Ladies and gentlemen, welcome to the Vistaprint fiscal year 2010 second quarter Q&A earnings conference call. My name is Chris and I will be your operator for today. This call is being hosted by Robert Keane, President and CEO and Mike Giannetto, Executive Vice President and CFO. Before we take the first call, as noted in the Safe Harbor Statement at the beginning of the earnings presentation, comments may include forward-looking statements including statements regarding revenue and earnings guidance and actual results may differ materially. Risks that could impact those statements are described in the documents that are periodically filed with the Securities and Exchange Commission. (Operator Instructions).

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

Thank you very much. Youssef Squali, Jefferies. Hi, everybody and Robert congratulations on a very good quarter. So, couple questions, I guess, starting with the mandatory guidance question. So, if I look at your Q3 guidance, I am looking at sequential drop in revenues of roughly 13%, if I do the same math last year, it was about 8%. In prior years, it was even less. So, is that basically driven by your usual conservatism? Are you seeing something to make you more cautious, was Europe substantially above expectations and that's not sustainable, that's why you're doing it or is it something else? And then, I guess related to that, if I look at the margins, they're substantially below where they were in prior quarters and even in same periods in prior years. How much of that is driven by Vertrue and this acquisition that you are talking about being dilutive? It was too small for me to have thought it was going to be that dilutive. So, maybe you can just help us understand those?

Hi Youssef, it's Mike. So, in terms of the revenue growth Q2 to Q3, Q2 we just finished a pretty outstanding quarter in terms of revenue growth driven, as we would expect in this quarter, driven by the holiday and consumer related products. What we've seen in the seasonality in the business is that in Q3, obviously the holiday goes away and we see a drop in overall revenue. I would say, we're obviously seeing the same directional move as we did last year and the year before. In terms of relative to your conservatism or not in the revenue guidance, I think, we have a realistic range on the lower end at the 165, I think, it's no conservative but in terms of the overall range, we think it's a realistic range based on our forecast and expectations right now. In terms of the margins?

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

You mean a sequential drop from…

Correct

Q3?

Correct.

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

Okay. And on the margin?

So, for the margins, Q2 we had a record profitable quarter in terms of dollars in margins and what we see obviously from a revenue standpoint, in our guidance, the midpoint, we were guiding to a revenue number about $25 million lower which obviously is going to negatively impact margins. As well as we announced back a couple months ago, we terminated the membership programs which is no longer part of our revenue stream and we are continuing to make investments that we first outlined, as we entered the fiscal year. In some cases we've accelerated some of those investments given the over performance in Q2 and our confidence in terms of delivering on the revenue in the second half of the year. So, there's a combination of revenue drop, which we would expect going into Q3 on the continued ramping up of investments as well over the second half of the year. And there is some dilution which we haven't specifically called out in terms of a number, but there is some dilution associated with the Soft Sight acquisition, as we integrate into the business with really no revenue stream. We won't see any revenue coming from that product line until next fiscal year.

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

You're right. That is the calculation. Sequentially, I think this quarter, sequentially Q1 and Q2, Q2 we do normally see an increase in the COCA in general advertising expenses which is really related to the holiday period where advertising costs in general will elevate. To your point, do I manage into it, we do not manage to a COCA number or the calculation you just did which is (inaudible) for COCA. We really look at cost of acquiring customers and then the anticipated future net present value of the contribution going forward and we may trade-off on those economics as opposed to an absolute COCA amount. So that's some of the variables impacting that, if you look at on a cost per order basis, it's been relatively flat. When you look at advertising as a percentage of revenues relatively flat with last year as well, same quarter, about 20% of revenues.

Our next question comes from the line of Ingrid Chung of Goldman Sachs. Please proceed.

Good afternoon, thanks. So, my first question is on non-Vertrue referral fee revenue. I was just wondering, how you view that revenue stream. By our calculations, the referral revenue stream was about 1.2% of revenue last quarter and is about 1% this quarter and you are saying that's going to be roughly 1% for the rest of the fiscal year? Are you actively trying to grow this and grow the number of partners you have or are you just keeping the partners you have right now and just growing the revenue you have with those current partners? And then secondly, we noticed that the number of temp employees you have increased quite a bit both sequentially and year-over-year. Is this purely because of the unexpected demand you had in the quarter? Or is there more of a strategy of moving more toward employees mixed towards temps?

I will first do the membership question and then Mike do the employee temp question? The non-membership programs for referral revenues we certainly see as a growth area and we plan to continue to invest in and we hope they will continue to grow and we don't make specific predictions about any product lines. But they are a relatively small percentage of our revenues. These are things like the referral programs we have with people like Pitney Bowes or Intuit or Google Ad Words or the like. And we do hope that those will continue to grow. Just to be clear, I think as you just alluded to, anything as membership has been terminated and the total referral number is down substantially because of that. But we do expect and hope for continued investment to grow that business other than membership. Mike, in terms of temp employees?

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

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

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

Hi guys. This is [Sunil Doshi] calling in for Mark. A couple questions. One was on the Softscribe acquisition. Could you talk a little bit more about your M&A strategy going forward? Was this more of a one-off acquisition or can we expect to see more M&A on this front? And then secondly, just on the broader international side, it looks like reported growth is very strong. Can you talk about where the growth was coming from and anything you can talk about in terms of how the small/medium business market in Asia and Europe is firming up?

Okay, no problem. So, we maintain the same acquisition strategy, as we always have had which is we always are considering acquisitions but we are very, very prudent about them because we really want to ensure that it adds value to us as a buyer, not just to the selling party. And I think, we have a great deal of prudence because a lot of acquisitions don't work out for the acquiring party. So, we consider them, this is the first time in a long time since we have been a private, well before we went public that we've completed a transaction. But we will continue to consider them in the future. We still believe that acquisitions are not likely to make up a significant portion of our future revenue growth. We have always said we will not rule small tuck-in acquisitions and it's certainly possible. But the acquisition strategy remains the same. In terms of growth outside of the United States, it was a milestone quarter in the sense that we had more than 50% of our revenues last quarter coming from outside the U.S., we do expect that number if you look at it to be a seasonally inflated number that will come down the other side but the multi-year trend is clear, it's up and to the right. We had some currency impact of about $12 million that boosted our non-U.S. revenues because of the weak U.S. dollar. But broadly speaking, if you're looking cost and currency terms, the non-U.S. business continues to grow at a very, very strong rate of approximately 48%. So, what's driving that? We find that number one, Europe continues to grow very, very well. In percentage terms, it's not growing as fast as Asia-Pacific which is Japan, Australia, New Zealand, but it's a much bigger market for us. And so, we are continuing to be very bullish on the growth in the U.S. The US grew 26% excluding membership, so it was still very good growth. Europe grew faster than that and small business marketing in Europe is doing very well for us. And your question in terms of Asia-Pacific which for us is today limited to Australia, Japan, New Zealand; we find more similarities than differences with those markets when you compare that to Europe or North America.

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

Thank you and congratulations on a good quarter. Thanks for taking my questions. Mike, I just wanted to follow-up on the gross margin line, well out of expectations again this quarter. Any update on your non-print services? Is that material part of the upward driver here? And if you could, any further color on total subs there, that would be helpful. And just want to take another shot at the earlier question, is the acquisition, you know is it materially dilutive in the third quarter? Any more color around that would be helpful. Thank you.

So, Shawn, in terms of gross margin, we did see an expansion year-over-year and sequentially quite nicely. In terms of the services piece which is websites, e-mail predominantly, it's growing very nicely. It certainly is helping in the gross margin line. We're not getting specific in terms of the size of it. We did say we had 150,000 paying subs back in June, but we're not updating you at this time. I will say that it definitely has had a positive impact on a year-over-year basis. It's growing very nicely. And there were many moving parts within gross margin actually when you look over a year-over-year basis, we had some headwinds with FX movements with the Canadian dollar as well as the referral revenue percentage, namely the membership coming down, which were able to offset with mix and some shipping savings. In terms of the dilution, we refer to from the acquisition, I would not call it material, Shawn, I think, it is worth calling out as we are investing over the next six months to integrate and bring the product to the market in early '11. But again, it's not a real significant number but again, it's worth calling out.

Our next question comes from the line of Jim Friedland of Cowen & Company. Please proceed. Kevin Copelman - Cowen & Company:

We do our marketing decisions very much on a channel-by-channel analysis by our marketing people and we hit on a lot of different cylinders. We did mention that we were doing broadcasts and in prepared remarks earlier tonight, we talked about how one of the accelerated investments that we will be making going forward is additional broadcast test. So, we were pleased with that but it still remains in a test phase. So, it helped but it was not a material, that wasn't the thing that made the difference. It was really strong increases across the board. We do think that this trend line of new customer acquisition is like any other trend lines in our business. It will fluctuate quarter-to-quarter but clearly last quarter was very nice up and to the right. Kevin Copelman - Cowen & Company: Okay, thanks. And as far as the Australian facility, when you guys get that up and running and also with the marketing offices that you announced there, are there any plans to launch new foreign language sites in that region along with that?

We don't make specific announcements ahead of any product or geographic or other development we plan on. But I would say if you look at Vistaprint's history, we have a very successful history of introducing into markets around the globe and we certainly would expect that trend to continue. I wouldn't want to publicly talk about which ones are going to be next in which part of the world but there's a lot of the world that we're not in. Kevin Copelman - Cowen & Company: Okay, thanks. And last question, you shutdown membership rewards. How are you guys using that to screen real estate?

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

Our next question comes from the line of Mark May of Needham & Company. Please proceed. Mark May - Needham & Company: Thank you. Hi, the free cash flow conversion on revenues was great, so congratulations; love the trend there. I think, the only thing, I want to focus on is try to put some context on the Q3 revenue guidance. Could you maybe give us what the percent of revenue and tell me if it's in your webcast, I haven't had a chance to look at it if it is. But the percent of revenue from consumer in Q1 and Q2 of '08 and Q1 and Q2 of '09, I think, you usually put a chart in there but you don't actually have the percentage breakdown. I think that would be very helpful in putting into context the Q3 revenue guidance.

Mark, its Mike. In terms of what the performance in Q2 this quarter that we're reporting on, it was about 30%. That's an approximation based on product categorization of consumer and holiday. Prior, Q1 was sub 10% and we certainly don't expect to see anything near 30% in Q3. We would see it go down to a 10% or so range, 10% or 11%, which we normally when you look at a non-December quarter, that's usually the range we're in high single-digits, 10%, 11%. Mark May - Needham & Company: You were also around 30, a year ago too, right?

That's correct.

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

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

So, we don't give specific guidance on the gross margin but directionally, we do expect it to go down from the Q2 level which we normally see in Q3 and there's a few drivers. One is, from an overhead absorption standpoint on the margin, we are guiding revenue down by $25 million. So obviously, we lose some of the overhead absorption. There is some impact from the membership reduction. There is also a bit of FX more of a headwind, as we go into Q3 with the Canadian dollar, but I wouldn't call that significant. I would say the biggest drivers of the expected decline would be the revenue reduction, the overhead absorption as well as some of the product mix going from Q2 to Q3.

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

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

Mitch, its Mike. You're right. There are a lot of pushes and pulls. Currency definitely helped it year-over-year with the weakening of the U.S. dollar. On the other side, what dampens it a bit in terms of growth is the service of the subscription business, the websites because we're looking at an average selling price each month that is the prices we offer those services go from $5 to $20. So, obviously, it's going to bring down the AOV a bit. What we also see, the dynamic in this quarter is we do normally see AOV increase in the holiday quarter, as we sell the holiday products and cross-sell and up-sell on holiday cards and calendars. So, there's some seasonality in there as well. So, I would say those are the three main dynamics, $0.5 million in the quarter as you look at it from either a year-over-year or a sequential basis.

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

We've said often if you look over a multi-year period in recognizing that quarters will go up and quarters will go down, we have increased the number of products per order a bit. But what is much more dramatic is the number of orders per year a customer would buy. So, you do see a little bit of a trend up and to the right on the units per order, but often those additional units are at a low cost. They're an add-on at checkout as opposed to doubling the price of the basket.

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

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

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

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

I'll take the first stab in terms of how we think about it from a product perspective and then let Mike talk about the margins. I think, we are uniquely positioned to go into this market because either Website and e-mail marketing service or some of these search placements services we just introduced, those are core parts of how small businesses would like to be able to market their business just as much as a brochure or a sign or a business card would be. And we have been successful in being able to give this turnkey product that of a physical or a digital product that helps small businesses market their business. And so one is a very clear logic in the minds of our customers and that we're really unique in the market with the breadth and extensiveness of our product lines in that regard. And that is very important from a margin perspective that I'll certainly let Mike talk to. But I think from a gross margin perspective, it's a nice product but there are many companies in the space who have great gross margins and don't necessarily have great bottom line. I think differentiating things for Vistaprint is we very, very rarely would acquire digital customers or electronic customers on their own. We always cross-sell into our base and so the marketing spend of $100 plus which you often see in this space we do not incur because we are cross-selling into our existing customer base. And so there's a gross margin but there's also the marketing costs which is the advantage we have.

So, from a gross margin standpoint, it's a very nice gross margin profile. We just reported, we're over 65%, as a company but the electronics or digital part of business is well above that corporate average. So, we don't breakout margins by product but if you look at some kind of pure play, standalone companies in terms of Websites or e-mail marketing, that would be the range I'd look at but it's definitely well above our corporate average.

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

I think if you were to just take that with a pure hypothetical which is actually not possible of stripping that business out and having it stand alone, so have our revenue and our growth without any of the other products, which are inherent in our ability to get these customers in that hypothetical, yes. But I think, it's very good for Vistaprint. But I think what we really believe that our unique differentiator is we do have that broad product line and its part of the overall solution, it's not a standalone.

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

Couple questions, I might have missed a couple of details on the customer acquisition cost number and if you gave the number of digital subscribers or maybe if you plan to update at the analyst day?

So, Aaron, we didn't give out the number of service subscribers. In terms of advertising costs, we did talk about that, but when you look at total advertising expenses divided by new customer adds, which is a proxy for COCA, it was just under $22 for the quarter, up a bit sequentially and up over last, a year ago as well. When you're looking at advertising expense, it was about 20% of revenues very similar to last year December quarter as well. So, total advertising as a percentage of revenues fairly flat with last year, when you're looking at it in terms of proxy for COCA, it's up a bit.

Great. And then, in terms of the digital customers, are you seeing them spend more? Obviously, I assume they were probably coming back to the site more often. Do you see those customers spend more on other products as well? Just in terms of Europe, can you talk about any countries that you are seeing strong growth for, it seems like Germany is kind of a standout right now.

So, we do believe that our best customer across many of our product lines, they may buy customer apparel, custom signage, print products, promotional products and electronics. So, it's a little bit of a chicken and the egg to say which came first, the Website or the brochure or whatever. So, we do see those types of customers often cross shop. In terms of Europe, we don't breakout country-by-country but our biggest countries are the four largest economies there. So, it's France, Germany, the U.K., the Netherlands. But we are growing very, very well off of what is getting to be pretty substantial basis in a significant 6 or 10 other countries.

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

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

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

I would reiterate what Mike said in answer to another question earlier in the call which is earlier in the year at the beginning of the year, we talked about a substantial number of investments we were planning to make and those are not investments that can be turned on overnight. They are really ramping up now and they're hitting the P&L in the second half more. But we did talk about those investments. And then, just to recap some of the things we spoke about that we're doing incremental to those previously announced investments, we have broadcast tests, we're doing more engineering talent recruitment, more engineering projects. We're continuing increases to what we're doing in Europe in terms of customer service with the investment in Tunis and the opening in Berlin. We are accelerating some operating investments in Australia and again, each one of these in and of themselves may not be material, but they do all start to add up and that includes the integration of Soft Sight with all those employees who are now on Board without any offsetting revenues until the fiscal year 2011.

Okay, great, thanks. And one more if I may, just wanted to take it to maybe a little bit different approach to the cost of customer acquisition and just wondering if that's really even the right way to look at the effectiveness of your advertising expenditures because presumably, your advertising expenditures are going for more than just acquiring new customers. So, just dividing ad expense by new customers might not really capture the full effect of what you're trying to do in terms of drive repeat customers or test other marketing channels as you said. So, could you just kind of comment on that please?

You've got to give a qualitative agreement with that which as I've often said that if you were to divide all of Coca-Cola's advertising reported by the number of people who drink Coca-Cola for the first time that quarter, they would look like they have a very high cost of customer acquisition. And to your point, a lot of advertising can drive repeat business as well. We do not give out COCOA, but we have this number which is the most it could be because we're taking 100% of our advertising and ascribing 100% of that to the number of new customers. But you're right, it does drive repeat purchases.

Okay, great thank you very much. That's all I had.

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

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

I think the qualitative answer again is that if you recall, we were really cutting back last year in a number of different investments because of a massive loss of currency headwinds were going against us, the economy was reeling and we pushed out a lot of investments. And in the end, we actually did better than we expected on the top line until they came through and we overachieved on the bottom line. So, that was a very different circumstance last year. It was really great prudence in our cost lines that started to be announced in the October earnings call of last fiscal year, so, I guess, 15 months ago and we're in a different situation this year where in the beginning of this fiscal year, we started talking about investment increases and we are now doing additional ones.

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

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

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

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