Cimpress N : Annual Report on Form 10-K for Fiscal Year 2019

2019 Annual Report

Notice of Annual General Meeting of Shareholders | Proxy Statement

July 31, 2019

Dear Investor,

It has been five years since we became Cimpress and this period has been transformational for our company. Today we are a strategically focused group of businesses linked by the power of mass customization, with 13,500 employees, operating across more than 20 countries, producing custom products with approximately 80 million unique designs each year, and with almost half of our revenues generated from businesses other than Vistaprint. Over this five-year period we multiplied our revenue by 2.2 and our unlevered free cash flow (UFCF) by 3.41, reduced the number of fully diluted outstanding shares from 34.2 million to 31.7 million, and increased invested capital from $688 million to $1.2 billion.2

Despite the superficially positive headline numbers, and as discussed in more detail later in this letter, we believe we have grown our intrinsic value per share (IVPS) over the past four to five years at a rate slightly below our weighted average cost of capital (WACC), which is well below our aspiration to create economic value comfortably above our WACC.

The ultimate responsibility for our poor performance lies with me, of course, which is why I have significantly increased my personal focus on the issues we face by spending much more time on the "front lines" of Cimpress and, in particular, of Vistaprint.

Looking deeper into Cimpress, there are a number of issues that have led to our poor performance. Vistaprint has over-invested in advertising and needs to improve foundational basics such as customer obsession, financial rigor, analytical capabilities and world-class technology. Our early-stage businesses have consumed over $200 million of capital with results well below our expectations. We erred by investing in a large centralized organizational structure and then had to spend even more capital to restructure as we shifted to the decentralized organization we have today.

Our recognition of these and other challenges has led to operational, cultural, leadership and organizational changes over the past two years. In particular, I believe that actions the Cimpress team collectively took in fiscal year 2019 have created growing momentum toward a more successful future.

I was recently reminded of a concept in the book "Good to Great" which I find useful in explaining how I can be so aware of Cimpress' shortcomings and yet remain optimistic. The book's author, Jim Collins, noted that "every good- to-great company embraced what we came to call 'The Stockdale Paradox': you must maintain unwavering faith that you can and will prevail in the end, regardless of the difficulties, and at the same time, have the discipline to confront the most brutal facts of your current reality, whatever they might be."3

• During this same period, we multiplied operating cash flow by 2.2, adjusted free cash flow by 3.0, and cash interest related to borrowing by 8.8. Please see reconciliation of non-GAAP measures at the end of this letter.
  2 Total debt net of issuance costs and discounts was $445 million as of June 30, 2014 and $1.0 billion as of June 30, 2019.
  3 Source: "Good to Great: Why Some Companies Make the Leap...And Others Don't" by Jim Collins. The "Stockdale Paradox" refers to the coping strategy used by U.S. Navy Vice Admiral James Stockdale, who was a prisoner of war in Vietnam for over seven years.

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I see the brutal facts of the past five years, in other words our disappointments, as parts of a corporate adolescence in which we learned hard lessons and matured toward today's larger organization that, as we enter our corporate adulthood, knows where we want to go and has the capability to get there. A retrospective understanding of that struggle provides helpful context to why we now are optimistic about our ability to address our current challenges.

Prior to 2014 we were primarily operating one business, Vistaprint, which was working to drive customer satisfaction scores higher, improve customer service, invest in life-time-value based advertising, and expand product selection. This drove growth but also significantly increased the complexity of the business.

Elsewhere, we had begun to make acquisitions in Upload and Print and to build businesses in emerging markets. When we chose to evolve ourselves from solely Vistaprint into Cimpress our thesis was that the centralization of manufacturing, product management, graphic services, finance, HR and technology across our growing collection of mass customization businesses would enable scale advantages. In retrospect we centralized far too much, instead creating bureaucracy, high costs, distance from our customers, slowness and complexity. We understood our mistake and reversed course relatively quickly, but not before our actions slowed down our businesses and severed their access to data and feedback loops that are vital to serving customers well.

In addition to these self-inflicted wounds, all of our businesses have faced growing external pressures over the past five years. E-commerce standards have risen significantly, as have our customers' expectations. The use of mobile devices skyrocketed, but customization on small screens is difficult, hurting our conversion rates. Competitive pressure has increased steadily for both price levels and advertising. The economic expansion that has continued for the last ten years has increased input costs for paper and shipping services.

Our response to these internal and external challenges was, starting in 2017, to decentralize Cimpress' organizational structure and to reinvigorate an entrepreneurial culture. Since then, we have:

• Reduced our central shared strategic activities to only those select few that can drive the most significant value: the mass customization platform (MCP), a shared talent pool in India, and procurement services.
• Eliminated over $80 million of annual overhead costs and other operating expenses.
• Established more robust business-specific financial reporting to improve management transparency.
• Clarified the processes and standards by which we allocate capital and assess returns.
• Improved our procurement advantages through both scale-based negotiating power and the sharing of innovations and procurement practices that we adopted from businesses we have acquired.
• Built our MCP technology only with modular and flexible micro-services, and actively licensed third-party SaaS whenever possible.
• Grew our shared talent pool in India to approximately 550 team members as of the end of fiscal year 2019, each deployed to operate directly as part of the respective teams of our decentralized businesses.
• Maintained the autonomy of newly acquired businesses, for instance National Pen and BuildASign, learning from the past in which our post merger integration seriously damaged what had previously been accountable and entrepreneurial cultures.
• Created financial incentive structures that will align the senior leaders of our businesses to the returns they deliver to long-term shareholders.
• Narrowed the focus of our early-stage businesses to reduce investment levels and increase the probability of strong future returns on any incremental capital we invest.
• Implemented a decentralized organizational structure that shines a clear light on what works and what does not, and places the levers and decision rights to deliver value in the hands of front-line leaders.

We believe that the strong cash flow growth that we delivered in the second half of fiscal year 2019 is an early illustration of the benefits of these actions. Internally, we see clear signs of accelerating speed, customer focus and innovation.

In addition to the above, in line with our longstanding commitment to corporate social responsibility, we have strengthened in areas that are good for the long-term health of our planet and society.

• In support of the 2015 Paris Climate Accord, since 2016 we have significantly reduced our carbon pollution emissions and are on track to reduce them by 50% or more between 2016 to 2025 compared to what we would have otherwise emitted, as measured by science-based targets.

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• Over 85% of the paper printed in Cimpress facilities comes from responsible sources and is Forest Stewardship Council® certified4 and we expect to move that to 95% in the coming year.
• We continue to build a diverse team across many dimensions that is welcoming of all team members regardless of race, nationality, gender, age, sexual orientation or religion.

For the past several years, this letter has articulated not only how we assess our performance at driving returns on the capital we have invested but also a detailed view into our philosophy about capital allocation and how we make such decisions. That philosophy is unchanged. If you are new to our story, please review my past annual letters to investors for this content. We also include a truncated version as an appendix to this letter.

What has evolved, as it does every year, is that we know more about ourselves and our opportunity than we did a year ago. In the past twelve months we experienced failures, successes and, in several parts of the business, the crisis of not fully living up to the opportunity before us. We have emerged from this difficult year with a clearer view on what's most important to drive future value creation and with tangible improvements to our cash flow despite the fact that we continue to make substantial investments across our business in support of future growth. It remains up to us to prove to ourselves, and to you, that these early positive trends gain momentum over the coming year.

Capital Allocation Summary

We consider capital allocation to be any spend that does not pay back within twelve months on a net basis. The chart below and its supporting table summarizes the capital allocation, other than debt repayment, that we have made over the past five fiscal years. We also include in the supporting table the capital we have raised via divestitures or partial-equity sales of businesses.

With the BuildASign acquisition, organic investments and share repurchases, fiscal year 2019 was the largest year of capital deployment in our history. We already recognize that we should not have made some of our fiscal year 2019 organic investments, and we have much to prove to demonstrate attractive returns on these investments as a portfolio.

In summary, looking back over the past five years, we think share repurchases have been a great use of capital; acquisitions of profitable, established businesses have been a good use of capital; returns on the aggregate total of our organic investments have been okay but far from good; and investments in early-stage businesses have been in aggregate a bad use of capital.

Capital Allocation - Including All Organic Investments that take Longer than 12 Months to Pay Back

Recent History

USD, Millions

$700								$698M
			$619M	$595M
$600
											Share repurchases
$500		$403M
$400					$385M
											Acquisitions & equity investments
$300												Organic investments
$200
$100
$0

FY15

FY16

FY17

FY18

FY19

• FSC® C143124, FSC® C125299

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