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Shutterfly, Inc. (NASDAQ:SFLY)

February 13, 2013 5:00 pm ET

Executives

Jeffrey T. Housenbold - Chief Executive Officer, President and Director

Analysts

Heath P. Terry - Goldman Sachs Group Inc., Research Division

Heath P. Terry - Goldman Sachs Group Inc., Research Division

Great, so we'll go ahead and get started. My name is Heath Terry. I cover the Internet sector for Goldman Sachs. We're really excited to have Jeffrey Housenbold, the CFO of Shutterfly, here with us.

Jeff, for the people in the audience that maybe only know Shutterfly through the cards that they get around Christmas time. How do you describe the company?

Jeffrey T. Housenbold

So a lot of the popular terms today you hear cloud, you hear social, you hear Big Data, you hear SaaS, you hear mobile, we've been doing a lot of those since 1999. So from a technical standpoint, we're a cloud business. We got 18 billion photos up in the cloud, 80 petabytes of data or SaaS service. We're a mobile company and we have lots and lots of data. But from a consumer standpoint, we're really building a brand as equity in helping people share life's joy, helping them express themselves socially, connect deeper on a more personal level and enhance those relationships. And today, we do that largely around memories and stationery and social expression. So if you read the [indiscernible] play on our press release, it says the leading Internet social expression and personal publishing platform. Kind of think about those. But at the heart of it, 80% of our customers are female, she's college educated, $96,000 household income, and she wants to connect and stay relevant, and she wants, when she corresponds and expresses herself she wants it to be fashion forward and on trend and be consistent with who she is in her persona. She wants to be a little different, she wants to be creative but she doesn't want it to be hard to do. She wants to be able to share life stories, pass them on for generations to come, be the chief memory officer of the family. So we're building an unrivaled platform that helps our customers do that regardless if you are on a Apple device or a PC, if you're on a PC or a tablet or a mobile phone, if you're on Android or you're on an iOS. We're completely ubiquitous to the camera you use, to the operating system, to how you want to do that. We want to be that company that's trusted to help you share life's joy.

Heath P. Terry - Goldman Sachs Group Inc., Research Division

How big is that market?

Jeffrey T. Housenbold

We think the market is about $30 billion, $35 billion in the U.S. and about $100 billion on a worldwide basis. And you look at, just say, the greeting card industry. In the U.S., it's a $9 billion industry, about $3 billion in birthday cards, about $3 billion in holiday cards, and $3 billion in everything else ranging from sympathy to teacher appreciation, to St. Patrick's and Valentine's Day. And if you think about the markets we're going after, they are largely stuck in an old modality, largely off-line, largely static and generic content and largely inconvenient and high price with no personalization. So what we think we're doing is providing a better consumer value proposition, disinconvenienting the establishment and doing it using modern front end web technologies and back end modern print-on-demand capabilities where we can print a unit of 1 and be profitable. Where in the old days you would have run off offset and have high upfront startup costs you'd have to advertise over a large volume. So in the greeting card industry, for example, we have 4 brands: Treat, Wedding Paper, Devious, Tiny Prints and Shutterfly. In our new Treat brand if you want to send a greeting card to someone, it's someone's birthday, today you sign up for our service, it will ping you through a push notification and in 2 weeks, it's Heath's birthday, and I know something about him, right? And I'll say, "Hey, he's a friend, he's a guy and I want to send humorous". It will scan throughout 6,000 or 7,000 cards, tell you here are 10 that meet your needs. And instead of saying, "Dear Heath" or "Dear buddy," I can personalize that. I can make a joke. I could talk about the time when we went fly fishing. I could put a picture or not. I could do that all in the convenience of this device from my desktop, in less than 2 minutes, personalize it, had better printing and better quality, have it mailed to me for $2.50 versus $4 of the generic card going to CVS. So we think time, convenience, creativity, personalization, quality are the differentiators and we keep pushing on those threads.

Heath P. Terry - Goldman Sachs Group Inc., Research Division

Treats, it's into the investments that you've been making in mobile and digital over the last year. How are those investments, and really just mobile in general changing the type of user engagement and frequency that you see?

Jeffrey T. Housenbold

So the 4 brands, Shutterfly, we announced for the full-year 2012, $641 million with 20% EBITDA. Shutterfly is the vast majority of that revenue with having EBITDA margins north of 20%. Tiny Prints, close to 20%; wedding under that, it's in investment mode; Treat is negative, it's a brand-new initiative; mobile is negative, it's a new initiative, our new memory cloud service, negative new initiative and then Enterprise, dilutive to that margin but slightly positive this year. So we're kind of running a portfolio of brands and initiatives that allow us to fund investments and growth opportunities, mobile being one. So we have a number of mobile initiatives. We have 4 different iPhone apps, 1 for Treat, 1 for Shutterfly, 1 for our Shutterfly Share sites and then we have another app through the acquisition of ThisLife that will get embedded in as part of our new cloud service. People now have a camera with them all the time. So sometimes investors say, "Isn't Facebook killing your business?" and I say, "No, in fact it's helping our business." Because the more you interact with your memories on a daily basis, the more you're thoughtful about them. And the fact that you have a camera with you all the time today allows you to capture more photos. The fact that there's no cost to taking that photo -- in the old days you had to buy film or big flashcards, today it's relatively free. And editing tools are there and filters, it allows you to be more creative with your pictures and have better ones. And if you have better pictures, you want to share them, you want to turn them into physical products and you're more likely to spend money. So we're seeing more and more pictures coming from mobile devices but it's not as large as you would think. We see people sharing our products so you can make a photobook, for example, and share that electronically. You can post it on Facebook. You can put it on your blog. So we also think carefully about mobile and what device and what use occasion. So you have an iPad on your lap. That's kind of a lean back device for our targeted demographic of moms. TV is on or she's cooking dinner. She's helping the kids with homework and it's kind of a lean back versus a lean forward device like the PC where you're like okay, I got to finish this yearbook. It's the end of the school year, and I'm going to make that a focused effort. Versus this device, I don't think people are going to make photo books on this device, right? Notwithstanding some of my competitors' development focus but on that device, they'll make a photo book. So we're taking the power of the swiping and the power of the device against our different product lines, against a use case and different targeted demographics and we're creating unique solutions that we're starting to monetize. So we didn't have the ability in our Shutterfly app until November to actually order. It was an upload sharing deal. Now we have order and I could take a picture, open the device, take a picture and instantaneously your picture appears on all of the products. And it's one click checkout. So now again I've reduced the friction in the product. So if I go to the app and say, order, and I go to use the picture -- here's a picture of my good-looking CFO sitting right there, I took earlier today, this picture now just showed up on all our products. Boom, click check out. So if you run into your buddies or you're at the Super Bowl or the AT&T Pebble, go like this, click, order and the gift will be waiting for them by the time they get home. So we're just starting to now monetize mobile. And then lastly, like most e-commerce companies, we're seeing more and more interaction through mobile because people are reading their e-mails largely through these devices. And our websites were not mobile enabled until Q4. So we just now enabled those and so we think that will continue to drive uptake and conversion and revenue.

Heath P. Terry - Goldman Sachs Group Inc., Research Division

And how does the acquisition of ThisLife fit into all of that?

Jeffrey T. Housenbold

We're really excited about ThisLife as a component of our cloud service strategy. So I'll use myself as an example to kind of elucidate what I think the challenge and what the solution is. So I have 248,000 photos. I have a Lenovo at work. I have a Dell at home. My wife has a MacBook at home. She has a iPad 2. I have an iPad 3 and my son has an iPad 1. My other 2 sons have an iTouch. And we have some pictures on Dropbox. We have some on Facebook. We have some on Flickr. We have some on Instagram. And this is the problem, a lot of people just have pictures stuck in this device, they don't know what to do. So the first step is to auto aggregate all of that into a secure place and that's the Shutterfly cloud where we'd have never down sampled or deleted or charged people. It's free unlimited storage. Then the next challenge for consumers is how the heck do I wade through 248,000 photos? So my middle guy turned 9 in May and so he want to make a photo book for grandma and so with ThisLife, you'd be able to click on his picture, click on grandma and we'd go through my 248,000 photos and they'll go, here's 1,100. Then we made an acquisition in May of last year Photoccino, 8 really smart guys in Israel, they have 30 proprietary algorithms. We overlay that on the 1,100 pictures and they'll tell me which ones are in focus, which ones have a people in it, are they smiling, are their eyes open and now it tells me that 200 great photos. Then we take the Shutterfly auto creation process for our photo books and the algorithms we had, and it makes the photo book instantaneously. So now in about 2 minutes. I made grandma a photo book of the 200 best pictures. I took the paradox of choice out. Women more than men are afraid to delete photos because like it's a memory. I'm like, the kid's eyes are closed, delete it. My wife is like no, it's still a memory, don't delete it, right? So we removed that guilt and that sense of the paradox of choice away and now they could come in and annotate it, change the background, add a different font or something and we take what would have been a 10-hour process to go through 248,000 photos and we make it into a 30-minute delight, where when my wife puts the 3 kids to sleep at 9:00 at night, she has some me time, she's able to solve that challenge she has, that problem, which is delight grandma. And so that's the vision of the new Shutterfly cloud service. So a lot of people offer that aggregation and charge for storage, right, everyone from DropBox, to McAfee, to Carbonite, to Amazon, Cloud Drive, to iPhotos, iCloud, to SkyDrive from Microsoft to Google Drive, right? And that'll continue to get commoditized. But what we think we have different is one, in an intelligent value added layer on top of storage and then second, an economic business model allows us to do different things. So, for example, sign up for an annual subscription and get a free photo book or give it away to your best Shutterfly customers or give it away for free until they have 1,000 photos or videos and then charge them. So we play with different pricing and scheme but we're not selling a storage service. There's plenty of that and I don't have the scale to beat Google at that game. But I do have the scale and the focus in the technology and the brand to provide next-generation photo and memory management service on a global basis. And I don't need to go over to Europe or Asia or Latin America physically to have people use my piece of software and pay me. So that's also back doorway into having an international revenue stream.

Heath P. Terry - Goldman Sachs Group Inc., Research Division

That makes a lot of sense. You touched on international. How do you start to think about international particularly as this business becomes more and more about the software and service side of it and less about physical fulfillment side?

Jeffrey T. Housenbold

Yes, so I think, people are going to continue to print. And that's going to continue to grow. Our guidance was $740 million to $746 million this year. International has always been in our aspiration to be a global company. We probably would've been global already had the financial crisis not happened. And at that juncture I decided, you know what, there's still a lot to do and a lot of headway, headroom in the U.S., let's just focus. And then with the European crisis and stuff, it's been that less interesting. We're starting to get a point where a couple of things. One is, we have plenty of cash, we're spitting off cash, we have no debt, we have access to capital, capital is cheap. Second is everything seems to be for sale in Europe. So we've been in the last 12 months, no less than 10 or 15 companies have reached out to us. There's been more of a rationalization and expectation on valuation because you have slowing growth and you don't have a robust IPO market on the LSE or other exchanges. And now, we have the deepest bench strength that we've ever had in the company's history of freeing up time from management to go after things. And you had a slow decay rate of that opportunity. So it wasn't like we had to go there immediately. So I think it's more, if you look over in the next 4 to 8 quarters, it's more likely today than it's ever been. But there's still plenty of growth to be had in the U.S. that we're going to be disciplined and patient to do the right deals and it will be a combination of build, buy and partner. So in places like Korea and Japan and China, you can't go it alone as a U.S. company, you're going to need partners. We've identified those and had year-long, multi-year-long conversations with folks and when we're ready to pull the trigger, we have a clear strategic roadmap how to do that.

Heath P. Terry - Goldman Sachs Group Inc., Research Division

The competitive environment seemed to take a pretty big swing in your favor in the fourth quarter. What do you feel like drove that?

Jeffrey T. Housenbold

So people have asked us, there's no one silver bullet. There's no one silver bullet in our integrated marketing campaign. There was no one silver bullet that drove the outsized success in the quarter but I think our relentless focus, our knowledge of the customer, what her needs are, where they're going, how to service those, the brand equity that we built, the more than $330 million we've invested in technology and manufacturing capabilities, our patent portfolio, all those things create barriers to success and scale and profitability. What we saw from a pricing environment, if you flash back to Q4 of 2011, you saw heavy discounting from HP Snapfish and you saw it from American Greetings Cardstore. And that forced us to miss our revenue and earnings by a couple of percent and pre-announced. Now we had increased the guidance 3 or 4 times throughout the year but it put us in a penalty box. We were surprised people would be that irrational given the high emotional value of the products, the relatively low ASP and the growth in the market. So caught us a little bit surprised in last Q4, where we had 12 months in assumption that people would continue to be irrational. In fact, American Greetings went from 70% off in Q4 '11 to 90% off this quarter. And yet our cards and stationery business was on fire. So we were able to adjust our marketing mix, our assortment, our pricing and promotions, our designs, our business development partnerships, and do these things that allowed us to not only deliver more top line in Q4 than people expected but also for it to flow through in a quarter where you have a lot of capacity utilization at a higher rate. And so I think our focus, our scale and our innovation, and our customers interests are really allowing us to outpace the competition and most of our traditional competitors are now in our rearview mirror. Right now we're thinking about how do we redefine through our new cloud based service, how do we redefine where the world is going and how do people want to interact with their images and their memories and then how do we help them manage this ever-growing array of digital content that matters to them.

Heath P. Terry - Goldman Sachs Group Inc., Research Division

And within that, what's happening to the cost of finding customers?

Jeffrey T. Housenbold

So Q4 we took leverage and throughout the year, you saw sales and marketing as a percentage of revenue actually go down. And again that's the benefits of scale that we're reaching. It's the benefit of the brand equity that we've been building. And it's just smart optimization. I spent over $3 billion of online marketing in my career, easy to get there when you're spending hundreds of millions a year on eBay and we've always been the first. I believe that great marketers take 10% to 20% of their budgets and allocate it towards innovation. So I was Google's first AdWord's customer ever. Cheryl called us out on Facebook's earnings call about our early adoption of their new platforms. We're constantly trying new things and if it works we do it. We were Groupon's second national customer. If they don't, you move on to the next thing. So we were able -- I'd been at Shutterfly now for 8 years and our cost of acquisition has continually been below $12. And in fact, in Q4, you saw meaningful leverage in sales and marketing. So we think that's all part of that integrated marketing approach and the fact that we continued at InfoTrends just means we have 52% of the market today and when you get in your home and hopefully you guys did this, your 100 cards or so at holiday and you turn them over and they say Tiny Prints or Shutterfly, 80% or 90%, it reinforces the power of the brand and so our customers are very evangelic on our behalf. If you add up our Facebook fans compared to much, much larger companies, we compare incredibly favorable. Our retention rates and loyalty rates, the number of customers that walk in the front door, the virality of that. We don't have true network effects and very few businesses do, but we have positive viral effects and we're enjoying those and increasing scale and success.

Heath P. Terry - Goldman Sachs Group Inc., Research Division

The migration of Kodak seems to have gone about as well as you could have hoped for it to. I guess, one, what was your experience there, and what do you think drove that. And then how does that make you think about future acquisitions along those lines?

Jeffrey T. Housenbold

So pleased by the team across many different functions from the GMs to finance, to the Internet operation guys who had to figure out how to move 5 billion photos in a very short amount of time and 20 petabytes of data or whatever it was. But we did execute really well there. And in the way we talked to those customers, they weren't used to that, our customer-centric friendly approach. We were able to provide a better user experience, better breadth of products, better designs, better user experience and higher conversion rates and all these things. And they responded very favorably. And so that contributed somewhere between $21 million and $23 million of revenue during Q3 and Q4. We've guided $35 million to $37 million for this year. So we saw more people move their photos over to Shutterfly than we expect, but it was free and they didn't have to do anything. We saw less people become transacting customers than we modeled in the quarter, that we've been stealing the best of their customers over years because their business peaked in '07; it's been negative ever since. But those customers responded in a much higher average order value because we took the Kodak experience and modeled a little bit more than that. Well, they look just like Shutterfly customers in the quarter. And again it was the power of putting a better experience into someone who was predisposed to being active in the category. And so we've now done this. If you think about it, Sony shut down Image Station, we got their customers. Yahoo! shut down Yahoo! Photos, we got their customers. American Greetings shut down PhotoWorks, we got their customers. And then this year we got Kodak and Fuji. And so we're the natural go-to to consolidate the industry because people appreciate that they don't have to turn around and tell their customers they're deleting their memories. They would much rather say, "Hey, we partnered with Shutterfly and your memories are going to live on" and they'd get positive press from that. And we take those customers and we're able to strip out all the redundant cost that Kodak had in maintaining their site, creating designs, building infrastructure, all that and just take the customers and then it becomes incredibly accretive. So we think there are a couple more to do in the industry, everything seems to be for sale. We've been approached in the last year -- I told you about international but domestically last year we looked at 41 acquisitions and we did 6 of them. They were all smart and strategic and had a good valuation structure in a way that creates a win-win and we think there's a few more to be done.

Heath P. Terry - Goldman Sachs Group Inc., Research Division

One of those acquisitions was Penguin Digital. What did that bring to Shutterfly's mobile capabilities?

Jeffrey T. Housenbold

I've got a team of 12 or 13 great engineers. People with a shared vision in New York City where I don't have to compete at the same level we do here in Silicon Valley. And these guys, it's amazing, we code freeze October 1 because you don't want to mess with the site going into Q4. And we were going to take their e-commerce platform and merge it into our Shutterfly app and I just showed you an example of that. And I say, "Guys, look. The deal's done. You only have 90 days so let's just plan on launching it in January 1," and this team said, "Bull. We're going to deliver it before your code freeze." And these guys worked around the clock and they delivered it. So what I got was 12 great guys who were energetic, enthusiastic, a shared vision and they want to make their mark on the world in a less competitive environment so I'm building a lot of my mobile capabilities in New York City.

Heath P. Terry - Goldman Sachs Group Inc., Research Division

The manufacturing side of things is something that probably gets missed I think a lot by investors. What advantage does that give you, particularly when you look at optimizing that side of the business, what strategies are sort of available to you?

Jeffrey T. Housenbold

So I think there's 4 or 5 advantages. First, we have about 10 to 12 points better margins than if you outsource. So we get better flow-through. Second is our pace of innovation is much quicker because my product folks are sitting next to my manufacturing R&D folks in a very collaborative way. If you're outsourcing to a commercial printer, like most of my competitors do, that commercial printer is geared towards running a larger scale offset stuff for big clients. And you want to add a 5x7 photo book around the corner is like they're not going to invest in the finishing equipment to do that. So we can innovate much quicker. It also allows me to control quality. We have by far the best quality in the industry. And it also allows me to control service level and expectations of the customer because I know exactly when that order will be printed, when it will drop in the mail stream and when they should expect to get it. So I'm just able to deliver especially there in those peak periods. And then lastly, it creates barriers to success. We have been doing this now for 13 years. We have in manufacturing, manufacturing systems and stuff, we have over $100 million invested and I have 30-plus vendors representing my manufacturing facility. So I go get the best stuff. That's what allowed us to win. Kodak had to have every piece of Kodak equipment. Fuji, Fuji and HP, HP. I have them all. I take the best. And so I drive the highest throughput, the highest quality at the lowest total cost of ownership. And we continue to expand. We have a 100,000 square-foot facility in Phoenix. We have same in Charlotte. We're moving 7 or 8 miles down the road to South Carolina. We're getting increased tax benefits and I'm getting a 300,000 square foot facility, for the same price I'm paying for my 100,000 square-foot facility. So that will allow me to take on additional capacity, expand my commercial and enterprise businesses, be able to add new substrates and formats and do things that my competitors can't do.

Heath P. Terry - Goldman Sachs Group Inc., Research Division

We do have mics in the room. If anyone has any questions, raise your hand. We'll get over a mic to you for the webcast.

Unknown Analyst

[indiscernible] What's the usage pack that you have seen of customers. Do you think in terms of lifetime and how that value has grown?

Jeffrey T. Housenbold

Yes, so we're pretty sophisticated. We look at different things, new versus existing, what channel did they come through, what partner within that channel, what was the first product they activated on, what's the frequency of their purchase behavior, how many photos do they upload, what's the cadence of those uploads. And I would say, there was really a seminal shift about 3 years ago. So in the early days at Shutterfly, we had to get you in on a very simple product and that was usually a 4x6 print. And then we put in front of you what we call a single surface products so take that print and put it on a mug. Then it was like, let's get you into a calendar. Well, calendar is just a sideways photo book. So then let's get you into photo book and we have to migrate you and your LTV went like this. What we saw about 3 to 4 years ago as people became more comfortable with using online services, with creating things, with giving their credit card was, new customers started looking more and more like existing customers and they were coming in and activating on the more complex products like a set of holiday cards or photo books. And so about 3 years ago, we stabbed [ph] about a 15% to 18% gap between the order value of the new versus existing. About 3 years ago, that shrunk. In fact, over the last 2 years new customers have ordered more than existing customers because you're starting to hit the mainstream who are more comfortable in doing things. And so what we see is the hard part is to get you to transact once, then the leaky part of the funnel is 1 to 3. If we get you to 3-plus then your LTV grows larger with Nick Lee [ph]. If we could get you to 10X then you become a super heavy user. That's my wife right now, sweet spot is affluent educated women with children under the age of 10 in the household. And then you move out in concentric circles and your spend goes out. When they become teenagers, they're not around to take pictures. They got pimples and they don't want you to take their pictures. And what's nice for us is there's a new cohort that comes through every year. There's 4 million births, 2 million weddings and so some people go, well, young people don't print. Young people don't print because they don't have a credit card. They don't have a home and they haven't gotten engaged. They haven't had a baby, and they don't know that they have grandparents that they have to make happy. And so we're creating new digital products and new platforms and we're not saying that there's not a shift in technology and behavior but it's not as people think that people aren't going to print. People are going to print. You can't give a digital photo book as a wedding gift. There's gifting occasions that a physical product really matters. We're doing a focus group. I see Sophis sitting right behind you. And one of the interesting things that he had done when he was at Piper was he'd get this panel together in Laguna of young kids. And we'd all sit, bunch of middle-aged people sitting in the audience and he put a bunch of 16- to 25-year-olds up and in the early days of "what's this MySpace thing?" and "pimping out your page" and Facebook and all these things. And we all would be wide eyed open. Well, we do the same thing internally. And what they tell us is, "Oh my God. No one ever sends me anything in the mail," "I got this tree card, it was the most special thing." They're so delighted when they get a physical thing because they don't get it. They're doing text messaging. That was probably Cisco's earnings, sorry. And so it's not that they don't want to print and touch. We just have to do it in a tone and a voice and a set of designs and in a way that meets their new set of social norms. And we do that and we evolved and we're excited about that.

Unknown Analyst

Focus in your orders [indiscernible] mobile [indiscernible]. Is there any way you can quantify versus a year ago?

Jeffrey T. Housenbold

Yes, the question is, how much has come through mobile? How do you quantify its impacts? So we haven't given specific metrics. Up until 3 months ago, you couldn't order over a mobile phone, so it's 3 months old, but the uptake is really nice. It's not going to move the needle -- Picture of me and Heath. And so it's not going to move the needle this year. But the trajectory is really nice and what we're seeing is, I thought there was going to be some Q4 seasonality. We're really not seeing it because it's so narrow, it's a small base. It's still up into there. What you'll see throughout 2013 as you'll see us launch another 4, maybe 5 mobile initiatives this year and as you enter into 2014 and beyond, I think it will start to show up in a more meaningful way. And we're excited about that.

Unknown Analyst

[indiscernible] new products or features [indiscernible]

Jeffrey T. Housenbold

Yes, yes and new services, new products, new features, new capabilities taking advantage of those mobile devices for that targeted demographic against that need.

Unknown Analyst

Can you talk a little bit more about the Enterprise business? What's the value proposition there? And obviously, it's been growing at a fast rate but it's off of a very small base, what can you do to accelerate that?

Jeffrey T. Housenbold

Yes, very pleased by Enterprise. It's our fifth year, first year was 2, second year was 5, third year was 8 and 13, now 27. So it's not going to grow 100% a year forever but very happy about that. And the strategy was the following. I've been here 8 years now. My first 3 years, I just pounded my head against the wall trying to smooth out seasonality. Not because I cared but because you guys kept saying, "Hey it would be nice if you get to breakeven in Q1, Q2, Q3, that will make us feel better." I don't care anymore because my job now is to make Q4 bigger. My lesson learned was -- I still care about you guys, don't worry, was it doesn't matter if you have a baby in February or a wedding in June. Most of your giftgiving is going to occur in the fourth quarter. So I went out added Mother's Day and Father's Day and wedding and baby, and those all went up but Q4 kept getting bigger and bigger and bigger. And it's a retail model and you got to get comfortable with that just like if you're investing in in2it or Amazon or Google. And so I have this fix capacity, I have these trained employees. I have these Ferrari digital presses and I have depreciation flowing through my balance sheet and P&L. And so Enterprise was really a backhaul strategy. So I have available capacity in January 1 through December 1. And so how do we utilize it? We looked at different models, and we didn't want to do the micro-targeting like at Vistaprint. What we said was, we rather have 20 or 30 accounts doing $1 million to $20 million each. Knowing that it's going to take a longer deal cycle, but what we do, there's not a single company who have said no to a meeting to us because they all go, "Oh my God. My wife loves you. Sure, I want to meet you." And the fact is -- the other fact is because we don't sell into the procurement office, we're selling into the cheap marketing offices. And they love what we do from a marketing and a brand standpoint now, our sophistication in ROI, in analytics and data merge and stuff. And we go in and we say "Look, you're spending $100 million or $300 million," or one of our clients, AT&T, spends close to $1 billion a year on direct mail. And we say, "Give us $1 million or $2 million. We will help you drive higher ROI and conversion rates from having true one-to-one marketing in snail mail like you do in e-mail." So we take their merge, so for AT&T, they have U-verse. But instead of being offended like I've been an American Express card holder since '87. I can't tell you how much it offends me they're wasting paper and 14 times a year they send me to get the green card in the mail, or the gold card or the small business card or whatever. Or they target me on Facebook, I'm tired. I've been a customer since '87. So what we did is AT&T gives us their database, and they tell us, are you a cell phone user, an Internet user or a cable user or home phone user? We know your zip code. They know something about your background ethnicity or gender so if you're an African American male living on the upper West side, the actors on the piece of direct mail are going to be different. I know you have mobile sung [ph] and a cellu-home package. I'm going to offer you a discount and it's truly one-to-one marketing. The per-price for that piece is more expensive than just getting a generic offset piece but the conversion rates are much higher and so they're happy to pay for us. And so we've signed up Dell, AT&T, UnitedHealth Group, the GAP, Harley-Davidson, Omaha Steaks, big Fortune 1000 customers we're going after. It's going to be lumpy. It looks like an enterprise sales. I have 3 salespeople, delivering $27 million of revenue. That's not bad. I'm happy to pay their commission. And we think there's a big opportunity. Our current footprint of capacity would allow me to make that a $100 million business. And kind of that scale, which you start to approach at $40-ish million, maybe $50 million, you should expect about 30% flow through to free cash. And historically, our mean trading has been 20x pretax, free cash. Got $38 million outstanding. We got a buyback to offset the stock-based comp dilution, and you kind of do that, and there's $8 to $12 sitting in Enterprise that's not baked into the price right now.

Unknown Analyst

Okay. Jeffrey, I appreciate you taking the time.

Jeffrey T. Housenbold

Thank you for having me. Thank you.

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Source: Shutterfly, Inc. Presents at Goldman Sachs Technology & Internet Conference 2013, Feb-13-2013 02:00 PM
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