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Shutterfly (NASDAQ:SFLY)

Q1 2013 Earnings Call

May 01, 2013 5:00 pm ET

Executives

Michael Look - Vice President of Investor Relations

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

Brian M. Regan - Chief Financial Officer and Senior Vice President

Analysts

Naved Khan - Cantor Fitzgerald & Co., Research Division

Colin A. Sebastian - Robert W. Baird & Co. Incorporated, Research Division

Paul Judd Bieber - BofA Merrill Lynch, Research Division

Kerry K. Rice - Needham & Company, LLC, Research Division

Shawn C. Milne - Janney Montgomery Scott LLC, Research Division

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

Kevin Kopelman - Cowen and Company, LLC, Research Division

Brian Patrick Fitzgerald - Jefferies & Company, Inc., Research Division

Trisha Dill - Wells Fargo Securities, LLC, Research Division

Nishant Verma - Morgan Stanley, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Shutterfly First Quarter 2013 Financial Results. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce the host for today's conference, Michael Look, Vice President of Investor Relations. Please go ahead.

Michael Look

Thank you, operator. Good afternoon, everyone. Welcome to Shutterfly's first quarter fiscal 2013 conference call.

With us today are Jeff Housenbold, Chief Executive Officer of Shutterfly; and Brian Regan, Chief Financial Officer.

By now, you should have received a copy of our earnings press release, which crossed the wire approximately 1 hour ago. If you need a copy of the press release, you can go to shutterfly.com under the Investor Relations link to find an electronic copy. We've also released a presentation that we will use as we go through this call.

Call participants are advised that the audio of this conference call is being recorded for playback purposes and that a recording of this call will be made available on our website within a few hours. You can access these recordings through our Investor Relations section of our website at shutterfly.com.

Before we begin, I'd like to note that our discussion today will include forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. These forward-looking statements include statements about our business outlook and strategy, the share repurchase program and statements about our historical results that may suggest trends for our business. For more information regarding these and other risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in these forward-looking statements, as well as risks related to our business in general, we refer you to the sections entitled Risk Factors in the company's most recent annual report on Form 10-K and its other filings with the SEC.

I would also like to note that any forward-looking statements made on this call reflect information and analyses as of today.

This presentation contains certain financial performance measures that are different from the financial measures calculated in accordance with GAAP, and may be different from calculations or measures made by other companies.

A quantitative reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures is available in our first quarter fiscal 2013 earnings press release, which is posted on the Investor Relations section of our website at shutterfly.com.

Now I'd like to turn the call over to Shutterfly's CEO, Jeff Housenbold. Jeff?

Jeffrey T. Housenbold

Thanks, Mike. Good afternoon, everyone, and welcome to our first quarter 2013 earnings call. I will begin today's discussion with an overview of our Q1 financial results and progress, and then turn the call over to Brian for a detailed discussion of our first quarter financial results, followed by our financial guidance for Q2 and full year 2013. We will then open the call up for your questions.

As you can see from our press release issued earlier today, 2013 is off to a solid start with better-than-expected Q1 revenue and profitability, as well as the completion of another strategic acquisition that will expand our customer base, increase revenue and add new Photo Book customization options to our platform. Let me briefly discuss these achievements in greater detail, starting with our summary of financial results.

During the first quarter, net revenues grew year-over-year for the 49th consecutive time to $116.7 million, an increase of 28% from the same quarter a year ago, and adjusted EBITDA was $3.3 million, up $2.7 million from the prior year. Our Q1 revenue and adjusted EBITDA results were above the high end of our guidance ranges, and were mainly driven by solid growth in our Consumer business across all major product groups and operational efficiency gains resulting from our increased scale.

On the Consumer side of our business, top-of-the-funnel activity remained robust as our investments in integrated marketing campaigns continue to increase consumer awareness and engagement across our 4 lifestyle brands.

In Q1, we saw accelerating double-digit growth in visits, registrations and uploads, which translated into 20% year-over-year increases in both unique transacting customers and orders.

During the quarter, we continue to optimize our pricing and promotional strategies resulting in lower customer acquisition costs as a percentage of revenue and a 7% year-over-year increase in average order value.

Our ability to consistently expand our customer base and drive profitable revenue growth at a rate higher than the broader e-commerce sector confirms that our singular focus on consumers and our unwavering commitment to innovation, outstanding product quality, stylish designs, exceptional customer service and overall value are resonating well with consumers and continue to differentiate Shutterfly from our competition. And we believe that we are still in the early stages of the digital transformation of multiple multi-billion dollar markets, and continue to make strategic investments in our business to capture more of this secular shift.

Delivering innovative and compelling high-quality products and services has always been at the forefront of our strategy. Consistent with that strategy, during Q1, we enhanced our world-class platform of personalized products and services by introducing several new innovative offerings.

Let me highlight just a few of them. We expanded our premium Photo Book options by introducing matte finish photo covers, added stainless steel travel mugs, pillows and new magnet sizes and designs in our Photo Gift and Home Decor category, and added Tri-Fold cards to Wedding Paper Divas and enhanced the personalization capabilities. We also made several enhancements to Treat, including new designs, expanded occasions, the ability to order personalized gifts and a faster mobile app experience. All of these premium content options and product enhancements further differentiate us in the marketplace and increase order value.

In addition to growing our Q4 brands, Shutterfly and Tiny Prints, investing in mobile, wedding and Treat, we made solid progress against our new cloud service and Enterprise offerings.

In addition to our integrated marketing campaigns, we continue to partner with other leading brands to increase the awareness and trials of our products. For example, earlier this month, we joined forces with Hallmark to launch the One-of-a-Kind creations collection, leveraging Hallmark's network of thousands of Gold Crown store locations in the U.S. This new personalized gift collection offers consumers creative ways to display their favorite photos, utilizing a collection of frames that include customizable family tree designs and collages of photos with the silhouette or monogram. This in-store personalized product introduction is just one example of how we are leveraging our market leadership through partnerships to increase awareness and trial of our products, and accelerate the transformation of the social expression and personal publishing markets from offline to online.

So far this year, we have signed deals with 18 additional leading brands, including Nordstrom, Johnson & Johnson, Kellogg's, J. Crew, Infomo, JetBlue and NASCAR, bringing our total number of active partnerships to more than 100.

In addition to our web-based enhancements, we continue to invest in mobile as a key strategic growth area. Our goal is to give consumers the choice and convenience of preserving, sharing and transforming their memories into high-quality photo products regardless of device, platform or location. We are committed to being a leading innovator in mobile, and in the last 9 months, we have introduced several new mobile applications, including our Treat, Shutterfly and Share Site iPhone applications, as well as our better mobile experience through the launch of our M.dot enabled websites. Much of our mobile development has accelerated since our acquisition of Penguin Digital last year. And now, we have more than 1.6 million active quarterly mobile users, all supported by very positive consumer feedback and app store ratings. Going forward, we will continue to enhance our consumer mobile experience by introducing new features and functionality through our mobile platforms and expanding the number of devices, platforms and products that Shutterfly supports.

We also continue to make strategic, disciplined acquisitions as evidenced by yesterday's announcements that we have acquired MyPublisher. Founded in 1994 and based in New York, MyPublisher was one of the original Photo Book pioneers in our industry. Over the past decade, MyPublisher has introduced numerous innovations to the Photo Book industry and built a loyal base of customers using its desktop client software and specialized in-house manufacturing capabilities. This acquisition will expand our customer base, accelerate our revenue growth and enable us to further differentiate our product and service offerings.

Over time, we will incorporate some of MyPublisher's Photo Book customization options into Shutterfly's leading online Photo Book creation path, providing consumers with a broader set of product and service offerings. However, for the time being, the MyPublisher and Shutterfly Photo Book platforms will remain separate, offering customers multiple creation path options for Photo Books. MyPublisher's non-Photo Book customers will be redirected to Shutterfly and introduced to our industry-leading portfolio of personalized photo products, including cards and stationery, calendars, photo gifts and home decor.

Lastly, I want to provide a brief update on our ongoing efforts to expand our East Coast manufacturing operations. Currently, our Fort Mill project is on schedule and within budget. We have already begun, on a limited basis, to fulfill small quantity orders through our Fort Mill facility. And over the next few months, we'll start ramping up production before eventually shifting to all of our East Coast production from Charlotte to Fort Mill before this year's holiday season.

In summary, I am pleased with our continuing momentum and ability to sustain such a high-level of executions across our business as we continue to leverage our scale and scope economy, integrated marketing platform, vertical integration, solid balance sheet and profitable business model to differentiate ourselves from our competitors, extend our market-leading position and deliver profitable growth over a prolonged period of time.

We are making significant progress towards transforming the multibillion dollar social expression and personal publishing markets from a largely static and offline experience into a dynamic, online digital experience, and believe that our market opportunity remains significant, and that the strategy that have enabled us to merge as the online marketshare leader will continue to distinguish us from the competition.

With that, I will now turn the call over to Brian to review our financial results and outlook in greater detail. Brian?

Brian M. Regan

Thanks, Jeff, and good afternoon, everyone. I'll begin my comments today with some observations about our first quarter performance, key metrics and operating results. I'll then conclude with an overview of our Q2 financial guidance and an update to our full year outlook for 2013 before opening the call up for your questions.

Earlier today, we posted first quarter results that were better than the high end of our guidance ranges for net revenues, adjusted EBITDA, net loss and EPS.

Taking a detailed look at our results, net revenues for the first quarter totaled $116.7 million, a 28% increase over the prior year and above the $110 million high end of our guidance range. Consumer revenue totaled $109.8 million, reflecting 29% year-over-year growth, largely driven by solid performance across product lines led by Cards & Stationery, Photo Books and Photo Gifts. Net revenue from our Enterprise business grew 12% over the prior year to $6.9 million, reflecting a modest delay in the timing of orders from one of our largest established customers.

As Jeff alluded to earlier, consumer engagement remained robust during the quarter as we experienced accelerating double-digit growth in visits, registrations and uploads. These strong metrics translated into a 20% year-over-year increase in transacting customers and 20% growth in orders, for roughly 2.25 million unique transacting customers who generated more than 3.4 million orders across our 4 lifestyle brands.

Average order value for the first quarter was $32.13, up more than 7% from the prior year, as we continue to realize benefits from a number of pricing and promotional strategies that we continue to refine in Q1 after a successful launch of these plans in advance of the 2012 holiday season.

Moving to cost of revenues and gross margin. Gross margin in the first quarter was 47%, 183 basis points higher than our gross margin last year and meaningfully above the 44% high end of our guidance range. Q1's higher gross margin reflects the aggregate benefits of higher unit volumes, favorable product mix and higher average selling prices, as well as improvements in our labor efficiencies and shipping rates and a slightly lower mix of Enterprise revenue in Q1.

Turning now to operating costs. Excluding stock-based compensation, OpEx totaled $67.8 million dollars, reflecting the increased cost structure from M&A activity in the past 10 months such as ThisLife, Penguin and Photoccino, plus purchase accounting amortization and scale and innovation investments that we announced on our last conference call.

Looking more specifically at our operating expense components, technology and development costs totaled $24 million for the quarter or 21% of net revenues. Excluding stock-based compensation and depreciation, our technology and development spending increased approximately $4.3 million or 32% from the prior year.

Q1's increase in technology and development spending largely reflects the incremental costs associated with our acquisitions of Photoccino, Penguin Digital and ThisLife, as well as increased investments in technology and development headcount.

Sales and marketing expenses totaled $34.9 million in the quarter, representing 30% of net revenues and consistent with Q1 of last year. Excluding stock-based compensation and amortization, sales and marketing expense increased 27% from the prior year to $27.1 million or 23% of net revenues, and also in line with Q1 of last year.

Q1's customer acquisition costs as a percentage of revenue were approximately 13.5%, which is more than 50 basis points more efficient than the prior year. Sales and marketing expense was primarily driven by investments in direct response and performance marketing campaigns, brand awareness initiatives, as well as additional sales and marketing headcount.

General and administrative expense for the quarter totaled $19.9 million or 17% of net revenues. Excluding stock-based comp and credit card processing fees, G&A expenses represented 10% of quarterly net revenues, which is also flat year-over-year.

Adjusted EBITDA for the quarter was a positive $3.3 million and significantly better than the $2.5 million to $3 million adjusted EBITDA loss range we guided to.

Our favorable Q1 EBITDA results reflect the combined effect of solid revenue growth, continued operational efficiencies and a shift in the timing of some headcount and marketing investments into later quarters.

The effective tax rate for the quarter was 48.5%. And on a GAAP basis, our net loss for the quarter totaled $12.4 million or a loss of $0.33 per share, favorable to our guidance of net loss per share of $0.39 to $0.42 per share.

The weighted average shares used to calculate the net loss per share totaled 37 million shares, which is higher than our recent guidance due to a greater number of stock options exercised in Q1.

Finally, capital expenditures during the quarter totaled $14.3 million, including $5.7 million for technology equipment and software, $5.1 million for manufacturing equipment and building equipments and $3.5 million in capitalized software development costs.

Cash and liquid investments at quarter-end totaled $154.5 million. In addition, we continue to have access to up to $125 million in currently available funds from our untapped revolving credit facility.

To conclude our prepared remarks today, I'd like to summarize our outlook for the second quarter and the full fiscal year 2013, including the estimated impact of our acquisition of MyPublisher as of the April 29 effective close date of the transaction that we announced yesterday.

As Jeff stated at the start of this call, 2013 is off to a solid start. Our commitment to innovation, design forward products and services, customer-friendly policies and industry-leading quality continues to enable Shutterfly to differentiate ourselves from the competition, and has so far resulted in solid customer growth and financial performance.

The competitive landscape, however, remains uncertain as we continue to see elevated discounts and behavior from our competitors throughout Q1 and into the current quarter. In addition, we are mindful of the current state of the economy and fragile nature of consumer discretionary spending. All of these factors, combined with our initial estimates for MyPublisher, are incorporated into our Q2 and full year guidance.

In terms of net revenues, we expect stable, non-holiday growth rates with increased activity heading into Mother's Day, Father's Day and graduation periods. In addition, we expect increased performance across our Cards & Stationery categories with incremental contributions from Wedding Paper Divas during key wedding seasons.

In terms of cost structure for 2013, we expect to incur approximately $3 million to $3.5 million in onetime acquisition-related costs for MyPublisher during 2013. These costs include professional fees and deal costs to complete the transaction in Q2 and transition costs through the integration process for the next few quarters.

In addition, we estimate our 2013 GAAP financial results will include purchased intangible amortization and depreciation of MyPublisher assets amounting to approximately $7.5 million for the full year, and roughly 1/2 of those D&A charges will be incurred in Q2.

With these comments in context, we now expect net revenues in Q2 to range from $118 million to $121.2 million, which reflects year-over-year growth of up to 22.4%.

We expect our Q2 GAAP gross margin to range from 45.5% to 46% of net revenues, and our Q2 GAAP operating loss to range from $35.3 million to $36.8 million.

We estimate our adjusted EBITDA for Q2 will range between a loss of $1.5 million and a loss of $3 million, and that our GAAP effective tax rate will range between 39.5% and 40.5%. We expect the GAAP net loss per share to range from a loss of $0.55 to a loss of $0.58 per share based on approximately 38.1 million weighted average common shares.

Turning now to the full year. We are now increasing our projected 2013 net revenues to total between $766 million and $771 million, which reflect year-over-year midpoint growth of 20%. And we are increasing our full year GAAP gross margin to range from 53% to 53.4% of net revenues. We currently forecast that our GAAP operating income will be approximately $12.7 million to $18.9 million, including the incremental depreciation and amortization charges related to MyPublisher that I just described. And we are reiterating our estimate that our full year 2013 adjusted EBITDA margin will be 18% to 19% of net revenues or $137.7 million to $146.8 million.

The full year GAAP effective tax rate is now expected to range from 32% to 34%, reflecting deductions from disqualifying dispositions of incentive stock option exercises year-to-date, as well as Congress' retroactive passage of Federal R&D tax credits for 2012 and 2013.

We now expect full year GAAP net income per share to range from $0.20 to $0.30 per share, partially based on an upward revision to projected share count now forecasted to be 39.9 million weighted average diluted shares.

The change in full year GAAP EPS from our prior outlook reflects 3 primary drivers: one, higher depreciation from a greater mix of purchased versus leased equipment in our facilities and accelerated deployment timing; two, as I alluded to earlier, MyPublisher deal, transition and depreciation and amortization costs; and three, the impact of a higher stock price on stock-based compensation and higher share count from option exercises.

And finally, we continue to expect that 2013 capital expenditures will range from 9.4% to 10.4% of net revenues, so our CapEx guidance remains unchanged.

In summary, we believe that our initial Q2 and revised full year 2013 financial guidance gives appropriate weight to our most recent business performance, the current and anticipated market conditions and the expected impact of our MyPublisher acquisition.

So with that, I'd like to thank you for your time today and open the call up for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Youssef Squali from Cantor Fitzgerald.

Naved Khan - Cantor Fitzgerald & Co., Research Division

Sorry, it's actually Naved Khan for Youssef. Just a couple of questions, so one on the guidance, Brian, how much contribution are you baking in and from the MyPublisher acquisition in your second quarter and the full year outlook? And then can you also comment on the -- or give us some more color on the competitive landscape as it pertains to Snapfish and Cardstore, which is now private as a part of American Greetings, and how is sort of that affecting your strategy and your ability to price? I see that your AOVs were actually up nicely in the first quarter, so can you elaborate on that?

Jeffrey T. Housenbold

Sure. Naved, this is Jeff. Let me talk a little bit about MyPublisher because I think there's been some confusing data out in the marketplace that wasn't audited in financials. The MyPublisher acquisition, which is another smart, strategic tuck-in for us, we used all cash. We paid about 1.1x trailing 2012 revenue, about 5.5x EBITDA for that, and they've been kind of shutting down marketing and starving marketing over the last 12 to 14 months, so it's a slightly declining asset. We're going to be shutting down their calendars and their cards and their photo gifts part of their website and redirecting people to Shutterfly. And so there's some uncertainty as to what the capture rate will be there. For the full year, given that we're only going to be recognizing revenue from May 1 onwards, we're estimating $18 million to $20 million in the full year guidance. It will be slightly EBITDA positive for 2013 as we go through some severance costs, transaction costs, Sarbanes-Oxley costs and other transition costs. And then in 2014, the EBITDA should exceed that of the core Shutterfly business because of the synergies and the scale economics that we get from our manufacturing and shipping and labor utilization.

Brian M. Regan

And just one clarity on the MyPublisher cost, the split between Q2 and the full year, as I indicated in the prepared remarks, we are expecting around $3 million to $3.5 million of onetime non-recurring deal and transition costs, predominantly in Q2, and then roughly $7.5 million of accelerated depreciation and amortization for the full year. And about half of that will also incur -- be incurred in Q2. So that is all baked into our guidance.

Jeffrey T. Housenbold

And that's why that's a large part of the shift you see in the GAAP EPS guidance, and we'll talk more about that as well. In terms of competitive landscape, I think as we continue to execute against our winning strategy, we continue to gain market share, we are becoming the destination of choice for people who want to preserve and do more with their memories. We think that the smaller players in the market, given their volatile pricing, becomes less important to the success of Shutterfly. We're focused on our strategy, on optimizing our pricing and promotion and lifetime value, and I think you saw that in Q4, and you saw that again in Q1 as we were able to increase the average order value by 7% even in a quarter where all competitors were still doing heavy discounting because of our premium offering, our ability to upsell and cross-sell and our ability to capture customers at a lower cost because of our brand awareness.

Unknown Analyst

Okay, that's very helpful. So just to go back to MyPublisher, you mentioned in your prepared remarks that, I guess, in the near-term at least, you operated as a separate entity. But over time, what's the plan here? I mean, do you sort of plan to integrate the back end operations and move the production to your East Coast and West Coast -- or East Coast and Phoenix operations? And then can you talk about the opportunity in the marketing, sales and marketing line?

Jeffrey T. Housenbold

Yes. So we, through the acquisition, we're picking up their 42,000 square foot facility in Westchester County, New York. We will be keeping that and continue to operate the MyPublisher production because they have different sizes and different kind of binding and features than the Shutterfly Photo Book line. We'll also be able to, over time, do some of our Enterprise printing out of that facility and perhaps some of the Shutterfly and Tiny Prints production for northeast customers as well. So we'll be picking up a third manufacturing facility through this transition. And we're upgrading their fleet of digital presses, which were running on an older version than we run on. And so that's part of some of the CapEx that we'll spend this year that's included in our guidance for the full year. As it relates to sales and marketing, MyPublisher actually turned off all marketing last year. They redirected their investments into rewriting their platform from a Flash, Flex base 1 to HTML5. We're shutting down part of that, which is the accelerated amortization and depreciation that Brian spoke about. And so you have a slight -- a downward decay of the user base from that lack of advertising dollars behind it. So we will, once we integrate it, we will take a fresh look at what the appropriate level of investment from sales and marketing is for that brand, but our anticipation of total spend at the ink level is incorporated in our guidance today.

Operator

Our next question comes from Colin Sebastian from Robert Baird.

Colin A. Sebastian - Robert W. Baird & Co. Incorporated, Research Division

Brian, it looks like organic growth rate in the quarter was somewhere around 20% year-over-year, if you could just check my math on that. And then Jeff on the mobile business, thanks for providing some more data on the active user base there. I was wondering how many of those users are also transacting if this is becoming a funnel for new demographics, for example, or how much overlap is there among your existing paying customer base?

Jeffrey T. Housenbold

Yes. On the mobile front, we're pleased in the last 9 months, as I indicated in my prepared remarks, we've launched a series of mobile initiatives, updated Shutterfly iPhone app, a Treat iPhone app, a Share Site iPhone app. We also M.dot-enabled our websites so that users coming through tablets and smartphones can access portions of our site. We're continuing to invest on the tech and dev line in upgrading our Flash and Flex base creation paths to HTML5. And we'll continue to do that over the next 12 months so that all of the features and functionality will be available to consumers across any device that they're using, and we'll continue to expand our anticipation as to incorporate Android, as well as iOS devices in the future. We're pleased that in Q1, we saw about 4% of revenue coming from mobile, which is -- it's a nice start from a base of 0 just a couple of quarters ago. And so our goal and strategy is to be device-agnostic, platform-agnostic and provide the most choice for our customers. And with MyPublisher, we picked up a desktop client as an alternative creation path for Photo Books, which just furthers our kind of ecosystem and ability to offer customers where they want and how they want to create and interact with their memories. On the organic growth rate, it was roughly 19% to 20% for Q1.

Colin A. Sebastian - Robert W. Baird & Co. Incorporated, Research Division

Great. And one quick follow-up on the promotional environments and the gross margin. Brian, where we -- should we read into your comments that the promotions or the competitive pricing is a little more elevated than you had expected going into the quarter? Or is it sort of stable with your expectations?

Brian M. Regan

Yes, Colin. It's about the same as our initial expectations, so it hasn't abated tremendously from really 2012 from what we saw, but you definitely saw a 60% to even 75% off by a number of competitors, particularly in Photo Books. So about similar to our expectations.

Jeffrey T. Housenbold

Yes, one other interesting piece of color. So as of today, we've been approached year-to-date by 43 companies about potentially acquiring them. So we've seen the books of 43 companies, and we chose to do the MyPublisher acquisition out of all of them. They had positive EBITDA, and they had revenue. What we've seen in many of our smaller competitors as they're approaching us is that their promotional activity is a nonprofitable enterprise for them, that they continue to get one-and-done types of customers through flash sales, and they tend to overinvest trying to gain scale. And so many of them are struggling to raise their next round of funding, and so we expect there to be continued kind of shakeout in the industry as we move through '13 and '14.

Operator

Our next question comes from Paul Bieber from Bank of America Merrill Lynch.

Paul Judd Bieber - BofA Merrill Lynch, Research Division

Two quick questions. I think you commented on the intense competitive landscape, and then you gave a new metric that the customer acquisition costs are down. I think you said 50 basis points year-over-year as a percentage of revenue. Can you help us to reconcile just for competitive landscape and the fact that you're seeing more efficiency in customer acquisition? And then secondly, just a quick follow-up on MyPublisher, you've mentioned a few times that there's some customizable manufacturing capabilities, and I was wondering if that capability opens you up to a new market segment that you're not really currently serving?

Jeffrey T. Housenbold

Great. Yes, so on the customer acquisition costs, Brian was trying to provide a little more color, but I wouldn't read too much into and in that. In the 8.5 years I've been at Shutterfly, our customer acquisition costs have remained below $12 on average. They moved from quarter-to-quarter. Obviously, Q4, they rise given the competitiveness from retailers trying to capture consumers' mind share. But we're getting better leverage. Our unaided brand awareness is up meaningfully in the last 5 quarters. And so as Shutterfly becomes bigger, our scale and our brand equity is allowing us to get more effective recognition at the top of the funnel. And then our continuous improvement across our e-commerce platform is getting higher conversion rates and we continue to tinker with our pricing promotions and our integrated marketing constantly optimizing that. You saw in Q4, we did our first real television commercial campaign. We're in market now for Mother's Day and Father's Day. So that's a new element into the integrated marketing, and it's lifting all boats as it's providing top of the awareness, top-of-the-funnel awareness list on making the working dollars work harder. So we think as we continue to increase the scale of the company, we should get more and more effective leverage out of sales and marketing. And as we launch our memory cloud service, we believe that will create additional stickiness into the ecosystem. As it relates to MyPublisher, they have what I'd call more finishing and bindery options available than on core Shutterfly, and they ran their manufacturing facility well, but more in a batch-like fashion versus the high-speed lines that Shutterfly does. I think they also have some semi-pro photographer segments, and what I'll call more intense digi-scrappers. And so we think this is a nice complement to our kind of mainstream Photo Book customer, and allow us to push more on wedding, semi-pro and kind of heavy digi-scrapbooker.

Paul Judd Bieber - BofA Merrill Lynch, Research Division

Okay. And one quick follow-up question. I think you said mobile was 4% of revenue, and I think the app was e-commerce-enabled when you released the new app in January. So did mobile effectively go from 0% to 4% from January to the end of the quarter?

Brian M. Regan

Yes. We launched the monetizable component of our app late November. So it went from de minimis in December to about 4% in the first quarter. So we saw -- and that includes not just the mobile app, but that's people coming through our M.dot-enabled websites as well. So that's a nice start, and we'll continue to track that, and we won't be disclosing that as a metric in the prepared remarks, but from time to time, we'll give you guys updated color on them.

Operator

Our next question comes from Kerry Rice from Needham.

Kerry K. Rice - Needham & Company, LLC, Research Division

Just a couple of questions. On the Enterprise business, you mentioned that the timing of some orders slipped from your largest customer or from a large customer. Can you talk about, did those then -- have they -- have the orders been completed now or did they get pushed out further than Q2? And then regarding MyPublisher, I think they also had some international revenue. Could you talk a little bit about maybe what your strategy is with potentially growing that business or looking more international? And then the final question is on the cloud service offering. Is that on track, still to be introduced later this year? Or can you give us any update on that?

Jeffrey T. Housenbold

Sure. On Enterprise, what we've been saying is it's a relatively new business for us. It looks more like Enterprise sales, and will continue to be lumpy. One of our largest customers was evaluating to go private transaction during Q1. And so we're delaying some of the expenditures. We've seen some of those projects start to come in here in the early part of Q2. And so that's nice. We're still very excited about Enterprise as an opportunity for us, and we're delighted by the progress we're making. But from quarter-to-quarter, the inflow of revenue and customers will continue to be lumpy until we get greater scale, but we're on track for our full year expectations internally. As it relates to MyPublisher and international, they had a very de minimis amount of international revenue similar to Shutterfly, where we'll ship anywhere in the world. With their desktop client, it's actually easier for non-U.S.-based residents to be able to create. Most of that is English speaking with U.K. and Canada. And we continue to be excited about the potential to be a global company, and we're looking at build-by-rent scenarios across a host of different opportunities. But as you look across Europe, they're still having a lot of macroeconomic malaise, difficult for an American company to build it alone in China, India, Japan and Korea, so that likely is more partnership-focused. But the aspiration is to be a global company at some juncture here over the next few years. On the cloud service, we're on track. We anticipate the launch of our new cloud service later in this year. And we're excited about the early receptivity that we're getting from focused groups and other market testing that we're doing. And because we're in a unique position of managing more than 19 billion images today, we're more than just a storage. And then in aggregation play, we actually have the ability to go end-to-end from aggregation, deedoop management, smart product creation. And given our business model, we're able to capture both a subscription-based revenue stream upfront plus the downstream product creation from an e-commerce standpoint. So we're excited about that initiative, and we'll give you guys an update on the next call.

Kerry K. Rice - Needham & Company, LLC, Research Division

Can I ask 1 follow-up question, maybe for Brian? Guidance, particularly for OpEx, is that also -- what -- maybe what percentage of that is related to MyPublisher versus just adding, continually adding some heads and additional resources around R&D, new products and facilities?

Brian M. Regan

Sure. I'd say, Kerry, in the overall total, last quarter, we actually did allude to around $10 million to $15 million of strategic investments that Jeff broke down between Enterprise, wedding, Treat, cloud, mobile, et cetera. And that's still roughly around $12 million to $17 million. MyPublisher is effectively -- the overall growth year-over-year that you can see in our overall cash OpEx, the increase itself, it's worth about 1/4 of that. So we're looking at somewhere between $12 million and $13 million of total OpEx, cash OpEx that's coming in from MyPublisher. So it's a shape -- it's a chunk of that cost, but it's certainly not the largest driver.

Operator

Our next question comes from Shawn Milne from Janney Capital Markets.

Shawn C. Milne - Janney Montgomery Scott LLC, Research Division

Could you, just on a -- maybe you can provide a couple more details on MyPublisher? My understanding is their AOV is quite a bit higher than yours, if you want to provide any color on that? And then just on the second quarter guidance, what kind of organic growth rate's baked into that? I mean, and if you strip out MyPublisher and some of a bit of a Kodak impact that looks actually quite a bit lower than what you just put up, if you can clarify that?

Jeffrey T. Housenbold

Yes. MyPublisher, we're not going to be disclosing the particular metrics, but they've been largely Photo Book-focused, which is our highest AOV category on Shutterfly. So they do very little in cards, calendars and the like. So their average AOV is higher than the Shutterfly AOV. So that will have some positive benefit to Shutterfly. But given their revenue base onto our base, it's a relatively small impact on a full-year basis from an AOV standpoint. On Q2 guidance, we're not going to be breaking out Kodak specifically or MyPublisher for Q2, we did provide the 18% to 20% for the full year. I think you're seeing an appropriate level of Q2 guidance here as the Q4 is still several quarters away from us. We still have some transition costs in the model to get MyPublisher right, but we feel good about where our customers and orders are going. They were up about 20% for the quarter, 7% on AOV. And so given where we are with the macroeconomic uncertainty, I think the Q2 guidance is appropriate.

Shawn C. Milne - Janney Montgomery Scott LLC, Research Division

And just a quick follow-up to that. I mean, does it -- split out the Cards & Stationery, is MyPublisher more Q4-weighted?

Jeffrey T. Housenbold

They're actually a little less Q4-weighted than Shutterfly, not a whole lot, but they're a little more balanced in the first 3 quarters of the year than Shutterfly is. If you were using a rough model, I'd say 20-20, 20-40, would be a good way to approximate.

Shawn C. Milne - Janney Montgomery Scott LLC, Research Division

Okay. And then lastly, was there any material impact on your business from Easter, leap year?

Jeffrey T. Housenbold

We looked at it. It was obviously a slight impact, but given the scale of the business now, not meaningful.

Operator

Our next question comes from Heath Terry from Goldman Sachs.

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

Just I guess one quick kind of clarification on the mobile side of things, I know we've talked about it a good bit here already, but the 4% of revenue, how does that compare to what you're seeing from a traffic standpoint? And as you look at the growth that you're seeing in overall traffic to the site, how does that break down between desktop and mobile at this point?

Jeffrey T. Housenbold

Yes. Heath, consistent with, I think, Internet Retailer put out a study a couple of weeks ago, most retailers are seeing somewhere between 18% and 30% of their traffic now coming from mobile devices. We're right smack in the middle of that. It moves from month-to-month, but I would say if you were modeling, 1/4 of our traffic is coming from mobile. And like almost every other retailer, mobile is converting at a lower rate than the desktop. But it's not necessarily 1 for 1, right, because our customer will open one of our e-mails on her smartphone while she's waiting to pick up the kids, and then will go back to her PC later at night and make a Photo Book or take advantage of our promotions or our products and services. But it is, as most people are experiencing, an increasing component, which is why the investment that we're making in the back half of last year and throughout this year to launch a number of more mobile initiatives that will come out this year to try to capture more of that market and greater conversion rates.

Operator

Next question comes from Kevin Kopelman from Cowen and Company.

Kevin Kopelman - Cowen and Company, LLC, Research Division

And just a follow-up on customer acquisition questions. Are there any kinds of advertising that, that figure doesn't include? And then are you continuing to see the efficiency improvements in the Q2 that you saw in Q1?

Jeffrey T. Housenbold

Yes. So it's all in. So if you think that all major avenues of customer acquisition -- they fall into a couple of buckets. One is online marketing, which is SEO, SEM affiliates and media, and includes social on Facebook, FBX and other Facebook and social initiatives. It includes our partners, and we're delighted with the 18 new Tier 1 partners we added in Q1, bringing our total active partnerships to more than 18. These are premium brands that are introducing their customers to our products and services. And so that's an efficient way to capture new customers. And then it includes some offline stuff that we do, direct mail, catalog, and of late, television. So we're excited about being able to continuing, apply a very rigorous ROI model to every single dollar we spend and trying to figure out what the right fuel mixture across those different channels, against different quarters, against peak versus trough periods to get that as optimized as possible. And in Q2, we're not guiding or giving any specifics into Q2 to this day. But I would say, we're having no meaningful change in the fuel mixture as we move into Q2.

Brian M. Regan

And Kevin, just to add to that, I think the only thing that really is excluded out of that that's significant is just headcount within the departments. There's some small percentage of nonworking media costs, whether it's production or agency costs, but it's very small as a percentage of the total. So predominantly, what's only excluded out of that is headcount.

Operator

Our next question comes from Brian Fitzgerald with Jefferies.

Brian Patrick Fitzgerald - Jefferies & Company, Inc., Research Division

A couple of quick questions. Can you give us a sense for the customer repeat rate maybe in core Shutterfly? And as you add and integrate these new services, what impact are you seeing there? Is it causing people to come back to this site? Is it causing a better repeat rate, a better frequency?

Jeffrey T. Housenbold

Yes. Q1 was in line with historical standards of 1/3 new, 2/3 existing. So we continue to have really strong loyal customers, that if we could get them to try once, get them to the shop more than 3x, they're lifetime value grows logarithmically. And so we have marketing initiatives against first purchase, second, third, and then kind of moving you into being a superheavy user as you move towards 10-plus. So the ratio hasn't changed dramatically. As we continue to add features like we're the only ones who offer free, unlimited non-compressed, non-downsample storage, our award-winning free share sites, our upcoming cloud-based service, our 100% happiness guaranteed, the most designs in the marketplace, the most choices for Photo Book sizes and fonts and backgrounds and textures, the most greeting cards, the most birth announcements, graduation cards. As we expand our breadth and depth of our offering, many of our competitors are struggling to catch up. I think that just creates more reason and stronger brand equity for new customers to try us and for existing customers to come back quarter-after-quarter.

Operator

Next question comes from Trisha Dill from Wells Fargo Securities.

Trisha Dill - Wells Fargo Securities, LLC, Research Division

My first question is on Kodak Gallery. Just wondering what you saw some Kodak customers in Q1? I know you were pleasantly surprised with Q4 and how they acted more like traditional Shutterfly customers with not as much of a need to discount as you had planned. So just wondering if this continued into Q1?

Jeffrey T. Housenbold

It did. The Kodak customers as they're on our platform were getting a little bit more out of them than I think they did on a Kodak platform. They still tend to be a little more print-centric than Shutterfly customers, who are more Photo Book-centric, but the Kodak customers are responding well to our differentiated service and design offering, and to our targeted customer relationship management and e-mails. And so we continue to be pleased with Kodak. And if you think about Kodak, and now, MyPublisher, both of those were deals that were very cost-effective when you think about a multiple of EBITDA or a multiple of revenue. And given our scale and our vertical integration, we're able to get increasing EBITDA margins out of them after the first initial kind of transition period. So we'll continue to look for additional tuck-ins that make sense, but we think that our platform is second to none now in the marketplace.

Trisha Dill - Wells Fargo Securities, LLC, Research Division

Great. And then just a follow-up on your acquisition strategy. Just given your comments about the number of companies that you looked at, who are unprofitable, can you talk about how that sort of impacts your desired taste for acquisitions that would sort of fall under the consolidation category?

Jeffrey T. Housenbold

Yes. Our acquisition strategy has been the same. It's one that says, is there a strategic rationale? Is there a reasonable price? Do we believe it either enhances our offering or our scale or our economics? Do we believe there is a good cultural fit between the employees and Shutterfly? And do we believe the post-merger integration and the synergies we expect are realizable, and in a short amount of time? And so we take that filter against, for example, the 43 inbound companies year-to-date, and many of them don't pass that filter. We're okay buying a technology tuck-in that doesn't have revenue or profitability, but buying a $6 million or $8 million or $12 million business that has been around for 8 or 10 or 15 years that still has never been EBITDA-positive, those aren't the deals that we're rushing out to do. Our expectation is those companies will likely go away, and we'll acquire their customers organically through our integrated marketing efforts. Those that we think give us scale, have revenue, give us a differentiated offering or a geographic basis that we don't have or a customer segment that we don't have, are much more interesting. And so the number of available acquisitions domestically in the core business is shrinking because there's not a lot left that have scale. So we're starting to look, as I mentioned, internationally but also into adjacent markets that might leverage our brand and our customer base or our print on-demand capabilities.

Operator

Our next question comes from Scott Devitt from Morgan Stanley.

Nishant Verma - Morgan Stanley, Research Division

This is Nishant Verma for Scott Devitt. Just had a question on gross profit margin. I was wondering if you could elaborate. You mentioned a number of factors on how your volumes, your overall product mix and a few others on whether the 180 basis points improvement was sort of an equal contribution from these factors or whether there were actually one or 2 main drivers for the improvement in margins? And then how we should expect gross profit margins to continue? And I know in the past quarter, as you've called out, I said some businesses that are still in ramp up mode that could depress gross margins. I was wondering if there was any of those you wanted to call out this quarter?

Brian M. Regan

Sure. Hey, Nishant, it's Brian. So I think when you look at the quarter, I think we called out a number of factors. The very first items that we called out which were really unit volumes and average selling prices were still the largest factor that went into the higher Q1 gross margin. And then really some equal weighting for significant cost savings that we're beginning to realize, both in input costs, as well as shipping. Savings, we're really getting some additional scale benefits. As well as this quarter itself, we saw a little bit of a lower mix of Enterprise revenue, which otherwise would be a slight drag on the overall gross margin. But going forward, as we've talked about in our original guidance, we're now a little more confident based on AOV, as well as our cost-savings initiatives, in particular shipping and input costs, and overall, direct labor getting more efficient. Those are kind of the key drivers that allowed us to tick up our overall gross margin guidance for the year by a full 100 basis points. So we feel pretty good about what we're seeing there, and the investments that we've been making in equipment and capacity being able to in-source more previously outsourced volumes for both our Tiny Prints, Wedding Paper Divas and Enterprise businesses, as well as enhanced automations across our production facilities are all really beginning to pay off. Last year, we talked about $9 million of automation investment into our facilities. We're really beginning to see some of the fruits of those labors in our gross margin percentage.

Operator

This concludes our Q&A session. I will turn it back to management for closing remarks.

Jeffrey T. Housenbold

Thanks, everyone, for joining us on the Q1 call. As you can see, we continue to execute against our strategy, delivering better-than-expected top and bottom line results for Q1, another strategic acquisition that makes sense on the valuation and the strategy standpoint. And we're excited about the investments we're making in wedding, Enterprise, Treat, mobile and our upcoming cloud service, as well as expanding the value proposition and the ultimate size of the franchises of shutterfly.com and tinyprints.com. So we'll see many of you out on the road during the quarter, and we look forward to updating you in 90 days from today.

Brian M. Regan

Cheers.

Operator

Ladies and gentlemen, thank you for participating in today's program. This concludes the program. You may all disconnect.

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