Cimpress PLC

NASDAQ:CMPR

Earnings Call Analysis

Company Maintains Steady Revenue Guidance

The company witnessed some variability in revenue growth, with impacts such as timing issues dragging the consolidation growth rate marginally, but management expects these to rectify over the year. The Vista segment met expectations apart from these timing impacts, showing strong customer value and count growth. Input costs are trending positively, with areas such as paper, energy, and freight costs reducing, positively affecting margins. Despite softer trends in the reseller channels, segment EBITDA still increased due to lower input costs. The company remains on track with cost reduction initiatives aiming for a $100 million benefit this fiscal year. Management remains confident in achieving growth, maintaining revenue guidance and increasing EBITDA projections for FY 2024, expecting at least 8% year-over-year reported growth and 6% year-over-year FX-neutral growth.

Cimpress Reports Solid Q1 and Steady Outlook Amid Economic Uncertainty

Cimpress kicked off its fiscal year 2024 with robust first-quarter performance and a confident stance for the year ahead despite global economic uncertainties. The company, known for its mass customization platform, reported an 8% year-over-year increase in consolidated revenue, boasting a mix of organic and acquired growth across its diverse business segments. Adjusting for constant currency terms, organic growth stood at 4%, reflecting a nuanced landscape where each segment contributed unevenly, and certain timing changes in revenue affected growth calculations. The bottom line was a highlight, with adjusted EBITDA soaring to $89 million from prior-year levels, a commendable 68% increase over a nine-month window, thanks to broader cost reductions yet to be fully realized in reported results. The management expressed pride in their stride towards lower net leverage, with an end-of-year target below 3.25x, aligning with their intensified focus on debt reduction.

Operational Efficiency and Capital Expenditure Strategy

Cimpress is not just riding the wave of top-line growth; they're also finessing their operations. The company has sustained its investment in growth, albeit at a relatively low pace compared to previous years, and Q1 saw a spike in capital expenditures particularly in their Interplan and print businesses. However, the executives were quick to clarify that this should not be seen as a new normal - it was simply a capital-intensive quarter with no expected shift in CapEx guidance for the remaining fiscal year. They anticipate a more moderate capital spending profile in upcoming quarters, with a focus on investments that meet clear payback and return thresholds.

Leaning into Effective Cost Management

Cost management remains a spotlight for Cimpress, with successful ongoing initiatives poised to deliver roughly $75 million in annual benefits thanks to strategic decisions made in the previous fiscal year. Input cost pressures have eased, particularly with paper prices and energy costs, contributing to improved margins. This is underlined by the remarkable decrease in energy costs, exemplified by a reduction of more than 50% in Italian kilowatt-hour prices compared to the same quarter last year. Furthermore, inbound freight costs have calmed significantly, adding another layer of operational reprieve. All these improvements are thoughtfully embedded into the raised fiscal year guide, which now anticipates an adjusted EBITDA of at least $425 million.

Customer Growth and Expansion in Vista

The Vista segment, a significant contributor to Cimpress' portfolio, mirrored the overall company's robust performance, reporting a 6% basis revenue growth on organic constant currency. The performance has been fueled by an increasing customer base and higher average order values powered by product mix and pricing. Of note, European market growth was substantial, playing into the company's favorable trend of improving per-customer value coupled with rising customer numbers, now exceeding 100,000 new consumers this quarter. Investments continue not only in new customer acquisition but also in enhancing the lifetime value of existing customers through incremental improvements across the customer experience and conversion rates.

Strategic Outlook Amid Market Volatility

In an environment rife with macroeconomic uncertainty, Cimpress remains committed to achieving its published revenue and profitability goals. They hold steady to their organic constant currency revenue guidance of at least 6%, a testament to their consistent business model and strategic foresight. The company looks to the future with calculated optimism, expecting to realize a modest required improvement of nearly $10 million outside of its prior cost reduction plans and currency impact to reach or exceed the adjusted EBITDA guidance of $425 million for FY '24. This confidence is bolstered by their proactive adjustment to potentially volatile market conditions, ensuring agility within their well-structured growth plans.

Earnings Call Transcript 2024-Q1

[Operator]

Welcome to the Cimpress Q1 Fiscal Year 2024 Earnings Call. I will introduce Meredith Burns, Vice President of Investor Relations and Sustainability.

[Meredith Burns, executive]

Thank you, Tanya, and thank you, everyone, for joining us. With us today are Robert Keane, our Founder, Chairman and Chief Executive Officer; and Sean Quinn, EVP and Chief Financial Officer. I hope you all had a chance to read our earnings document published yesterday. We appreciate the time that you have dedicated to understand our results, commentary and outlook. This live Q&A session will last 45 minutes to an hour, and we'll answer both presubmitted and live questions. You can submit questions live 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've also published non-GAAP reconciliations of our financial results and outlook on our IR website. We invite you to read them. And so now I will turn things over to Sean for some brief remarks before we take questions.

[Sean Quinn, executive]

Thanks a lot, Meredith, and thanks to everyone who's joined us today. Before we take questions, I'll just highlight a few key points from the financial results and also the updated outlook that we published yesterday. First of all, we delivered solid results in the first quarter. Consolidated revenue grew 8% on a reported basis and 4% on an organic constant currency basis. Growth did vary by segment, and it was also reduced by approximately 200 basis points from year-over-year revenue timing changes. Consolidated profits were very strong. Adjusted EBITDA grew $43 million year-over-year in Q1 to $89 million. Adjusted EBITDA margin was up from 6.5% last year to 11.7% this year. This benefited from gross margin expansion from leverage and advertising spend and reduced operating expenses. Adjusted EBITDA expansion over the last 3 quarters has been very significant. Our trailing 12-month adjusted EBITDA at the end of September was $383 million, and that compares to $228 million at the end of December, a 68% increase in just 9 months and still with significant benefit from our prior cost reductions yet to impact those reported results. Adjusted free cash flow for the quarter increased significantly year-over-year by just over $63 million with a higher adjusted EBITDA and also significantly more favorable net working capital compared to the year ago period, which was helped by returns to more normalized inventory patterns. I won't go through all the segments here today. But given the significance of the profitability expansion in Vista, let me just share some highlights there. Basis revenue grew 6% on an organic constant currency basis. Overall revenue growth was driven by approximately even contribution from growth in orders and then higher average order values. The higher average order value is driven by both product mix and pricing. Revenue grew across geographic markets and across product lines with the fastest growth continuing to come from our promotional products, apparel and gifts category, signage and packaging and labels. There's a lot of investor focus on Europe these days, and I'll note that from Vista, growth in Europe was quite strong in Q1. Business segment EBITDA grew $44 million versus last year, which, similar to last quarter, was driven by a balanced mix of revenue growth, gross margin expansion, lower advertising spend as a percentage of revenue, which decreased and materially lower operating costs as a result of the cost reductions that we announced back in March. Importantly, in Vista, we're also seeing continued improvements in per customer value, which is a trend that's been in place for the past several years, but we're now also doing that while growing the customer base year-over-year, which grew by more than 100,000 customers in the first quarter. That was primarily driven by new customer growth, and those new customers generated record levels of in-quarter variable gross profit per customer when compared to past Q1 new customer cohorts. There are many small improvements that contribute to this, and there remains a lot of opportunity for more of these improvements, which can have a meaningful impact on our overall customer experience, conversion rate and financial results, and that's where our focus is. From a balance sheet perspective, we ended the quarter with cash and marketable securities of $148 million, even after we purchased $21 million notional value of our 7% senior notes for just under $20 million. Net leverage decreased sequentially to just over 3.5x trailing 12 months EBITDA as defined by our credit agreement. As we've talked about on recent calls, from a balance sheet perspective, we've been prioritizing a reduction in net leverage, and that's happening at a good pace. Moving to our outlook. Given our strong Q1 profitability and cash flow performance, we're raising our FY '24 adjusted EBITDA guidance to at least $425 million, and we continue to expect that to convert to free cash flow at approximately 40%. Our organic constant currency revenue guidance of at least 6% remains unchanged. We recognize there's some macroeconomic uncertainty in most parts of the world, and we'll, of course, be monitoring that as it relates to future revenue commentary. Our expectation is still to end the year with net leverage that is below 3.25x. So that also remains unchanged. And with that, Meredith, why don't we open it up for questions.

[Meredith Burns, executive]

You bet. Thanks, Sean. [Operator Instructions] We also received many presubmitted questions with some overlapping areas where I'll ask 1 or 2 representative questions where the answer will cover everyone's questions. So we'll get to as many as we can and make sure we get to a variety of topics that around people's met. So the first question, I'm going to throw to Sean. So on a reported basis, Visa Europe grew at 17% year-over-year, which we assume translates to 8% to 9% once FX effects are removed. Are we thinking about this the right way? And if so, what is driving faster organic constant currency growth in Europe versus North America?

[Sean Quinn, executive]

Yes. Thanks. Just so everyone knows on the call, we published financial and operating metrics each quarter, which we posted on our Investor Relations site, and that's where the data is that would have prompted this question. The constant currency revenue growth in Vista Europe was actually just above 10%. So it's a little higher than the math that whoever asked the question was doing. And that was indeed higher than in North America, but both regions performed well. I would say that even beyond just the revenue growth in Europe being just above 10%, gross profit grew at a higher rate there and contribution profit grew at an even higher rate. And so again, overall, a very strong quarter for Vista, but also, in particular, in Europe. At a category level, there's 2 areas to call out in terms of where performance was -- our growth was higher in Europe, and that would be in packaging and labels and also in marketing materials. Those 2 categories happen to be the ones that benefit the most from leveraging new product introduction from fulfillment from other Cimpress businesses in Europe, which there's not that same opportunity in North America. The combination of the technology migration that we did last year, which just to keep in mind, they were the latest markets to be migrated were a few of our large European markets. So kind of the benefit of that is a little bit delayed. And there's also organizational changes that we put in place back in March. And I think the combination of technology migration and those organizational changes has allowed the team to have more focus in Europe and also to move more quickly to have customer impact in those markets versus a year ago. There were pretty meaningful improvements in customer credit rates that was notable in Europe due to a lot of the work of our customer care teams that's beneficial to revenue. That was also a good trend in North America, just a little bit better in Europe. And then I would say, we've also been able to take the learnings from other markets, both from an advertising spend perspective, but also in areas like pricing or how we're thinking about promotionality and bring those to some of our European markets in ways that we haven't before, and that is definitely having an impact. So in general, I would say it's primarily micro factors rather than macro factors that delivered the differential performance.

[Meredith Burns, executive]

Great. Thank you, Sean. All right. So we're going to stick with revenue here. And we've had several questions trying to really sort of pick apart the differential growth rates by segment and some of the timing impacts there. So I'll ask one question and touch on the other questions that came in on this, and you can cover all of them at ones in detail. So in a lot of ways, it was a strong quarter, but revenue growth rates declined sequentially in all segments and are lower than your annual growth expectation. What were the key contributing factors to that? And given your continued confidence in the annual growth rate was the decline this quarter expected? And then the other questions around this are really getting at the growth rates in our Upload and Print businesses and why there was a difference between those 2 groups.

[Sean Quinn, executive]

Yes. Okay. I'll do my best here. First of all, I agree with the overall sentiment. We believe that it was a strong quarter. Profitability and cash flow were quite strong. But there was some variability in the revenue growth. So I'll dive into that. There's -- I mentioned in the opening remarks, there's about 200 basis points of timing impact, too, that are a drag on consolidated growth rate. Over half of that will benefit revenue in the remainder of the year. As backlog normalizes, there's really nothing to that other than timing. So just know that, that had some impact. And then I would also just keep in mind that the expectations that we set coming into the year was that we were going to have lower growth and particularly in our Upload and Print businesses as we lap pricing changes from last year and so on. In terms of how we perform versus our expectations, generally speaking, let's say, Vista was right on plan other than the timing impact that I outlined. We feel good about the quarter there, the fact that per customer value continue to improve, while customer accounts also grew, as I noted, I think, is a good signal as well. So Vista was right on track and solid quarter. In Upload and Print, those -- both of those segments within Upload and Print, each grew over 20% in Q1 last year in constant currency. So we're lapping that. We're lapping pricing increases. So it's still a tough comp. But relative to expectations, there, I'd say it's a little bit more of a nuanced story and you kind of have to get down to the country, category, channel level to better understand that. There are -- in certain markets we're seeing either stable or increasing orders, but some indication of customers purchasing lower quantities per order in some categories. So a little bit of a trade down there in some categories. We also saw softer revenue trends in our reseller channels, which just from an overall Cimpress perspective is relatively small. It's roughly mid-single digits percentage of revenue for overall for Cimpress. But it does impact the growth for some of these businesses in the Upload and Print group. And that's one reason that growth was lower for Print Group within Upload and Print just because there's more concentration on a relative basis in the reseller channel, especially in France. That is a trend that's been present for some time. And it's a trend that has benefited the Cimpress overall in the long term, but from wagon growth in the near term for some individual businesses to have more concentration there. So we do expect that will continue to be somewhat of a headwind to near-term growth for those businesses that have more concentration in resellers. I think important to note that in Upload and Print, despite lower overall growth, segment EBITDA still grew year-over-year, and that was helped by lower input costs that we've experienced so far this quarter, and we expect that to be a feature for the remainder of the year as well. I'm not going to go through all the other segments. I think those are the most notable takeaways. As was mentioned in the question, we held our revenue guidance for the year. There will be variability as we go throughout the year in terms of growth rates by quarter as we lap pricing and also as we previously said, we expect the growth rate in the December quarter and Vista to be weighed down somewhat by consumer concentration during the holiday peak. But based on what we've seen, we still felt confident leaving the revenue guidance on touch.

[Meredith Burns, executive]

One more quick question for you, Sean, on revenue. Can you elaborate on the backlog that provided a $4.3 million drag on revenues during the quarter? Was it isolated to one product category or was this something that was broad-based in nature and that was in the Vista business.

[Sean Quinn, executive]

Yes. Yes, we always have fluctuations in backlog, which is the orders that we've received, but we haven't yet shipped. There's really nothing to read into on that one, and it's not specific to a category. Those fluctuations have to do with things like what's the last calendar day of the quarter end, but also things like timing of promotions as we cross the quarter end or seasonality. And we don't try and manage that in any unnatural ways as we end the quarter. From an economic standpoint, all that really doesn't matter. Vista, we receive the cash upfront from customers. And it's just that there was a higher level of orders not yet shipped on the last day of the quarter. So that will come into revenue when they do ship, and that's really it. But it does impact growth rate year-over-year.

[Meredith Burns, executive]

Thanks, Sean. Okay. Let's get Robert involved here. And we've got some questions on the Vista customer additions. So the 100,000 customer additions referenced in the earnings document, could you add some additional context, such as what the percentage increase was, what the percentage of the total? And then a very similar question you specifically noted that Vista grew its customer base year-over-year by more than 100,000 customers. Does this represent a recent quarterly high for new Visa customer additions? What is the size of the total Avista customer base currently?

[Robert Keane, executive]

Okay. Well, thanks for the question. First of all, 2 words were used there. One is customer base and customer additions. So it really is customer base that we referred to repeat customers plus new customers or in other words, plus customer additions. So it was good growth. New customers drove that growth. The number of new customers grew 13% versus the same quarter of the prior year. Repeat customers were still down slightly year-over-year, but that is a trailing metric after the new customer acquisitions and the trend in repeat customer count also improved sequentially. So we have overall growth in the customer base. We don't go into a lot of the details that you asked about specifically, but let me give some additional context. First of all, it's very important to keep in mind that customer count on its own is not the metric we seek to grow. We certainly wanted to grow, but it's not the only metric. It's important to know that we care most of all about the profitability per cohort. And to get to that, you need to also look at how much gross profit per customer we are generating. What's that worth over the life of a customer expressed in NPV terms and what's the cost of customer acquisition relative to that lifetime value. So it's a factor in the equation, but it's not the top number we're looking at. And that focus on economic value holistically is why compared to going back 5 years or so in our history for the last multiple years, we have seen a reduction in customer count as we've moved away from the prior value proposition, which is based on very deep discounts towards higher-value customers. And in some of our multiple investor days over the last couple of years, we've shown charts and data, how we've greatly reduced economically negative results in our lowest decile or deciles. And we've strongly grown gross profit per customer overall and in our top deciles and very much driven by our top cells. We also, over that multiyear period, have really reduced value-destructive advertising. We've greatly reduced discounting, and we have focused on higher-value products, not -- we've done price increases, but even more so, we've moved to higher value products before price increases. And Q1 was a continuation of all those trends. Gross profit per customer in the most recent quarters, acquisition cohort was higher than it ever has been in the first quarter of any year. The improvement in repeat customers, of course, helps, and we're happy about that. And we are also focusing on driving repeat business by giving better value to these customers. And finally, in terms of increasing the number of customers going forward, we're optimistic about this. There's a lot that's gone into this. It's not just what we've done in the past 1 or 2 quarters. It goes back to the multiyear repositioning the brand, the increasing awareness of our product breath accelerating into growth areas of higher value products like promotional products, improving the customer experience. And they've had an earlier impact on value per customer, but they clearly now are improving our ability to acquire more customers. And so we're looking forward to seeing that continue.

[Meredith Burns, executive]

Thanks, Robert. Really exciting development in Vista. All right, Sean. Next question for you. We thought our upload and print businesses were nearing the end of an investment cycle, but we were surprised to see the uptick in capital expenditures this past quarter. What investments are we making here? And do we expect these to moderate?

[Sean Quinn, executive]

Yes. This is a good question. The growth investment Interplan and print businesses in recent years has been relatively low. But you're right to note that this past quarter from a CapEx perspective, it was definitely a high CapEx quarter for these businesses. And that's not a new run rate. The equipment purchases that we make in those businesses. And in particular, in the Print Group, which is more vertically integrated than the Print Brothers segment can be a little bit lumpy over time, and there happen to be some large piece of equipment that we purchased this quarter. There was also within that, about $2 million of facilities-related CapEx, which that doesn't occur often. And so that's sort of a one-off. But the rest of it is print production equipment. Those are investments that have clear payback and return thresholds that have to be met. And some of that's maintenance CapEx as well. So it wouldn't necessarily be captured in the growth investments that we outlined each year. So yes, higher intensity CapEx quarter for these businesses, that's not a new run rate, and there is some lumpiness there. There's no change to our CapEx guidance for the year. And so that might be helpful in terms of -- when you look at the CapEx guidance that we provided for the full year and back off Q1, it would imply that the rest of the year does not have that level of intensity. And so the quarterly run rate for the next 3 quarters will be lower.

[Meredith Burns, executive]

Thanks, Sean. And also thanks to the person who asked that question, who is clearly looking at the detail in our financial and operating metrics that we posted on our website. All right. Next question, Sean, input costs are trending better than expected. Any additional color to share, where are you seeing the biggest benefits?

[Sean Quinn, executive]

Yes. In general, input cost environment definitely continues to improve. We talked about this back at Investor Day a bit. I would say even since then, it's improved some. Paper costs have been coming down after what was very sharp increases that we experienced over the last 2 years. And that's happening more quickly in Europe. The pace of the decrease is happening more quickly in Europe than in North America, and that's definitely benefited gross margins. In markets where energy costs have really spiked last year, those are -- those costs are down meaningfully just as a point of reference in Italy, which was one of the countries where there was the most intense increase. The cost per kilowatt hour is less than half of what it was in Q1 last year. So down quite a bit. Inbound freight costs are down meaningfully as well. So those are probably the 3 that I would highlight. But as we noted in the release, the changes have been slightly more favorable than what we had planned for at the beginning of the year, and that's also now incorporated into our guidance.

[Meredith Burns, executive]

Great thank you. All right. One quick one here, and then we'll move into some outlook questions. So can you provide an update on the cost reduction initiatives, Sean?

[Sean Quinn, executive]

Yes, we gave quite a bit of detail back in March in our call back then and when we had made those changes. And just for recall, the total benefit that we had expected from the cost reductions was about $100 million. Some of that we got in FY '23. And there's another $75 million of that $100 million, which was a year-over-year benefit that we expected to get this fiscal year, which is roughly evenly split between the first 3 quarters. We're on track with what we previously outlined. As we entered the year, the changes as related to any headcount impact, those changes had already been made prior to the beginning of the year. And then any decisions on things that were noncompensation reductions, those decisions were also made. So it's really just a matter of the passage of time for us to see the remaining benefit over the next 2 quarters. So maybe just to put it plainly, we're on track.

[Meredith Burns, executive]

Great. Thank you. All right. Sean, a few quarters ago, we talked about how the consumer category remained important for Vista so much so that a dedicated team has been formed to focus on the category. With the all-important holiday season around the quarter, can you please give us an update on the outlook for consumer. We actually did have multiple questions on holiday outlook and that one is representative.

[Sean Quinn, executive]

Yes, sure. So I'll give some overall comments here. We're going to give a specific holiday outlook, but it's an important part of the year. From a consumer perspective, it has come down overall in the mix, Cimpress overall to less than 10% of our overall revenue. But the December quarter is an important one from a consumer perspective, particularly in Vista, but then also in BuildASign as well. In Vista consumer revenue has declined in the last few years and some of that is just from behavior change that happened through the pandemic, especially in invitations and announcements, that's probably the most pronounced. And what we've said recently is that the profit pool for consumer in Vista is a very important one, and it's one that we definitely want to protect. And while there's opportunity for growth there, first and foremost, we want to protect that profit pool. I think the question referenced to a dedicated team. We've always had a team focused on that category. But over the last year, we've also added some specific product teams there so that they can continue to make focused improvements in the experience and also drive new product introduction that's targeted at that customer segment. We've talked at our Investor Day about just the pace of new product introduction overall starting to increase. And many of those products are relevant for consumer use cases as well. They just need different content or different merchandising like in drinkware or apparel. So the category will benefit from overall new product introduction will also benefit from overall experience improvements on the site. And as noted in our prior remarks, we're seeing that happen, and that will benefit consumers as well. Many of the new products that we've launched, especially in the photo products, home decor, some of our apparel gifts are showing nice growth. Although in Q1, our consumer overall was basically flat year-over-year. We do expect that from an overall perspective in the December quarter that consumer will still put some pressure on the Vista growth rate, as we mentioned back in Investor Day. But there's a lot of improvements that we've been able to make over the last year. So the team has done a really nice job there in the planning, just had a review the other day on all that work and the client for the peak season basically starts now. So while consumer it's not our primary focus from a brand perspective, it is still really important. And frankly, we're also uniquely equipped to serve customers across both small business categories and consumer categories. And when we look at the customer -- our customer value metrics, those hybrid customers, small business and consumer are very valuable for us. There's a lot of creative that we've used in our mid and upper funnel channels that we're repositioning this time of year to be relevant for consumer again. And that just like we were doing for all of our brand advertising is really trying to demonstrate the breadth of the product offering. And so you should see that over the next few weeks and months here through the holiday season. So we feel good about our plans. We've made a lot of improvements, and we're excited about the weeks ahead here.

[Meredith Burns, executive]

All right. Robert, a question for you. Have you seen any signs of prices softening in any of your end markets?

[Robert Keane, executive]

No, nothing broad-based. All of our businesses are constantly testing pricing. So there are some places where prices decreased there are also areas where they went up. So I'd say no, this is normal in the course of testing and optimizing at this point. All right.

[Meredith Burns, executive]

Sean, to give the market increased confidence in achieving a 2024 EBITDA guidance, are there any KPIs that you'd be willing to share?

[Robert Keane, executive]

Yes, sure. Well, I'm not sure what well KPIs would be helpful in that regard. Hopefully, even throughout the call so far, there's been more granularity provided that is helpful and provides confidence. We don't normally give such specific guidance like we have in the last quarters. But back in the March quarter, we provided guidance, which we beat and then we raised the expectation for the June quarter, we exceeded that, and we increased our guidance for FY '24. And we just delivered strong Q1 EBITDA results, also cash flow results and increase our guidance for the full year. So again, hopefully, you should get confidence from that as well. But I think it's not KPIs, but here's the math that I would focus on in terms of confidence in the full year guidance. As I said in my opening remarks, as of September, we have $383 million of FY '24 adjusted EBITDA. I said in a response to an earlier question that we're on track with the cost reductions that we previously outlined. So if you do the math on that, those cost reductions, we said $75 million of benefit in FY '24, roughly ratably over the first 3 quarters. So there's still $50 million to come a benefit that will come into the run rate over the next 2 quarters. And then we said that we have currency headwinds this year of about $20 million for the year. $3.5 million of that was in Q1. So there's $16.5 million left to go there. So if you just add all that up, you need to -- we need to deliver just under $10 million of the EBITDA expansion over the remaining 3 quarters of the year from the flow-through of growth to get to at least $425 million. That's not KPIs. But basically, in order to be confident in our guidance, you need to believe that we can deliver just under $10 million of improvement outside of cost reductions that we announced in March and outside of currency impact, whether that be from growth, efficiency, so on. We remain confident. Obviously, that should -- hopefully, that's understood from the fact that we increased our guidance. But that's the math that I would do to get comfortable.

[Meredith Burns, executive]

Great. So a couple of other questions here. One of which was presubmitted and one of which came in live. Sean, can you walk us through the puts and takes of the FY '24 guide, which calls for at least 8% year-over-year reported growth and 6% year-over-year FX-neutral growth and what is baked into the guide in terms of the macro? And another revenue question, I still don't understand how you get to 6% constant currency revenue growth for the full year if 1Q was 4%, and you're seeing Q2 was a tough comp. 2H, you'd have to have -- there's some math here. You have to have 16% constant currency comp in Q3 and 9% comp in Q4, what am I missing, raising EBITDA guidance by $5 million is great, but did 1Q outperform more than $5 million? Were there any pushouts of expenses from 1Q into the rest of the year?

[Sean Quinn, executive]

Okay. A lot there. Let me try and cover all that. So just in terms of puts and takes, the first question and influence the macro. I walk through that bridge to get to our EBITDA guidance just now. And then the cash flow guidance just flows from that because it's -- we're talking about cash flow conversion off of that EBITDA. From a macro perspective, we don't make specific predictions and frankly, we don't have any better ability to forecast macro than people on this call. And so the way that I would think about it in terms of the puts and takes in the FY '24 guide and also the macro. I think it's helpful if you actually start from the bottom of the P&L and work your way upwards. And starting with OpEx after the cost reductions and the focusing of investment that we did last year. We feel good about our OpEx levels. Those are well under control and will continue to be managed very closely. From an advertising spend perspective, there, we made some decisions around focus last year as well. We continue to experiment there. Those decisions are all within our control. So we feel good about that. From a cost of goods sold perspective, as I mentioned in response to an earlier question as well, input cost environment is improving. We do expect to experience those improved levels for the remainder of the year. So we feel good about that as well. And then it comes down to revenue and that's frankly where I'd say we attempt to be appropriately realistic about the environment that we're in. But of course, there's always macro risk to some extent. In terms of all the math to get back to 6% constant currency growth. The question is referring to what we'll be comping through the rest of the year. And yes, we do expect there to be some pressure on Vista growth from consumer. We've talked about that. There's nothing new in the December quarter. But other than that, I'm not going to walk through quarter-by-quarter revenue guidance or by segment. But we feel comfortable that we can still get to that level. Keep in mind also that there are some of these timing impacts in Q1 as well. And more than half of that will flip into revenue over the rest of the year. So that helps. And then as we get to -- towards the back end of the year, and it actually becomes an easier comp in parts of our business, and so that will influence growth rate in parts of our business as well. So listen, I think overall, is there a risk? There always is because there's always uncertainties from a macro perspective. But we've tried to be realistic about our expectations. Hopefully, the way that we've performed over recent quarters as we've given this guidance also kind of shows that that's how we're acting and we're trying to be realistic. Things can change, but we're going to try to be realistic, and we'll keep everyone updated on how we're doing against those expectations.

[Meredith Burns, executive]

Thanks, Sean. All right. A question on Vista profitability. With Vista, adjusted EBITDA margins coming in at 19% for the quarter. How should we think about the potential upside to your previously provided color at Investor Day, which calls for 16% to 18% margins in FY '24?

[Sean Quinn, executive]

Yes. The Q1 results position us well within the context of that range that we talked about. I think the one variable, just to keep in mind there is advertising spend as a percentage of revenue was at the low end of the range that we had provided in terms of annual spend. I think it was a little bit under 15%, 14.5% or so. And so that's one variable just to take into account from a margin perspective. We do expect that will fluctuate quarter-to-quarter. But yes, I think the Q1 results position us well within the context of that range.

[Meredith Burns, executive]

All right. Question for you, Robert. What percentage of annual revenue or EBITDA is from business cards only, excluding stationery and everything else, just business cards. Not much of the market still thinks impress as things of Cimpress as the business card company. I know it's been decreasing. And I hope that the asker knows that, that's as a percentage of revenue. So I believe it's helpful to disclose that. It's literally the first question I get when I bring up Cimpress.

[Robert Keane, executive]

Okay. Well, thanks for the question. First of all, let me be very clear. Variable gross profit, gross profit and contribution profit after advertising of business cards are all up in absolute dollars versus FY '18 before we started this whole transformation of Vista. They were all-time highs in fiscal '23, and they were Q1 historical highs this quarter. And it's very close to that from a revenue perspective. There's some differences there. And I realize that the Investor Day, we gave a category that included stationary. But if you looked at just business cards, what I just said is true. So business cards revenue and business, our gross profit continue to grow in absolute dollar amounts that's true FY '23 versus FY '22, it's true this past quarter versus the first quarter of FY '23. Now the growth is in low single digits each year, and we think it's going to continue like that. But we also recognize it's a market which is declining overall, but we're taking share. Now for many years, we spent a lot of advertising reinforcing Vistaprint, not Cimpress is print as a discount business company. So that was a perception, and we have moved way with that over the last multiple years. And so we still get some of that perception in the universe of investors. But although we don't disclose, in fact, we don't even calculate EBITDA by product, which was a question, I think, we do calculate the gross profit numbers and variable contribution profit I just described. And now couple of more thoughts on this. inside Cimpress, obviously, Visa has the most significant revenue gross profit from business cards. But we do see them -- they're about 25% plus or minus of revenue base, as I mentioned, other than during the pandemic, which they did fall, but they have consistently grown. Why are they growing? I think one, people are using them in new -- our customers are using them in new use cases. QR codes are becoming very popular, which it's a very easy way to get someone to your website or your digital presence. We have greatly increased the quality and the depth and breadth of our business card offering in terms of all the variations. And we're finding that customers are buying much smaller volumes of business cards, but at much higher end products, which is leading to both order and value growth. And because we're selling it at higher price points and higher gross profits than our traditional lead products, if you think of a very traditional Vistaprint approach 5, 10 years ago, it was 250 or 500 basic business cards with constant deep discounting often a $10 or $9.99 business cards for 50% off. We've moved away from that. So I'd also say that some of these questions that investors have asked me come from a corporate setting. And I think it's a different way people operate in a corporate setting versus a small business, we could use it again for loyalty cards in a store. It's a box insert for small e-commerce or other product sellers. I mentioned QR codes. And so the trends are very different. Overall, other businesses have far less revenue from the business cards National Pen and builds basically nothing in Upload and Print, it's closer to 5%.

[Meredith Burns, executive]

Great. Thank you, Robert. Robert, I'll stick with you for the next question, which is about the Wix partnership. How do you think about digital offerings contribution to the business throughout the course of the year? And where do you think it can grow over the medium term?

[Robert Keane, executive]

Okay. I'm pretty sure your question is about financial contribution, but I just want to give the context of value proposition contribution. I just mentioned QR codes, we recognize, of course, in this world, the physical digital connection of small business brands is important and in mid-larger businesses. So having the Wix partnership at Vista is very important to be relevant in that world because design and marketing activities very much transcend that physical digital divide. Or increasingly are removing that device. Now financially, we think we have an opportunity to grow in the Wix partnership because we're now fully migrated off of our legacy product we have in Zero. We're focused on optimizing the experience of the Wix product, which is an excellent product for customers in the small business space. And we think we're offering our customers a product. They like more, but importantly, the retention is strong in customer cash flows for us even after split the split we do with Wix are better. And we're looking at very successful increases in retention rates. So again -- so far, the transition has been the focus off of the old product we have. Now that it's done, the team that's working on this is shifting their focus to building from here. These are very valuable customers for us. The product is very relevant in today's world, and we're optimistic.

[Meredith Burns, executive]

Thank you, Robert. All right. Let's shift to Sean. Can you remind us of our software capitalization policy. I love it. Do you expect capitalized software to remain at current levels or moderate given the Vista replatforming is behind us? And if a moderation is expected, would those outflows no longer be incurred or would they shift back into the income statement?

[Robert Keane, executive]

Yes. Yes. We expect capitalized software to be either flat or slightly lower this year than it was last year. Last year's level was $58 million. And that's -- last year's level was down from FY '22, which was a high of $65 million. From the -- in terms of the income statement part of the question, if you're asking about the GAAP income statement, the costs that we capitalize get amortized into the P&L over 3 years. And so that reduction in the capitalized software levels from what was that high of $65 million in FY '22, down to what will be approximately the same as last year, probably a little bit lower to $58 million. That difference will benefit the P&L over time because the amortization happens over time. So that founds a little delayed. My guess is that the question might be trying to get at whether that reduction effectively would reduce our EBITDA because the cost of those team members is just no longer capitalizable, or is there a true reduction and that won't have any impact on EBITDA. And the answer there is that the reduction from those FY '22 levels is primarily due to the cost reductions that we did in FY '23, which did focus where we're investing, but also did take advantage of areas where we could make changes post replatforming. And so you shouldn't expect the cases that are here at swing back as to EBITDA.

[Meredith Burns, executive]

Great. All right. So we've had a live question here. And I think Robert or Sean will do a great job answering it. How are you leveraging technology data and AI and Gene learning to improve customer experiences and drive growth across your lines of business?

[Robert Keane, executive]

Yes. So one, we're doing a lot. I'll give a few examples now. I'd really encourage you to go to our most recent Investor Day, it's all online at our IR site where both the slides. But if you look at the script or watch the video, you really get a good sense in much more detail that I can go into today. But let me just touch a few points. Data is very important. Martin, our CTO at the group level, Bassat the Vista level and you spoke about technology and data in a great extent. We have literally millions of enrichment where we improve the quality of data at our customers and over 80 billion specific events that happen in upload and order payment, et cetera, which all goes into our data systems. We use machine learning in many different areas. We started at 3, 4, 5 years ago in early examples of how do you make graphic uploads higher resolution, how do you do background knockouts over time that's gotten much broader than what we were doing back in FY '20. And today, we're doing things like having insights into the designs. Our customers are uploading AR-powered tenfleet galleries, the AI information or capabilities we have behind things like logo maker are all based to getting machine learning. We're moving into generative AI work for suggesting graphic design improvements, design quality insurance, customer service and a lot of other ways. So again, that's a brief and rapid list of some of the things we're doing. I'd encourage you to look at our Investor Day to get more detail.

[Meredith Burns, executive]

Fantastic. Thank you, Robert. All right. We have one more question that is on capital allocation. So Sean, get ready, would you consider buying back term loan B seeing that the total interest on TLB is higher than the bonds, which are 7% fixed? We had a couple of questions like that.

[Sean Quinn, executive]

Sure. And we've had a couple of questions like this in recent quarters. So the answer will be very consistent with what we've said in recent quarters. As of -- at the end of September, the weighted average interest rate on our term loan B that was just under 8%, 7.9%, inclusive of swaps. And so the nonhedged portion of that was higher. So yes, the current rates are higher for our term loans, which were at variable rate, and that's higher than the 7% coupon on our bonds. But our bonds were trading at a deeper discount our loans. So when you look at the yield, the yield has been much higher for bond repurchases. That was the case in Q1. To put that in perspective, during the window that we were buying in Q1, our bonds traded between 93% and 94%, and our average purchase price was 93.6% or so. And the U.S. dollar tranche of our term loan B traded closer to part. So that discount was not there. The yield to maturity on our bond repurchases in Q1 averaged a little bit under 10%. Although if you assume that we refinance our bonds in advance of the maturity, then the actual yield goes up from there. The bonds also mature 2 years before the term will be. So we take term into account when we're trying to make these decisions as well. It's not out of the question that we would buy term loan B, but these are some of the factors that we consider, most notably yield and term. There are some others too. And so we'll continue to look at that and also the direction of interest rates, which obviously is an important input to this.

[Meredith Burns, executive]

Thank you, Sean. All right. That brings us to the end of our questions, and I'm going to hand things over to Robert to wrap up.

[Robert Keane, executive]

Okay. Thank you, Meredith. Thank you to all the investors for joining the call and continuing to entrust your capital with us. We look forward to delivering during this second quarter, which is our holiday peak as well as the rest of the fiscal year. We're off to a very good start. We're excited to be leveraging a stronger set of tools and capabilities to deliver great customer experiences stronger really than we've had in years. We are also financially excited to continue on the path to grow our profit and cash flow, very much in line with what we've been speaking about for the last year and to continue as we do so, nonetheless, to invest in the development of new capabilities, new customer value propositions that will continue to build our intrinsic value per share. Thank you again for your time, and have a great day.

[Operator]

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect.