Real Story: VistaPrint Can't Hear the Knockin'

However, there is a dispute as to who owns some of the technology. Up until September 2005, Mod-Pac(MPAC Quote) handled the back-end printing for VistaPrint. Since then, VistaPrint has brought the printing in-house with proprietary and patented technology. However, Mod-Pac, which is run by VistaPrint CEO Robert Keane's father and brother, claims an inventorship interest in the print-aggregation technology. A representative from VistaPrint does not believe that Mod-Pac is currently using the technology. Calls to Mod-Pac were not returned.

What is known, however, is that Mod-Pac has started its own printing business, PrintLizard.com. While the site probably will not make for stiff competition anytime soon, it illustrates that companies with back-end technology will join the fray, attracted by the plump gross margins that are attainable in this business. It will be difficult for VistaPrint to maintain its market share as more competitors emerge.

Margin Pressure?

In the third quarter, VistaPrint's gross margin was a higher-than-anticipated 70.6% due to a shift in product mix and higher capacity utilization. Going forward, management expects gross margin to be in the 65%-67% range.

The company expects net margin to be in the 13%-14% range, while 2007's target is 15%. VistaPrint is able to achieve higher net margin than some other companies due to its incorporation in the tax haven of Bermuda. In the nine months ended March 31, VistaPrint paid just $1.1 million in taxes on $14.8 million in income -- or roughly a 7.5% tax rate.

However, Howard Rosencrans, chief research analyst with Capital Growth Financial, believes the margins are unsustainable. "VistaPrint is serving the price-sensitive, low-end consumer market with production from widely available commercial offset presses," said Rosencrans, who made a timely bullish call on Elan (ELN Quote) in early March.

Rosencrans believes "others can and will duplicate VistaPrint's model." Capital Growth Financial does not have an investment banking relationship with VistaPrint and Rosencrans, who has a sell rating on the stock, does not have a position in the stock.