CMPR - Cimpress

[AzCactus]

Any thoughts on this quarter's results. 

[KCLarkin]

Really impressed with National Pen. I was skeptical but this looks like a really smart acquisition.

 

Vistaprint organic growth seemed soft but would want to see another quarter before getting too worried.

[flesh]

http://ir.vistaprint.com/phoenix.zhtml?c=188894&p=irol-newsArticle&ID=2368814

 

Based on "20% yoy growth in rev" my guess is they paid somewhere between the National pen multiple and the U and P multiples. Looking at the build a sign portion it looks like there should be some National pen like synergies and mild synergies with the canvas print portion.

[flesh]

I'm a buyer today.

 

Found this interesting from the DEF-14a on 10-22

 

(11) Authorize our Board of Directors until May 13, 2020 to repurchase up to 6,200,000 of our issued and outstanding ordinary shares (which

represents approximately 20% of our 30.9 million shares outstanding as of June 30, 2018) on the open market (including block trades that satisfy

the safe harbor provisions of Rule 10b-18 pursuant to the United States Securities Exchange Act of 1934, or the Exchange Act), through privately

negotiated transactions, or in one or more self-tender offers at prices per share between €0.01 and an amount equal to 120% of the market price of

our ordinary shares on the Nasdaq Global Select Market, or Nasdaq, or any other securities exchange where our shares are then traded (the

market price being deemed to be the average of the closing price

on each of the consecutive days of trading during a period no shorter than one trading day and no longer than 10 trading days immediately

preceding the date of repurchase, as reasonably determined by the Board of Directors)

 

(12) Authorize our Board of Directors until May 13, 2020 to issue ordinary shares or grant rights to subscribe for ordinary shares up to a

maximum of (i) 10% of our outstanding share capital at the time of issue for general corporate purposes including but not limited to equity

compensation, acquisitions, and financing, and (ii) an additional 10% of our outstanding share capital at the time of issue in connection with our

acquisition of all or a majority of the equity or assets of another entity

 

[KCLarkin]

Cimpress really loves to throw stinkballs at investors.

 

I don't really have much commentary on the current quarter. Just reinforces my general view that Keane, though well-intentioned, is just not a great operator. They also seem to be undoing some of the disastrous TSR equity plan:

 

We are engaged in a process to realign management financial incentives to directly tie management compensation to the performance of an executive's business(es). In limited cases, when appropriate, this includes having executives or groups of executives purchase equity directly in the businesses that they lead.

 

Glad I sold half my position. Wish I'd sold it all once I'd lost faith in management.

[kab60]

I understand why one would lose faith, since their execution has been poor. They've bought a lot of companies from highly entreprenurial people, and while synergies have been lacking - so has the entreprenurial drive apparently since they became part of Cimpress! I made a bit of money before but basically didn't see why the industry was ripe for consolidation and thought their model was flawed, so I made a mistake and lucked out. But I'm not even sure if that's right (that their model is flawed and it wasn't just bad execution).

 

While Keane might be a slow learner, at least he's learning and owning up to his mistakes. He should've probably just sticked with and focused on Vistaprint, but that's the past. Perhaps he read The Outsiders too many timers, and while I like decentralized operations it also requires unsentimental leadership that gets rid of bad management. Anyway, long way of asking - did everyone lose faith? Valuation makes it, optically at least, make it look the most attractive it has in a long time.

[valueinvestor]

I understand why one would lose faith, since their execution has been poor. They've bought a lot of companies from highly entreprenurial people, and while synergies have been lacking - so has the entreprenurial drive apparently since they became part of Cimpress! I made a bit of money before but basically didn't see why the industry was ripe for consolidation and thought their model was flawed, so I made a mistake and lucked out. But I'm not even sure if that's right (that their model is flawed and it wasn't just bad execution).

 

While Keane might be a slow learner, at least he's learning and owning up to his mistakes. He should've probably just sticked with and focused on Vistaprint, but that's the past. Perhaps he read The Outsiders too many timers, and while I like decentralized operations it also requires unsentimental leadership that gets rid of bad management. Anyway, long way of asking - did everyone lose faith? Valuation makes it, optically at least, make it look the most attractive it has in a long time.

 

I think the price is fair for a wonderful company. Vistaprint is more than business cards and I don’t think the market does not understand that. Also a huge runway for growth because 98% of sales come from North America, if I remember correctly. At 14x owners earnings to enterprise value (specifically the discounted cash flow that can be generated and returned to investors), as well as there no real competition, it is tempting. Unless the print is dead thesis is right, which I don’t think will be true for one more generation, one can do well.

[mwtorock]

anyone has looked at market share / end market growth data recently?  any concerns that the end market is not as big as expected?

[KCLarkin]

I sold my last Cimpress shares today. I've owned it since March 2014. The original J-Curve thesis was correct. FCF went from $54m in 2014 to $211M in 2019. Vistaprint returned to solid organic growth and the company used the free cash flow to purchase additional businesses and buyback a modest amount of stock. The stock has performed extremely well versus the S&P 500 and TSX (my benchmarks). Even with the outperformance, Cimpress doesn't look expensive based on FCF.

 

However, the execution and capital allocation has been uneven with frequent writedowns and other plot twists. Recent missteps at Vistaprint are a big concern. I've decided to take my profits for now. Management seems to be reigning in their spending and the cash flow is starting to gush but I find this management team too unpredictable.

 

Good luck to any remaining longs.

[AzCactus]

Kinda interesting here.  Stock has gotten absolutely pummeled this year.  And while I know everything is cheaper this is looking pretty appealing.  Anyone else having a look at this--in the low 70s?

 

[kab60]

I am, but I don't think it's all that cheap when one considers leverage, their poor execution and lack of growth... So many other things seems priced so that one should make quiet a bit of money if/when we get to the other side of this coronavirus thing (not talking Airlines...).

[KCLarkin]

Their customers are small businesses that will get killed if there are prolonged quarantines. But if not, it is pretty cheap.

[flesh]

Time to kill cmpr, selling at 45/share.... 6 year low. 5x ttm eps. Tell me how CMPR goes bk. Please.

[kab60]

EBITDA craters, they trip covenants, vulture HY investors refuse to give them a waiver? What do you think about their leverage? Aren't they pretty close to their covenants before zombie apocalypse hit?

[kab60]

Bonds trade around 82. Can these Guys somehow NOT trip their covenants? Generally I think most viable Companies will get a waiver from their banks when they trip convenants due to coronavirus, but not sure whether things are as straightforward with bond investors. Does anyone have a take on that?

[Gregmal]

This is a situation ripe for some jerk off fund like Aurelius Capital. I wouldn't touch. You can have a ton of relief from good actors, but all it takes is one greedy scumbag with lack of a moral compass to really put one of these companies in a bad spot.

[kab60]

This is a situation ripe for some jerk off fund like Aurelius Capital. I wouldn't touch. You can have a ton of relief from good actors, but all it takes is one greedy scumbag with lack of a moral compass to really put one of these companies in a bad spot.

Yeah, that is what nags me somewhat. And that Cimpress blew a ton of money on buybacks around 125 which kept leverage close to covenants... These Guys and capital allocation is a pretty sorry sight. They say all the right things, I am sure intentions are good, and then they just fumble- again and again. At least they owe up to their mistakes. And they have obviously done some right things recently.

[widenthemoat]

Their current total leverage ratio is 2.9x compared to a maximum of 4.75x (senior secured is 2.1x compared to a max of 3.25x). Based on my numbers, assuming they did not need to draw down on their revolver to get through this crisis (this analysis completely falls apart if they did), LTM EBITDA would need to drop to $300m (~35% in one quarter) to trip their senior secured covenants. At face value, a 35% drop is not a whole lot of cushion - especially with a complete economic shutdown this quarter (maybe even longer). I think it’s important to understand two things here:

 

1) The covenants are based on TTM EBITDA and the cost structure is highly variable:

 

Based on my figures, TTM EBITDA as of 12/31/19 was ~$460m. Historically speaking, ~80% of EBITDA is earned in Q4 - Q2, so we can assume that ~$370m of EBITDA has been earned this year from Q4 - Q2. This means that Q3 EBITDA will need to drop to -$70m before their senior secured covenants are tripped. Again, this seems very possible in this environment, but lets run the numbers anyways.

 

Q3 revenue was ~$660m in 2019, so let's assume that drops 40% and gross margin also contracts to 40% (50% historically). That leaves us with $160m of gross profit. Operating costs (inclusive of depreciation and amortization) have historically run at about $280m per quarter. That leaves us with a $120m operating loss. Add back depreciation and amortization of $45m and you’re now at EBITDA of -$75m for the quarter. Management has historically estimated that $225m of annual operating expenses are growth investments, which is roughly 10% of revenue, or ~$60m for Q3. Add back half of this to be conservative and we are now at -$45m, just barely within covenants.

 

About a year ago the CFO walked through a similar analysis:

 

Our total gross leverage at the end of last quarter was 3.21x our trailing 12-month EBITDA. So just for simplicity, let's just assume that in the following quarter we didn't generate any free cash flow that we could use to pay down our debt, net debt 3.21x total gross leverage, for us to reach or breach our maintenance covenant of 4.75x, which, of course, we would never want to get close to, in the following quarter, we would have to have our trailing 12-month EBITDA drop by about 27%. If you assume -- every dollar of EBITDA decrease also increases our debt balance. We feel that a drop of that magnitude in our trailing 12-month EBITDA in one quarter is more than enough room to work with given 9 of the 12 months of that calculation are already known. And that's because to have such a drop in our trailing 12-month EBITDA that would mean that the actual percentage drop for that quarter would, of course, be far higher. Given the amount of discretionary investment that we have, coupled with the amount of time to respond, we believe this gives us many options to deal with the type of, again, "very adverse scenario" that the person who asked the question is asking about.

 

2) Management is extremely incentivized to avoid a covenant default:

 

This company has essentially been Robert Keane’s life work and the vast majority of his net worth is tied up in the equity. Additionally, the Board of Directors all have substantial equity exposure. This is no basis to make an investment decision on, but I have total confidence that management will be scratching and clawing to save the equity at all costs. This is not the case for every company, so it is worth mentioning and in my view very important.

 

I’ll be the first to admit - this is way too close for my personal comfort. I’m posting these numbers as a sanity check and to get everyone's thoughts.

 

Thanks,

Dan

 

[widenthemoat]

Their current total leverage ratio is 2.9x compared to a maximum of 4.75x (senior secured is 2.1x compared to a max of 3.25x). Based on my numbers, assuming they did not need to draw down on their revolver to get through this crisis (this analysis completely falls apart if they did), LTM EBITDA would need to drop to $300m (~35% in one quarter) to trip their senior secured covenants. At face value, a 35% drop is not a whole lot of cushion - especially with a complete economic shutdown this quarter (maybe even longer). I think it’s important to understand two things here:

 

1) The covenants are based on TTM EBITDA and the cost structure is highly variable:

 

Based on my figures, TTM EBITDA as of 12/31/19 was ~$460m. Historically speaking, ~80% of EBITDA is earned in Q4 - Q2, so we can assume that ~$370m of EBITDA has been earned this year from Q4 - Q2. This means that Q3 EBITDA will need to drop to -$70m before their senior secured covenants are tripped. Again, this seems very possible in this environment, but lets run the numbers anyways.

 

Q3 revenue was ~$660m in 2019, so let's assume that drops 40% and gross margin also contracts to 40% (50% historically). That leaves us with $160m of gross profit. Operating costs (inclusive of depreciation and amortization) have historically run at about $280m per quarter. That leaves us with a $120m operating loss. Add back depreciation and amortization of $45m and you’re now at EBITDA of -$75m for the quarter. Management has historically estimated that $225m of annual operating expenses are growth investments, which is roughly 10% of revenue, or ~$60m for Q3. Add back half of this to be conservative and we are now at -$45m, just barely within covenants.

 

About a year ago the CFO walked through a similar analysis:

 

Our total gross leverage at the end of last quarter was 3.21x our trailing 12-month EBITDA. So just for simplicity, let's just assume that in the following quarter we didn't generate any free cash flow that we could use to pay down our debt, net debt 3.21x total gross leverage, for us to reach or breach our maintenance covenant of 4.75x, which, of course, we would never want to get close to, in the following quarter, we would have to have our trailing 12-month EBITDA drop by about 27%. If you assume -- every dollar of EBITDA decrease also increases our debt balance. We feel that a drop of that magnitude in our trailing 12-month EBITDA in one quarter is more than enough room to work with given 9 of the 12 months of that calculation are already known. And that's because to have such a drop in our trailing 12-month EBITDA that would mean that the actual percentage drop for that quarter would, of course, be far higher. Given the amount of discretionary investment that we have, coupled with the amount of time to respond, we believe this gives us many options to deal with the type of, again, "very adverse scenario" that the person who asked the question is asking about.

 

2) Management is extremely incentivized to avoid a covenant default:

 

This company has essentially been Robert Keane’s life work and the vast majority of his net worth is tied up in the equity. Additionally, the Board of Directors all have substantial equity exposure. This is no basis to make an investment decision on, but I have total confidence that management will be scratching and clawing to save the equity at all costs. This is not the case for every company, so it is worth mentioning and in my view very important.

 

I’ll be the first to admit - this is way too close for my personal comfort. I’m posting these numbers as a sanity check and to get everyone's thoughts.

 

Thanks,

Dan

 

The more I think about this, they probably already had January and February numbers baked in for the quarter prior to the economic standstill. What am I missing here? I know this is only a short term band-aid and if this is prolonged they will certainly have issues, but it seems to me they should be fine on covenants this quarter no?

[KCLarkin]

If they were in danger of tripping covenants, they would be doing massive layoffs already. They are fortunate that they had a few good quarters to boost their TTM. Bigger issue is that their business takes a long time to recover. Too early to tell. But either way, they should be able to raise debt/equity to avoid default.

[widenthemoat]

Thanks for the input KCLarkin. It looks like you owned this business for a long time. What are your thoughts on the long-term trends here? Do you think this will cause a lot of the physical print shops to go out of business and further accelerate the shift to online?

[KCLarkin]

Thanks for the input KCLarkin. It looks like you owned this business for a long time. What are your thoughts on the long-term trends here? Do you think this will cause a lot of the physical print shops to go out of business and further accelerate the shift to online?

 

Probably, but doesn't change the thesis. If they can survive the next 12-18 months without significant dilution or a liquidity event, shares are super cheap. The current version of Cimpress is a low-growth cash cow.

[flesh]

In Feb they raised 200m in a senior notes offering. I wonder how much of it they used for debt pay down, the expected use.

[kab60]

In Feb they raised 200m in a senior notes offering. I wonder how much of it they used for debt pay down, the expected use.

Or, God forbid, share repurchases... Agree it looks like a good bet here, but their customers are getting crushed at the moment, and not sure posters, business cards and signage is top of their mind when those that survive are back in business. Also, are we sure there will be growth after they turned the thing into a cash flow monster? I still think you would want some growth from here to do really well and one can probably find fatter FCF yields in more resilent Industries than this one.

[widenthemoat]

Thanks for the input KCLarkin. It looks like you owned this business for a long time. What are your thoughts on the long-term trends here? Do you think this will cause a lot of the physical print shops to go out of business and further accelerate the shift to online?

 

Probably, but doesn't change the thesis. If they can survive the next 12-18 months without significant dilution or a liquidity event, shares are super cheap. The current version of Cimpress is a low-growth cash cow.

 

Been running some numbers on this assuming a scenario where they need to raise some capital - let's say they need to raise $600m to pay down debt and get leverage to a more reasonable level.

 

If they can raise the $600m at a share price of $45 per share, that would increase share count by 13.3 million shares. The current share count is 26.2m, so we would be have a business that earns $250m of free cash flow (management estimated steady-state free cash flow of $400m - $450m prior to this crisis, so $250m normalized is pretty conservative) and total shares outstanding of ~40 million. That equates to about $6.25 per share in a normalized environment after significant dilution.

 

This is a business I have wanted to own for a long time. The economics of Vistaprint are remarkable when you compare it to competitors. For example, 4imprint provides products similar to Vistaprint in North America. If we compare the cost of a 500 pack of 4" x 6" postcards between the two websites, we can see that 4imprint costs $145 vs. $50 at Vistaprint (assuming the Premium quality selection.) Now compare this to 4imprint's gross margin of 30% vs Vistaprint's gross margin of 60%. On a per unit basis, the postcards cost 4imprint $100 vs. a cost of $20 to Vistaprint. If Vistaprint were to price its products similar to 4imprint, they would be earning a gross margin of nearly 85% on some of their products.

 

I obviously prefer they keep the prices down, and use this massive cost advantage to further re-invest in marketing and technology, but I think this highlights how strong their competitive advantage really is.