Cimpress - Earnings Call - Q2 2025

Executive Summary

• Q2 FY2025 was operationally mixed: revenue grew 2–3% to $939.2M, but operating income fell 25% YoY to $80.9M and adjusted EBITDA declined 21% to $132.3M due to non-recurrence of prior-year one-time benefits, U.S. consumer softness, higher performance ad costs, and specific one-time charges.
• EPS improved YoY to $2.36 (vs. $2.14) aided by other income from currency marks; sequentially EPS rebounded from Q1’s $(0.50) loss as December quarter seasonality and working-capital inflows returned.
• Management lowered full-year expectations while reaffirming multi‑year framework; H2 guidance calls for at least 4% organic CC revenue growth, ≥$220M adjusted EBITDA, and ≥$50M adjusted FCF; FY2025 at least $440M adjusted EBITDA and ~$289M CFO, ending net leverage ~3.0x (target 2.5x LT).
• Key catalysts: U.S. Upload & Print launch (Pixartprinting) in Q4 FY2025, expanding cross-Cimpress fulfillment, and leveraging AI to improve efficiency across engineering, manufacturing, service, and marketing.

What Went Well and What Went Wrong

What Went Well

• Upload & Print revenue grew 6–7% YoY with continued order volume strength; The Print Group EBITDA expanded YoY with gross margin improvement and lower LT incentive OpEx.
• Strong growth in higher‑complexity categories (packaging, apparel, signage, promotional, labels) with Vista bookings growing high‑single to high‑teens; H1 bookings outside business cards/consumer +11% YoY.
• Liquidity and balance sheet actions: repriced and upsized USD Term Loan B, eliminating the €46M tranche; annual cash interest reduced by ~$5M; cash and equivalents $224.4M; revolver undrawn.

Management quote: “Despite occasional near‑term financial volatility… we can drive attractive multi‑year growth in revenue, adjusted EBITDA and per‑share cash flows” (Robert Keane).

What Went Wrong

• U.S. consumer/legacy products underperformed; Vista consumer bookings declined in holiday cards and business cards, with cost-per-click in peak weeks up ~50% YoY and intensified competitive discounting; Canadian postal strike reduced Q2 revenue by ~$3M and EBITDA by ~$1.8M.
• Consolidated gross margin fell ~200 bps at Vista due to mix shift to lower‑margin categories and non‑recurrence of one-time benefits; Vista segment EBITDA down $15.4M YoY to $92.4M.
• One-time charges: $2.9M land duty tax in Australia; consolidated one-time headwinds >$16M YoY including prior-year favorable items non-recurrence.

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by. Welcome to the Cimpress Second Quarter Fiscal Year 2025 earnings call. I will introduce Meredith Burns, Vice President of Investor Relations and Sustainability. Please go ahead.

Meredith Burns (VP of Investor Relations and Sustainability)

Thank you, Michelle, and thank you for everyone joining us. With us today are Robert Keane, our Founder, Chairman, and Chief Executive Officer, and Sean Quinn, EVP and Chief Financial Officer. We appreciate the time that you've dedicated to understand our results, commentary, and outlook. This live Q&A session will last about 45 minutes or so. We got a lot of questions, and we'll answer both pre-submitted and live questions. You can submit questions via the questions and answers box at the bottom left of the screen. Before we start, I'll note that in this session, we will make statements about the future. Our actual results may differ materially from these statements due to risk factors that are outlined in detail in our SEC filings and the documents we published yesterday on our website.

We also have published non-GAAP reconciliations for our financial results on our IR website, and we invite you to read all of them, and now I will turn things over to Robert.

Robert Keane (Founder, Chairman, and CEO)

Thank you, Meredith, and thanks to all of you who are joining us today. As we covered in last night's release, we continue to progress against the objectives that I outlined in my letter to you and to all investors at the end of July, and which we also covered in detail in our September Investor Day. That being said, our Q2 results were not what we were planning to deliver, and that was due to a number of different items, which Sean is going to cover in a moment. To be clear, we consider the financial results we just delivered to be disappointing. We understand the underlying issues behind them. We are addressing those issues, and we're doubling down to ensure that we continue to progress against what are very well-established and communicated strategic and operational objectives.

That's why we believe that in the coming quarters and years, when we look back at the second quarter of this fiscal 2025, it's going to be seen as turbulence rather than a change of the upward financial path, which we have been on for the past several years. In our earnings document, I outlined a number of examples that give us confidence in our ability to grow our profits and our cash flow in the ways we've described. Focused production hubs that cut the cost of goods that we produce and also increase revenues via new product introduction are one example of that. Others are the pending launch of our Upload & Print business model in the U.S. Another example is the high growth of Vista's highest value customers and their strong growth at Vista and across all of Cimpress in new growth categories.

All of these exemplify the progress that we've made and the opportunity we have ahead for the remainder of the fiscal year and beyond this fiscal year. If you haven't read that part of the earnings document yet, I do strongly encourage you to do so, and I look forward to taking your questions on these topics shortly. More details are also available in the September 10th Investor Day presentation. All the things we're doing here described in those documents are activities that we believe are going to extend our competitive advantages and enable Cimpress to continue our long track record of profitable growth for years to come. In most of our businesses, we do face headwinds of slowing growth in some products and channels. However, we have tailwinds from higher growth product categories that are growing stronger every year.

And those tailwinds are in areas of our market that represent a much larger portion of our total addressable market than the market segments of our legacy products. Now, I founded this business 30 years ago this month, and there are a lot that have stayed true over the last three decades. First of all, we continue to operate in a very large market that still is served primarily by traditional suppliers and competitors. Second, our scale-based competitive advantages cross multiple parts of our value chain and give us market-leading capabilities. Importantly, our strategy remains constant to what we've been pursuing for the last several years, and we are maintaining what we call our focus on focus. In other words, an execution rigor to capitalize on our opportunity.

Financially speaking, as I just mentioned before, we do feel confident that having exited the turbulence of the past quarter, we can return to the financial path of our previously provided outlook. And when you combine all this together, I'm very confident that as ever, we have an ability to grow our per-share value over time. And with that, I'd like to turn this over to you, Sean, to discuss some of the financial results and outlook in more detail.

Sean Quinn (EVP and CFO)

Great. Thanks a lot, Robert, and thanks to everyone that's joined us today. We did provide a lot of information in the document yesterday. I'll try and keep my remarks brief just so we can get to the questions. There's a lot of questions that have come in. As Robert just noted, we were disappointed with the Q2 results, and of course, that's altered our outlook for the full year as we outlined last night. Robert commented on our strategic focus. I'm going to turn to an overview of our financial results, and let me just start a little bit more big picture as an overview. There were a lot of one-time items, including the lapping of significant benefits that we had last year, which, frankly, was more than normal, and that does create some noise. We've quantified those things, and so hopefully that was clear in what we've provided.

But beyond that, the vast majority of what drove the weakness relative to our plan was in the United States, and the biggest dollars are in Vista, but that was also present for our National Pen and for BuildASign as well. In Vista, there's a few things to call out. First, as we noted, in the U.S. overall, we saw lower performance in organic search, and that was impacted by changes to the Google core algorithm and search engine results page in the U.S. That impacted new customer acquisition, and that was most notable in business cards and consumer, which in terms of customer count from a new customer acquisition perspective, those are the largest categories in Q2 for new customers. We've been optimizing now against those changes. In our December quarter, the revenue mix in Vista changes to about 25% of our bookings coming from the consumer category.

That's actually a higher percentage in Europe than it is in North America, and we had planned for only slight growth in that category on the back of really two things. One, a strong holiday season last year, and also the shortened holiday season this year, just in terms of the number of buying days between American Thanksgiving and Christmas. In the U.S., it was also a less favorable environment than last year just overall. The cost of performance advertising was significantly higher, nearly 50% higher, and the competitive intensity was also higher from discounting from some of our competitors, particularly in some of our legacy products. For business cards and holiday cards in the U.S., we do see market demand down, and that's also factored into our multi-year forecast.

So there was not necessarily anything new there, but that was further accentuated by these other topics that I just mentioned that were particularly there in Q2. As a point of reference, business cards in Europe were stable year-over-year, and consumer in Europe was slightly up versus last year and actually a little bit ahead of our plan. Also, as we turned to the month of January, which is now nearly complete, consumer in North America is back to modest growth. In National Pen and BuildASign, there are some specifics there tied to go-to-market channels. But overall, we don't see a thematic change that cuts across the U.S. market, despite the fact that that's where most of the weakness was in the quarter. So nothing new that indicates that something has changed. There were a number of specific drivers.

As we talked about at our September Investor Day, business cards and consumer have been growing more slowly in the last years than other categories, and in the case of business cards, more recently have had slight decline. We do expect that to continue, but there are other additional factors at play this quarter. As for the specific results, our consolidated revenue grew 2% on both a reported basis and organic constant currency basis, but adjusted EBITDA declined just over $34 million. We were expecting a slight decline in adjusted EBITDA because of the extent of one-time benefits in last year's Q2 results, which was about $12 million last year, and we, of course, are comping those, but we also had the shortened holiday buying season, so we had factored that into our forecast.

Beyond that, we also had unfavorable one-time impacts to our profitability this quarter as well that weighed on adjusted EBITDA by another nearly $5 million, and we outlined those in the release last night. That leaves about $18 million of year-over-year EBITDA declines this quarter outside of those one-time items, and as previously outlined, most of that coming from the U.S. market with weaker sales of consumer-related holiday products like holiday cards and home decor, not just specific to Vista, as well as year-over-year declines in business cards and Vista. Signage, promotional products, and packaging categories had strong growth globally. That strength was not enough to overcome the weakness in those higher-margin legacy products in the U.S. market.

With that weakness concentrated in free channels like organic search, the shortfall had a more direct impact on EBITDA than we would typically see given advertising spend and operating expenses increase year-over-year. We have a lot of improvements in flight already, in addition to the examples of progress against our strategic objectives that Robert outlined. We'll get to some of those in the questions. As for our outlook, we remain committed to multi-year growth in revenue, EBITDA, and free cash flow. However, in light of our Q2 financial results, we are resetting our expectation for the year to incorporate our Q2 underperformance. For the second half of the year, we expect revenue, constant currencies, to grow at least 4%. We expect adjusted EBITDA to be at least $220 million and adjusted free cash flow to be at least $50 million.

We have initiated multiple actions to improve performance, reduce operating expenses or slow their growth, and to optimize our pricing. Again, we'll get into some more of that in the questions. That's factored into our updated fiscal 2025 guidance, as is some prolonged effect from just some of the weakness that we experienced this past quarter. We also now expect to exit this year with net leverage of approximately 3.0x our trailing 12 months EBITDA is calculated under our credit agreement. We do remain committed to our plans to reduce net leverage to our target of approximately 2.5x or below, but that will be slightly delayed from our prior expectations. With that, Meredith, let's open it up for questions.

Meredith Burns (VP of Investor Relations and Sustainability)

Great. Thanks, Sean. As a reminder, you can submit questions during this webcast via the questions and answers box at the bottom left of the screen. We received a number of pre-submitted questions, and we're getting live questions now too, some of them in overlapping areas. So I'm going to combine some of these to make sure that we're thoroughly addressing what's on people's minds. Let's take our first question. Sean, I'm going to ask this question to you. To what do you attribute the underperformance in business cards and holiday cards? Should we be thinking about this as incremental secular pressure on those product lines? What trends in these categories are baked into your multi-year outlook?

Sean Quinn (EVP and CFO)

Yeah, thanks. I touched on a little bit of this in the remarks just now, but it's an important topic. Let me try and get a little bit more specific. I'll start on the consumer side. We said overall that Vista consumer revenue declined 3%. That was in the release last night. That's about $4 million when you play through the math year-over-year. And nearly $3 million of that was attributable to the Canadian postal strike, which is not indicative of normal market demand. And by the way, we see Canada kind of snap back to more normal expected performance once that strike was over, including in January. We did have growth in part of that consumer category, but the main driver of the decline was holiday cards and, to a lesser extent, calendars.

I covered this earlier, but there were a number of factors at play that impacted that: the shorter holiday season, the higher cost of performance advertising. I mentioned it was up 50% in the peak weeks in the U.S. Competitive behavior was different than last year. I said earlier that consumer products grew overall in Vista's European markets, including from holiday cards. Holiday cards as a subcategory is more mature, and we don't expect it to be a growth product based on market demand. We do have some credit card data that we have visibility to that indicates there was decline for most of our competitors in the U.S. in that area this season and at similar rates to ours, and some of those competitors were quite intense with discounting and advertising. We can see that, but in our multi-year outlook, we don't assume growth from those specific products.

For BuildASign, sticking with consumer, for BuildASign, canvas prints revenue is down year-over-year about $5 million, and this is part of a trend we've seen really since going back to the pandemic. There was a pretty tremendous acceleration of demand in those products, and then since then, we've seen some decline. Those are still relevant products. We have strong capabilities, but that was down year-over-year this quarter. Q2 is seasonally important for consumer, of course, but the weight of consumer does come down in the mix during the rest of the year, so as we noted in our earnings document outside of the holiday period, Vista has been growing revenue from consumer products modestly outside of the holiday period when it's not the concentration of holiday cards, calendars, canvas prints, and so on.

And we did see that continue in January once we're out of the holiday season. We're back to modest growth in consumer across Vista. We did receive another question. I just kind of touch on here while we're on the consumer topic, just around competitive behavior and on the marketing front, if we tighten marketing investment in response to higher advertising costs. And on the competitive behavior, it does change every year. Last year was overall a more benign environment, I would say. We set our plans in terms of promotions that we run and our advertising and so on for the season, and then we make adjustments along the way. But we don't chase if we see behavior changing that we view to be irrational when it comes to just thinking about the impact on unit economics.

That's what we did from an ad spend perspective this year as well. The increase in our ad spend this quarter in North America was mostly in display and TV channels, so that was not specific to consumer. We held to our marginal return thresholds, and that spend in performance channels was therefore a good return. But it didn't go as far as last year because the unit pricing was far higher, so it just had less impact overall in terms of especially new customer acquisition. The question asked about business cards as well. Vista's business cards in stationery category was down about $5 million year-over-year in Q2 in the U.S. We don't think that there's any sort of sudden change in demand for that product that happened in Q2.

We have been seeing pretty stable trends over many years where our volumes were decreasing slowly over time, but that was being offset by more feature enhancements or change in order sizes as we attract different types of customers, but also optimizing net pricing since discounts had come down from where they were some years ago. As I mentioned in my earlier remarks in Q2, business cards in the U.S. were also impacted by organic search, and I won't go into that again, but that definitely had an impact on business cards. We'll continue to make improvements and optimizations in that category, whether it be in the product offering, how we merchandise, design services, and how that's integrated into the offering, acquisition offers, and a number of other things, all with the goal to protect that profit pool. That's what we talked about at our Investor Day as well.

Our H2 guidance that we've outlined does factor in modest growth in consumer for Vista, and we're back to that in January. It does factor in continued pressure in BuildASign in terms of their end market. And then for business cards in Vista, it does factor in a decline that's a bit more modest than what we saw in Q2. And by the way, that's also consistent with what we're seeing so far in January bookings. From a multi-year outlook perspective on business cards, we don't assume growth. We do factor in some modest consumer growth, as I said, outside of the holiday period.

Meredith Burns (VP of Investor Relations and Sustainability)

Thank you, Sean. Excellent. Okay. My next question, Robert, is going to be for you. Why does it make sense? Why does it make more sense to have Pixartprinting enter the U.S. market versus extending an existing Cimpress business with infrastructure already built stateside into Upload & Print?

Robert Keane (Founder, Chairman, and CEO)

At the highest level, our strong success we've had in Europe with the Upload & Print business model has taught us that it is very complementary to other segments we have in Cimpress like Vista and National Pen. So let me explain that a little bit by speaking about two different perspectives. First, let me talk to the customer need we're addressing with Upload & Print, and then I'll turn more specifically to the production infrastructure that you're asking about. For the customer value that we need to deliver, of course, all the Cimpress segments produce mass customized print, but the customers and the customer needs are typically different across our reporting segments. They are concentric circles. They overlap each other, but in general, they serve different customers that we've spoken about for many years.

To give a quick synopsis of the Upload & Print customers, these are people who feel comfortable using professional graphic design tools. You can think of something like Adobe Illustrator or Adobe InDesign. They use that and the skills they have to create complex graphic design that is inherent in more complex products like packaging, booklets, catalogs, very large format, signage, and other products. Beyond the graphic design, they often have higher quantity orders. They're still low by industry standards, but they're higher than Vista. A focused business unit or business segment is very helpful in understanding these needs and serving them, given they differ from customers that typically come to Vista, National Pen, or BuildASign. That's first and foremost why we want to enter the market, is to serve those customer needs.

Now, as to the production operations or infrastructure, let me step back. We've talked about this for many, many years, but the mass customization of print, the economic and operational skill we've developed depends on aggregating together very large numbers of very similar orders in highly specialized production lines. So you get a lot of repetitive production operations because we aggregate all these orders together. That specialization has a bunch of different factors. It could be by quantity. Did someone typically order 10 or 100 versus 1,000 or 5,000 of something? By decoration type, is it embroidery versus laser versus print versus different types of print? Sometimes by proximity to the customer that helps with shipping or proximity to suppliers. All that specialization means that the production lines, although it's all mass customization of print, do vary between our different businesses.

For example, Vista is generally focused on smaller orders of relatively simple-to-produce products and with orders that are where we very often ship multiple items put together in the same box and ship together. On the other hand, Upload & Print businesses tend to focus on larger order quantities, again, still small compared to traditional competitors and more complex products. And so that second type of product, the Upload & Print products, represent the type of production lines which we are building out in our new Pennsylvania facility. Now, that being said, there's definitely overlap. I mentioned the concentric circles.

That overlap in some ways is growing over time, which is why we are pushing forward with the concepts you've heard us talk about of cross-Cimpress fulfillment and why we are moving more and more towards focused production hubs to further aggregate volumes and get some of the benefits I just spoke about. So to be clear, the new Pixartprinting facility in the U.S. will produce products for Vista and likewise National Pen, BuildASign, and Pixartprinting. I'm sorry, National Pen, BuildASign, and Vista will fulfill for Pixartprinting in the U.S. Hopefully, that helps you understand, again, why we're entering the market with this very successful brand and business, but also why we've chosen the operational footprint that we've described.

Meredith Burns (VP of Investor Relations and Sustainability)

Great. Thank you, Robert. I'm looking forward to seeing that launch and grow in Q4. Next question is for Sean. Sean, we were surprised by the low growth experienced by both National Pen and all other businesses this past quarter. For National Pen, how material is their mail order business, and is that the main headwind facing that business? For all other businesses, what are the current growth and profit dynamics for each of BuildASign and Printi?

Sean Quinn (EVP and CFO)

Yeah. I'll touch on each of these businesses briefly, and I'll start with National Pen. We have been, and we've talked about this for the last few quarters, at least now, we've been reducing our direct mail advertising spend in National Pen, and that's really focused around optimizing for profitability in that channel. And of course, when you do that, that does have some impact on revenue, and it was a lower growth channel in any case, and then that has further impact on revenue, but we're optimizing for profitability. From a profitability perspective, we do also, like in National Pen, we often see some timing differences in profitability because of the timing of mailings in that channel. We take the cost when the mailings happen and not when they have impact necessarily, and so quarter to quarter, you see some different year-over-year trends.

In Q1, we were favorable year-over-year in that regard. We see some of the opposite of that in Q2. Just in terms of the weight of channels, e-commerce, telesales, and then now the cross-Cimpress fulfillment that National Pen is doing, all those are growing well. And now those together are larger than direct mail alone. Direct mail is about 25% of National Pen revenue from a channel perspective. And then the combination of e-commerce, telesales, and cross-Cimpress fulfillment is about 60% for National Pen, and then the remainder is their distributor business for larger accounts. In Q2, the profit impact was weaker from direct mail sales. There was also some product mix and higher inbound freight costs, as we called out in the release. On BuildASign, we've continued to see growth in signage products.

That was in Q2 offset by the declines that we saw, and I outlined earlier, in home decor, which is consumer-focused. In the holiday quarter, that impact from home decor is bigger. That's what drove the year-over-year decline this quarter in their standalone business in terms of them serving end customers. The fulfillment for Vista that they're doing as part of the cross-Cimpress fulfillment had significant growth. And so at a segment level, you still do see year-over-year slight growth, but in their standalone business, that was a decline, and a lot of the growth driven from cross-Cimpress fulfillment. Outside of the December quarter for BuildASign, we expect that the ramp in cross-Cimpress fulfillment will continue, and that will continue to be a more dominant trend in the overall revenue number.

Because of BuildASign's strong production capabilities and signage in particular, and also home decor products, we're moving most production volumes for Vista's U.S. business to BuildASign, and that not only saves costs and increases the rate at which Vista can introduce new products with a lot of focus there, but it's also freed up production space in Vista for new product introduction, which allows us to avoid future CapEx and then lean into these more focused production hubs that Robert was talking about earlier. For Printi, just quickly, Printi's small in our overall results. They've been putting the ingredients in place for a next chapter of growth, including necessary technology platforming, which is not unlike what most of our businesses have had to do at some point in time.

And then also expansion into new categories, which is really modeled after the success that we've had in our European Upload & Print businesses. So they're not recreating the wheel there, but, if you will, importing some of the capabilities that we've seen be successful in Europe. Printi's operating near break-even, sometimes higher. But this quarter, some of these bigger changes that we're rolling out do cause some discrete disruption, but they open up opportunity for them in what's still a large and relatively untapped market. Those new capabilities have a lot of opportunity for growth. It's going to take a few quarters to get ramped up, especially from a production efficiency perspective.

Meredith Burns (VP of Investor Relations and Sustainability)

Great. Thank you, Sean. I'm going to stick with you for the next one. This is a question that we got from multiple people, and so this is sort of a morphed combined question here. So in the letter you called out that you're taking multiple actions to improve performance, reduce OpEx and optimize pricing, can you unpack that a bit and provide some color in terms of how we should be thinking in terms of the quantitative impact of these actions? And have you already baked that into your revised targets for the year, or are these plans still being developed?

Sean Quinn (EVP and CFO)

Yeah. Yeah. There were a number of questions on this and some live questions or two. I think if you take a step back and you look at the second quarter of last year, about 90% of our adjusted EBITDA from a segment EBITDA perspective came from Vista and Upload & Print. So that's where the vast majority of the profit came from. Last year, we expect that roughly that would continue this year. Not that specific percentage, but that's where the weight of it will be. So I'll focus on those two first. In Upload & Print, there was some year-over-year puts and takes in Q2, but those businesses have been executing well, investing in new product introduction, driving efficiency gains. Robert outlined bringing the model to the North America market, and we're going to continue on that path in the back half of FY 2025 and beyond.

So we just stay the course there in terms of our plans. Those businesses in aggregate were quite close to the plan that we set out in Q2, so we continue the course there. In Vista, in terms of the actions, we've already taken a number of actions or put things in play. There's more being worked on very actively. And that ranges across cost efficiency relative to our prior plans, prioritization of product roadmaps focused on the areas that we need to have the most impact relative to where we were seeing some of the sources of weakness in Q2, some reallocation of our ad spend from a channel perspective, again, in response to where we see the biggest need and the biggest impact as well, pricing optimization. And I could go on. There's other examples too.

I think it's worth noting that we had already planned, if you just think about the first half of the year versus the second half of the year, we had already planned coming into the year that the year-over-year profile of our advertising spend would be lower in the second half of the year than it was in the first half of the year, and so that will have an impact as well just in terms of year-over-year profitability. That was already a more favorable setup for the second half of the year than the first half of the year. That includes some large brand partnerships that we had last year. If you recall, we won't have those in H2 this year just as one example of one of the drivers of that. We're not embarking in Vista or in Upload & Print. I said we stay the course there.

We're not embarking on major changes or major cost reduction programs. It's really about driving focus and urgency against the areas where we see the most opportunity. Of course, we're driving cost controls along the way, and so that is absolutely in focus, but it's not in the form of large restructuring actions. For National Pen and BuildASign, as I said, smaller part of our overall profitability in the second half of the year, where they're focused especially is on continuing to grow fulfillment for Vista in North America, having been executing well-defined opportunities for scale-based efficiency gains, but also new product introduction. We've seen clear examples of that. That will continue in the second half of the year, and of course, they'll be focused on making sure from a cost perspective we continue to optimize as well.

We haven't specifically quantified what the aggregate impact of all that is, but it is baked into the at-least framework of guidance that we've provided for the second half of the year.

Meredith Burns (VP of Investor Relations and Sustainability)

Thank you, Sean. Okay. Robert, this next question is for you. It's on a lot of people's minds. We have been getting this question. If tariffs are put in place on Canadian goods and if the de minimis exemption on imports to the U.S. is repealed, and the asker does recognize that those are both big ifs, how might the company respond? What percentage of the company's U.S. revenues come from the Ontario facility, and how much of this could be shifted to other U.S. plants? How much do you estimate it would cost to recreate the Ontario facility in the U.S., and how long would it take? And what is your U.S. manufacturing footprint, and can it accommodate the volumes that you're currently producing in Canada and Mexico?

Robert Keane (Founder, Chairman, and CEO)

Okay. Thank you all. I know there's a lot of questions to come in. I can, first of all, step back and assure you that we've obviously been aware of this for a long time, even before knowing the election results, and we spend a significant amount of time doing scenario planning, and as you say in your one of the questions, these are big ifs. No one knows what's happening or what will happen, and because there are so many unknowns, I can't outline specific plans, but we can provide you with some context and some of the background facts which you're asking for, so let me start with the facilities we have. Our North American production is across Canada, the U.S., and Mexico. In the U.S., we have four facilities: Reno, Nevada, Tennessee, Austin, Texas, and Indiana.

We have an additional facility, as you mentioned, which we are fitting out outside of Pittsburgh, Pennsylvania, and you add up all those five facilities, and it's a little bit less than 400,000 sq ft of production space. I believe, and I could be wrong, but I think every one of those are leased, and they're in places where we could lease more facilities. It's not a capital expense if we were to expand them. Our Canadian and Mexican facilities, we do own our Canadian facility, but we lease the Mexican facilities. Ours collectively about 800,000 sq ft, so roughly double the U.S. facilities. Windsor is our biggest facility, and when we look at that, given today, roughly 2/3 of our North American production space is in Mexico and Canada.

The facilities that we have now or that we're about to open up in Pennsylvania wouldn't, in their current form, be able to handle this volume without expansion. That being said, in the case of, I'll call it the worst case of Trump tariff taxes, it would not be a question of buying new capital equipment. It would be a question of moving the capital equipment, training up new teams to expand that facility. We do not deny or ignore the fact that that's a possibility. I think it's, personally, I think it's an unlikely possibility it would be that extreme, but we are taking that into our scenario planning. Now, to the extent we end up moving facilities, we do have quite a bit of experience doing that. As an example, and again, we are not planning this. We are planning for scenarios.

Once we have more details, we would decide what we would do, more details about what actually happens in terms of the new tariff taxes. I think that. Well, let me start with some experiences. We recently moved our Irish facility to the Czech Republic for National Pen. We recently moved a very large amount of our production operations from Canada to Mexico for large-format production. I can go into other examples. In Tennessee, we moved facilities, and we also moved part of the Tennessee facilities' production out to Mexico. We have experience moving facilities, and we've done that for years. We would not be duplicating CapEx again. We'd be shifting it. Now, you asked a question about the de minimis exemption, excuse me, under Section 321.

For those who are not familiar with it, that allows smaller value orders to be imported with exemptions to tariffs. There's a lot of question, including under the Biden administration, a question of looking into that, and so we've been aware of that for quite some time. To the extent that that changes for us, we do have plans to be able to work around that, not in place right now, but again, in our scenario planning. If 321 was, in its worst case, permanently eliminated for all products, it would have a material impact on us in the near term until we were able to shift production resources, and we would obviously consider things like passing that pricing through to customers to the extent we have pricing power.

And I think that a lot of these changes we're talking about in tariffs could give us pricing power in different parts of our product line. So I realize I'm touching on many different, I'll call it hypotheticals, because that is where we are right now, and that's where I think the entire U.S. economy that works with imports is right now. But again, I'll go back to what I said at the beginning. We're spending a lot of time on this, understanding different scenarios and "war gaming" or what would happen under different scenarios.

Meredith Burns (VP of Investor Relations and Sustainability)

Thank you, Robert. I'm going to stick with you for the next question. It's a quicker one. In reviewing past transcripts, in the May 2nd call, management said of the new customer acquisition cohort for Vista, it was the sixth quarter in a row of growth. But cohorts was not mentioned in this last quarter's announcement. Are you seeing a decline in new customer cohorts? And if so, what is driving that?

Robert Keane (Founder, Chairman, and CEO)

So yes, actually, Q2 customer cohort at Vista was down slightly. It's continuing to grow on a trailing 12-month basis. We don't give our cohort data every quarter, so that wasn't an intentional omission. I mentioned earlier in Q2, and Sean talked a lot about these, there were a number of different specific impacts in Q2 that were related to our channels. And we don't see that as a longer-term change to the cohort growth. The cohort growth, just for those who are not familiar, we define the value of cohort as the gross profit we generate from customers acquired in a given quarter or a given year. And we can look at that gross profit over the first quarter of acquisition or over a longer period, like a one or two-year period.

And the improvements we've been making, and here I'm focusing specifically on Vista, which was the question, but it's true across Cimpress, is to grow customer value. And that comes from a number of different areas, but the underlying trends we see at Vista remain consistent. And so I certainly expect us to continue the long-term trend of cohort expansion. Importantly, and I'm certainly not making a prediction here, but you have to understand that a cohort, because it's a measure of value over time, there's the first quarter value of gross profit, but then there's the slope at which that grows over time through repeat business. And we've generally increased the slope of cohort value growth, the rate at which it increases as you move into the future, as we've moved to higher-value customers in Vista.

I certainly expect that to continue, which, again, without getting into specifics of the Q2 cohort, means that sometimes that you can start at a lower value, but still catch up to others because of a steeper slope. This particular quarter did have the unique characteristics, again, that we've talked about in this call. So that may or may not be the case, but overall, that should be the case. We don't expect a change from the general trend we've been seeing in the increase in the value of each cohort going forward.

Meredith Burns (VP of Investor Relations and Sustainability)

Thank you very much, Robert. Okay, Sean, next one's for you. Vista advertising spend as a percentage of revenue has increased year-over-year for the past three quarters. What is driving that? Is it also due to your competitors? As a follow-up, is there inflation on advertising costs? Are customers harder to reach? Do they need to see an advertisement more times to make a purchase decision? And if so, why?

Sean Quinn (EVP and CFO)

Yeah. I covered some of this earlier. Maybe just to add on to that, yeah, I think there's a number of things in this question. In Q2, certainly there were impacts from the free channels that I mentioned before. But we did plan to increase advertising spend. Also in Q1, if you go back to Q1, you can see that too. That was consistent with our plan. And as I mentioned earlier, our plan also was that in the second half of the year, the year-over-year growth in advertising spend would be less. I think stepping back way back for a second, over the last years, we've said in a number of different public forums that the range of advertising spend as a percentage of revenue would be in that 15%-17% on an annual basis.

We were operating on the low end of that, actually sometimes even slightly below that. But we said that that would vary quarter by quarter, year by year. And so I think we're still kind of in that range. We have added more spend into our mid and upper funnel channels in some regions from time to time. So over the aggregate of this year, that's the case. It doesn't really show through so much on a consolidated basis this quarter. But that's one of the drivers. And so that'll change quarter to quarter, but I think we're still in this range that we expected. And that will come down likely in Q3 and Q4 as a point of comparison.

In terms of the increased advertising costs or the potential inflation advertising costs, as I said, in Q2 in the U.S., cost per click during the peak holiday weeks was up about 50% in the consumer category. That's a huge increase. That was not something that we see across the board. And actually, as a point of comparison in Europe, cost per click was actually down. And so these things change from time to time. I think the direction of travel in the cost of advertising and performance channels is an upward one. But there, we're continuing to work on efficiency. And again, that's a multi-year trend. So I don't think there's anything necessarily to read into that. In the back half of the year, we'll see a slightly different picture, again, consistent with what we had planned coming into the year.

Meredith Burns (VP of Investor Relations and Sustainability)

Thanks, Sean. Another one for you. What was the $12 million of one-time favorable items in the year-ago period?

Sean Quinn (EVP and CFO)

Yeah. I probably won't list out all of them, but these are all things that we disclosed last year as well. So it's not like these are kind of new things that we discovered. Just as a couple of examples, and there were some of these that impacted the cost of goods sold and therefore impacted gross margin favorably last year. Some of them were in OpEx. But a few examples, we had a VAT refund last year because of a ruling that we got that was $3 million that favorably impacted Vista's cost of goods sold last year. We had some government subsidies that we received that was kind of in the aftermath of COVID, some of these things shaking out in Europe that favorably impacted PrintBrothers by a few million last year.

We had some COGS timing differences we called out last year in PrintBrothers as well that had a favorable impact. So I won't go through all of them, but they were kind of these discrete things. I'd like to think we hold the bar high there in terms of the things that we will call out. And these, again, they're all things that we disclosed that are kind of one-off and across COGS and OpEx, but that adds up to $12 million year-over-year. And then, as I said too earlier, and we called out in the release, there was another $5 million of impact, including from the Canadian postal strike in this year's Q2 as well.

Meredith Burns (VP of Investor Relations and Sustainability)

Great. Thanks, Sean. I'm going to skip to Robert for this next question. Robert, what gives you confidence in Vista's ability to reignite growth in the U.S., and how should we think about the business card business from here on in?

Robert Keane (Founder, Chairman, and CEO)

As to what gives us confidence, I'd point you to all the things we've highlighted, certainly today, but also in our July letter to investors and the September Investor Day presentation. In summary, it's the growth of the more complicated but very important and very large product categories, which we've talked about for years. And that includes Vista growing in that, whereas traditionally they were more in our Upload & Print businesses. I'd also say just a point of confidence is Vista's continued success in improving its value proposition across the board, but especially with higher-value customers. And again, what we've spoken about for multiple years, the importance and the success that Vista's having in serving customers that are in its top couple deciles, and the value of those top deciles is individual customers in those top deciles is growing over time.

As to business cards, we've spoken quite a bit about it today. I won't repeat all that for time, but I would summarize by saying something that Sean said just a few moments ago, which is, we don't see this as we see Q2's drop, not as a fundamental change that suddenly, after years of slow growth or slight decline, there was a rapid decline in the market. We see it as more a variety of short-term factors. We do not plan on that market growing, but we do think that it's going to be returning to its multi-year slow, steady move away as society moves away from using that product. Just like in the past, there's been a slow, steady move away from people sending Christmas or other holiday cards.

So going back to what gives us confidence, I think that in the U.S., we have those tailwinds, which are quite strong, especially when you get out of the second quarter. In terms of reigniting growth, I'd actually reframe it slightly. In Vista, we grew 8% for each of the two quarters before this last quarter. And last year, we grew in Q2 9%. So again, there's always variation year to year, but we are addressing the specific drivers from this last quarter, as we've talked about today. And that, I think, will give us confidence in the Cimpress revenues overall, not just Vista.

Meredith Burns (VP of Investor Relations and Sustainability)

Thanks, Robert. Sean, next one for you. Can you unpack the updated second half FY 2025 guidance as it pertains to Vista? How are you thinking about the growth cadence at Vista throughout the remainder of the year? And which businesses are most impactful to the second half of FY 2025 outlook and the growth rates that you expect to see in the second half?

Sean Quinn (EVP and CFO)

Yeah. Earlier, I talked about how Vista and Upload & Print make up the vast majority of our segment. Even last year in the second half of the year and how we expect that would be similar for this year. We're not going to give specific segment-level guidance for the back half of the year, but we are expecting businesses to grow in Q2. We are expecting more meaningful year-over-year EBITDA growth in Vista as well in the second half of the year. I mentioned earlier that the year-over-year ad spend profile had already been planned to be a higher year-over-year increase in H1 compared to H2. So that is one of the drivers there too that helps that. One of the drivers of that, as I mentioned too, is just that we had a significant brand partnership last year, and there was also media directed at that.

We don't have that in H2 this year. That's just one of many drivers there. For Upload & Print, I would expect to see more of what we've been seeing in terms of trends for growth and profitability for National Pen and BuildASign. I would continue to expect to see more of their growth coming from cross-Cimpress fulfillment as that continues to ramp and be a more material part of what drives their revenue.

Meredith Burns (VP of Investor Relations and Sustainability)

Great. Next question also for Sean. Housekeeping question. Why did the weighted average share count go up sequentially by 738,000 despite the 533,000 in share repurchases this quarter?

Sean Quinn (EVP and CFO)

Yeah. This is a little bit more of a kind of a technical thing. Our weighted average shares outstanding decreased. And actually, if you compare it to last year, our weighted average diluted shares are down, or shares outstanding are down by, I think, over 1.6 million shares year-over-year. The sequential increase that you referred to is really an accounting topic. When you have a loss in your GAAP net income, which we did in Q1, largely because of unrealized losses that we had on our currency hedges, we're required to use our basic shares as our diluted shares because otherwise, you're effectively reducing your GAAP EPS if you have a loss per share. So that's just the rule. So that's a little bit nuanced. In terms of the actual trend, the actual diluted shares outstanding, yes, it has come down with the repurchases.

If you look at the basic shares outstanding that we have, you'll see that sequential decrease because of the repurchases.

Meredith Burns (VP of Investor Relations and Sustainability)

Great. Sean, sticking with you. Again here, Cimpress undertook a 50 basis point repricing and upsize of its term loan in early December, which closed on December 17th. Certain lenders may be frustrated with lower prices today. Was management not aware of the severity of the decline in EBITDA that far into the quarter? How was EBITDA tracking in October and November?

Sean Quinn (EVP and CFO)

Yeah. Understand the question. In Q2, which is unique to Q2, the holiday peak is a concentrated period of time, of course, and then the extent of our year-over-year profit impact this year, especially combined with the fact that it was a condensed buying period, was really not known until we closed the books for December because December has the biggest impact. Certainly, relative to what we had planned, December had the biggest impact relative to those plans, and again, with the shift to the holiday season, that was more so the case this year and becomes harder to forecast how that's going to profile from a consumer perspective, so relative to early December, certainly, the results were worse than we had expected and worse than what we were forecasting at that time.

Meredith Burns (VP of Investor Relations and Sustainability)

Great. Last live question here. Given the 3.1x net leverage versus your target of 2.5x combined with the weaker year-over-year EBITDA, do you anticipate buying stock if it remains in the 70s? Will the board reevaluate its leverage policy and/or target if the stock declines into the 60s or lower? Sean, why don't you take that one?

Sean Quinn (EVP and CFO)

Yeah. We ended with 3.1x net leverage. Our fiscal 2025 guidance now shows that we'd have a slight increase to EBITDA. Again, we've used this at least framework. So using that at least framework, it implies a slight increase to EBITDA in the back half of the year. So EBITDA expansion, also $50 million of free cash flow at least in the back half of the year. And most of that would be used to bring the leverage back to the approximately 3.0x that we've talked about in our guidance and in the year-end. So at those levels, there is some room for share repurchase, but we wouldn't expect it to be material. That would be somewhat dependent on our actual results relative to that guidance.

We obviously can't comment on hypotheticals for what the board might decide in the future, but there's no plan of changing that leverage policy as we sit here today.

Meredith Burns (VP of Investor Relations and Sustainability)

Thank you, Sean. All right. With that, Robert, I'm going to hand the call back over to you to wrap things up.

Robert Keane (Founder, Chairman, and CEO)

Okay. Thank you, Meredith. Let me summarize by saying we're continuing to execute on the plans, the strategic plans, and operational plans we laid out in September in our Investor Day. Although our Q2 results were not good, there are so many signs of progress happening across Cimpress today that we do see those Q2 results as undesirable, unwanted, but certainly addressable short-term turbulence, and we do not see them as a change to our overall trajectory, so by staying focused on our plans, by focusing on focus and on execution, we do expect to continue to deliver improvements to the value that we deliver to our customers that will, in turn, continue to support growth year in year in our financial results and the long-term trajectory that we've discussed so many times.

So let me wrap up by saying thank you to our investors for joining the call and to continuing to entrust your capital with us.