Focus Article: Vistaprint (VPRT)

Vistaprint N.V. (VPRT) $37.32

The Company:

Founded in Paris, France in 1995 by current President and CEO Robert Keane, Vistaprint is an online supplier of printed marketing products and services to micro businesses across the world. Vistaprint defines micro businesses as companies with 0 to 2 employees. The company’s products include business cards, banners, letterhead, mugs, T-shirts as well as websites amongst dozens of other products. My business partner and I have personally utilized their services twice over the last 12 months and were satisfied with the experience. The company also managed to up-sell us on some mugs and T-shirts on our orders. Vistaprint employs over 3,700 people, operates more than 25 localized websites globally and ships to more than 130 countries around the world. The company moved its headquarters from Bermuda to Netherlands in 2009.

Vistaprint caters to around 10 to 12 million unique customers every year. The average order including shipping is around $35. The company does around 50 million custom orders in a year and relies heavily on technology as well as process to fulfill as many as 120,000 orders in a single peak day.

The investment case for Vistaprint boils down to the following two graphs. The company grew revenue from $6 million in fiscal 2001 to $817 in fiscal 2011 and is on track to hit $1 billion in revenue in fiscal 2012 which ends on June 30, 2012. The company plans to grow both revenue and earnings per share at a 20% CAGR per year for the next 5 years to a target of $2 billion in revenue and $5/share in earnings by 2016.

The company plans to achieve this growth organically and any contribution from acquisitions will just be icing on the cake. The company has achieved this growth with its founder as its CEO since 1995. It is highly unusual to see a founder build a company from scratch to $1 billion in revenue straight out of business school. The company has stepped up acquisitions recently and has also been buying back shares under an approved $250 million buyback program.

In October 2011, Vistaprint acquired Albumprinter, a Dutch photo book and photo product company. Through this acquisition the company expects to combine it’s strengths of a pan-European customer base with Albumprinter’s expertise and technology for designing and producing photo books. Vistaprint also acquired Webs, a do-it-yourself suite of websites, Facebook Pages and mobile presence solutions for small businesses in December 2011. Webs has a business model based primarily on free products and was founded by three brothers more than a decade ago.

Business Statistics & Financials:

The company operates in two segments, small business and home & family. The small business segment generates 80% of Vistaprint’s revenue and the majority of its home & family business is derived from Europe. It is unlikely the company will see meaningful revenue from the home & family segment from the United States as the market here is more competitive than Europe. Interestingly enough, despite the economic turmoil in Europe, the company’s growth in Europe and Asia Pacific is at the same rate on a constant currency basis. The company grew revenue by 37% in Europe and Asia. Growth in the United States was 20%.

Vistaprint sports gross margins of 65%, some of the best in its industry, and operating margins just shy of 10%. The company plans to invest in its growth over the next couple of years and expects operating margins to decline in fiscal 2012 before moving back up towards their long-term goal of 10%. The company also expects to increase its capital expenditures to about 7% of revenue in fiscal 2012 when compared to 5% of revenue in fiscal 2011.

For the second quarter of fiscal 2012, Vistaprint reported revenue of $299.9 million, a 28% increase from its revenue of $234.1 million reported in the same quarter a year ago.  Excluding Albumprinter revenue of $15.7 million, total second quarter revenue was $284.2 million. There was no revenue recognized during the quarter from the acquired Webs business. Net income was $31.7 million and free cash flow was $67.7 million. Free cash flow appears to be consistently higher than reported net income.

The company currently trades for 11 times EBITDA, which is inexpensive for a company that expects double digit revenue and earnings growth. Assuming management does deliver on the 20% earnings growth per year for the next 5 years that it has projected, using a 10% discount rate and a 2% terminal rate, I get a value of $47.76 for the company using discounted free cash flow analysis.

Competitors:

Insider Buying:

Two insiders purchased stock on the open market over the last six months as listed below. You can view a list of all insider transactions for Vistaprint here.

10% Owner Thomas W. Smith is the managing partner of Prescott Investors, a private investment firm that was founded by him in 1973. He served on the board of directors of Prepaid Legal Services, a publicly traded company, which was acquired by a private equity firm last year. He has also served on the board of directors of SEI Investments Co., a publicly traded company, since May 2004.

We normally do not focus on insider purchases by 10% owners but Mr. Smith’s consistent purchases piqued our interest. Mr. Smith has not only been purchasing shares for Prescott Associates but has also been buying shares directly and for family accounts. He has also continued buying despite the stock appreciating more than 50% since last Fall.

Risk Factors:

Based on prior operating history, two risks that stand out are,

1. Execution risk as the company attempts to double its revenue over the next 5 years. The company has faced operational challenges in the past and has managed to get through those growing pains.

2. Reputation risk. The company suffered a big blow to its reputation a couple of years ago and was the subject of a class action lawsuit on account of affiliate relationships with companies that enrolled its customers into subscription plans and started charging their credit cards on a monthly basis. The company managed to get the class action lawsuit dismissed and cancelled those affiliate relationships. Vistaprint also scaled back on its aggressive marketing campaigns targeting existing customers and has  seen better results with lower frequency campaigns that are more targeted. According to an independent review of customer satisfaction during the holiday period, Vistaprint now ranks second to Amazon.com in terms of customer satisfaction and our experience with the company’s services were also positive.

Conclusion:

Every once in a while you come across a company where the more you look into the company, the more you like it. Vistaprint meets several of my criteria including strong organic growth, a founder CEO at the helm that has managed to grow the company, positive personal experience with the company’s products and a simple business that is easy to understand. The company’s target of 20% earnings growth for the next 5 years is ambitious and if I scale back the growth to 15% in my DCF model, I arrive at a price of $39.40, which is just a little higher than the current price.