Cimpress plc
Q4 2008 Earnings Call Transcript

Published: 1 Aug 2008

[Robert Keane:]

Thank you Peter, and welcome to everyone joining us. VistaPrint not only just turned in another very strong quarter, we also finished up yet another very strong fiscal year. So I will start with a review of our multi-year financial performance, followed by operating highlights from the past twelve months. Then I will turn to our strategy and some of our goals for the upcoming fiscal year. Last but not least, I will discuss our continued efforts to address the needs of our three key interdependent constituents

[Harpreet Grewal:]

Thanks Robert. As some of you know, this is my final quarterly call as CFO of VistaPrint. As previously announced, I will be stepping aside as CFO on September 2nd and Mike Giannetto will assume the role of CFO, so I would like to take a moment to reflect on the business, the quarter and the time I have spent working here. First, I would like to thank Robert and the company for the tremendous experience I have had as CFO over the last two years. VistaPrint is executing on a far-reaching plan intended to deliver considerable benefits to millions of small businesses on a worldwide basis. Robert leads a highly talented team including, among others, Janet Holian, Wendy Cebula and Mike Giannetto. They and the many other employees working at VistaPrint continue to execute in building an enduring transformational company during what are unquestionably challenging times for many companies. I believe VistaPrint remains at the early stages of a long growth cycle, thanks to its technology, its marketing prowess, and a superior turnkey marketing solution versus more limited alternatives in a market that is large and underserved in Europe, in North America, and beyond. The disciplined financial strategy that the company has defined and executed to has allowed us to balance revenue growth, longer term investments, and near term profit growth. In doing so, the company has consistently met or exceeded the high end of our revenue and EPS guidance. Fiscal year 2008 results show continued high revenue growth, generally stable non-GAAP operating and net margins even while absorbing the adverse impact of fluctuations, the highest reported non-GAAP EBITDA margin as a public company, lower capital intensity and significantly higher free cash flow. The last quarter, meanwhile, demonstrated the ability of our business model to deliver against, and in this particular case exceed, high revenue growth and EPS targets. Furthermore, in comparison to the same quarter last year, Q4 showed operating and net income margin expansion.. We achieved the Q4 margin expansion thanks to efficiencies in marketing and general and administrative expenses, which offset gross margin challenges related to lower referral fees, currencies, and shifting product mix. These results underscore the efficacy of the company’s financial model. Now to the highlights of the quarter and the year, VistaPrint generated revenues of $110.4 million in the fiscal fourth quarter, reflecting a 52% increase over the fourth quarter of the prior year. During the fiscal year, revenues were $401 million, reflecting a 57% increase over the prior year. All of our geographies performed well and revenue from websites targeting non-US markets comprised 39% of total quarterly revenues. Non-US revenues increased 84% nominally year over year. Excluding the impact of currencies, non-US revenues increased 66% year over year. Revenues from our US website increased 37% year on year. As previously discussed, referral revenues are trending lower and are expected to range between 2% and 5% of total revenues sometime in fiscal 2010 to fiscal 2012. During Q4 fiscal year 2008 referral revenues were 6.4% of total revenue, 190 basis points lower than year ago levels, and decreased 30 basis points sequentially. During the fiscal year referral revenues generated 6.9% of total revenue, 110 basis points lower than in fiscal year 2007. First looking in GAAP terms, quarterly net income was $10.3 million reflecting a 91% increase over the fourth quarter of the prior year. These quarterly GAAP results translate to a 9.4% net income margin in the quarter versus 7.4% in the fourth quarter of the prior year. Quarterly EPS was $0.22, also a 91% increase over the fourth quarter of the prior year. During the fiscal year, net income was $39.8 million, reflecting a 47% increase over the prior year. The fiscal year GAAP results translate to a 9.9%net income margin versus 10.6% in the prior year. Annual EPS was $0.87 reflecting a 45% increase over the prior year. In non-GAAP terms, quarterly adjusted net income was $15.0 million reflecting a 61% increase over the fourth quarter of the prior year. These quarterly non-GAAP results translate to a 13.6%net income margin versus 12.8% in the fourth quarter of the prior year. Quarterly non-GAAP adjusted EPS was $0.32, reflecting a 60% increase over the fourth quarter of the prior year. During the fiscal year, non-GAAP net income was $55.1 million, reflecting a 53% increase over the prior year. The fiscal year non-GAAP results translate to a 13.8% net income margin versus 14.0% in the prior year. Annual non-GAAP EPS was $1.18, reflecting a 51% increase over the prior year. Now, let me turn the presentation over to Mike Giannetto. Mike?

[Mike Giannetto:]

Thanks Harp. Now I will review our operations, detailed financial results, and guidance. Our key operating metrics were as follows

[Robert Keane:]

Thanks Mike. VistaPrint’s 2008 fourth quarter and full fiscal year were very strong. In the big picture these were just two events in a very long history of executing on our strategy. That track record stretches back for many years and has certainly continued since our public offering in 2005. In every one of the three fiscal years since our IPO, VistaPrint has grown EPS by over 35% per year. We have just guided, once again, to a significant increase for fiscal year 2009. There are few other companies in the public market who so consistently deliver this type of earnings growth. VistaPrint has done so thanks to the talents and enormous efforts of our employees, our market defining leadership position, and our deep-rooted culture of financial discipline. We are at the beginning of what we believe will be a long, rewarding and, ultimately, transformational journey. We intend to continue to meet the needs of our customers, employees, and shareholders by executing quarter after quarter, year after year, just as we have done in the past. We believe each of these three important constituencies is positioned to both contribute to and to benefit from our ongoing success. We would like to thank you for your time and attention, and we look forward to answering questions and comments on our live call at 5pm Eastern time. That concludes our prepared presentation.

[Operator:]

Ladies and gentlemen, welcome to the VistaPrint Fourth Quarter and Full Fiscal 2008 Q&A Earnings Call. My name is Amanda, and I will be your operator for today. This call is being hosted by Robert Keane, President and CEO, Harpreet Grewal, Executive Vice President and Chief Financial Officer and Mike Giannetto, Senior Vice President of Finance. Before we take the first call, as we noted in the Safe Harbor statement at the beginning of the earnings presentation, comments made include forward-looking statements, including statements regarding revenue and earnings guidance and actual results may differ materially. Risks factors that impact those statements are described in the documents that are periodically filed with the Securities and Exchange Commission. Now I will proceed with the first call. Your first question comes from Youssef Squali with Jeffries and Company. Please proceed.

[Youssef Squali:]

Thank you very much. Good afternoon. I have a couple of questions, first for Robert. Robert, in your prepared remarks I think you talked about how new products or you launched a number of products which now help you address more than 50% of the companies or of your client's annual spending. How far are we, or how much higher than that 50% are we, how close are we to that 100%. Because arguably as we get close to that you are CapEx related to new products should start coming down. In that same vein, if I were to look at your CapEx guidance of 14% to 17%, why such a big range when in '08 it was I think you have guided to 17% to 18%. So clearly a deceleration we are happy to see that, but we are still trying to just give us a little insight into the makeup of that, and then why the big range?

[Robert Keane:]

Sure, absolutely. So I will say that I fully agree there is a lot of leverage in our CapEx and you are seeing that this year. I will leave it to Mike or Harp to talk of the specifics of the range. Let me talk about your question in terms of new products and what percentage of the total pie are we looking to address. The pie chart that we show there talks about categories. So for instance, in the promotional products category we are in the well over 50%, really 75%. I am sorry, the promotional products category is one example where we intend and we are not in, let's say custom stress balls. In the promotional products, I think we will be interesting a lot of new additional products in the future. However, for the percentage of the pie chart you see there we are more than 50% around them, the chart in terms of participating in those slices, not specifically in covering a 100% of those given slices. So, I think you will see us introducing a lot of additional products and services in those additional markets. That being said, I think your question was more focused on the CapEx and a lot of those new products and services were entering are not as CapEx intensive as previous we have entered. So, although I think you will see us continuing to introduce a lot of new products and services, you will not see necessarily the type of CapEx intensity you have seen in the past. In terms of the percentage spread in our CapEx guidance, let me turn that over to Mike to speak to that.

[Mike Giannetto:]

Sure, Youssef, last year when we gave our full year guidance actually on the CapEx for '08, we gave a range of 15% to 20%. That was the range we did a year ago. In terms of this year, the 14% to 17%, we feel it is a range we could land in. We do have some larger construction projects where timing can change on them. We have two of them in this year's plan that we talked about in the prepared remarks. So, we think the range is a good one and because of the size of some of the projects we could see payments shift and move a bit.

[Harpreet Grewal:]

Maybe the last thing I will add to that is that we have often talked about the fact that there is leverage in our CapEx. In our CapEx plans we continue to see leverage in almost all categories whether its regarding individually presses, or whether it is new equipment. The one area which is a little lumpy in this fiscal year, which Mike highlighted during the prepared remarks, is that we are building out a facility, a call service center in Montego Bay. That is something that is a fairly significant investment that we are making, but almost across the board all other line items continue to show the sort of leverage that I think one anticipates.

[Youssef Squali:]

Thanks, and just one final question. If I look at your GAAP EPS guidance for Q1, it came to 18 that is versus 22% for Q1 on nice higher sequential revenues. Can you walk us through what should cause that to happen?

[Mike Giannetto:]

Sure. This is Mike again. In terms of Q1, you are going from Q4 to Q1. In the prepared remarks I talked about the seasonality of the business, which we have seen develop over the last couple of years and we will continue to see it this year. Seasonality being focused around Q2, our December quarter, we have a spike in a highest growing quarter due to the holiday period. This year, I think we will see that seasonality once again, and in Q1, we are making investments as we did last year, but this year again. To prepare for that increase in revenue, so we are making investments across the company but especially focused in manufacturing, to be sure we can meet the demand of Q2. So I think we will see a little bit more profit in terms of percentage for the full year in this Q2 as opposed to prior years.

[Robert Keane:]

Maybe partially extending on what Mike is saying, is in the first half of the year, you will see is about the same profit contribution on EPS basis in the first half as we have in previous years as well, which I think is important to note.

[Youssef Squali:]

Okay, thanks. Congratulations.

[Robert Keane:]

Thank you.

[Operator:]

Your next question comes from the line of Jennifer Watson with Goldman Sachs. Please proceed.

[Jennifer Watson:]

Great. Thank you. Can you talk about the number of active customers that you had in fiscal '08 and what the trend has been in gross bookings for active customers since you expanded the product category? Also, if you can talk a little bit about how successful you have been at bringing former customers back to the side? I know you mentioned marketing has been shifted to really focus on retention.

[Robert Keane:]

Sure, absolutely. We do not plan on updating the specifics of the number of active customers until our Analyst Day in the autumn. That being said, I can tell you both those numbers trended in the same up into the right direction they have for years. I do not want to give precision yet because that is something we have traditionally given out at our Analyst Day. However, the trends remain positive and strong. In terms of bringing former customers back, I think we were very happy with retention and the repeat customer contribution this last quarter and the year. We think we have very high customer satisfaction rates and you are starting to see that in some of the repeat rates we are getting. I would also say that we are always making adjustments in terms of where we are making a given set of investments in a quarter or year, and this last quarter we had some great opportunities to sell to our existing customer base. We pursued more heavily there than we get our new customer acquisitions. That is like many things we do an output of our philosophy and our culture of constantly testing and going where the low-high intrude is. I think it is now come of great customer satisfaction and repeat customers coming back was very strong for this quarter, but I think all of our customer spend be it new or repeat remains up into the rightly as it has in the past.

[Jennifer Watson:]

Mike, just a housekeeping question. With the G&A expense decline sequentially quarter-on-quarter, can you just touch on that a little bit?

[Mike Giannetto:]

Sure, year-over-year or sequentially?

[Jennifer Watson:]

Sequentially.

[Mike Giannetto:]

Yes. Really, there was nothing specific other than increased leverage that we would expect to see. There was no one time charges in Q3 to really call out. Other than that we continue to see leverage in different parts of the business including G&A.

[Jennifer Watson:]

Okay. Thank you.

[Mike Giannetto:]

You are welcome.

[Operator:]

Your next question comes from the line of Jim Friedland with Cowen and Co. Please proceed.

[Jim Friedland:]

Thanks first a product question. With the launch of websites first in US and then just recently, it is too early to call international. However, can you tell us what the uptake on that product looks like and maybe some expectations around that and then I had two quick numbers follow ups.

[Robert Keane:]

Sure Jim. Websites are on plan and we certainly expect them to grow as a percentage of revenues. However, in the US or elsewhere it's still too early to talk more specifically about them. Apart from saying that we think websites and other electronic services are very exciting opportunities for us.

[Jim Friedland:]

Okay great, just a numbers question. First on R&D, it was about after stock or excluding stock-based comp, it was 10.8% of revenues in fiscal Q4 and as we look ahead with our models, should we think that the energy idea that you will grow R&D roughly in line with your projected revenue growth?

[Mike Giannetto:]

Jim, we do not give specific guidance within the P&L, but it is one area we have mentioned that we have invested this year and we will continue to invest heavily in it. So I do not want to get into specifics about guidance with a particular line item, but it is an area that we will continue to invest in over the next year and we have many initiatives including new products and some of the other initiatives we discussed on the pre-recorded remarks.

[Jim Friedland:]

Sure, and then actually on the pre recorded remarks, Mike you said something I think about 1.2 million charge in Q4. Did I hear that right, and if so, what was it from?

[Mike Giannetto:]

That was actually last year. Jim, we are doing the doing the comparison Q4 '07 to '08, we had a share base comp charge from last year, which just trying to explain the year-over-year that was in the numbers in Q4 '07.

[Jim Friedland:]

Okay, great, then one last quick one. When is the Intuit next round or the next version of software is supposed to launch that will incorporate the VistaPrint offering?

[Mike Giannetto:]

I do not want to answer that, because that is Intuit's launch plan and I personally do not know what they have as a specific date, but it is in the autumn of this year.

[Jim Friedland:]

Okay. That sounds good thanks.

[Robert Keane:]

Thank you.

[Operator:]

Your next question comes from the line of Randy Hugen with Piper Jaffray. Please proceed.

[Randy Hugen:]

Thanks. It looks like new customer ads leveled off sequentially. Is this a new base level here, or do you think that metric is going to accelerate again next year, I guess, outside of the typical seasonality?

[Robert Keane:]

Okay, we do expect the total number of customers we acquire next year to be up significantly from this year, that being said overtime, we do expect new customer accounts to begin to slow. We do not think we are seeing that trend emerge yet. As I mentioned in the script acquiring 1.2 million customers is extremely healthy, especially at the low cost of acquisition we achieved. We drove more revenue from repeat customers which is a source of leverage for us, but we expect that we will continue to acquire greater numbers of new customers going forward as our marketing budgets allow. We can not rule out that it will be far or sometime in the future, I am not saying this in the next quarter, but sometime it will come down a little bit, but we see a significant runway in front with a broad trend up into the right will continue.

[Randy Hugen with Piper Jaffray:]

So was there any specific reason why things were somewhat flat this quarter?

[Robert Keane:]

No, it is really just a question that I answered a bit in the previous question which is we always make an allocation of marketing spend depending on the specific opportunities at hand, and we are pretty agile in moving from one to another. We had some great opportunities that were performing very well in repeat return customer marketing, hence we spent more there. I would not ascribe a general trend or a change in the general trend to this quarter.

[Randy Hugen with Piper Jaffray:]

Okay. Thanks. That helps a lot. Then your 2009 guidance revenue growth is exceeding earnings growth slightly. Is that mostly from a continuation of current currency and shipping cost trends, which have accelerated in the back half of the year or is there something else that is driving that?

[Robert Keane:]

In terms of the cost of the currency, we are planning for currencies based on current yield of currency, so we are assuming basically the currencies are staying where they are now based on where we sit in July.

[Mike Giannetto:]

One other thing that from a EPS targeting perspective what we do, we did establish the EPS target for fiscal year '09. I will articulate it in January of this year. The $1.10 to $1.20 is on a GAAP basis and in that respect, we have announced, formalized and our revenue range is resulting and what I think we would generally want to consider, depending where you go, and high point mid point of target. Basically what I think the emphasis is on stable margins, particularly when you look at on non-job basis.

[Randy Hugen with Piper Jaffray:]

So, now that we are through this fiscal year and seeing where currency rates are now. Should we expect a little more seasonality this year just would be tougher currency comps in the first couple of quarters of fiscal '09?

[Robert Keane:]

Seasonality in terms of what perspective?

[Randy Hugen with Piper Jaffray:]

So, if gross margins remain at similar levels to where there are in this quarter, that is very tough comps for the first half of fiscal '09 compared to where they were in the beginning of the year, maybe pushing more of the profitability towards the back half.

[Robert Keane:]

I think in terms of seasonality, we would expect this ear to look somewhat like last year. Although I made the comments about Q1 dipping down a bit, but we do expect to pick it up in Q2. So, when you look at how the quarters in ‘08 performed in terms of profitability. We would expect first half this year to look somewhat similar to the first half of last year. So I would not say its backend to the second half of the year. We would except to see more profits in our Q2 than we did in '08 and we think that will be tied to the seasonal success, we expect in the holiday product lines. One of the premises behind your question seems to be that if gross margins are down, that will bring down net margins. However, if you look at the quarter we just ended which had very low gross margins relative to earlier in the year. We still think they are very good gross margins our net margins were up. So there has been a lot of leverage in the business, and as we said many times, we would advise you to not to focus on any one part of our P&L. I think this quarter was a great example of that. We had a really great quarter and we think we have a really great year next year.

[Randy Hugen with Piper Jaffray:]

Okay, and then just one more here. As you move away from referral revenues, you mentioned you are using that real estate for other offerings. Can you just give us a general idea of the performance of some of those offerings and I guess their ability offset operating profit that was being delivered by the previous programs?

[Robert Keane:]

We are very happy with those types of diversifications, and there are a number of different of types of diversifications. One is just one-for-one, maybe a membership changed over to small business offering be it a Pitney Bowes or any of the other many offers we offer, and that is pretty transparent and equal. There are other things where let's say we sell a website subscription in that space, we are pushing the revenues out into the future, because we have a 90-day or 60-day free trial. You can have some timing differences, or we may have other things where if we sell a product which has better gross profit dollars, but a lower gross margin percentage. I can say we are very happy with where that trend is going. As Harp mentioned or maybe Mike did, the absolute trend is down in terms of referral programs. We are very happy with the economical Tardif that we are putting in place, and as we have said many times that trend down is a proactive and specific choice we are making, because we believe in the economic opportunities of the alternatives. It is not a reactive decline.

[Mike Giannetto:]

If I could extend on that just a little bit, I think it is useful to note that the economic alternatives plus the leverage of our business allowed us in fiscal year '08, if I look at non-GAAP operating margins basically to be constant, we came in at 14% operating income on net operating margin versus 14.1% where actual revenues came down fairly substantially. I think that in itself behind the numbers are flat that we are able to find that economical turn of leverage in the business even if we are facing the currency headwinds, we did that had a negative impact on the business as a whole.

[Randy Hugen with Piper Jaffray:]

Alright, thanks a lot. Congratulations.

[Robert Keane:]

Thank you.

[Operator:]

Your next question comes from the line of Franco Turrinelli with William Blair. Please proceed.

[Franco Turrinelli:]

Good afternoon gentlemen.

[Robert Keane:]

Good afternoon.

[Franco Turrinelli:]

Three questions. One real small housekeeping item. Can you remind us what the amount associated with the stock-based comp for Hart's departure will be in the first quarter?

[Mike Giannetto:]

Looks like the total charge will be about $800,000. It is a combination of share-based comp and some cash as well, but that will be about the approximate total charge.

[Franco Turrinelli:]

That is obviously included in the GAAP guidance that you have given us for the first quarter?

[Mike Giannetto:]

Correct.

[Franco Turrinelli:]

More importantly, more strategically, one of the things that really struck us in this quarter was maintaining the conversion rate so high and if we look at the last several quarters, the trend in conversion rate just is very positive. Can you tell us -- is this something that you are doing better? In other words, is it better website design? Is it better product mix? Or is it also just the fact that repeat customers are taking more of a percentage? Just help us think through the conversion rate and maybe how you think the conversion rate going forward?

[Robert Keane:]

Sure. I do think there is a slight impact from repeat customers, but if you look over the last two years, the percentage of business from repeat business has always been in that high 60s or in the mid-60s. So that is really not the fundamental driver. I would first and foremost as I have to say, you have to look at all three together and there maybe quarters where that will go down, because we have opportunities to get great session counts, which may have very good pricing for us to buy and therefore we are willing to buy even though conversion is lower. That being said, and we had to repeat that every time and we look at all three of those factors together, the conversion rate improvement I think are one of many examples of our willingness to invest in things, which then comeback and pay off. So, we have made major investments as everyone knows in new products and new services. I think that is one example where we are going to have more product and services to offer our customer, is more likely we can tighten to buy something. However, beyond that obvious introduction of new product and services, we have done a lot of things to improve what we are doing. So, in terms of it could be the quality of the products, or delivery of the products. However, it also is things like the user interface in the content. Recently we did a press release on a launch of a totally new version of our logo tool and if you go to our logo tool, it is really impressive it creates not only the logos for the customers, but then displays that and coordinates that across a whole series of products for a customer. That and many other user interfacing content improvements are the output of years of investment and continued investment in software development and content development and in user interface, which are starting to come back and pay for themselves very handsomely. So, I think its a combination of a lot of things, but I think that although there is a little bit of help from repeat customers, we do see a sustainable lift in our overall rate of conversion and that is coming from the investments we have made in new products, in product improvements, in software, in content and other areas.

[Franco Turrinelli:]

Thanks. That is helpful. Similar question, we were pleased to see the average order volume increase a little bit, anything to be read into that, are you seeing any difference in kind of order behavior?

[Robert Keane:]

Once again I will start by saying average order value, session and conversion rate, really move back and forth, quarter-to-quarter and year-to-year, you have to look at all three together. However, all of those, if you look at a multiyear trend, especially the session counts and the conversion rates, have trended up to the right. Recently, we started to see some movement, it is not a huge movement, 5% up in our average order value. Once again, I think to the extent that becomes sustainable and I do not want to say it is perfectly sustainable, because we look at all three together. However, those are some of the investments coming back to pay for themselves where we had product improvements or user interface improvements, or we are cross-selling things that we used to not cross-sell in the past.

[Mike Giannetto:]

Just one more thing to add there, repeat revenue did tick up this quarter which tends to bring a higher AOB as well, so I think those pile what we saw in Q4?

[Franco Turrinelli:]

Right. Yes, that is helpful Mike. Hey one final question before I let other people get into the queue. I can not possible not ask you about macroeconomic environment and whether or not you are seeing any changes in behavior, any weakness on the macro front. Thanks guys, congratulations.

[Robert Keane:]

Thank you. The answer to the macroeconomic question is no, we are not seeing this. We cannot rule out to that, it may not be having a impact on the global growth, but could we have grown faster? Possibly. However, based on looking at our sales of our business identity and promotional products as well as repeat customer bookings and new customer bookings, we do not see anything that we can specifically attribute to an economic impact at this time, and we can not rule them out but we do not see it and we have raised guidance on revenues multiple times in the last several quarter, we have exceeded those raised guidance every time. We have just given very healthy guidance for next year. So I think that is the bottom line answer.

[Franco Turrinelli:]

Yes. Thank you. Thanks a lot.

[Robert Keane:]

Thank you.

[Operator:]

Your next question comes from the line of Mark May with Needham & Company. Please proceed.

[Robert Keane:]

Hi Mark.

[Mark May:]

Hi. Thanks. I would like to first thank Harp for helping me better understand the company over the past couple of years, thank you. This first question would probably be for Michael or Harp. If you excluded the working capital changes, is it possible for, and its probably not possible in the current quarter, but excluding the current quarter because you have some big projects going on, is it possible that for the remainder of fiscal '09 that the company could be positive free cash flow excluding working capital changes for say three of the four quarters this year? I am wondering if you could give us a breakdown I do not know if you did this in the prepared, I have not gone to the very end, but a breakdown of the CapEx under your three buckets for the quarter and give some flavor for what that breakdown may be in the September quarter.

[Mike Giannetto:]

Sure. So Mark, this is Mike. So in terms of free cash flow, we are not giving guidance on free cash flow and I do not want to give specifics by quarter either, but based on our plan and based on our guidance we do expect to be free cash flow positive next year. We would expect it to increase over the current year as well. So, that is what we are expecting at this point. In terms of your second question, in terms of the capital expenditure, we did talk about it within our prepared remarks, but for the year we ended up with $63 million total CapEX, about 16% of revenues and in terms of how it broke out.

[Mark May:]

Since you have already addressed that maybe, can you just talk about how it may break out for fiscal '09?

[Mike Giannetto:]

We are not going to give specific guidance on that Mark in terms of what you will see in terms of different buckets. Qualitatively we did talk about an expansion in Windsor. Where we are expanding the manufacturing facility, as well as in Montego Bay, beginning work on our service center down there. So, there will be a good piece of the expenditures going into those facility expansions. I think in the rest of the traditional CapEx buckets you will see leverage, you should see leverage, we expect to see leverage next year, say in product and equipment, but you will see a fairly significant percentage of CapEx going into facilities.

[Mark May:]

Okay. Great and last question, the order volume was flat sequentially but your AOV was up strong. Can you provide some color on what drove the higher AOV, maybe either specific products, mark up on customers, or more color?

[Mike Giannetto:]

Sure, I think what we did see this quarter and in our prepared remarks, we talked about it, repeat customer revenue was up to 65% this quarter which is the highest, I think has ever been actually. So repeat customers tend to have higher AOVs, which I think definitely played into the increase we saw quarter-over-quarter. I would say that is probably the biggest driver of the increase. We do continue to rollout new products, it is no AOV went up, but I think the repeat increase definitely had a positive impact on the AOV.

[Mark May:]

Did you change your shipping prices at all during the quarter, or was it pure price mix, or customer mix space?

[Robert Keane:]

In terms of shipping prices, we are doing some testing, but within Q4 that really was not. We did not increase shipping prices in Q4, we are looking at testing it, but it did not have an impact in Q4.

[Mark May:]

I promise last question. I believe DHL is one of your main shipping partners. If I recall earlier in the year, they made an announcement that they are getting out of I think the ground shipping business in the US over a one or two-year transition period. Do you see that, how are you reacting to that and how do you see that; is it at all impacting your business segment from a shippers sense?

[Robert Keane:]

So DHL is a provider, a shipping provider for us, and you are correct they did make an announcement. We do not see it having a major impact on our business. We work with other carriers as well, so we do not see it is disruptive to us in anyway and we are managing that.

[Harpreet Grewal:]

Our systems are set up to for us to remain agnostic.

[Mark May:]

Okay. Thanks for answering my questions.

[Robert Keane:]

Thank you.

[Operator:]

Your next question comes from the line of Scott Devitt with Stifel Nicolaus. Please proceed.

[Scott Devitt:]

Hi, thanks, and congrats on the quarter.

[Robert Keane:]

Thank you, Scott.

[Scott Devitt:]

I had two questions and it is one following the other, but your incremental operating margins throughout this year have actually increased meaningfully if you look at it on a cash basis excluding stock comp, it was 18.3 this quarter or 400 basis points higher than your reported margins. So the vast majority of that is the sales and marketing efficiencies. I noticed in the prepared transcript that you cut or you lessened the marketing spend because of the loyalty dynamics, but you also cut back heads. I just wonder if you could add some color around that first, and then I have the follow on question? Thanks.

[Mike Giannetto:]

This is Mike. We did see leverage in the marketing and selling line and some of it within advertising and some of it within what we call internal marketing cost which is personnel cost as well as other overhead type costs. Just want to be careful we did not cut anything in terms of heads; what we did see is leverage in scale year-over-year and sequentially as well within marketing and selling. So it certainly was not a cut so to speak. We did see leverage there, but that was something that we had planned on.

[Scott Devitt:]

Okay. That is helpful and I misread the transcript. Then to follow on that question, if you look at the mid-points of your guidance in fiscal '09, I believe the top line is around 39% and the cash earning growth is 30%. Some of that, the difference in that is the fact that your interest income does not grow as fast as the remainder of the business, but despite the better income on operating margins here in the back half, you are losing some of that in fiscal '09 and that was the reason for the sales and marketing question. However, there are three levers and I know you are not going to touch on this in detail in terms of guidance, but either there is a bit of upside to the EPS guidance or gross margins are going to go down from current levels or sales and marketing as a percentage of revenue are going to go up. So, I was wondering if you talk about that a little bit. Thank you.

[Robert Keane:]

Thank you.

[Mike Giannetto:]

Thank you. Scott, you are correct, we are not going to talk specifically about individual line items. We did talk a bit about gross margins in terms of being stable in our range from current levels. In terms of the rest of the P&L, we are not going to get into the specifics, we are focused on the range, the EPS range we have provided and we are confident that we have a good plan that balances the investments we need to make and as well as drive the increased earnings.

[Harpreet Grewal:]

One thing that I might add and also the fact of the question asked by a previous individual is relative to your free cash flow which is what we are generally talking about is in fiscal year '08, you had a great trend where our free cash flow as Mike pointed out in his prepared remarks equaled to $18 million. One of the underlying assets to the free cash flow growth was the stability in operating margins on a non-GAAP basis, CapEx coming down as a percent of revenues which for our guidance, there is potential for that. If you look at our EBITDA margins, there was a very nice pickup in EBITDA margins from 18.2% to 18.9%, a 70 basis point pickup on a non-GAAP basis. So, we believe within the guidance that Mike articulated, there are briefly stable margins with a revenue growth that we have worked within the range that we talked about and CapEx range we have talked about. There is the potential for that dynamic to complete play out.

[Mike Giannetto:]

Just to top off on what Harp just said that 18.9% EBITDA is the highest EBITDA we have had at anytime, any years since we have gone public, in another three years and so.

[Scott Devitt:]

That is helpful and congrats again. Thanks.

[Mike Giannetto:]

Thank you.

[Operator:]

Your next question comes from the line of Dom LaCava with Canaccord Adams. Please proceed.

[Dom LaCava:]

Hi, thanks for taking my questions. I just tend to hop on and of, so you may have answered this. However, on the website solution, are you still giving 30-day free trial with the pricing still around $5 to $15, is there potential to lift that pricing, and then are there any other metrics now that you are supplying for people to track the progress of that product?

[Robert Keane:]

I did mention that websites are on plan and we expect them to grow as a percentage of revenues, but it is too early to talk more specifically about them. I think you are right, currently the pricing we offer is roughly three options of $5, $10 and $15 and we have a free trial which I believe we have tested various dates 30 days, 60 days, 90 days I am not sure what the current test is and we maybe testing multiple ones. However, we are very excited about it, it is a good product for us already, it is on plan, and we are very happy with it.

[Dom LaCava:]

Okay, and on the referral partnerships, are there any recent referral partnerships that have transitioned to your strategic partnerships. I know that you had highlighted that as a core strategy in cycling people from referral to strategic partnerships, anything there you can talk about?

[Robert Keane:]

No, nothing specifically. The team that does strategic partnerships manages the same team that does the referrals and we are very excited about some of the things in the pipeline, but we have nothing to announce.

[Dom LaCava:]

Okay, great. Than you.

[Operator:]

Your next question comes from the line of Michael Weisberg with ING. Please proceed.

[Michael Weisberg:]

Yes. Hi, everyone.

[Robert Keane:]

Hi.

[Michael Weisberg:]

Let me start just with a small thing. You mentioned Mike there is an 800K charge for Harp in the September quarter, and I think you said half was stock-based, where is the other half is that G&A?

[Mike Giannetto:]

It is all is G&A, but more than half is share comps, about 75% of it is share comp the rest of will be a charge a non-SBC charge within G&A.

[Michael Weisberg:]

Okay. 75% stock based. The rest is G&A. When you talked about your CapEx, can you give us a sense in Windsor how much of a capacity expansion are you planning up there that will be completed by that third quarter I think you said?

[Mike Giannetto:]

It is just about a 120,000 square feet that we are looking to expand, so we have currently about 165,000 square feet.

[Michael Weisberg:]

And going from 165 to 285?

[Robert Keane:]

Yes. 285 approximately.

[Michael Weisberg:]

Okay. If that Canadian newspaper was right, some of that is office space so is that effectively a 70% increase in capacity?

[Robert Keane:]

You are right. Some of that is office space, but it is a large increase in capacity as well.

[Michael Weisberg:]

Great. Bob, you mentioned the possibility or probability of having customer service in foreign languages. Is there anything in the CapEx budget this fiscal year for that, or is that beyond this year?

[Robert Keane:]

No. Nothing of substance, I will turn it to Mike. I think that there is a lot in the CapEx budget for Anglophone customer service because of our long-standing history and success in our Jamaican operations, we are expanding that. However, the rest of it is there is some CapEx, computers and things that, but I think Mike you want to talk about it?

[Mike Giannetto:]

Yes. Bob is correct. There is a little very small amount in for the European-based centers in our plan but not to be to construct anything that would be in a lease situation.

[Michael Weisberg:]

The Jamaica thing which is taking 18 months, is that just a big new facility? Is that what are you doing there in Montego Bay?

[Robert Keane:]

Correct. It is a large new service center, office building which will allow us to expand over the coming years.

[Michael Weisberg:]

Great and Mike did you say that you thought gross margins would be roughly stable at the fourth quarter level in fiscal '09? Did I hear you say that?

[Mike Giannetto:]

That is correct and we are planning for that now, its factors that, it hit us pretty hard in '08, we are assuming they are not going to hit us hard in '09 that being mainly currencies. We also start to see in terms of shipping some fuel surcharges coming through higher oil prices have come in to a negative impact on our margins too which flows through our different inputs. So, assuming those two areas do not move on as significantly, we would expect to be in a fairly tight range of stability coming off of the Q4 number.

[Michael Weisberg:]

Great. Did you also say though that is part of the spend in the first quarter will be, it sounded like some of that spend would be on the gross margin line, in terms of preparing for the December quarter.

[Robert Keane:]

That is correct. This is part of the lumpiness of our CapEx preparing for Q2 as well, so we will be putting equipment in place which will start deprecating, but also will bring in more plant personnel, temp personnel that will need to be trained up before the Q2 increase. So, there will be investments in the cost of goods sold line in Q1.

[Michael Weisberg:]

Great. Thanks. One final thing Harp is this your last conference call?

[Harpreet Grewal:]

It is.

[Michael Weisberg:]

Well, on behalf of many of us, you have done a great job in sometimes trying situation. So, thanks for all the help.

[Harpreet Grewal:]

I appreciate for the kind words.

[Operator:]

Your next question comes from Nate Swanson with ThinkEquity. Please proceed.

[Nate Swanson:]

Hi, I jumped on late, so I assume most of my questions have been asked, but I am just wondering you have $125 million cash or $100 million of cash, and it seems like you should be cash flow positive. This is always been an organic growth story. Thoughts about uses of cash in the coming quarter?

[Mike Giannetto:]

Nate, it is Mike. We have no specific plans that we are prepared to share right now in terms of uses of the cash.

[Nate Swanson:]

Okay. Thank you.

[Mike Giannetto:]

Thank you.

[Operator:]

Ladies and gentlemen, that concludes our question-and-answer session for today's call and I would like to turn it now back to Robert Keane for closing remarks.

[Robert Keane:]

Thank you. Let me close by saying thank you to all of you for your interest in VistaPrint. Our last quarter, our last year and next year's guidance really affirmed that our model works and that our business is striving. We delivered high revenue growth and high earnings growth, stable margins, growing free cash flow, lower capital intensity and we are very excited about the coming year. We are very optimistic about where the business is going and we look forward to meeting with many of you in the coming quarter and in the coming year to report on our progress going forward. Thank you very much.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation, you may now disconnect. Have a good day.