline during the pandemic. This segment has shown consistent growth. The reasons for this growth include customers utilizing business cards in new ways, such as with the growing popularity of QR codes that easily direct people to websites or digital platforms. We have also significantly enhanced the quality, variety, and overall offering of our business cards. Although customers are purchasing smaller quantities, they tend to choose higher-end products, which has resulted in increased order values and profits. Our pricing is now positioned at higher levels compared to traditional offerings from 5 or 10 years ago, where we would sell basic cards in bulk with heavy discounts. We've moved past that model. Some investor inquiries come from a corporate perspective, which differs from how small businesses operate. For instance, business cards can also be used creatively, like loyalty cards in retail settings or as inserts for small e-commerce businesses. The trends are evolving. In contrast, other businesses within our portfolio, like National Pen, derive significantly less revenue from business cards, around 5%.

Meredith Burns, Vice President of Investor Relations and Sustainability

Great. Thank you, Robert. Robert, I'll stick with you for the next question, which is about the Wix partnership. How do you think about digital offerings' contribution to the business throughout the course of the year? And where do you think it can grow over the medium term?

Robert Keane, Founder, Chairman, and Chief Executive Officer

Okay. I'm pretty sure your question is about financial contribution, but I just want to give the context of value proposition contribution. I just mentioned QR codes; we recognize, of course, in this world, the physical-digital connection of small business brands is important in mid and larger businesses. Having the Wix partnership at Vista is very important to be relevant in that world because design and marketing activities very much transcend that physical-digital divide. Or increasingly are removing that divide. Now financially, we think we have an opportunity to grow in the Wix partnership because we're now fully migrated off of our legacy product; we have in Zero. We're focused on optimizing the experience of the Wix product, which is an excellent product for customers in the small business space. We think we're offering our customers a product they like more, but importantly, the retention is strong in customer cash flows for us even after split the split we do with Wix are better. We’re looking at very successful increases in retention rates. So, so far, the transition has been the focus off of the old product we have. Now that it’s done, the team that’s working on this is shifting their focus to building from here. These are very valuable customers for us. The product is very relevant in today’s world, and we’re optimistic.

Meredith Burns, Vice President of Investor Relations and Sustainability

Thank you, Robert. All right. Let's shift to Sean. Can you remind us of our software capitalization policy? Do you expect capitalized software to remain at current levels or moderate given the Vista re-platforming is behind us? If a moderation is expected, would those outflows no longer be incurred or would they shift back into the income statement?

Sean Quinn, EVP and Chief Financial Officer

Yes. We expect capitalized software to be either flat or slightly lower this year than it was last year. Last year's level was $58 million, and that was down from FY 2022, which was a high of $65 million. In terms of the income statement part of the question, if you're asking about the GAAP income statement, the costs that we capitalize get amortized into the P&L over three years. That reduction in capitalized software levels from what was that high of $65 million in FY 2022 down to what will be approximately the same as last year, probably a little bit lower to $58 million, that difference will benefit the P&L over time because the amortization happens over time. My guess is that the question might be trying to get at whether that reduction effectively would reduce our EBITDA because the cost of those team members is just no longer capitalizable, or is there a true reduction and that won't have any impact on EBITDA. The answer there is that the reduction from those FY 2022 levels is primarily due to the cost reductions that we did in FY 2023, which did focus where we're investing but also did take advantage of areas where we could make changes post re-platforming. You shouldn't expect the cases that are here to swing back to EBITDA.

Meredith Burns, Vice President of Investor Relations and Sustainability

Great. Thank you. All right. So, we've had a live question here. And I think Robert or Sean will do a great job answering it. How are you leveraging technology, data, AI, and gene learning to improve customer experiences and drive growth across your lines of business?

Robert Keane, Founder, Chairman, and Chief Executive Officer

Yes. So, one, we're doing a lot. I'll give a few examples now. I'd really encourage you to go to our most recent Investor Day, it's all online at our IR site where both the slides and if you look at the script or watch the video, you really get a good sense in much more detail than I can go into today. But let me just touch a few points. Data is very important. Martin, our CTO at the group level, spoke about technology and data in great extent. We have literally millions of enrichment where we improve the quality of data at our customers and over 80 billion specific events that happen in upload and order payment, et cetera, which all goes into our data systems. We use machine learning in many different areas. We started at three, four, five years ago in early examples of how do you make graphic uploads higher resolution. How do you do background knockouts? Over time that's gotten much broader than what we were doing back in FY 2020. We're doing things like having insights into the designs. Our customers are uploading AR-powered ten-fleet galleries. The AI information or capabilities we have behind things like logo maker are all powered by machine learning. We’re moving into generative AI work for suggesting graphic design improvements, design quality assurance, customer service, and many other ways. This is a brief and rapid list of some of the things we're doing. I'd encourage you to look at our Investor Day to get more detail.

Meredith Burns, Vice President of Investor Relations and Sustainability

Fantastic. Thank you, Robert. All right. We have one more question that is on capital allocation. So, Sean, get ready, would you consider buying back term loan B seeing that the total interest on TLB is higher than the bonds, which are 7% fixed? We had a couple of questions like that.

Sean Quinn, EVP and Chief Financial Officer

Sure. And we've had a couple of questions like this in recent quarters. So the answer will be very consistent with what we've said in recent quarters. As of the end of September, the weighted average interest rate on our term loan B was just under 8%, at 7.9%, inclusive of swaps. The non-hedged portion of that was higher. The current rates are higher for our term loans, which were at variable rate, and that's higher than the 7% coupon on our bonds. However, our bonds were trading at a deeper discount than our loans. When you look at the yield, the yield has been much higher for bond repurchases. That was the case in Q1. To put that in perspective, during the window that we were buying in Q1, our bonds traded between 93% and 94%, and our average purchase price was 93.6% or so. The U.S. dollar tranche of our term loan B traded closer to par; that discount was not there. The yield to maturity on our bond repurchases in Q1 averaged a little bit under 10%. However, if you assume that we refinance our bonds in advance of the maturity, then the actual yield goes up from there. The bonds also mature two years before the term loan. So, we take term into account when we're trying to make these decisions as well. It's not out of the question that we would buy term loan B, but these are some of the factors that we consider, most notably yield and term. There are some others too. We'll continue to look at that and the direction of interest rates, which obviously is an important input to this.

Meredith Burns, Vice President of Investor Relations and Sustainability

Thank you, Sean. All right. That brings us to the end of our questions, and I'm going to hand things over to Robert to wrap-up.

Robert Keane, Founder, Chairman, and Chief Executive Officer

Okay. Thank you, Meredith. Thank you to all the investors for joining the call and continuing to entrust your capital with us. We look forward to delivering during this second quarter, which is our holiday peak as well as the rest of the fiscal year. We're off to a very good start. We're excited to be leveraging a stronger set of tools and capabilities to deliver great customer experiences stronger than we've had in years. We are also financially excited to continue on the path to grow our profit and cash flow, very much in line with what we've been speaking about for the last year, and to continue as we do so, nonetheless, to invest in the development of new capabilities, new customer value propositions that will continue to build our intrinsic value per share. Thank you again for your time, and have a great day.

Operator, Moderator

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect.