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Interactive Buyside Equity Research

December 9th, 2013

CAFEPRESS, INC. Thesis Overview


CafePress (PRSS) is a leading ecommerce platform enabling worldwide customers to create, buy and sell a wide variety of customized and personalized products. The company is in the penalty box for past mistakes including a sloppy IPO, missing projections and poorly integrating acquisitions. What remains is a legitimate ecommerce business with a critical mass of revenues, leading technology, proprietary library of content and undervalued and forgotten equity value.

Stock Rating Catalyst Category Price Target Price (12/9/2013): $6.50 Upside: 62% Ticker: PRSS Exchange: NASDAQ Industry: Ecommerce Trading Stats ($USD millions) Market Cap: $115 Enterprise Value: $94 Price / Book: 1.3x Dividend Yield: N/A Price / 2013E EPS: 72.0x Price / 2014E EPS: 18.0x EV / 2013E EBITDA: 8.0 x EV / 2014E EBITDA: 4.7x
Source: Company filings, Wall Street Consensus

BUY Value $10.50

Price Performance 52 Week range: $5.19 - $7.47 Analyst Details IB Username: JudyR2K Employer: Juniper Investment Co. Job Title: Portfolio Manager Analyst Disclosure PRSS Position Held: Yes

Interactive Buyside Equity Research


December 9th, 2013

Company Overview
CafePress (PRSS) is a leading ecommerce platform enabling worldwide customers to create, buy and sell a wide variety of customized and personalized products. Products include clothing, accessories, art, photography, posters, stickers, home accents, and stationary. There are currently over 500 base goods available to design. This is truly crowd-sourced or user generated content. The company serves its customers and content owners through its portfolio of e-commerce websites, led by its flagship site CafePress.com. Customers include millions of individuals, groups, businesses and organizations who use PRSSs innovative and proprietary print-on-demand services to create customized products. There are currently 19MM registered members, 3MM individual shops that offer PRSS services and over 3MM current customers. The company works with content owners (individual designers, artists, and branded content licensors) to leverage its platform to reach a broad consumer base and monetize their content. The companys technology allows for single unit and small quantity orders on a when-ordered-basis. The company ships over 8MM items per year and growing. The company tracks total number of customers, total number of orders, and average order size (AOS). AOS has traditionally run $50 - $53, and has been relatively stable. With the most recent acquisition of EZ Prints, the AOS has declined to $38 due to mix. EZ Prints business has a much lower order value, including many orders below $10. One of the companys goals is to raise AOS through new higher priced items such as home goods and logo sportswear. The company has 3 types of revenue streams due to its diverse business model: 1. First, the company recognizes full revenues from online transactions through its portfolio of e-commerce websites, where customers find or design and buy products. Second, the company recognizes net revenues (revenues less royalty payments to content owners) when an item is purchased using licensed content or from a previously designed product from one of its millions of designers. The company licenses content, particularly in the area of entertainment, for customers to use when designing products. PRSS also works as the backend for others storefronts (i.e., ABC.com, Urbanoutfitters.com) to allow those businesses to offer create and buy services using their own proprietary content. a. Most recently, PRSS signed a deal with Marvel to give its customers access to the marvel characters. This is significant, as there is a move toward content owners looking for additional ways to monetize their investment. The Marvel characters have great appeal, and now consumers can use these to design all sorts of exciting products. If a company like Marvel needed PRSS expertise to allow customization, imagine how many smaller content owners could benefit from a similar relationship. Likewise, PRSS has s deal with Sony Pictures to launch a store for the TV show Breaking Bad. These are just a few of the new entertainment and licensed opportunities for PRSS. Finally, the company also acts as a fulfillment partner to other e-commerce businesses. Here PRSS does not take title to the inventory and only recognizes fees for services as revenues.

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Just a point on designers - individuals use the site and vast creative resources to design interesting products that others might like (whether to wear, or for the home, etc.). Designers are creating 100,000 new designs per week on average. Those products remain on the site, and can be searched for and discovered by other customers. This allows for long tail marketing. If a customer buys a designers product, that designer gets 10% of the revenues. This has created an industry for a number of talented designers. In fact, there is a small number of designers who work from home to design products and earn 6 figure incomes. This has also created a huge library of proprietary products for PRSS, as the company owns the designs. PRSS library is increasing by over 130,000 new images a week. Today, the company has a catalog of ov er 400MM unique products.

Cost of Sales
The companys cost of sales includes raw materials (i.e., cotton, as t-shirts are close to half of the business today) for its base products, shipping, labor, royalties and fixed overhead related to manufacturing facilities. The company is currently consolidating numerous facilities it has acquired through acquisitions to increase utilization and improve manufacturing,

Interactive Buyside Equity Research


December 9th, 2013

labor and shipping efficiencies. Inventory consists of such things as blank t-shirts, mugs, etc. These products never really go bad and are sourced both locally and in Asia. Given the on-demand nature of the business, inventory levels can stay relatively low and the business can scale nicely.

Sales & Marketing Expense


Sales and marketing expense consists mainly of customer acquisition and customer support costs. One of the major keys to this business is efficient customer acquisition. Customers are acquired through various programs including paid search marketing, email campaigns, flash deal promotions, display advertising, and social media programs. In the past, PRSS relied too heavily on Google search to organically drive the business and has broadened out its marketing investments. Today about 20% of traffic comes through Amazon sites, 15% through Google sites, 8% through Facebook, 7% through Yahoo sites and 3% through others like Microsoft sites, Twitter and Pinterest. The company continues to refine the right level of spending and has increased this expense on an absolute and per customer level as the ROI proves positive.

Customer Acquisition Costs


Customer acquisition costs run about $10 recently. On an average order of $50, with a gross margin around 40%, this leaves $10 of incremental profits after acquisition costs in year one. This does not consider that the average orders per customer runs about 1.4 orders per year and growing, yielding $14 on average in profits on a $10 marketing investment before overhead. PRSS is also focused on lifetime value of a customer and is driving investments to increase order frequency and AOS. The company tends to realize higher average order values from repeat customers compared to first time customers.

Technology & Development


PRSS also invests a significant sum in technology and development as the other major key to this business is efficient back end customization technology and fulfillment. These dollars support its website operations as well as customized systems and equipment used to manufacture customer orders. PRSS has proprietary pre-press technology and can produce high quality products across many categories. It buys off-the-shelf printers and re-engineers the drivers allowing them to handle mass customization jobs. It has developed custom order routing software to aggregate orders and route them to the appropriate printing location. The companys systems guide and track products through assembly, packaging, sorting and shipment. The company has 3 issued and a number of patents pending relating to ecommerce services, proprietary printing and decorating services.

Market Overview
The personalized segment is extremely fragmented, with most of it served through offline businesses. Industry estimates range from $25B to $1Trillion depending on which category of products and which geographies one includes. Today, PRSS is mostly a domestic business with only 15% of the business overseas, mostly in Europe. The business is highly seasonal with about 40% of business coming in the fourth quarter. There is a large retail component and of course holiday giving is a big season.

Growth Strategy
PRSS has grown both internally and through acquisitions. Over the past 3 years, the company has acquired a number of businesses to expand its categories (i.e., canvasondemand.com), customers (logo sportswear - to offer personalized apparel for groups and organizations), and technology offerings (EZ Prints). The EZ Prints acquisition is significant as it offers proprietary software that helps power the customization services for third party retailers. EZ Prints had over 130 partners (including Disney) using its end to end customization solution at the time of acquisition. PRSS has used a combination of upfront payments and earn outs to complete these deals. There was a time that the backend earn out liability was significant. The company has worked through much of this at this point including writing off part due to underperformance from the EZ Prints acquisition. EZ Prints had some legacy business that has underperformed, but this d oesnt change the power of and importance of the technology.

Interactive Buyside Equity Research


December 9th, 2013

Competition & Risks


PRSS competes with traditional offline printing businesses, catalog retailers, and e-commerce players like Amazon, Vistaprint, Zazzle, Art.com, and other customized sites. This is and will always be an extremely competitive market - and that is the number one risk to the business. Yet, it also allows for creative and strong technology players like PRSS to grow share and acquire niche tuck-in situations. Other risks include copyright or trademark infringement from user-generated content. There is a potential liability for user content due to things like racism and pornography. PRSS does maintain strict content usage policies to try to avoid such situations.

Management
Top management has been with the company for some time now. Key members include: Bob Marino is the CEO. He joined the company in 2005 and the board in 2011. He started in operations and grew up from there. Prior to joining PRSS, he served as CEO of Cuisine Innovations and a VP of Tyson Foods. Monica Johnson has been the CFO since 2005. Prior to joining PRSS, she was the CFO of ARC International, and VP of Finance at Webvan. Fred Durham is the co-founder of PRSS and the Chief Product Officer. He is a serial entrepreneur and has extensive experience in the e-commerce industry. He owns about 10% of the company. Another 16% of the company is owned by the original VC, Sequoia Capital. I cant imagine they are happy with the stock performance and must be considering all ways to get fair value here.

What Went Wrong?


So why is the stock $6? Possible reasons are as follows: 1. 2. 3. Management was not prepared to be public. The company went public on unrealistic projections and used the past to linearly project the future. The company missed estimates and alienated the sell-side. The business model was too reliant on search - in particular Google search. A few years ago, Google changed its search algorithms, which affected traffic negatively for many small sites. This change hurt traffic on many of PRSS small shop clients as they found it hard to stay relevant in search results. Search traffic is also expensive traffic given the revenue share that Google takes. The companys European business was hurt from the recession. The company did not fully flesh out its business model. Who is the customer? How do they reach the customer and at what cost? Who makes the best partners? The company completed a number of acquisitions in a short time and did not appropriately value them and integrate them. In 2008, the company got a 10% lift from election-related content. Obama was new and exciting. PRSS did not see nearly the same lift in 2012, which it expected. Earnings and cash flow in 2013 are severely hurt due to one-time investments to consolidate facilities and integrate acquisitions. The company has been running duplicative facilities to insure no disruption during this transition. This is expected to be completed by the end of 2013. Let me repeat #1: Management was not prepared to be public.

4. 5. 6. 7. 8.

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What is Going Right?


1. 2. Valuation - the stock is $6 and trades for a fraction of revenues, with a year-end estimated net cash balance of at least $30MM and positive ebitda. It has been thrown out for dead. PRSS is a pioneer and leader in online customization - a huge and growing worldwide market. The company has 19MM members and growing and a large proprietary content library.

Interactive Buyside Equity Research


December 9th, 2013

3. 4. 5. 6.

PRSS is building a powerful e-commerce platform focused on best-in-class scalable technology. The CEO is a visionary with a strong marketing and operating background. The company is starting to develop appropriate financial disciplines and a focused business model. The company is consolidating redundant facilities to create a more streamlined and profitable business with room to scale. 7. Key acquisitions like EZ Prints has broadened the business model and opened up opportunities for additional b2b partnerships. 8. The company continues to be ebitda positive despite short-term operational issues and incremental investments. 9. PRSS has licensing agreements with major entertainment players like Marvel. This offers a huge new opportunity. 10. The company is launching a number of new sites with Fortune 500 companies that will add new business in 2014 and beyond. 11. With $250MM in revenues, the companys size makes it an attractive acquisition candidate by a larger ecommerce player. 12. Positive ROI on new customer acquisition investments.

What is PRSS Worth?


PRSS today trades for 0.32x sales and 6x EBITDA. EBITDA is depressed this year by one time investment spending of $5MM to complete the plant consolidation. If you adjust for that, the company is trading at an EV/EBITDA of 5x - food for thought as one considers comparable situations. There are a number of companies that I believe PRSS should be compared to when considering the appropriate valuation. Although no one is a perfect match, many have similar business models, characteristics, customer profiles, etc. The most important message I want to express, is the company has a value to consumers and business alike. It has a b2b and b2c and b2b2c component all tied in to one business. This past year of acquisitions, integration, broadened distribution, and frankly catching up on direction and focus has hurt earnings and clouded the value of the business.

Relative Value & Historical Analysis of E-commerce Companies


GSI Commerce: GSI was the first public company to focus on e-commerce fulfillment and distribution for other companies. EBay bought the company a few years ago for a significant multiple of revenues and even more so of EBITDA. The founder of GSI Commerce then went on to start a new related business called Fanatics. Dreams, Inc.: Dreams was public until recently when it was bought by a private company called Fanatics. The founder of Fanatics had founded GSI Commerce, which he sold to EBay. Dreams was also in the ecommerce fulfillment and distribution business - but focused entirely on sports apparel. Dreams had the license to many professional and college sports content and was the backend marketing and fulfillment for many sports-related sites and businesses. This was acquired for over 1x revenues, 30x trailing EBITDA and 14x forward EBITDA. The company had signed a few deals that gave them visibility on big forward growth. PNI Digital Media (Toronto: PN): This is an ecommerce company that provides transaction processing and order routing services by connecting consumers with ordered digital content with retailers. This company is mostly involved in digital pictures and to a lesser degree, stationary. This company has had declining revenues and EBITDA for 4 straight years. This company is currently trading for 1.3x revenues and 33x EBITDA. PFS Web (NASDAQ: PFSW): This company is a provider of end to end e-commerce solutions. PFSW has no proprietary content or library of content. The company is primarily domestic, although recently it received an investment from a Japanese company and now has an Asian partner to help build the international business. The company also has a declining products and distribution business, which is not worth much. The company is currently trading at 0.4x revenues and 10x EBITDA.

Interactive Buyside Equity Research


December 9th, 2013

Speed Commerce (NASDAQ: SPDC): This company recently changed its name from Navar (NAVR). SPDC also is a provider of end to end ecommerce solutions with no proprietary content. SPDC has a very small international business. Navar originally bought Speed Commerce for about 1.1x sales and 9x EBITDA. SPDC today consists of its e-commerce business plus a product distribution business. The products business is by far the majority of its sales so the comparisons are not quite apples to apples. At the beginning of 2012, before Navar acquired Speed, it was trading at an EV/sales of about 0.1X. That is how little the street valued the business. Today, the company is trading at an EV/sales of 0.45X (with still the majority of its sales in the old products business) and 12x EBITDA. Vistaprint (NASDAQ: VPRT): VPRT is an online supplier of graphic design and customized printed products to small businesses and consumers. This is one of a very few public companies that offers its customers the ability to truly customize the end product. The company does have high gross margins (65%) as it pays no royalties and its cost of goods is very low. Customer acquisition cost is more than twice what PRSS pays, so the net contribution of a new customer is similar to that of PRSS. VPRT trades for 1.5x sales and 10x EBITDA. Shutterfly (NASDAQ: SFLY): SFLY produces and sells professionally-bound photo books, greeting and stationery cards, personalized calendars, and other photo-based merchandise. This company also offers customization features to its customers, although it is very narrow in its photo niche. Gross margins are also high at 54%, yet customer acquisition cost is also much higher than that of PRSS. The company trades for 2.2x sales and 11x EBITDA. Shutterstock (NYSE: SSTK): SSTK is a global provider of licensed photographs, illustrations and videos to businesses and marketing agencies. The company does license proprietary content and allows its use in a customized fashion. Again, this is a high gross margin business at almost 62%. The company trades for 10x sales and 48x EBITDA.

Overview of Catalysts / Key Value Drivers


Opportunities What more can PRSS do?
PRSS has many ways to grow through expanding products, gaining new customers, increasing average order size and repeat business, new partnerships with owners of branded content, geographical expansion to Asia, Middle East and Latin America, and acquisitions. The company can also approach businesses like PFS Web and Speed Commerce to work together to offer complete customization and ecommerce fulfillment solutions. The company is just beginning to explore opportunities in the nonprofit world. PRSS has launched dedicated sites for such organizations as Autism Speaks. These sites allow people to make donations by buying custom t-shirts and other goods. I approached the CEO of PRSS with an idea to enter the healthy eating category. As mentioned earlier, Wall Street currently values this category as a fast growing, timely, high multiple business. I am one who suffers from tremendous food allergies. I order many customized food products online that require efficient and small production runs. I have to be less concerned about price than I am about ingredients. I suggested PRSS look to buy Youbars.com (among others). Youbars.com allows you to create bars to your liking. With You Bar: You choose the ingredients and the bar size. You view the nutrition facts of your custom energy bar while you are creating it. Your box of custom nutrition bars is made fresh-to-order and shipped to your door with a satisfaction guarantee. Your customized nutrition facts and your chosen protein bar name are printed on each individual protein bar package. The CEO of PRSS happens to know well the founder of You Bar. Bob Marino is even mentioned in a book on customization written by the founder of You Bar. Who knows where this relationship could lead or what it could mean for future growth areas.

Interactive Buyside Equity Research


December 9th, 2013

One can see how this business could be much larger than it is today while maintaining its leadership position. The company should complete its integration and restructuring this year. If it can continue to add new customers profitably and grow incremental profits, this wont continue to trade at its current valuation. And it very well may not remain an independent public company forever. The company feels strongly that it can grow internally double digits. As the new social and mobile efforts take hold, internal growth will improve. The company has reduced the number of flash sales (i.e., Groupon-type business) which has hurt sales in the short term but will help margins in the long run. The new partnerships like Marvel and other top companies will add to growth as they are launched. Signing of these happened a while ago, but the timing of launch has been unpredictable due to the initial work and customers timing. Many new seeds have been planted which should start to show up next year. Gross margins have been hurt by over 300 basis points due to the interruption from the integration and running of duplicative facilities, and the inclusion of the EZ Prints business. The integration will be complete by year end and the company has just anniversaried the acquisition, so the negative margin compares should be behind them. Additionally, capital expenditures are elevated this year at $14MM to complete the integration. As earnings recover and capex resorts to normalized levels, cash flows should improve.

2014 Analysis
For arguments sake, I assume the company only improves profitability on current business by 200bp s due to a higher gross margin. This should be easy to do as the expense on the restructuring will be behind it.
2013E $250.0 $5.0 (2% margin improvement) $97.0

Revenue Gross Profit Improvement Total Gross Profit

Revenue Assumed Growth % Incremental Value: Incremental Sales Gross Profit Margin % Sales & Mkting Exp @ 25% Gen & Admin Exp @ 8% Incremental EBIT

2014E $275.0 10% $25.0 $10.3 41% ($6.3) ($2.0) $2.0

EBITDA Build-Up 2013E EBITDA One-time Investment Improvement 2014E Base Case EBITDA Incremental EBIT Incremental D&A 2014E Incremental EBITDA 2014E Upside EBITDA

$12.0 $5.0 $17.0 $2.0 $1.5 $3.5 $20.5

Interactive Buyside Equity Research


December 9th, 2013

Price Target
At ~$6 per share, PRSS is trading at 3.6x 2014 EBITDA. Given, the companys market position, proprietary content, technology innovation, corporate partnerships and so much more, this seems a little extreme. I do believe PRSS has earned a discounted valuation to the comps listed earlier until it proves out consistent sales and earnings growth. But the seeds are planted to begin to see that next year. A fair valuation for PRSS might be 0.6x Sales and 7x EBITDA which puts the stock next year at $10.50. And if the company should be approached by a suitor, a valuation of 1x sales or 8-10x EBITDA is possible.

Interactive Buyside Equity Research


December 9th, 2013

Financial Summary
($ in millio ns, except per share data)

FY end Dec 31: Total Revenue % Growth COGS % of Sales Gross Profit Gross Margin % Operating Income % of Sales EPS EPS Growth %

2011 175

2012 218 24.6% 129 59.2% 89 40.8% 0.0%

LTM 242

2013E $ 247 13.3% $ 151 61.1% 96 38.9%

100 57.1% 75 42.9% 5 2.9% 0.59

147 60.7% 95 39.3%

(5) $ (6) (2.1%) (2.4%) 0.13 $ 0.09 (81.3%)

$ 0.48 (18.6%)

Sum m ary Cash Flow EBITDA EBITDA M argin Cash Interest Cash Taxes Capital Expenditures Free Cash Flow as % Sales

16 $ 14 $ 10 $ 11 9.1% 6.4% 4.1% 4.5% (2) 1 (3) (8) (7) (6) 11 6.3% $ 6 2.8% $ 3 1.2% $ 6 2.4%

Sum m ary Balance Sheet Cash & Equivalents Total Debt Net Debt / EBITDA

$ $

36 -2.3x

$ $

41 -2.9x

$ $

37 -3.7x

$ $

35 -3.2x

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