Cimpress N.V. (NASDAQ:CMPR) Q4 2022 Results Conference Call July 28, 2022 8:00 AM ET
Company Participants
Meredith Burns – VP, IR and Sustainability
Robert Keane – Founder, Chairman and CEO
Sean Quinn – EVP and CFO
Operator
Good day, and welcome to the Cimpress Q4 and Fiscal Year 2022 Earnings Conference Call.
I will now introduce Meredith Burns, Vice President of Investor Relations and Sustainability. Please go ahead.
Meredith Burns
Thank you, Vaishnavi, and thank you, everyone, for joining us today. We decided to host this earnings follow-up webcast in light of increased investor focus on macroeconomic uncertainty as well as the fact that our annual Investor Day will be in September, which is later than it has been in recent years. 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 and annual letter to investors. There’s a lot of information in these documents, and we appreciate the time that you have dedicated to understanding our results, our commentary and our 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 Ask-A-Question box at the top right of the screen.
Before we start, I’ll note that in this session, we’re likely to make statements about the future. Our actual results may differ materially from these statements due to risks that are outlined in detail in our SEC filings and the documents we published yesterday on our 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 Quinn
Great. Thanks a lot, Meredith, and let me echo our thanks to those who have joined the webcast today. Before we take your questions, I just want to highlight a few salient points from the information released yesterday. In the fiscal year that just ended June 30, Cimpress delivered record revenue and gross profit in the face of significant cost inflation, supply disruption and lingering impacts of the pandemic.
Our organic constant currency revenue growth accelerated in the second half of the year and to 19% in the fourth quarter. Our value creation trajectory is clear in our Upload and Print businesses, and National Pen, and BuildASign and Printi, and you’ll see strong results across each of those businesses. But it’s worth highlighting that our upload of Print businesses as a whole, which now represents 30% of our consolidated revenue, had record revenue and record combined segment EBITDA this past fiscal year despite these macro conditions and also currency headwinds.
And the 2 largest businesses in the group had record new customer acquisition during this past quarter as evidence of the continued shift from off-line to online, which we believe accelerated in the current environment. So very strong results there.
In our largest business, Vista, revenue growth wasn’t as strong as many of our other businesses. Our profitability this past fiscal year and also in the fourth quarter was significantly weighed down by high levels of discretionary investment and also cost inflation that increased in the second half of the year and was not offset by price increases, although we believe there’s opportunity for that in the near term that we’ve started to take action on.
In Vista, we’re progressing on our multiyear transformation journey with stronger foundations. Vista is now nearly complete with the migration to our new tech stack, which is launched in all but one small market. That effort is required in almost 3-year dedication of almost all of Vista’s engineering resources and constrained our bandwidth to innovate and improve our customer offering. But as we look forward, it’s a crucial enabler in product development and data and analytics and personalization and an accelerated new product introduction.
With our foundational investments in place, the Vista team now has a clear focus on demonstrating that Vista’s transformation can now yield rapid improvements to customer value and the financial returns on the significant investments that we’ve made, and we look forward to sharing tangible examples of that at our September Investor Day.
To offset some of the cost inflation that’s baked into our cost structure as we head into this next fiscal year, but also to further prioritize our focus on areas with near-end financial returns, we’ve been proactive to reduce cost in parts of Cimpress as well. The savings from actions outlined this quarter and also in last quarter should result in annualized savings of about $25 million.
In the annual letter, we also described important liquidity and risk management topics that allow us to keep our focus on operational execution despite increased volatility. We have ample liquidity. We have no material debt maturities until May of 2026. We have a robust currency hedging program and a portion of our debt denominated in euro, amongst other balance sheet hedging. And we have a mix of fixed and floating rate debt, coupled with the use of interest rate swaps to mitigate the impact of interest rates.
In our letter, we’ve once again shared our range of estimated steady-state free cash flow, which shows a decrease from our pre-pandemic high due to Vista’s financial results and, in particular, the impact of cost inflation and also product mix changes, which is partly offset by increases in our other businesses. There are plenty of external inputs like the impact of inflation, the impact of currency swings and the like, that are anything but steady-state right now, but nonetheless, this range that we’ve disclosed implies an intrinsic value per share that’s significantly higher than where our share price is trading today.
We’ve also provided forward-looking commentary by component in our annual letter. I’m not going to go through all that here. But in summary, we see Cimpress as being competitively advantaged and able to continue to grow profitably for years to come.
In Vista, where we’ve been investing significantly, we expect annual organic constant currency revenue growth in the year ahead to accelerate from where it was in FY ’22, which was 5%. And on the profit side, we expect that the shape of Vista’s profitability improvement will start to be visible in FY 2023 and that over the next several years, Vista’s segment EBITDA and unlevered free cash flow can return to historical highs.
With that, Meredith, let’s open up for questions.
Question-and-Answer Session
A – Meredith Burns
Thanks, Sean. [Operator Instructions] So, we’re going to take our first question, which was pre-submitted yesterday. Thank you, by the way, for pre-submitted questions. We got several. So did you see continued momentum in Europe within the Vista segment in Q4 ’22, as you did in Q3 ’22? Any indications of softness in customer spending due to inflation and/or economic slowdown in Europe or elsewhere?
Robert Keane
So this is Robert speaking. And first of all, I want to join Meredith and Sean in welcoming everyone. Thank you for joining.
The quick answer is that no, we did not see softness in Europe. Europe has been doing very well. If I break that down, Vista, the constant currency revenue growth in Europe in Q4 was in the teens. So that’s a good result there. It’s definitely improved over the first half of the year. If you look at our consumer business, excluding facemasks, which will for understandable reasons down globally — invitations and announcements grew in Europe. They did not in the U.S. We can talk about that if need be.
The biggest business we have in Europe is in the Upload and Print businesses, and they had very strong growth, 47% combined organic constant currency growth. So we see Europe is doing very well.
Meredith Burns
Great. And we’ll stick with Europe with a live question that got submitted about the Upload and Print businesses for a second. Drivers of the strong growth behind the Upload and Print businesses you mentioned in the letter that you had a record customer adds — and in the 2 businesses — largest businesses there. Was this driven by new products, changes in the sales team or simply macro? And more importantly, how sustainable is this growth?
Robert Keane
One I’d say that the team — 2 or 3 years ago, if you go back to — we did some significant restructuring of how we went through Upload and Print. You may recall that. And we took out a middle layer of leadership to really push team to the front line and focus on execution. That has been extremely successful. It was paramount to our ability to get through the pandemic and react quickly.
I think the long — the short answer to what could be a longer answer is, we continue to invest in those businesses through the pandemic when a lot of other companies pulled back. The momentum of the teams that we set up in the structure of the teams we set up 2 or 3 years ago has really started to become a self-feeding momentum. We definitely see smaller online players and especially offline traditional printers being very stressed in the current environment.
That includes supply chain stresses, in terms of paper supply and gas and other energy prices, shipping costs. So we are advantaged because of the Cimpress’ global procurement capabilities, the ability to shift our production around a large number of production sites in Europe. And so I think all those things came together to just take advantage of what our secular tailwinds of this entire market shifting from an online — I’m sorry, from an offline model to an online model, but importantly, from traditional means of production, which are job shop batch-based production towards mass customization. And that combination of online and mass customization is what’s been driving our European business.
Meredith Burns
Great. Thank you, Robert. All right. So we’re going to move over to the U.S. right now in particular, in Vista. Describe in more detail, please, what led to just marginal U.S. growth within Vista, for example, the $4 million decline in consumer product sales.
Sean Quinn
Yes, there are really 2 areas that I would say were disproportional in the U.S. The first one is consumer product sales and the second one is the impact of facemasks. Each of those is about $4 million of year-over-year decline that weighed on growth. On the consumer side, that was really weighted towards invitations and announcements. So that was the biggest impact there, which is really different market by market.
We’ve seen actually growth in that category elsewhere, but a decline in the U.S. market in Q4. I’ll just add that in terms of small business product revenue, in the U.S. that was stronger. We saw good growth there year-over-year, certainly in promotional products, but also in signage as well as in marketing materials and business cards, which are very large categories in the U.S.
Meredith Burns
Great. Thank you. Next question, what led to your decision to exit your businesses in China and Japan?
Robert Keane
I think there’s — in summary, it’s focus in capital allocation. Now if you go, click into each one of those, we have attempted for well over a decade in both of those markets to go into what are obviously enormous markets. And if you look at the opportunity there, hypothetically or theoretically, there’s a very large opportunity, and we see competitors in both markets doing very well. We also see our China team developing a business model that is very innovative. The teams, we really respect and like the teams there, but we really feel and felt that we needed to focus on turning around Vista and continuing momentum in our core other businesses in Europe, Australia and the U.S.
We do have 2 smaller businesses in Brazil and India. Those are both growing very fast and either at profitability or about to get to profitability. So we ended up making this tough decision. In terms of capital allocation, we’ve mentioned in the letter, Sean has spoken about different times that we — although, we don’t change what we consider our — or our hurdle rates month-to-month, quarter-to-quarter, even year-to-year, there is a implied hurdle rate of what we need to do, given the opportunities for capital investment, whether it’s organically in the Upload and Print businesses or Vista or National Pen or importantly, places like share buybacks and debt repurchases, which we have not done. We can talk more about that. I’ll defer to you, Sean, on that. But in light of all of those capital allocation opportunities, we just felt that we should stop the spend and stop the investment in China and Japan.
Meredith Burns
Robert, and we did just get a question asking about the size of the revenue that we’re foregoing in those 2 markets.
Sean Quinn
It’s small. Yes, I would call it relatively immaterial to consolidated revenue in the sort of $10 million range roughly. So it’s not significant.
Meredith Burns
Great. Thank you.
Robert Keane
But just to be very clear, a negative EBITDA and negative cash flow that will cease.
Sean Quinn
In both markets.
Meredith Burns
Great. Thank you. All right. We’re going to shift to a couple of questions around our outlook. So first, from a margin perspective, in Vista, the language around margin outlook is noticeably noncommittal for Vista. Can you please clarify when you estimate that margins will return to pre-pandemic levels? How does the margin outlook 2 to 3 years from now compare to the margin profile of pre-pandemic low 20%s?
Sean Quinn
Yes. Yes, we didn’t talk about margin for Vista guidance or for any of our businesses. We did add more commentary than we have in the past. So hopefully, people find that helpful. We said in the letter that we expected in FY ’23, that Vista’s profitability improvement will start to be visible and then over the next several years that we could reach historical highs. So that’s not margin outlook, but we do expect margins to expand, and that’s required to expand over that several-year period, and that’s required as part of the commentary about getting profitability back to historical highs.
I think that that margin improvement will happen across each part of the P&L, in gross margin, in leverage in terms of ad spend as a percentage of revenue and then also in our OpEx leverage. But the shape of our margins will also be somewhat dependent on how design and digital and some of our other offerings impact our margin mix. And so we’re really focused on absolute profit and that’s why the commentary was focused around that as well.
Meredith Burns
Great. Thank you. And then do you think that adjusted EBITDA margin expansion for Cimpress in FY ’23 is a reasonable expectation due to your focus on leveraging the significant investments made in FY ’22 as well as your efforts to combat inflation and reduce costs?
Sean Quinn
Yes. Yes, we didn’t — again, we didn’t provide consolidated margin guidance, but we did give some indicators here. So in Vista, if you look at our guidance, it does imply that margin expansion will be delayed there because we said that annual organic constant currency revenue growth would accelerate, but EBITDA growth will be slower. And the reason for that is that we still have the annualization of some of our incremental investments that we did in FY ’22, in particular, those in the first half of the year that will have the full year impact of, but also the full year impact of cost inflation. And then that will be — there’s still a question of how much of that will be offset by pricing. And as we said, we think there’s opportunity there. We need to prove how much.
In our other businesses, we said we believe that there was an opportunity for some margin expansion. And so you have to, kind of, put that all together in terms of what you believe at the Cimpress level. Of course, when it comes to margin, there are other macro factors that will come into play like the extent of any further cost inflation from where we are and our ability to offset that with price. So we’ll have to, of course, manage that throughout the year.
Meredith Burns
Great. Thank you. So you mentioned pricing, let’s stick on that one. Do you have confidence that you can raise prices in the Vista segment without impacting demand? How long do you think it will take to offset inflationary pressures through pricing?
Robert Keane
I think, I’ll say that there will be some impact to demand potentially, but we definitely believe that the net impact will be positive. And there is — there are paths where we think we can actually grow demand in terms of absolute volume. Let me just answer that or click down a few levels to that.
In Upload and Print, traditionally, that’s been a more and is a more of a commoditized market. We’re selling to graphic professionals who can go on the Internet and find supply anywhere they want. And traditionally, this is real competitive differentiation. One of them has been doing studio-based web-based self-service design that saves the customer the cost not of printing per se, but of the graphic design effort. So in Upload and Print, which doesn’t have that competitive buffer or that design value to the customer, we have seen increasing volumes while we’ve increased prices. I think that is because like us, competitors, both offline traditional and online competitors are all facing very severe costs in input — the inflation in input costs and the market pricing is going up.
More broadly, I’d say that the — even before this inflationary environment, the Vista strategy we’ve laid out is to take that traditional strength in do-it-yourself design that Vista has had that differentiated us from so many other our competitors out there and really double down on that by — if you look at just to create 99 designs, the investments we’re making our customer service-based design, those are really at the core of the elevation of the value proposition or the increase of the value proposition we’re giving to our customers in Vista.
That leads to an elevation of the brand. And as we move away from a brand known for deep discounting of business cards to the broader value proposition, on top of the fact that we see Upload and Print having the ability to grow volume while increasing pricing, we think that value shift in doubling down the demand can and will help Vista both raise prices while preserving or we would prefer growing volumes.
Meredith Burns
Thank you, Robert. All right. Have we seen any early benefits from launching the new Vista technology platform in the United States? Or I’ll just add anywhere.
Robert Keane
Yes. Well, I’ll talk about U.S., but I can — I agree with you it’s anywhere. It certainly applies to both. I would say definitely, first of all, very recently in the last 2 to 3 months, we’ve seen that we’ve been able to roll out robust and dynamic pricing tests, which rather than just rolling out a price are sophisticated in the ability to measure the elasticity of demand, and we try to understand and we are able to understand product by product and country by country the net impact to the gross profit, net of volume changes. So it’s not just let’s raise prices by X percent, but it’s actually recognized that different products have different elasticity curves and work on that. That type of sophistication simply did not exist in the monolith.
In terms of product introductions, we are seeing — we’re still early in the game because we’re getting the final country off the monolith, but we definitely see faster, easier ability to improve products being enabled by the API structure of the new model — of the new architecture compared to our monolithic traditional platform. I’ll give you 2 or 3 very specific examples. We have introduced a product called LogoMaker. You can see in the U.S., U.K. and other sites, if you go into a search button to LogoMaker that was built entirely on a new platform.
That — if you go through that experience, you’ll see at the end of that experience, it’s directly integrated to cross-sell into print products. And that type of handoff is greatly eased in a new tech platform. And we’ll — I’d say the other — another example is VistaCreate. It’s very early days, but we have — it’s got VistaCreate for American sized posters. We have a beta running where the design you do in VistaCreate move straight into the checkout flow on VistaPrint. And we do that handoff from one to the other because of this API structure.
And finally, our Wix partnership, the speed at which we can integrate things like payments and subscription is greatly increased. So overall, I’d say the platform is just coming live across the world, and we are still learning to use it. But I think it is meeting our expectations of expanding the bandwidth and increasing the velocity of us in terms of doing constant product development that is going hand-in-hand with data-driven experimentation to see the actual impact based on real customers.
Meredith Burns
Great. Thanks. So a quick follow-up question on the results. So a follow-up, excluding facemasks and Consumer Products, what was the growth in Vista U.S.? Seems the growth was negative given the commentary of Europe up teens and Canada up 20%?
Sean Quinn
Yes. In our commentary, even in our documents, we said marginal growth. So it was positive. It was just not significant, but it was — there was still growth despite that weight. But the growth in other markets was much higher. And like we said in our second and third largest markets, it was 20% or higher.
Meredith Burns
But excluding facemasks and consumer, the growth in the U.S. is the question?
Sean Quinn
Got it. Yes, it was roughly flat. I’m sorry, I think that’s — yes, the marginal growth, including those, it’s higher than that without them. And so it would be — it’s kind of roughly mid-single digits in Q4.
Meredith Burns
All right. Great. So we’re going to move to a question about guidance on growth investments. So organic growth investments at Vista were $100 million plus in FY ’22. How much do you expect to invest in FY ’23? I know that we didn’t give specific guidance there but…
Sean Quinn
Yes. So we didn’t give specific guidance other than to talk about kind of the trajectory of some of our profitability, which is a little bit different, but of course, it’s related. I think there’s a couple of things that we’ve said that I think are helpful here. One is starting in Q3, we did start to slow hiring. And that’s certainly continued. And then we also had the recent cost reductions that we did as well. And we said that in FY ’23 that we prioritized our investments and our focus around areas that have the ability to deliver near-term returns as well.
We do have some of the full year impact of the FY ’22 investments, as I mentioned before, but I think this overall commentary around, kind of, increased hurdle rate for organic investments, especially incremental organic investment, but also the slowing the rate of hiring and then the actions that we took recently, hopefully is going to set the scene for the, kind of, the path or the pace of investment as we look forward.
Meredith Burns
Okay. Let’s take some capital allocation questions. There have been quite a few that have come in. So we’ll start out on bonds side. So can the company buy back bonds in the open market? Or are there bank covenants preventing this? And if you can buy back bonds, given the current prices are well [sub-80] yesterday, why wouldn’t this be a good use of cash, especially with the elevated level of cash on the balance sheet at $622 million?
Sean Quinn
Yes. Yes. So we can buy back our bonds in the open market. And just from a tactical perspective, we have the mechanisms established to execute that if we were to decide to allocate capital there. And we’re not limited in terms of our debt covenants, in terms of our ability to do that. Just so everyone knows, unlike if we were to do share repurchases, there aren’t any pre-purchase disclosure obligations, so we could go in and purchase those in the open market. And we certainly understand the attractiveness there and also the math in terms of the returns.
As is the case also with our share repurchases, this is a — it’s an active consideration that we’re very regularly thinking about and is ultimately a triangulation between our liquidity needs and especially in light of some increased macro uncertainty, we biased there towards liquidity recently, but also thinking about our net leverage and then assessing relative returns. We have these discussions with the Board on a very regular basis, and we’ll continue to do that. And — but we agree with from a returns perspective, both repurchasing our bonds or share repurchases at these levels, we believe are attractive returns.
Meredith Burns
Okay. Next question. You mentioned that the hurdle rate for incremental organic investment has increased as a result of the share and bond price depreciation. What is that new hurdle rate?
Sean Quinn
Yes. Robert mentioned earlier. This is not something that, kind of, we calculate month-by-month or, kind of, the precise number changes. So there’s no precise number to provide there in response to the question. But I think, one, we think it’s critical that we continue to invest in our businesses and especially in Vista, given the impact of the profitability there on our per share value. And so we certainly have biased to continue to invest behind our businesses. But as we consider whatever those investment levels are and especially any incremental investments, we have to weigh that against returns on either bond or share repurchases as well. And as I said in response to the earlier question, buying back our bonds right now is a very clear and calculable return. We can see what the yield is. And buying our shares, that requires a little bit more judgment. But there, as I said in my opening remarks, I think there’s a very high return there as well at recent price levels.
And so some of — I think, some of our recent actions, I think, have been informed by this notion of a higher hurdle rate, exiting long-term investments for the reasons that Robert talked about before, like our businesses in Japan and in China, I think are clear examples where we just — we can’t justify those long-term investments right now relative to increased hurdle rates when we can allocate capital and our time and focus elsewhere. There’s, of course, always factors like liquidity that we’re always considering. And so that full option set will remain on the table. And like I said before, that’s an active discussion that we have with the Board on a regular basis.
Meredith Burns
Great. All right. So a question on organic growth investment. Organic growth investment has averaged about $150 million for the past 8 years. That seems more like a normal business expense than nonrecurring investment. Why should investors have confidence anchoring their estimate of intrinsic value on steady-state free cash flow estimates when investment spend is so persistent? What can you do over the coming years to improve confidence in steady-state free cash flow estimates as a realistic answer — anchor for intrinsic value?
Sean Quinn
Great. This is a great question. It was pre-submitted. So I did have a chance to think through this. So I’m going to spend a few minutes here. Robert, please chime in if there’s anything you want to add as well.
Yes. I think in Robert’s letter over the years, he’s been quite candid about where we’ve had failures. And so there’s definitely a portion of the spend that’s referenced over the last 8 years that aren’t normal business expense, they were intended growth investments that failed. And things like some of our early-stage investments, Robert’s talked about that extensively in past letters are examples of that.
But yes, I think overall, the whole notion of steady-state free cash flow and understanding and, kind of, breaking apart the investments that aren’t required for steady-state free cash flow was a completely new concept for us 8 years ago. And so the ranges over time have narrowed quite a bit. And I’m going to spend just a few minutes going through — trying to answer your question, but really focused on our current investment levels to put it in perspective. But before I do that, the question refers to nonrecurring expenses. And I just want to be really clear about what we try and outline in the letter, which is not intended to be nonrecurring expenses.
Some growth investments like CapEx or some third-party costs could be nonrecurring in nature, but things that are people-based costs are definitely recurring unless we make a choice to not have them recur. And so that distinction there is, I think, important. We’re trying to outline the cost of the investments that are not needed to maintain steady-state free cash flow, and that’s what we defined in the letter.
Just to also put things in perspective because we’re talking about an 8-year arc year and there’s a question about are any of these — are these investments we outlined, in fact, growth investments. We’ve — and I recognize we’ve also had significant M&A that wasn’t part of the question, too. But our revenue over the last 8 years has gone from $1.3 billion to $2.9 billion. Our adjusted free cash flow has gone from $72 million in FY ’14 8 years ago to, I’ll say $244 million just prior to the pandemic.
Our unlevered free cash flow is up over that period, more than that from $78 million to $317 million in FY ’20, just prior to the pandemic. And our adjusted EBITDA has grown quite a bit, too. And if you go back to, kind of, the start of that 8-year period, which the company was still mostly Vista, our adjusted EBITDA for FY ’14 was $181 million and just before the pandemic in FY ’20, just for Vista, our EBITDA was $362 million. So there’s clearly been growth as well. But when you look at our actual results and then also the statements that we make about what we think we can do next year in the next couple of years and then you look at our investments, I think that the picture has gotten much clearer, especially over the last few years. And so I’m just going to, kind of, click through that.
In our businesses outside of Vista, there’s really — on a relative basis, there’s really not that much growth investment and revenue and profits are growing. So take Upload and Print, for example. Most of the growth investment there is growth CapEx. And you can see their actual growth in revenue and segment EBITDA. And I think one can pretty quickly conclude that that’s a reasonable amount and that those are, in fact, growth investments.
Take our all other businesses segment, a big part of the FY ’22 growth investment that’s in there is from our business in China, which Robert talked about earlier, we’ve made the decision to exit. That exit won’t decrease our steady-state free cash flow. And so clearly, that’s not something needed to maintain our steady-state free cash flow. So again, I think you can conclude that’s a reasonable estimate.
And then in Vista, there’s also some areas that I think are equally clear. If you take our 99 designs and VistaCreate investments that we’ve done post acquisition, that’s a significant piece of our overall investment. There too, I think there’s just not much judgment there. Those are just now starting to be integrated into the VistaPrint experience. And so those investments are the — that we outlined are the actual EBITDA or cash flow burn in those businesses that we’ve acquired and those are clearly growth investments.
For advertising, this is where you start to get into some more judgment. So from an advertising perspective, there’s certainly judgment in understanding how much of that is needed to maintain our steady-state. But with the mid- and upper-funnel ad spend that we’ve had in FY ’22 and the nature of that and the fact that that isn’t intended to pay back in year and the fact that we’ve only included just a small amount of our performance advertising in our growth investments that we outlined in the letter, I think from my perspective, that line is pretty clear as well.
And that leaves 2 areas. One is our mass customization platform. That’s been a big one over the last 8 years. And I think that’s certainly harder for an outsider to judge. But we’ve actually been moving more of that into maintenance because it’s becoming more integral on how we run our businesses. And so you’ll see that that’s actually shifted down in our FY ’22 numbers even though our actual costs have gone up. And we’ve had a significant increase in the usage of MCP services and also things that enable inter-business fulfillment. We referenced that in the letter, which has grown massively over the last 3 years, but also aids revenue growth and profit improvement. And so we think that’s a reasonable estimate that we’ve included for FY ’22.
And then the other one that’s, I think, the hardest for you all to judge is the investment in Vista OpEx, that talent-base, where we’ve added significant costs over the past few years, either in terms of hiring new talent, which we have a very high level of confidence in, in areas like user experience, design or in product management or data and analytics and brand, and even in our technology teams, which now as we can look beyond replatforming, many of those teams can shift to building new capabilities.
And so we think that there is significant opportunity for these teams to unlock, but we’re really just getting started improving that. And so the key questions really then are can Vista grow revenue and more importantly, our contribution profit at a level that justifies that growth investment and in particular, that talent-based investment. And we’ve said in our forward-looking commentary that we think in Vista, we can accelerate top line growth in that over the next several years, we can get back to historical levels of profitability. And so that’s what we must prove to all of you.
And when we did pull back on investment in 2019 and 2020, just before the pandemic, we did expose large increases in profitability and cash flow, which again has suggested that these are, in fact, not needed to maintain steady-state. The pandemic and cost inflation has definitely had an impact on underlying profitability and cash flow in Vista, and that’s reflected in our estimates as well. And the replatforming effort, as Robert outlined before, has consumed just a tremendous amount of organizational focus and resources. But now we’re excited about where we can go from here, and we’re confident in that.
Meredith Burns
Thank you, Sean. All right. So we’re going to shift back to a couple of live questions that we’ve had in a couple of different areas, one of them on marketing. So with Vista, we noticed that you started leaning more aggressively into marketing this past quarter. Does that mean that you feel confident enough in the product and value proposition that is just a matter of driving awareness now? How will you balance growth in margins in that segment in the next 12 to 18 months?
Robert Keane
I do definitely believe that your question contains the answer. We are more comfortable with where we position the brand. So pre-pandemic, we pulled back because we felt, one, the ROI on ad spend just wasn’t making sense, so we pulled that back. The other thing is the brand was very much stuck in the deep discounted business card brand image, which limited the future upside of the business.
Today, we have reversed a multiyear decline in the gross profit per customer. If you look after 12, 24, 36 months of a customer’s lifetime, how much gross profit do we generate, we have gotten back on what had been a long-term trend to move that up every year. We have a value proposition which still needs to continue to evolve, but as we’ve, both simultaneously reduced discounts and reduced list prices to be more transparent to customers. And with that and with the launch of the new platform with VistaCreate, with 99 designs, we feel now is the time to turn to bringing in new customers at larger numbers than we have in the last 12, 24 months based on that new value proposition.
And again, it’s not a radically new value proposition, but it’s definitely an elevated brand value, and we definitely see that. In terms of how we look at margin expansion, Sean, you might want to add or margins related to those advertising. We really look at it as an ROI perspective if we are going to generate X dollars in cash flow over a given period from a new customer, how much can we spend at the margin to acquire those types of customers, and then that will generate value to the shareholders. We don’t measure it from a EBITDA margin or a near-term free cash flow margin.
Sean Quinn
The only thing I’d add to that is, I think with the introduction of more mid and upper funnel spend, which we’ve seen come in over the last few quarters, and there were some testing in these areas last year as well, unlike our historical performance advertising spend, which is a little bit more consistent as a percentage of revenue, the way that those dollars get spent can it go up and down in terms of the intensity quarter-by-quarter. And so from a margin perspective, you may see a little bit of volatility there. We’ve said that we don’t expect to stay at the Q4 levels of advertising as a percentage of revenue for a full year, which is again an indicator thereof, we’ll have moments where it’s a little bit more intense and moments where it’s less intense, which is just because of the changing mix of our spend.
Meredith Burns
Great. So I’m going to throw a question out there that I think we’re probably not going to answer, but I just want to get it out here on the call. So we’ve been asked if we can provide more context on what counts as visible I believe in referring to Vista’s margin or Vista’s profits in FY ’23?
Sean Quinn
Got it. Well, I think visible means to appear, I think the — yes, what we’re trying to get across there is that there should not be an expectation based on the commentary that we provided that we’re entering into a large year of margin expansion in Vista as we still annualize the increased investment levels that we had in FY ’22 and also the significant cost inflation that we’ve had, and we’ve outlined that in our documents last few quarters.
And so to say visible really is that we are working, kind of, towards the trajectory of both continued profitability improvement, expansion and margin expansion. And the start of that should be visible as we progress throughout the year. But as we annualize the impacts of these other things I’ve outlined, that won’t be visible to start. And so hopefully, that’s clear. And yes, I think that — well, I’ll stop there. I think that’s about as specific as we can be.
Meredith Burns
Great. Thanks. Given the increase in interest rates, especially in the U.S., how do you expect this will impact underlying volumes as new business owners will borrow to — less to invest?
Robert Keane
We have not — we don’t — that’s a very difficult thing for us to say specifically. I would say that in past deep recessions or near shutdowns, including the pandemic, the 2008 global financial crisis, small businesses tend to come into the formation. And the amount of money we’re talking about here, our average customer buying something like $100 a year Vista is not something, I think, it is sensitive to a rate swing. It’s — we as a business are a lower cost alternative to traditional graphic design and traditional printing. So I’m sure you could run an economic model to find some impact on that, but our spend is so small, even within the budget of a small business. We don’t see that as something that we can ascribe a specific impact to.
Sean Quinn
Yes. The only thing I’d add to that is, yes, I think where we sit in, sort of, the marketing stack for a small business, having a presence and having an identity and telling people what you’re doing is required in some way, shape or form for a small business. And as Robert, as you just said, I think what we present is a low-cost option to be able to do that in a credible way and allow small businesses to look professional, which they need to do.
Meredith Burns
Can you address the significant increase in inventories year-over-year on your balance sheet?
Robert Keane
Yes, I’ll take that. So inventories have increased quite a bit almost across all of our businesses and some businesses more than others. But there it’s really — it’s really 2 things. One is there has been constrained supply in some of our key inputs, including paper. And so we have built up more inventory in those areas to make sure that we have stock and can withstand any further disruption that may exist there.
So that’s one. And then I think the other one is just there’s some products, especially in the promotional products area, which National Pen is more exposed to that, we’ve had longer lead times because many of those raw materials are sourced from China. And so we’ve been more prudent there in acknowledging those longer lead times again to make sure that we have stock, especially as we look forward to the holiday season that’s ahead in the December quarter.
And so I think the, sort of, the cost of doing that relative to the cost of not having the supply, we think, is the right trade-off to make. We’ve always, I think, very prudently managed our working capital. We’ll continue to do that. But here, we’ve been — we’ve taken some of that risk off the table by building some inventory.
Let me just also mention that this is inventory that is, sort of, high running products. It’s paper, it’s not a question of if we will use it. It’s just a matter of when. And so that’s another input to that decision, where it’s easier to feel comfortable building some of that inventory, and it’s really just kind of the cost of capital type cost as opposed to the risk of obsolescence.
Meredith Burns
Thank you. For the aggregate organic Vista Investments to meet your hurdle rate won’t unlevered free cash flow have to grow considerably above the pre-pandemic level?
Sean Quinn
Yes, it will. It will. So I think that’s a very fair point. But I think that especially given the impact that we felt over the last few years, either from the pandemic, from changes in product mix, from cost inflation, of course, in order to get to the point that’s referenced in the question to justify and have strong returns on all of our investments, of course, we have to first get to what we outlined in the document. And so what’s outlined in the document is not kind of an end state that is our goal, but is at least the first point on that destination.
Meredith Burns
So we’ve got a lot of questions about share repurchases. Why aren’t we doing share goes repurchases? We’ve talked about this in the answers to other questions as well about capital allocation. One nuance around this topic. The past few months have shown that share price depreciation can be sudden and violent — why have you not requested authorization for share repurchases so that you are ready should the right opportunity arise?
Sean Quinn
Yes. Just so everyone knows, we do not currently have a share repurchase authorization that is out there. The quick answer is we have — we can move very quickly on that. We have a 5-person Board, of which Robert is one of them and the Chairman. And within a couple of hours, we can get that authorization if needed, this is an active conversation we have with the Board, and so we can move very quickly there. And just to be precise about it, our disclosure obligation there is actually to disclose an authorization prior to actually repurchasing, not to disclose when there’s an authorization by the Board just to be precise about it.
Meredith Burns
Great. We have another question just came in. Does the company anticipate the need to draw on the revolver in FY ’23 or ’24?
Sean Quinn
Certainly don’t anticipate it. It is — it’s there for a purpose, if it was ever needed in the future. But no, with $327 million on the balance sheet as we cross the end of the year between cash and marketable securities, we don’t see a need to do that. And — but it is available to us. That’s a $250 million revolver. There are — there is a first lien covenant that would kick in if we had a balance outstanding on that revolver as we cross a quarter end. We are just — just so people know, we are below that first lien covenant right now and so we could do that. But no, we don’t have any plans to use it.
Meredith Burns
The big increase in accounts payable in Q4. Does this reverse in FY ’23? And how should we think about working capital overall for FY ’23?
Sean Quinn
Yes. There was definitely some favorability in Q4. You can see that in our results from working capital. We had a combination of things to the prior question around inventory. Inventory is built, so that’s unfavorable, but there was large increases in accounts payable. And that will fluctuate over time. I think some of that favorability will settle in. We don’t provide any specific forecast around working capital. But yes, that accounts payable, I would expect to unwind some in — over the course of FY ’23. And then also, from an inventory perspective, depending on the need for us to continue to maintain inventories at the current levels, which are well above historical levels, that can unwind as well.
If you look at our steady-state free cash flow analysis in our annual letter, we do actually make an adjustment there for working capital because that was quite favorable in FY ’22, and we would not expect that same level to repeat in FY ’23.
Meredith Burns
Great. Thank you. One more question, which is asking for guidance that we’re probably not going to give. You mentioned too that you expect to delever over the next year, would you be able to quantify how much higher levered free cash flow can be in FY ’23?
Sean Quinn
No, we’re not going to provide that guidance.
Meredith Burns
Yes. All right. I am — we’re 10 minutes away from 9:00 or 5 minutes over our target time. I’m going to turn things over to Robert for some parting words and go over from there.
Robert Keane
Great. Well, first of all, let me step way back and look at this market opportunity, the TAM we have and how we look at this. And so there have been 2 key drivers that we’ve been aware of and we’ve exploited for a very long time, that being mass customization rather than traditional print economics and the shift from offline to e-commerce online.
And at the highest level, we very much believe that those trends are accelerating, and we think it’s a great market with a lot of runway in front of it. You can see in the results here that, the real question obviously comes down to what’s the future of Vista? And why are we investing so much to turn Vista around? I’ll go back to what built Vista which what it was what built Cimpress originally. And from a period of approximately 2000 to approximately 2015, we, at VistaPrint at the time, had an incredible combination of that shift online and into mass customization, but very specifically, there were other attributes to that model.
We really tightly constrained the number of products we offer to customers. So we have 1 Pen, 2 different types of business cards, 2 different types of postcards, but very limited amounts so that we could do production operations that were very, very standardized in ultra-high volume. And so that the graphic design elements could be very simplified because they weren’t very complex.
We also found that using advertising of high prices with deeply discounted and often in the early days free products, drove incredible response often being, I’d say, creating demand from that type of offer. And as a product, we intentionally positioned ourselves not as bad quality, but at the lower end of the quality of the spectrum of the market. And finally, we became very, very adept at cross-selling in the experience from one design format — one format to another through design and in the operations, being able to put all those into a single box, save a lot of shipping and sell $30, $50 orders with multiple products in it. That was and it frankly is a incredible business model where we make a lot of money. But if you look what happened, and we started seeing this in the 2005, a little bit by 2010, other business models came in around that. We certainly see it in Upload and Print, which did not go for people who didn’t understand graphic design like Vista, but went to professional graphic designers who wanted to buy online and still leveraged the mass customization economics.
The areas of logo apparel and logos on promotional products, we have at Cimpress or National Pen, but also we see this with Vista’s promotional products and there’s competitors in the industry because the graphic design is relatively simple. You just put a logo on to something. That was a product which also quickly became online.
So Vista was this very — VistaPrint was this very profitable, disruptive business. It came into a massive market 20 years ago and built an incredible, kind of, counteroffer to all the traditional assumptions of that market. But we do believe and we still believe that that — you could see that in our growth at 5, 6 years ago, we had run that course. And we fundamentally believe that going back to that shift online and shift to mass customization is driving into the very core of this enormous TAM, so into packaging, into signage, into apparel products, which were never before moving online. And that’s why we see the growth that we do in the other parts of Cimpress.
Simply put, at Vista, we need to elevate and we are very successfully moving Vista out of that deep discount, lower-quality products of very limited selection to the design and marketing partner for small businesses. And one click down from that is we believe that we can build a simply best-in-world integrated smooth flowing series of design capabilities, ranging from things you see like in VistaCreate, where we have tens of thousands of freelance designers creating templates, a very strong algorithmically driven modifications to those templates through what we were doing in VistaPrint traditionally through the design assistance we give with live customer care in browsers, through 99 designs where you can get a custom bespoke graphic design from freelancers who once again are tens of thousands of freelancers, typically in low-cost locations around the world.
And that that gives the customers who don’t have either the graphic design skills of Upload and Print customers or don’t want to pay for that in traditional prices, the opportunity to also drive into the heart of that market. So we recognize that turning around Vista is really critical. These are discretionary investments. Until we got off our old monolithic technology stack, we couldn’t capitalize on those, but we’re pouring those investments into the business.
We said many times, fiscal ’23 is a year of focused execution. If we do not progress as we expect, we have the ability to reduce the investments and generate significantly higher margins. Underneath this business is a very profitable business, but it will be worth a lot more if and when we can drive into that core market like we are in our Upload and Print businesses by adding the whole design and service capabilities, but importantly, increasing our capabilities in data analytics, in product development, in user experience, and we fundamentally believe that’s a huge opportunity. We believe in that strategy. We’ve said many times why and we look forward to talking about that in more detail in September.
But again, the success in Vista elsewhere demonstrates the opportunity of these shifts. We can’t say for sure what the future looks like, but we have, in the past, shown our ability to pull down investments most recently in the pandemic if and when need be to expose the underlying cash flow capabilities of the business. But we’re moving forward into FY ’23 because we feel that we have never been better positioned, including at Vista in terms of technology, people, products and a strategy to give much greater value to the customer in a way that’s not done anywhere else, and that will, we believe, translate to value to shareholders.
So thank you again for listening. Thank you for your time reading the documents we put out last night, and we look forward to the September Investor Day which we’ll be having. It’s not that far off in the future.
Meredith Burns
Okay. And thank you, Vaishnavi. We can now end the call.
Operator
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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