Vistaprint N.V. Q2 2010 Earnings Call Transcript

123jump.com Staff
03 Mar, 2010
New York City

Revenue rose 40% to $194.6 million & net income rose 45% to $26.9 million or 59 cents a share. Gross margin was 65.1% in Q2 of fiscal year 2010 reflecting a 160 basis point increase year-over-year. Sequentially gross margins were 150 basis points higher.

Vistaprint N.V. Q2 2010 Earnings Call Presentation Transcript


Vistaprint N.V. ((VPRT))
Q2 2010 Earnings Call Transcript
January 28, 2010 4:20 p.m. ET

Executives

Meredith Mendola - Vice President, Investor Relations
Michael Giannetto - Executive Vice President and Chief Financial Officer
Robert S. Keane - Chairman, President and Chief Executive Officer

Presentation

Meredith Mendola

Welcome to the Vistaprint Second Quarter Fiscal Year 2010 Earnings Presentation. This is Meredith Mendola, Vice President of Investor Relations. With us today are Robert Keane, our President and Chief Executive Officer; and Mike Giannetto, our Chief Financial Officer.

Before we get started, please note that our comments include forward-looking statements, including statements regarding revenue and earnings guidance and actual results may differ materially. Risks that could cause actual results to differ materially from those statements are described in the documents that we periodically file with the Securities and Exchange Commission, including our Form 10-K for the fiscal year ended June 30, 2009, our Form 10-Q for the period ended September 30, 2009, and our other recent SEC filings which are available on the Investor Relations page at vistaprint.com.

As a reminder, a detailed reconciliation of GAAP and non-GAAP measures is posted in the appendix of the Q2 fiscal 2010 earnings presentation that accompanies these remarks.

Now, I’d like to turn the presentation over to Robert Keane. Robert?

Robert S. Keane

Thank you, Meredith. And welcome to everyone joining us. I’ll start by reviewing last quarter’s financial and operational highlights, then discuss a small technology focused acquisition we completed during the quarter and then turn to a review of our strategy and goals for the remainder of the fiscal year.

After that, Mike will review our financial results in detail along with our financial guidance. Later, at 5:15 p.m. Eastern Time, we’ll host a separate answer -- question-and-answer session that you can access through a link on the Investor Relations section of www.vistaprint.com.

Now, let’s review the quarter just ended. Q2 of fiscal year 2010 was another quarter in which Vistaprint delivered simply great financial results. We grew revenue and GAAP EPS by 40% year-over-year. Our earnings exceeded our expectations due to higher than anticipated revenue and value-related gross margin improvements.

Operationally speaking, Q2 was also another quarter of strong execution. First, we grew revenue significantly across product lines and across our geographic markets. We performed well both in small business products as well as in holiday and consumer products.

Non-U.S. revenue was the majority of our revenue for the first time as a public company. This was due to very strong holiday results outside of the U.S., as well as, a year-over-year currency benefit.

Second, we acquired a record 1.8 million new customers during the quarter while at the same time significantly growing revenue from repeat customers.

Third, this quarter, we continued to improve on the graphic design content for our products by further increasing the breadth, depth and quality of graphic designs with which our customers can make an impression.

Fourth, we expanded our product range of small business digital marketing solutions via the introduction of a service that enables a small business to increase its visibility in local search results via the automated submission of their company’s profile to a wide variety of search engines and online directories.

During Q2, we also completed the acquisition of a small privately held technology company called Soft Sight, Inc. Soft Sight’s innovative and patented automation software enables an end-user’s uploaded artwork to be automatically converted into embroidery stitch patterns for subsequent automated manufacturing.

The embroidery designs can be instantly previewed and modified online. The digitization of embroidery stitch patterns has traditionally been a labor intensive, manual process which resulted in high setup costs for custom embroidery. But Soft Sight has developed sophisticated algorithms to eliminate much of that labor.

This technology is a strong match to Vistaprint’s capabilities. We believe that we will be able to introduce high-quality custom embroidered products in low quantities at low prices by combining Soft Sight’s software with Vistaprint’s powerful graphic content-matching capabilities, our product marketing expertise, our large customer base and our mass customization manufacturing experience.

We believe this product line will appeal to both our small business and consumer customers and that we have the potential to become over time a leading player in low-volume custom embroidery.

This acquisition was driven by Soft Sight’s technology not their revenues, which are negligible. About 15 Soft Sight employees have joined Vistaprint and we’ve begun working together to integrate the Soft Sight technology into our platform for marketing, online graphic design and manufacturing.

We plan to launch the new embroidered products to our customer base in the first half of fiscal year 2011, and we do not expect any revenues from embroidered products before then. Therefore, we anticipate that the acquisition and the integration will have a dilutive effect on earnings per share for the remainder of 2010. Longer term, we’re excited about the revenue and profit potential of this market.

Next, I would like to briefly review Vistaprint’s three main near-term growth drivers and the progress we are making to capitalize on them.

First, these are a well known expansion from printing to all things marketing for small businesses by entering new product categories and expanding within existing categories. Our first half fiscal 2010 results reflect solid execution of our strategy to become a true marketing partner to our customers.

In fact, during our second quarter, our small business marketing product revenue grew as fast as our consumer and holiday revenue. Our recent expansion into local search submission services and our anticipated entry into the market for embroidered logo apparel are two examples of future growth opportunities in the small business marketing space.

We believe that no other company offers such breadth of small business marketing products and services and that our customers value Vistaprint’s ability to provide turnkey solutions to their marketing and branding needs.

A second near-term growth driver is geographic expansion. As I mentioned earlier, our non-U.S. revenue in the second fiscal quarter was 51% of total revenue. While the non-U.S. revenue typically trends higher in Q2 due to seasonality and we did have a currency benefit year-over-year, this growth is largely the result of the investments we’ve made in our European business and validates our past commitment to investing in geographic expansion.

Additionally, the Asia Pacific region, which for now is limited to Australia, New Zealand and Japan, continues to be our highest-growth region. We expect this trend will continue as we build out our presence in that market.

Our third growth vector is the home and family market. In the second quarter of this fiscal year, we estimate that holiday and home and family revenue was about 30% of revenue, up about 40% year-over-year.

This is the result of investments we have made in graphic content for customers’ designs, new products that appeal to the home and family market and our ability to acquire large numbers of new customers while increasing spend from existing customers. We believe there are many remaining opportunities for us to capitalize on and so we continue to focus on the future.

In that regard, I’d like to provide an update on some of our targeted investment areas for fiscal year 2010. In the past two earnings calls, we’ve described several areas of investment for fiscal 2010 that are designed to drive long-term growth and competitive advantage.

In Q2, we continued to execute on these plans. In terms of geographic expansion, we continued to hire marketing and management talent in our European operations to help us fuel growth in this region.

Additionally, we have begun construction on our new manufacturing facility near Melbourne, Australia. We expect this facility to be operational in the first quarter of fiscal year 2011. We also plan to open an Asia-Pacific regional marketing office in Sydney later this fiscal year. We believe these investments will help us better serve customers in Asia-Pacific through faster delivery, accelerate our revenue growth in the region and lower our cost of goods sold.

As part of our plan to expand customer service in languages beyond German and English, we continue to grow our talent in our new design, sales and service center in Tunis, Tunisia. We are now operational in French and Italian telephone and e-mail services from this facility. We believe these investments will help us improve customer loyalty and lifetime value.

In the home and family area, we delivered great results on past product launches primarily targeted to this consumer customer. We also delivered enhanced content that helped new and repeat customers find the right way to express themselves this past holiday season.

Finally, we are progressing on our investments in automation to help drive longer term cost efficiencies. The engineering and implementation of automation is a multi-year process but we are making steady progress. We launched a new automated package conveyance system in our Canadian plant in the past quarter and made key progress on automation related to our shipping processes in our plant in the Netherlands.

We believe investment in these and similar automation areas should drive efficiencies in the manufacturing process that will benefit gross margins over the mid to long-term and further enhance our scale-based competitive advantages.

Looking forward, our strong first half revenue and earnings performance provides the flexibility to increase our investment in these areas during the second half of fiscal year 2010.

Now, I’d like to make a few comments on the remainder of 2010. We’ve been confident in our ability to execute against our plans for the year and our performance in the first half of the year makes us even more enthusiastic. As Mike will explain in more detail, we are raising our previous revenue and EPS guidance for fiscal 2010.

We are raising earnings guidance despite the negative earnings impact of our previously announced termination of the third-party membership programs previously offered on our website and the expected dilution from the costs associated with the acquisition and integration Soft Sight.

Even as we are raising earnings guidance, throughout the business we are also increasing our investments for long-term growth and competitive advantage. Examples of increased fiscal 2010 investments beyond those we have previously announced include more engineering projects, accelerated recruitment of key personnel, a new customer service center in Berlin, Germany and additional testing of product, excuse me, a broadcast marketing opportunities.

Although each of these investments will be dilutive in the near-term, we will be making them because of the confidence we have in Vistaprint’s long-term market opportunity. Because of the belief that the bigger Vistaprint becomes, the more competitive we become and because similar choices to reinvest in the past have helped us deliver the performance that Vistaprint just delivered in the December quarter and in many other quarters throughout our company’s history.

In summary, we are very pleased with the second quarter results as once again Vistaprint delivered outstanding earnings and revenue growth. As always, we are operating this company for the long-term and looking ahead to the remainder of fiscal year 2010 we have a lot to be excited about.

Finally, we are confident about our ability to deliver on the raised earnings guidance that Mike will walk through shortly.

Now, I’ll turn the presentation over to Mike for his financial review. Mike?

Michael Giannetto

Thanks, Robert. Our second quarter results showed continued high revenue and earnings growth. We again demonstrated the ability of our business model to deliver against and in this particular case strongly exceed revenue and EPS guidance. Now to the highlights of the quarter, which I will follow with FY2010 guidance.

Vistaprint generated revenues of $194.6 million in the second fiscal quarter, reflecting a 40% increase over the second quarter of the prior fiscal year. GAAP net income for the second quarter was $26.9 million or 13.8% of revenue, reflecting 45% growth year-over-year. GAAP EPS in the second quarter was $0.59 or 40% growth from the second quarter of fiscal year 2009.

Non-GAAP adjusted net income for the second quarter was $33.6 million or 17.3% of revenue, reflecting 43% growth year-over-year. Non-GAAP adjusted net income per diluted share in the second quarter was $0.73.

Strong performance across geographies and product lines drove the 40% second quarter year-over-year revenue growth. During the second quarter, referral revenue was 1.9% of total revenue, 270 basis points lower than year-ago levels and 160 basis points lower sequentially. Referral revenue related to membership programs was 0.9% of total revenue, compared to 3.8% of total revenue in Q2 2009, a 290 basis point decline.

For the remainder of the fiscal year, we expect referral revenue to be slightly over 1% of revenue, lower than previously anticipated due to the discontinuation of the membership program revenue. Of course, due to the discontinuation, revenue from third-party membership programs will be zero for Q3 and for all future quarters.

Currency exchange rates have begun to benefit revenue growth, compared to the same period last year. Year-over-year, the U.S. dollar has weakened against most of the other currencies in which Vistaprint operates. Excluding the impact of currency movements, our total second quarter revenue grew 32% versus the dollar-denominated growth of 40%.

Looking forward, if currency exchange rates stay at current levels they should continue to benefit our year-over-year reported revenue growth rate for the remainder of fiscal 2010, but they will continue to negatively impact gross margin.

However, as always, we remain focused on our constant currency growth rates, which have held steady for several quarters now at around 30%.

Moving on to bookings metrics, more than 20 channels and partnerships contributed to our total bookings in Q2 of fiscal 2010. Approximately 66% of bookings came from repeat customers. The largest channel for repeat customers remains our own outbound permission-based e-mail, which is also one of our lowest cost channels.

New customers represented 34% of bookings. Paid search represented about 18% of total bookings fairly consistent with previous quarters.

New customer acquisitions at approximately $1.8 million remained strong and were a record high for the company. The number of new customers added in Q2 was up from our Q1 additions, reflecting the same seasonality we saw last year. Year-over-year, new customer acquisitions grew 20% from the second quarter of fiscal 2009.

During the quarter non-U.S. revenues were 51% of total revenue, up on a sequential basis and up from 42% last year. Non-U.S. revenues increased 68% year-over-year. Excluding the impact of currency movements, non-U.S. revenues increased 48% year-over-year.

Revenues from our U.S. website increased 20% year-over-year in the second quarter. Excluding revenues from membership programs for both Q2 2009 and Q2 2010, our U.S. revenues grew 26% year-over-year.

Web sessions increased to $80.5 million in Q2 2010, a 31% increase versus the $61.4 million we generated in the second quarter of the prior year. Conversion rates were 6.6% in the second quarter of fiscal 2010, up slightly from 6.5% in the second quarter of 2009.

Average order value was $36.63 in Q2 2010, an increase from $33.57 recorded in the prior year’s second quarter. As we have always noted in the past each of these metrics will vary up and down based on a number of factors. Including new product introductions, product mix, geographic expansion, mix of consumer and small business customers, channel mix, marketing campaign testing, seasonality and the like. As such, they should be considered together by looking at the product of the three factors not individually.

Now to gross margin which is defined as revenue minus the cost of revenue expressed as a percentage of total revenue. Gross margin was 65.1% in Q2 of fiscal year 2010, reflecting a 160 basis point increase year-over-year. Sequentially, gross margins were 150 basis points higher.

Gross margin changes were due primarily to the following drivers. On a year-over-year basis, quarterly gross margins were impacted positively by a combination of improvements in shipping fees, product mix and materials costs, which more than offset the lower membership revenue and the negative impact from currency.

On a sequential basis, quarterly gross margins were impacted positively by overhead absorption and product mix, which more than offset the lower membership revenue and the negative impact from currency.

Our GAAP net income for the second quarter was $26.9 million, reflecting a 45% increase over the second quarter of the prior year. These quarterly GAAP results translate to a 13.8% net income margin in the quarter versus 13.4% in the second quarter of the prior year.

In non-GAAP terms quarterly adjusted net income was $33.6 million reflecting a 43% increase over the second quarter of the prior year. These quarterly non-GAAP results translate to a 17.3% adjusted net income margin versus 16.9% in the second quarter of the prior year.

Looking at the Q2 fiscal 2010 income statement versus Q2 fiscal 2009, one can see that as a percentage of revenue. Cost of revenue decreased 160 basis points year-over-year, due to the reasons previously mentioned. Marketing and selling expense increased 10 basis points to 30.8%.

Technology and development expense decreased 50 basis points to 10.5% of revenue due to leverage in overhead and salaries. Q2 2010 technology and development expense also includes a write-down of approximately $900,000 related to the acquisition of Soft Sight.

General and administrative expense increased by 110 basis points year-over-year to 8.0% due to higher external consulting fees and legal fees.

Operating margin increased 90 basis points primarily due to lower cost of revenue. Tax expense was 9.6% of pre-tax profits, compared to 9.2% of pre-tax profits during Q2 of the prior fiscal year. This increase was primarily due to shifts in geographic mix of income and the expiration of a U.S. Federal Research and Development Tax Credit.

Looking sequentially at the Q2 income statement versus the prior quarter, Q1 of fiscal 2010, one can see that we gained significant leverage across P&L line items due to our seasonally higher revenue.

Cost of revenue decreased by 150 basis points due to reasons previously discussed. Marketing and selling expense decreased 130 basis points primarily due to leverage in marketing headcount and overhead costs.

Technology and development expense decreased 170 basis points. General and administrative expense decreased 140 basis points. Operating margin increased by 590 basis points. Tax expense of 9.6% of pre-tax profit, compared to 9.5% of pre-tax profits in Q1 of 2010.

Share-based compensation expense was $6.7 million or 3.4% of revenue during the second quarter of fiscal 2010. Share-based compensation expense includes related tax expense for fiscal years 2008 and 2009, and for the first two quarters of fiscal 2010.

As described in our press release financials, share-based compensation in the three and six months ended December 31, 2009 includes a charge of $1.3 million related to prior periods.

Vistaprint recently became aware that the third-party software application we use to calculate share-based compensation costs contained computational errors, impacting the timing of expense recognition, resulting in a cumulative understatement of share-based compensation expense and additional paid in capital.

This is an issue that has caused several companies to restate or adjust share-based compensation expense over the course of the past couple months. We concluded the error was not material to any prior period or our current year results. Since share-based compensation is a non-cash item, there is no impact on net cash provided by operations.

Finally, looking forward, we expect that as a result of this issue, our quarterly share-based compensation expense will be somewhat more unpredictable due to the timing of grant and vest dates and forfeitures.

Our balance sheet remains strong with cash and equivalents of approximately $159.1 million. During the quarter, Vistaprint generated $57.9 million in cash from operations, compared with $44.1 million in the second quarter of fiscal 2009.

Free cash flow was $25.5 million in the second quarter, up 69% from $15.1 million in the second quarter of fiscal 2009. On a trailing twelve-month basis, return on invested capital as of December 31, 2009 remained high. Including share-based compensation expense, it was approximately 30% and excluding share-based compensation expense, it was approximately 39%.

During the quarter, the company made $30.9 million in capital expenditures, which equates to approximately 15.9% of quarterly revenues. Quarterly CapEx breaks down as follows. 72% went to land and facilities as we continue to expand our Canadian manufacturing facility and have begun construction of our new manufacturing facility in Australia, 18% went to manufacturing and automation equipment and the remaining 10% went to other uses such as IT infrastructure.

Now, let’s go over our financial guidance as of January 28, 2010. This guidance reflects our expected market opportunity, our profitability objectives and our ongoing commitment to making investments for growth. Vistaprint specifically disclaims any obligation to update any forward-looking statements, which should not be relied upon as representing our expectations or beliefs as of any date subsequent to January 28, 2010, the date of this presentation.

With this in mind, our expectations for the third quarter of fiscal year 2010 are as follows. Revenue is expected to be in the range of $165 to $170 million, an increase of 29% to 33% year-over-year.

GAAP EPS on a diluted basis is expected to be between $0.28 and $0.31 based on about 45.5 million weighted average shares outstanding.

For the full fiscal year ending June 30, 2010, our guidance is as follows. We expect revenue to be $675 to $685 million, an increase of 31% to 33% year-over-year. Given this revenue range and the fact that we no longer offer any third-party membership referral programs, we expect total referral revenues to be approximately 2% of total revenue for the year and revenue from membership referral fees to be less than 1% of total revenue for the year.

Full fiscal year GAAP EPS on a diluted basis is expected to be between $1.44 and $1.52 based on about 45.3 million weighted average shares outstanding.

Capital expenditures for the year are expected to be approximately $90 to $100 million or about 13% to 15% of revenue at the revenue guidance midpoint. Included is our planned investment of approximately $30 million for investment in our manufacturing plant in Australia.

This is an increase from prior guidance for fiscal 2010 due to the earlier timing of some capital expenditures previously planned for fiscal 2011. Without the Australia investment, our capital expenditure guidance for 2010 would be around 10% of revenue at the midpoint of the range.

We are providing the assumptions noted on our guidance slide to facilitate comparisons with non-GAAP adjusted net income per diluted share. Based on these assumptions, for Q3 of fiscal 2010, non-GAAP adjusted EPS excluding share-based compensation is expected to be between $0.39 and $0.42 based on an estimated share-based compensation expense of $5.4 million.

Full fiscal 2010 non-GAAP adjusted EPS, which excludes share-based compensation expense is expected to be between $1.92 and $2 based on an estimated share-based compensation expense of $23.1 million.

Starting this fiscal year, we’ve been providing some of our long-term incentives in cash instead of stock, so share-based compensation is not expected to grow as fast as our net income. Therefore, non-GAAP adjusted EPS will grow at a slower rate than GAAP EPS.

Reviewing our seasonal patterns can provide some color on our full year guidance. We target annual revenue and earnings objectives and investors should be aware that quarterly fluctuations, when they occur are primarily reflective of our disciplined financial decision-making which focuses on long-term not quarterly performance, the implementation of our strategy and the seasonal nature of portions of our business.

Our consumer and holiday products are seasonal in nature so they accelerate our sequential growth rate in our fiscal second quarter, which ends December 31st. Almost all of the holiday business goes away in the third quarter and there is typically less consumer spending in that quarter as well.

Having just turned in strong holiday business, we would expect to see a similar pattern that we saw in 2009, where overall revenue declined sequentially from the December quarter to the March quarter.

Further, revenue guidance just provided, we still expect very strong year-over-year growth both on a full year basis and in every quarter, when compared to the same quarter in the prior year. This seasonality also has an impact on our quarterly earnings pattern, which historically has risen significantly in our second fiscal quarter and then trends lower.

Finally, I’d like to update investors on our capital expenditures guidance for 2010. This chart shows capital expenditures in dollars and as a percentage of revenue for the past several years and also shows our expectations for 2010 at the mid-point of our raised revenue guidance range.

As previously mentioned, we expect capital expenditures as a percentage of revenue to be about the same as in fiscal 2010 as in 2009 at the high-end of the capital expenditures guidance range and potentially lower if we spend at the low-end of our guidance range. You can see that we are getting leverage in our investment -- in our manufacturing-related equipment over time and expect that to continue in 2010.

Without the approximately $30 million planned investment in Australia for fiscal 2010, our capital expenditures as a percentage of total revenue would be about 10%. Our planned 2010 capital expenditure for Australia comprises about two-thirds for land and facilities and the remaining for manufacturing-related equipment and other capital investment.

Now, let me turn the call back to Robert.

Robert S. Keane

Thanks Mike. Q2 was another great quarter in all respects, continued strong revenue and EPS growth, continued operational execution and continued investments in areas designed to support future growth.

For the full fiscal year, we are confident in our ability to deliver results in line with today’s raised financial guidance. And as we have discussed today, we are delivering this upside while also making significant additional investments intended to build long-term competitive advantage and shareholder value.

We have always had high expectations for Vistaprint’s business and our vision is to build a transformational and enduring business institution for the mutual benefit of our customers, our employees and our shareholders. We remain as convinced as ever that we still have a significant opportunity ahead of us and that the best is yet to come.

Meredith Mendola

We’d like to thank you for your time and attention. And we look forward to answering questions and comments on our live call at 5:15 p.m. Eastern Time. That concludes our prepared presentation.

Question-and-Answer Session

If you would like to ask a question ladies and gentlemen, please press star one. If you would like to remove your question press star two. We will pause momentarily to compile a list of questions.

Our first question comes from the line of Youssef Squali. Please proceed.

Youssef Squali - Jefferies & Company

Thank you very much. Youssef Squali, Jefferies. Hi, everybody, and Robert, congratulations on a very good quarter. So couple questions, I guess starting with the mandatory guidance question.

So if I look at your Q3 guidance, I’m looking at sequential drop in revenues of roughly 13%. If I do the same math last year it was about 8%, in prior years, it was even less. So is that basically driven by your usual conservatives? Are you seeing something to make you more cautious was Europe substantially above expectations and that’s not sustainable? That’s why you’re doing it or is it something else?

And then I guess related to that, if I look at the margins, they’re substantially below where they were in prior quarters and even in same periods in prior years. Is that, how much of that is driven by Vertrue and this acquisition that you are talking about being dilutive it was too small for me to have thought it was going to be that dilutive. So maybe you can just help us understand those?

Michael Giannetto

Hi Youssef. It’s Mike. So in terms of the revenue growth Q2 to Q3, Q2 we just finished a pretty outstanding quarter in terms of revenue growth, driven as we would expect in this quarter driven by the holiday and consumer related products. What we’ve seen in the seasonality in the business is that in Q3, obviously the holiday goes away and you see a drop in overall revenue.

I would say we’re obviously seeing the same directional move as we did last year and the year before. In terms of relative to your conservativism or not in the revenue guidance, I think we have a realistic range on the lower end at the 165. I think it’s conservative but in terms of the overall range, we think it’s a realistic range based on our forecast and expectations right now, in terms of the margins.

Youssef Squali - Jefferies & Company

Why would it be substantially below what it was last year, I guess is my question?

Michael Giannetto

You mean a sequential drop from…

Youssef Squali - Jefferies & Company

Correct.

Michael Giannetto

… in Q3?

Youssef Squali - Jefferies & Company

Correct.

Michael Giannetto

I think we had unbelievably strong Q2 that we just finished and the mix of the business changes very substantially, back to business. And so the out-performance that was in the quarter was very -- was not in large part but a very significant part driven by the holiday products which don’t exist after New Year’s. So I think that’s a major driver.

Youssef Squali - Jefferies & Company

Okay. And on the margin?

Michael Giannetto

So for the margins, Q2 we had a record profitable quarter in terms of dollars in margins and what we see obviously from a revenue standpoint in our guidance the midpoint we were guiding to a revenue number about $25 million lower obviously is going to negatively impact margins.

As well as, we -- as we announced back a couple months ago, we terminated the membership programs, which is no longer part of our revenue stream. And we’re continuing to make investments that we first outlined as we entered the fiscal year. In some cases we’ve accelerated some of those investments given the over-performance in Q2 and our confidence in terms of delivering on the revenue in the second half of the year.

So there’s a combination of revenue drop, which we would expect going into Q3 on the continued ramping up of investments as well over the second half of the year.

And there is some dilution which we haven’t specifically called out in terms of a number but there is some dilution associated with the Soft Sight acquisition as we integrate into the business with really no revenue stream. We won’t see any revenue coming from that product line until next fiscal year.

Youssef Squali - Jefferies & Company

And just lastly, if I may, if I look at COCA, it’s up another dollar substantially. I think it was $21.89, up from $20.79, so now this is a trend. How should we be thinking about COCA? Is that even a -- is that a derived really outcome that you don’t necessarily manage to or how should we be thinking about that going forward?

Michael Giannetto

So and you’re right. That is the calculation. Sequentially, as in this quarter, sequentially Q1 and Q2. Q2 we do normally see an increase in the COCA in general advertising expenses, which is really related to the holiday period where advertising costs in general will elevate.

To your point, do I manage into it, we do not manage to a COCA number or the calculation you just did which is approximately for COCA. But we really look at cost of acquiring customers and then the anticipated future net present value of the contribution going forward. And we may trade-offs on those economics as opposed to an absolute COCA amount.

So that’s some of the variables impacting that. If you look at on a cost per order basis, it’s been relatively flat. When you look at advertising as a percentage of revenues, relatively flat with last year as well same quarter about 20% of revenues.

Youssef Squali - Jefferies & Company

Okay. Thank you very much.

Robert S. Keane

Thanks.

Michael Giannetto

Thank you.

Operator

Our next question comes from the line of Ingrid Chung - Goldman, Sachs & Co. of Goldman Sachs. Please proceed.

Ingrid Chung - Goldman, Sachs & Co.

Good afternoon. Thanks. So my first question is on non-Vertrue referral fee revenue. I was just wondering how you view that revenue stream. By our calculations, this referral revenue stream was about 1.2% of revenue last quarter and is about 1% this quarter and you are saying that’s going to be roughly 1% for the rest of the fiscal year?

Are you actively trying to grow this and grow the number of partners you have or are you just keeping the partners you have right now and just growing the revenue you have with those current partners?

And then secondly, we noticed that the number of temp employees you have increased quite a bit both sequentially and year-over-year. Is this purely because of the unexpected demand you had in the quarter or is there more of a strategy of moving more toward employees mixed towards temps?

Robert S. Keane

Okay. Well, I’ll first do the membership question and then Mike do the employee temp question?

Ingrid Chung - Goldman, Sachs & Co.

Okay.

Robert S. Keane

The non-membership programs for referral revenues we certainly see as a growth area and we plan to continue to invest in and we hope they will continue to grow and we don’t make specific predictions about any product lines. But they are a relatively small percentage of our revenues. These are things like the referral programs we have with people like Pitney Bowes or Intuit or Google Ad Words or the like. And we do hope that those will continue to grow.

Just to be clear, I think as you just alluded to anything membership has been terminated and that as a total referral number is down substantially because of that. But we do expect and hope for continued investment to grow that business other than membership. Mike in terms of temp employees?

Michael Giannetto

Sure. So, Ingrid, we do use temps to flex up the work force in both of our plants during the December quarter. We have -- you can see we have a significant spike in revenue volume in Q2 and then as we talked about earlier, it drops down in Q3. So we do try to use to the extent that we can a flexible workforce to meet the spike of demand in Q2 and then ramp it down as the revenue lowers in Q3.

Ingrid Chung - Goldman, Sachs & Co.

Okay. And just as a quick follow-up on the first question. Is your referral fee revenue from Google, Intuit, et cetera. Is that as high margin as the Vertue referral fee revenue?

Robert S. Keane

Yes. It is.

Ingrid Chung - Goldman, Sachs & Co.

Okay. Great. Thank you.

Operator

Our next question comes from the line of Mark Mahaney of Citi. Please proceed.

Neil Doshi - Citi Investment Research

Hey, guys. This is Neil Doshi calling in for Mark. And a couple questions. One was on the Soft Sight acquisition. Could you talk a little bit more about your M&A strategy going forward? Was this more of a one-off acquisition or can we expect to see more M&A on this front?

And then, secondly, just on the broader international side, it looks like reported growth is very strong. Can you talk about where the growth was coming from and anything you can talk about in terms of how the small, medium business market in Asia and Europe is firming up?

Robert S. Keane

Okay. No problem. So we maintain the same acquisition strategy as we always have had which is we always are considering acquisitions but we are very, very prudent about them because we really want to ensure that it adds value to us as a buyer not just to the selling party. And I think we have a great deal of prudence because a lot of acquisitions don’t work out for the acquiring party.

So we consider them, this is the first time in a long time since we have been a private, well before we went public that we’ve completed a transaction. But we will continue to consider them in the future. We still believe that acquisitions are not likely to make up a significant portion of our future revenue growth. We have always said we will not rule small tuck-in acquisitions and it’s certainly possible. But the acquisition strategy remains the same.

In terms of growth outside the United States, it was a milestone quarter in the sense that we had more than 50% of our revenues last quarter coming from outside the U.S. We do expect that number if you look at it to be a seasonally inflated number that will come down the other side but the multi-year trend is clear, it’s up and to the right. We had some currency impact of about $12 million that boosted our non-U.S. revenues because of the weak U.S. dollar.

But broadly speaking, if you’re looking cost and currency terms, the non-U.S. business continues to grow at a very, very strong rate of approximately 48%. So, what’s driving that? We find that number one, Europe continues to grow very, very well. In percentage terms, it’s not growing as fast as Asia-Pacific which is Japan, Australia, New Zealand, but it’s a much bigger market for us.

And so we are continuing to be very bullish on the growth in the U.S. U.S. grew 26% excluding membership, so it was still very good growth. Europe grew faster than that and small business marketing in Europe is doing very well for us.

And your question in terms of Asia-Pacific which for us is today limited to Australia, Japan, New Zealand, we find more similarities than differences with those markets when you compare that to Europe or North America.

Neil Doshi - Citi Investment Research

Great. Thank you, Robert.

Robert S. Keane

You’re welcome.

Operator

Our next question comes from the line of Shawn Milne of Janney Capital Markets. Please proceed.

Shawn Milne - Janney Capital Markets

Thank you. And congratulations on a good quarter. Thanks for taking my questions. Mike, I just wanted to follow up on the gross margin line. Well out of expectations again this quarter. Any update on your non-print services, is that material part of the upward driver here? And if you could, any further color on total subs there, that would be helpful.

Just want to take another shot at the earlier question, is the acquisition -- is it materially dilutive in the third quarter? Any more color around that would be helpful? Thank you.

Michael Giannetto

Sure. So, Shawn, in terms of gross margin; we did see an expansion year-over-year and sequentially quite nicely. In terms of the services piece which is websites, e-mail predominantly, it’s growing very nicely. It certainly is helping in the gross margin line. We haven’t -- we’re not getting specific in terms of the size of it. We did say we had 150,000 paying subs back in June but we’re not updating you at this time. I will say that it definitely has had a positive impact on a year-over-year basis. It’s growing very nicely.

And there were many moving parts within gross margin actually when you look over a year-over-year basis. We had some headwinds with FX movements with the Canadian dollar as well as the referral revenue percentage namely the membership coming down, which were able to offset with mix and some shipping savings.

In terms of the dilution we refer to from the acquisition, I would not call it material, Shawn. It’s, I think, it is worth calling out as we are investing over the next six months to integrate and bring the product to the market in early ‘11. But again, it’s not a real significant number but again, it’s worth calling out.

Shawn Milne - Janney Capital Markets

Okay. Thank you very much.

Operator

Our next question comes from the line of Jim Friedland of Cowen And Company. Please proceed.

Kevin Kopelman - Cowen And Company

Hi. Thanks. It’s Kevin Kopelman in for Jim. Just had a couple of questions. First on new customers, it looks like new customers actually accelerated a bit in the quarter. Could you give us any color on how you were able to drive new customer acquisition? And also was your broadcast advertising having an impact there?

Michael Giannetto

So we do our marketing decisions very much on a channel-by-channel analysis by our marketing people and we hit on a lot of different cylinders. We did mention that we were doing broadcasts and in prepared remarks earlier tonight, we talked about how one of the accelerated investments that we will be making going forward is additional broadcast test.

So we were pleased with that but it still remains in a test phase. So it helped but it was not a material that wasn’t the thing that made the difference. It was really strong increases across the board. We do think that this trend line of new customer acquisition is like any other trend lines in our business. It will fluctuate quarter-to-quarter but clearly last quarter was very nice up and to the right.

Kevin Kopelman - Cowen And Company

Okay. Thanks. And as far as the Australian facility, when you guys get that up and running and also with the marketing offices that you announced there, are there any plans to launch new foreign language sites in that region along with that?

Robert S. Keane

We don’t make specific announcements ahead of any product or geographic or other development we plan on. But I would say if you look at Vistaprint’s history, we have a very successful history of introducing into markets around the globe and we certainly would expect that trend to continue. I wouldn’t want to publicly talk about which ones are going to be next in which part of the world but there’s a lot of the world that we’re not in.

Kevin Kopelman - Cowen And Company

Okay. Thanks. And last question, you shutdown membership rewards. How are you guys using that to screen real estate?

Michael Giannetto

We’re using it for a bunch of different things, almost exclusively internal products for the types of referral programs like we mentioned in a previous question. So the small business products and services, say as an example, an Intuit or Pitney Bowes or other types of advertising if you want to reach our small business customer base. But that includes our own use. It can be anything from website sales to more traditional products.

Kevin Kopelman - Cowen And Company

Thanks.

Michael Giannetto

Thank you.

Operator

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

Mark May - Needham & Company

Thank you. Hi. The free cash flow conversion on revenues was great, so congratulations, love the trend there. I think the only thing I want to focus on is try to put some context on the Q3 revenue guidance. Could you maybe give us what the percent of revenue and tell me if it’s in your webcast, I haven’t had a chance to look at it if it is.

But the percent of revenue from consumer in Q1 and Q2 of ‘08 and Q1 and Q2 of ‘09, I think you usually put a chart in there but you don’t actually have the percentage breakdown. I think that would be very helpful in putting into context the Q3 revenue guidance.

Michael Giannetto

Mark, it’s Mike. In terms of what the performance in Q2 this quarter that we’re reporting on, it was about 30%. That’s an approximation based on product categorization of consumer and holiday. Prior, Q1 was sub 10% and we certainly don’t -- we do not expect to see anything near 30% in Q3. We would see it go down to a 10% or so range, 10% or 11% which we normally when you look at a non-December quarter that’s usually the range we’re in, high single digits, 10%, 11% and then…

Mark May - Needham & Company

You were also around 30 a year ago too, right, is that…

Michael Giannetto

That’s correct.

Mark May - Needham & Company

Okay. Okay. I think that’s it. Thanks guys.

Robert S. Keane

Thank you.

Operator

Our next question comes from the line of Scott Devitt of Morgan Stanley. Please proceed.

Scott Devitt - Morgan Stanley

Hi. Thanks. I apologize if I missed this. I’ve been jumping back and forth. But I was wondering if you could just comment on the gross margin that is implied in the March quarter guidance? And how much of that is just related to the membership versus other things like Canada, et cetera? Thanks.

Michael Giannetto

So, first, we don’t give specific guidance on the gross margin but directionally we do expect it to go down from the Q2 level, which we normally see in Q3, and there’s a few drivers. One is from an overhead absorption standpoint on the margin. We are guiding revenue down by $25 million. So obviously we lose some of the overhead absorption.

There is some impact from the membership reduction. There is also a bit of an FX more of a headwind as we go into Q3 with the Canadian dollar but I wouldn’t call that significant. I’d say the biggest drivers of the expected decline would be the revenue reduction, the overhead absorption as well as some of the product mix going from Q2 to Q3.

Scott Devitt - Morgan Stanley

Thank you.

Operator

Our next question comes from the line of Mitch Bartlett of Craig-Hallum. Please proceed.

Mitchell Bartlett - Craig-Hallum Capital

Hi. Could you discuss the average order value of the pushes and pulls on that, it’s obviously up nicely even FX adjusted, it seems like it would be up nicely despite the fact that you’re growing in the non-print services side of the business. So what’s going on there? Just more better cross marketing, better attachments to other products?

Michael Giannetto

Mitch, it’s Mike. You’re right. There are lot of -- there are pushes and pulls. Currency definitely helped it year-over-year with the weakening of the U.S. dollar. On the other side, what dampens it a bit in terms of growth is the service of the subscription business, the websites because we’re looking at an average selling price each month that is, the prices we offer those services go from $5 to $20. So obviously it’s going to bring down the AOV a bit.

What we also see, the dynamic in this quarter is we do normally see AOV increase in the holiday quarter as we sell the holiday products and cross-sell and up-sell on holiday cards and calendars. So there’s some seasonality in there as well. So I would say those are the three main dynamics, $0.5 million in the quarter as you look at it from either a year-over-year or a sequential basis.

Mitchell Bartlett - Craig-Hallum Capital

So year-over-year, the number products per order has not materially changed?

Robert S. Keane

I think if you -- we’ve said often if you look over a multi-year period in recognizing that quarters will go up and quarters will go down, we have increased the number of products per order a bit. But what is much more dramatic is the number of orders per year a customer would buy.

So you do see a little bit of a trend up and to the right on the units per order but often those additional users are at a low cost. They’re an add-on at checkout as opposed to doubling the price of the basket.

Mitchell Bartlett - Craig-Hallum Capital

And then the FedEx Kinko rollout and how that has been initially received. Could you maybe comment on that?

Robert S. Keane

So we’ve been very, very happy with that FedEx went live with its online store in May and the rollout into their physical stores across the U.S. was completed in October. We are happy. We believe that they are happy and it’s a good growth business. I think it’s a win-win partnership for both of us.

Mitchell Bartlett - Craig-Hallum Capital

Thanks.

Robert S. Keane

Thank you.

Operator

Our next question comes from the line of William Morrison of Thinkequity. Please proceed.

William Morrison - Thinkequity Llc

Thanks. I was hoping you could give us a little bit more detail about the web services businesses and maybe talk a little bit about how we should be thinking about the margins in those business longer term?

Robert S. Keane

Okay. I’ll take the first stab at it in terms of how we think about it from a product perspective and then let Mike talk about the margins. I think we are uniquely positioned to go into this market because you know website and e-mail marketing service or some of these search placements services we just introduced. Those are core parts of how small businesses would like to be able to market their business just as much as a brochure or a sign or a business card would be.

And we’ve been successful in being able to give this turnkey product that of a physical or a digital product that helps small businesses market their business. And so one is a very clear logic in the minds of our customers and that we’re really unique in the market with the breadth and extensiveness of our product lines in that regard.

And that is very important from a margin perspective that I’ll certainly let Mike talk to. But I think from a gross margin perspective, it’s a nice product but there are many companies in the space who have great gross margins and don’t necessarily have great bottom line. I think differentiating things for Vistaprint is we very, very rarely would acquire digital customers or electronic customers on their own.

We always cross-sell into our base and so the marketing spend of $100 plus which you often see in this space we do not incur because we are cross-selling into our existing customer base. And so there’s a gross margin but there’s also the marketing costs which is the advantage we have.

Michael Giannetto

So from a gross margin standpoint, I mean, it’s a very nice gross margin profile. We just reported -- we’re over 65% as a company but the electronics or digital part of business is well above that corporate average.

So we don’t break out margins by product but if you look at some kind of pure play standalone companies in terms of websites or e-mail marketing, we have that would be the range I’d look at but it’s definitely well above our corporate average.

William Morrison - Thinkequity Llc

So it sounds to me, I mean, it sounds like the EBITDA margin then would be much higher than other comparable businesses out there that we can look at that are in e-mail marketing for instance or website design?

Robert S. Keane

I think if you were to just take that with a pure hypothetical which is actually not possible of stripping that business out and having it standalone, so have our revenue and our growth without any of the other products, which are inherent in our ability to get these customers in that hypothetical, yes.

But I think it’s very good for Vistaprint. But I think the what we really believe that our unique differentiator is we do have that broad product line and it’s part of the overall solution, it’s not a standalone.

William Morrison - Thinkequity Llc

Thanks.

Robert S. Keane

Thank you.

Operator

Our next question comes from the line of Aaron Kessler of Kaufman. Please proceed.

Aaron Kessler - Kaufman Brothers

Yeah. A couple questions, I might have missed a couple of details on the customer acquisition cost number and if you gave the number of digital subscribers or maybe if you plan to update at the Analyst Day?

Michael Giannetto

What we said, Aaron, it’s Mike. We didn’t give out the number of subscribers -- service subscribers. In terms of advertising costs, we did talk about that. But from -- when you look at total advertising expenses divided by new customer adds which is a proxy for COCA, it was just under $22 for the quarter, up a bit sequentially and up over last a year ago as well.

When you’re looking at advertising expense, it was about 20% of revenues, very similar to last year December quarter as well. So total advertising as a percentage of revenues, fairly flat with last year. When looking at it in terms of proxy for COCA, it’s up a bit.

Aaron Kessler - Kaufman Brothers

Great. And then in terms of the digital customers, are you seeing them spend more, obviously I assume they were probably coming back to the site more often. Do you see those customers spend more on other products as well?

Just in terms of Europe, can you talk about any countries that you are seeing strong growth for, it seems like Germany is kind of a standout right now?

Robert S. Keane

So we do believe that our best customer across many of our product lines. They may buy customer apparel, custom signage, print products, promotional products and electronics. So it’s a little bit of a chicken and the egg to say which came first, the website or the brochure or whatever. So we do see those types of customers often cross shop.

In terms of Europe, we don’t break out country-by-country but our biggest countries are the four largest economies there. So it’s France, Germany, the U.K., the Netherlands. But we are growing very, very well off of what is getting to be pretty substantial basis in a significant six or 10 other countries.

Aaron Kessler - Kaufman Brothers

Great. Thank you.

Robert S. Keane

Thank you.

Operator

Our next question comes from the line of Kevin Steinke of Barrington Research. Please proceed.

Kevin Steinke - Barrington Research

Hi. Kevin Steinke from Barrington Research. Just quickly back to the guidance. You said that Soft Sight was not really material in terms of dilution. So is it safe to say that the kind of flattish year-over-year EPS implied by your guidance in the third quarter and second half of the fiscal year is primarily due to your decision to accelerate investments and/or are there any other factors that you would want to add to that?

Robert S. Keane

Kevin, I’d say those are the main drivers in terms of our investment plan and accelerating some things that we had not originally planned on in this fiscal year, as well as the membership cancellation. Those are the main drivers of what you’re seeing in terms of the year-over-year EPS growth numbers.

Robert S. Keane

I would reiterate what Mike said in answer to another question earlier in the call, which is earlier in the year at the beginning of the year, we talked about a substantial number of investments we were planning to make and those are not investments that can be turned on overnight. They are really ramping up now and they’re hitting the P&L in the second half more but we did talk about those investments.

And then just to recap some of the things we spoke about that we’re doing incremental to those previously announced investments, we have broadcast tests, we’re doing more engineering talent recruitment, more engineering projects. We’re continuing increases to what we’re doing in Europe in terms of customer service with the investment in Tunis and the opening in Berlin. We are accelerating some operating investments in Australia.

And again, each one of these in and of themselves may not be material, but they do all start to add up and that includes the integration of Soft Sight with all those employees who are now on board without any offsetting revenues until the fiscal year 2011.

Kevin Steinke - Barrington Research

Okay. Great. Thanks. And one more if I may. Just wanted to take maybe a little bit different approach to the cost of customer acquisition and just wondering if that’s really even the right way to look at the effectiveness of your advertising expenditures. Because presumably, your advertising expenditures are going for more than just acquiring new customers.

So just dividing ad expense by new customers might not really capture the full effect of what you’re trying to do in terms of drive repeat customers or test other marketing channels as you said. So could you just kind of comment on that please?

Robert S. Keane

You’ve got to give a qualitative agreement with that which as I’ve often said that if you were to divide all of Coca-Cola’s advertising reported by the number of people who drink Coca-Cola for the first time that quarter, they would look like they have a very high cost of customer acquisition. And to your point, a lot of advertising can drive repeat business as well.

We do not give out Coca-Cola but we have this number which is the most it could be because we’re taking 100% of our advertising and ascribing 100% of that to the number of new customers. But you’re right, it does drive repeat purchases.

Kevin Steinke - Barrington Research

Okay. Great. Thank you very much. That’s all I had.

Robert S. Keane

Thank you.

Operator

Our final question comes from the line of Ed Antoian. Please proceed.

Edward N. Antoian - Chartwell Investment Partners

Hi, guys. Just one more follow-up on gross profit margins, kind of in the guidance, the sequential decline next quarter. Could you, last year in Q3 from Q2, gross profit margins didn’t go down and volumes went down as someone else calculated, like 10% or 11%. Why wasn’t the overhead, lack of overhead absorption affecting gross profit margin last year in Q3?

Michael Giannetto

I think the qualitative answer again is that, if you recall we were really cutting back last year in a number of different investments because of a massive loss of currency headwinds were going against us, the economy was reeling and we pushed out a lot of investments. And in the end, we actually did better than we expected on the topline until they came through and we overachieved on the bottom line.

So, that was a very different circumstance last year. It was really great prudence in our cost lines that started to be announced in the October earnings call of last fiscal year. So 15 months ago and we’re in a different situation this year where in the beginning of this fiscal year, we started talking about investment increases and we are now doing additional ones, yes, I think, last year we also…

Edward N. Antoian - Chartwell Investment Partners

Yeah.

Robert S. Keane

… we also had from an FX standpoint, the Canadian dollar helping as opposed to this year was hurting. I’m not saying it’s the major driver but that is part of what we are experiencing if you’re going back to a year ago.

Edward N. Antoian - Chartwell Investment Partners

Okay. Thanks, guys.

Robert S. Keane

Okay. Thank you.

Operator

That concludes our question-and-answer session. I would now like to turn the call back over to Mr. Robert Keane.

Robert S. Keane

Well thank you to everyone who joined us this evening. We’re very pleased with our second quarter results. We’re very excited as usual about the opportunities ahead of us as we keep growing Vistaprint. So we’d like to thank you for your time and for your support and we look forward to updating you again soon. Have a good night.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a good day.