Shutterfly Management Discusses Q2 2013 Results - Earnings Call Transcript

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 |  About: Shutterfly, Inc. (SFLY)
by: SA Transcripts

Operator

Good day, ladies and gentlemen, and welcome to the Shutterfly Incorporated second quarter financial results conference call. [Operator Instructions] As a reminder, today's conference is being recorded.

I would now like to turn the call over to Michael Look, Vice President of Investor Relations. Please go ahead, sir.

Michael Look

Thank you, operator. Good afternoon, everyone. Welcome to Shutterfly's Second 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've 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 have 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 the 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 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 relating 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 analysis as of today. This presentation contains certain financial performance measures that are different from 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 second quarter fiscal 2013 financial results 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 our Shutterfly's CEO, Jeff Housenbold. Jeff?

Jeffrey T. Housenbold

Thanks, Mike, and good afternoon, everyone, and welcome to our second quarter 2013 earnings call. I will begin today's discussion with an overview of our Q2 results, and then update of our operational and strategic initiatives, and then I'll turn the call over to Brian for a detailed discussion of our second quarter financial results, followed by our financial guidance for Q3 and full year 2013. We will then open the call up for your questions.

As you can see from our earnings press release, we had a strong second quarter, demonstrating continued execution and momentum in our business. Net revenues increased 35% to $133.5 million, marking our 50th consecutive quarter of year-over-year growth.

In addition to the over delivery on revenue, adjusted EBITDA was $6.3 million, up $2.7 million or 77% over the prior year. Our Q2 revenue and adjusted EBITDA results were above the high end of our guidance ranges and were mainly driven by solid growth across all 5 of our consumer brands, as well as our Enterprise business. Our stated results include a partial quarter of our MyPublisher acquisition. However, excluding the MyPublisher contribution, Q2 net revenues still grew 30% year-over-year. Our better-than-expected adjusted EBITDA was a result of strong top line growth, continued operational efficiency gains from our increased scale and the rescheduling of a few investments and marketing programs into Q3, to better align with the launch of several new products and services. As you may recall from previous discussions, our growth framework is to capitalize on our market-leading position and expand our 2-core social expression and personal publishing brands of Shutterfly and TinyPrints; invest in our earlier stage growth businesses including Wedding Paper Divas, Treat, Enterprise and our soon-to-be launched Enhanced Cloud Service; to expand our mobile offerings across our consumer brands; and to prudently use our strong balance sheet to drive future top and bottom line growth.

As key enablers to our future growth, we continue to allocate appropriate resources toward continued product and service innovation, expansion of our manufacturing footprint, enhancements to our customer experience and support teams and scale of our people, processes and technologies.

In short, we are playing to win in what we believe are the early stages of large market opportunities and as such, are making investments for both short- and long-term success. With this framework in mind, let me provide some more detail to our progress during the second quarter, starting with our Shutterfly brand.

During the quarter, we continued to leverage the unique capabilities of our Israeli-based Photoccino team in several ways: first, we further incorporated the Photoccino algorithms into our Custom Photo Book Creation Paths, enhancing the intelligence of our auto-fill capabilities by making photo, layout and background selection better while improving auto-cropping and the end results. This has resulted in quicker photo book creation and improved customer satisfaction rates.

Second, we recently launched a new service internally called, Magic Shop, utilizing the proprietary Photoccino technology. Magic Shop can be found in the my Shutterfly service, where it automatically analyzes recently uploaded pictures and instantly creates new products from a customer's best photos. While it's still early, we are seeing increased conversion rate and sell-through from this highly targeted upsell capability.

We also recently launched a new shortened Cart & Checkout flow, which dramatically simplifies the purchase process from an average of 5 to 7 steps down to 2 easy steps, plus a simplified way for customers to change their orders. This new cart checkout began rolling out at the very end of Q2. While we only have a few weeks of data, we are seeing a positive uptick in checkout conversion rates. We continue to make good progress against our mobile initiatives making it the easier and more convenient for consumers to transform their memories into high-quality photo products regardless of device, platform or location.

In the past few days, we released a new Shutterfly for iPad application, adding commerce capabilities similar to our popular iPhone app and the ability to see photos in an enhanced photo viewer and popular photo filters.

In addition, consumers can now view their Photo Book projects at full-screen resolution on their tablet devices without having to enter into the creation path. And leveraging our new M.dot enabled sites, customers now are able to order their Simple Path and Custom Path photo books straight from their mobile devices.

In addition to our iOS applications, just a few weeks ago, we launched our first Shutterfly App for Android devices. The new app has the ability to view and upload, and we will be adding commerce capabilities at the end of the third quarter. We are seeing good traction and positive consumer reviews with no marketing efforts to-date.

As we continue to expand our mobile offerings, we are seeing positive business results. During the second quarter, we estimate that nearly 5% of our Shutterfly branded revenue was derived from mobile sources, including our native apps, and M.dot and T.dot [ph] enabled sites, up from approximately 4% in the first quarter. We will continue to focus on building and updating our applications for desktop, laptop, smartphone and tablet devices and we expect to release several exciting product introductions during the next few months.

Continuing our efforts to expand our very popular Shutterfly Home Decor assortment, we introduced accent pillows, 8x10 canvass prints and a new line of wood wall art. This unique product line creates a wood grain that can actually be seen through the photo, giving each piece a very warm and natural look.

In our Photo Gift category, we improved our notepads, and magnet collections and refreshed our water bottle, mouse pad and playing card offerings with dozens of new designs and introduced an all-new creation pack.

To unveil our exciting new lineup of personalized gifts and Home Decor, we hosted a highly successful design house in New York City, featuring a number of celebrities and dozens of creative Shutterfly Home Decor products, many of which will be introduced later this year, in time for the holidays. Within our Tiny Prints brand, we saw a strong growth across a number of core occasions, including baby shower, birthday and graduation, resulting in healthy top line growth and accelerating trends across a number of key business metrics. Given this momentum, we are excited about the fourth quarter for Tiny Prints as the team is preparing to launch new designs, products and services, including the availability of next-day delivery for certain products. Next-day delivery is another example of the benefits we derive from our vertical integration and manufacturing footprint and creates another customer facing point of differentiation. We will measure the success of our new next-day delivery. And if it's successful at Tiny Prints, we have the ability to roll it out across our portfolio of brands.

As you can see, we are making continued progress in innovation within our 2-core brands of Shutterfly and Tiny Prints.

At our Wedding Paper Divas brand, we also saw strong growth as consumers continue to choose our leading online offering for engagement, save the date, rehearsal dinner, wedding and thank you stationery. During the quarter, we launched an updated creation path to improve the user experience and conversion rates, expanded a number of business development relationships and added new products, such as new personalized wedding napkins. In addition, we added Super Rush Production and Delivery, which was a very popular option this past holiday season at Tiny Prints, providing customers with expedited 1- to 2-business-day delivery.

While Treat is still in the early stages of development, we saw a year-on-year growth in net revenues of 88% as our refreshed birthday collection and Mother's Day and Father's Day offerings resonated well with both new and existing customers.

During the quarter, we continued to add new features and enhanced the functionality of our service. For example, customers can now add personalized iPhone cases to their Treat card order. Our Treat mobile app now allows for purchases of card club packs and enhanced push notifications include Facebook birthdays and notifications for communicating, "your card is on the way".

And on MyPublisher brand, we successfully completed the acquisition during the quarter and integrated the talented team of Photo Book pioneers into the Shutterfly, Inc. family. The team executed well across the board and slightly beat on the top line. We're excited about the opportunity to introduce the breadth of Shutterfly's non-Photo Book merchandise to the MyPublisher customer base during the Q4 holiday season.

With respect to our Enhanced Cloud Service, we are making good progress and are excited about the initial launch in the next few months. We believe our innovative Cloud service will address the increasing need for customers to manage their ever-growing collection of photo and video memories, and will further reduce the barriers to make unique, personalized products and gifts from these memories.

Our Enterprise team continue to execute against our strategy, serving our existing Fortune 1,000 clients while attracting new ones, resulting in 86% year-over-year increase in net revenues. We remain excited about the potential for the Enterprise business as it utilizes the available capacity of our market-leading digital printing capabilities and provides incremental revenue and adjusted EBITDA.

As you can see from our future[ph] results, we continue to make progress across our various business initiatives. According to InfoTrends' latest 2013 U.S. Online net-to-mail Photofinishing Market share report, we have extended our leadership position, capturing 56% to 59% of the market. While I'm very proud of this accomplishment, our entire team is focused on migrating the estimated 90% of customers who are still spending money offline on generic, static and expensive products to our industry-leading online platform.

To accomplish this goal, we are making additional and financially smart investments in our manufacturing footprint, customer support and technology infrastructure. These investments will further delight our customers, reduce our operating expenses and extend our competitive differentiation. In June, we officially opened our new, state-of-the-art production facility located in Fort Mill, South Carolina. Our Fort Mill expansion tripled our Southeast manufacturing footprint to over 300,000 square feet. It will reduce the time-to-market for new product introductions and create opportunities to in-source more of our order volume and product offerings for our Consumer and Enterprise businesses. This should drive higher margins over the long-term.

Given our commitment to achieving the highest levels of customer satisfaction, we also began the migration of nearly all of our customer service operations back to the United States. While this change has resulted in slightly higher costs, we believe it will improve customer service quality and response times, especially during the busy holiday season. And hopefully we need to increase customer lifetime values.

As we continue to optimize our manufacturing capabilities and supply chain, we have decided to strategically add 215,000 square feet of manufacturing capability in Shakopee, Minnesota as a central production hub in the Midwest. We will be breaking ground in Q3 2013 and anticipate a Q3 2014 opening. We estimate that the combined 2013 and 2014 cost of building this new facility will be mid-single-digit millions in CapEx, and excluding depreciation, will result in only $1 million to $2 million of increased operating costs over the same period. Once complete, we will have 4 production facilities located in the West, Midwest, Northeast and Southeast. We believe this investment will extend our competitive position by supporting our next-day delivery strategy and further increasing our customer satisfaction levels.

The financial payback on this project is estimated to be less than 15 months driven by the gross margin savings we will realize from reduced shipping costs and continued in-sourcing of current and new product production.

Furthermore, this will provide a level of redundancy in our manufacturing network and supply chain, which is important given the seasonality of our business. In addition to our new Shakopee facility, we are investing in a new storage and colocation center to optimize our long-term cost structure while improving our capabilities. The need to find a lower cost solution is increasing given the 20 billion memory stored on our servers and the upcoming launch of our Enhanced Cloud Service. Given the limited growth capacity in our current facility and the high-power costs in California, we have decided to move out of the state to a new state-of-the-art facility. We will invest some capital dollars to build out the new facility. And we'll have some temporary duplication of operating costs mostly occurring in 2014. However, we anticipate meaningful OpEx savings in 2015 and beyond. In fact, we estimate that over the 3-year period from 2015 to 2017, our new manufacturing and colocation facilities combined to generate operating savings of approximately $35 million. Lastly on the real estate and capital investment front, we are moving our Sunnyvale corporate offices to a new location in nearby Santa Clara to provide for growth capacity as we continue to attract and retain a world-class team.

The 2013 financial impact of our new manufacturing facility, colocation and storage facility and the corporate office space are all included in the guidance we provided in our press release and in Brian's prepared remarks.

In summary, Q2 was another very successful quarter. We delivered robust revenue growth, continued to drive healthy customer behavior across all 5 of our consumer lifestyle brands, extended our market-leading position, as recently noted by InfoTrends, and made significant enhancements to our products, services and infrastructure that position us well for the second half of the year and beyond.

We continue to leverage our scale and scope economies, integrated marketing platform, vertical integration, solid balance sheet and profitable business model to make rightsized strategic investments that we believe will enable us to continue to distinguish ourselves from our competition and transform the multibillion dollar social expression and personal publishing markets from a largely static and offline experience into a dynamic online digital experience.

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 second quarter performance, key metrics and operating results. I'll then conclude with an overview of our Q3 financial guidance and an update to our full-year outlook for 2013 before opening the call up for your questions.

Please note that we completed our acquisition of MyPublisher on April 29, and that our Q2 financial results reflect MyPublisher's operations from that date through the end of June. In order for you to better understand the revenue impact of this acquisition, we will present our Q2 revenue results today with and without MyPublisher. As we continue our efforts to fully integrate the business and deploy our multibrand strategy, we may choose to omit this or other financial information in future periods.

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

Taking a detailed look at our results, net revenues for the second quarter totaled $133.5 million, a 35% increase over the prior year and above the $121 million high end of our guidance range. Excluding MyPublisher, net revenues for the second quarter totaled $128.5 million, an increase of 30% from the same quarter last year. Consumer revenue totaled $124.9 million, reflecting 32% year-over-year growth, largely driven by strength across all 5 of our lifestyle brands and solid performance across all of our core product lines.

Net revenue from our Enterprise business grew 86% over the prior year to $8.6 million and reflects continued organic growth at a number of existing clients, including new orders from one of our largest clients that had been delayed from Q1.

As Jeff alluded to earlier, customer behavior remained very healthy. Average order value in Q2, on a reported basis, grew 10% year-over-year to $34.96, the highest level for a non-Q4 period in the company's history. Excluding MyPublisher net revenues and orders in the quarter, average order value would have been nearly $34.50 or up 8.8% over the same quarter last year, reflecting the strength of our loyal customer base and continued to benefit from a number of pricing and promotional initiatives.

During the quarter, total unique transacting customers and orders increased 24% and 20% year-over-year, respectively. As we continue to drive improvements in our overall marketing efficiency, which resulted in a lower customer acquisition cost as a percentage of revenue. That translated into more than $2.3 million unique customers who generated nearly 3.6 million orders across all 5 of our lifestyle brands.

Moving to cost of revenues and gross margin. Gross margin in the second quarter was 46.3%, 252 basis points lower than our gross margin from the same period a year ago, and slightly above the 46% high end of our guidance range. As expected, our year-over-year decline in gross margin was largely driven by higher depreciation, equipment expenses and increased customer service costs related to our new Fort Mill facility, as well as product mix shift. These increases in cost of goods sold were partially offset by lower material costs relating to our increased scale and in-sourcing, as well as lower overall shipping rate as a result of certain cost-savings initiatives.

Turning now to operating costs. Excluding stock-based compensation, OpEx totaled $73.6 million, reflecting the increased cost structure from M&A activity in the past 12 months, such as MyPublisher, ThisLife and Penguin Digital, including purchase accounting amortization, offset by a shift in the timing of various marketing programs into Q3.

Looking more specifically at our operating expense component, technology and development costs totaled $26.5 million for the quarter or 20% of net revenues. Excluding stock-based compensation and depreciation, our technology and development spending increased approximately $4.3 million or 28% from the prior year. Q2's increase in technology and development spending largely reflects the incremental cost associated with our recent acquisition, as well as increased investments in technology and development headcount.

Sales and marketing expenses totaled $38.3 million in the quarter, representing 29% of net revenues, which is consistent with Q2 of last year. Excluding stock-based compensation and amortization, sales and marketing expense increased 24% from the prior year to $29.4 million or 22% of net revenues, down from 24% in Q2 of last year. This decrease in sales and marketing expense as a percentage of revenue was largely driven by a shift in the timing of various marketing programs and promotions to better coincide with the timing of new products and services in Q3.

General and administrative expense for the quarter totaled $20.9 million or 16% of net revenues. Excluding stock-based comp and credit card processing fees, G&A expenses represented 10% of quarterly net revenues approximately in line with Q2 of last year.

Adjusted EBITDA for the quarter was a positive $6.3 million and significantly better than the $1.5 million to $3 million adjusted EBITDA loss range we guided to. Our favorable Q2 EBITDA results reflect the combined effect of solid revenue growth, continued operational efficiencies and a shift in the timing of headcount and marketing investments into Q3.

The effective tax rate for the quarter was 54.3% and reflects the impact of disqualifying dispositions of incentive-stock options during the quarter. We are introducing a new non-GAAP financial disclosure today. Non-GAAP earnings per share to normalize the impact that our convertible note offering has on our earnings per share, primarily due to the additional noncash interest expense we must record as the difference between our 0.25% convertible coupon and an estimated high-yield market rate of roughly 5%. We are disclosing our non-GAAP EPS as a comparable measure to our previous GAAP EPS guidance, and we are only excluding the effects of our convertible note offering as you can see from the reconciliation in our press release today.

For the quarter therefore, our non-GAAP net loss was $10.9 million or a loss of $0.29 per share, better than the high end of our previous GAAP EPS guidance for a loss of $0.55 per share. Our net loss for the quarter on a GAAP basis totaled $11.8 million or a loss of $0.31 per share. The weighted average shares used to calculate the net loss per share totaled 37.8 million shares and reflects the impact of our $30 million concurrent stock buyback that we completed as part of our convertible note offering in May.

And finally, capital expenditures during the quarter totaled $20.1 million, including $6.3 million for technology equipment and software, $9.5 million for manufacturing equipment and building improvement and $4.3 million in capitalized software development costs.

Cash and liquid investments at quarter end totaled $366 million[ph], including approximately $240 million in net proceeds from the convertible note offering in May. 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 third quarter and full fiscal year 2013. As Jeff stated at the start of this call, we are playing to win in the early growth stages of large market opportunities and we are making significant investments in our current businesses to ensure long-term success. At the same time, the macroeconomic and competitive landscapes remain uncertain. All of these factors are incorporated into our q3 and full year 2013 guidance.

In terms of Q3 net revenues, we expect consumer market activity to slow down from Q2 levels as the typical summer seasonality kicks in with no major gift-giving events during the third quarter and as we begin to lap last year's Kodak acquisition. In addition, we expect to continue to make significant investments in our infrastructure and marketing programs in preparation for this year's peak holiday season.

With these comments as context, we expect net revenues in Q3 to range from $115.5 million to $117.5 million, which reflects year-over-year growth of up to 19.2%. We expect our Q3 GAAP gross margin to range from 40.5% to 41.5% of net revenues and our Q3 GAAP operating loss to range from $41 million to $43 million. As we mentioned a few times so far, certain investments in headcount and marketing initiatives have been shifted into this current quarter, so we estimate our adjusted EBITDA for Q3 will range between a loss of $6 million and a loss of $8 million and that our GAAP-effective tax rate will range between 46% and 47%. We expect the GAAP net loss per share to range from a loss of $0.63 to a loss of $0.67 per share based on approximately $37.9 million weighted average common shares.

This GAAP guidance reflects the impact of our convertible note offering and in order to provide a more consistent comparison between our current and prior guidance, excluding the effects of our convertible note offering, we expect non-GAAP net loss per share to range from a loss of $0.58 to a loss of $0.62 per share.

Turning now to the full year. We are now increasing our projected 2013 net revenues to total between $776 million and $781 million, which reflect year-over-year growth of up to 21.9%. And we are increasing our full year GAAP gross margin to range from 53% to 54% of net revenues. We currently forecast that our GAAP operating income will be approximately $14.2 million to $20.4 million. And even including the incremental real estate and capital investments, that Jeff described earlier, we are reiterating our estimate that our full year 2013 adjusted EBITDA margin will be 18% to 19% of net revenues or $139.7 million to $148.4 million.

The full year GAAP-effective tax rate is now expected to range from 30% to 32%. We now expect full year GAAP net income per share to range from $0.08 to $0.19 per share. Again, the change in our full year GAAP EPS from our prior guidance mainly reflects the impact of our convertible note offering. Excluding the effects of our convertible notes, we expect full year non-GAAP net income per share to range from $0.23 to $0.33 per share, up from our previous GAAP EPS guidance of $0.20 to $0.30 per share. The change between our current full year non-GAAP EPS and prior GAAP EPS outlook reflects our improved EBITDA outlook and slightly lower intangible asset amortization related to the MyPublisher acquisition.

And finally, we expect that 2013 capital expenditures will range from 10% to 10.4% of net revenues versus our previous guidance of 9.4% to 10.4%.

In summary, we believe that our initial Q3 and revised full-year 2013 financial guidance gives appropriate weight to our most recent business performance and the current and anticipated market conditions.

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] The first question comes from Youssef Squali from Cantor Fitzgerald.

Youssef H. Squali - Cantor Fitzgerald & Co., Research Division

And so 2 questions, I guess. Starting with MyPublisher, on the last earnings call, I think you talked about -- Brian, I think you mentioned $18 million to $20 million in revenues to be baked into your numbers for 2013. I was wondering what that number now looks like with the acquisition closed -- and having a couple of months of that business under your belt? And second, maybe Jeff, can you speak to the value proposition of your upcoming Cloud offering and just how that compares to the 3 offerings that Flickr, and SmugMug and a bunch of others have been kind of touting of late?

Jeffrey T. Housenbold

Great. You said thank you, this is Jeff. Let me answer your second question. If you look at what's in the marketplace today, many people are offering storage, right? So Flickr, and Dropbox and Carbonite and Google+ and iCloud and Amazon Cloud Drive, Microsoft SkyDrive. Most of them are offering basic storage of all file types, JPGs, including Word and PowerPoint and Excel documents and some type of sharing. We're actually offering something very different. Ours is focused around memories and its focused around helping people preserve, capture, aggregate, manage and create from both their photos and videos. So we're not trying to go out and charge for storage. What we're doing is offering a value-added application that will take all your pictures regardless if they're on Flickr or Picasa or on Facebook or your hard drive or on Shutterfly, aggregate them and then take out proprietary technology allow you to manage those, sort through those, select certain photos from certain moments, stories through your life, invite other people into that share, but then also use our smart creation technology to create products and so we think this will reduce the friction of upload and aggregation and sorting and editing and will drive higher throughput and velocity across our proprietary platform.

Youssef H. Squali - Cantor Fitzgerald & Co., Research Division

Just as a follow-up to that. You don't think that the others are also kind of moving up in that value chain and may kind of -- as long as they offer a free offering, they make it a little hard for you guys to create a value proposition for people to want to pay for it?

Jeffrey T. Housenbold

Well, we've always said we don't think the subscription component of this Enhanced Cloud Service is going to be a core revenue stream for Shutterfly in the near future. I think what we have that as unique is the e-commerce platform and nearly $776 million to $780 million flowing through that platform, by far, the biggest in the industry. So we don't have to make a lot of money from the front-end service. And we very well -- as we indicated in the past, decide to give it away to our best customers. Say, "hey, you're a VIP customer, you spent x on the platform, here it is, free". So we have, what I would call, more flexibility. I also do think people will continue to add to their capabilities over time, but keep in mind, we've been competing in doing that quite effectively against the large companies like HP and Kodak and Wal-mart, Walgreens, CVS and Google and Apple and Facebook since we pioneered this industry in 1999, consumers come to us because we're about memories. And we are about helping them turn those memories into personalized and creative products and gifts for their friends and family.

Brian M. Regan

This is Brian. Just to address the first part of your question. As Jeff indicated in his prepared remarks, MyPublisher, we're very happy about the integration efforts, the team is executing very well and while we had a little bit of outperformance this quarter, our guidance does not incorporate any change to our initial guidance of $18 million to $20 million in revenue and then with deal and transition costs this year, we will have a few incremental millions of -- a few million dollars of incremental EBITDA and then that EBITDA margins will improve materially then in 2014 once we lap the deal and transition costs. And that's really nothing new in the incorporated guidance.

Operator

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

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

Just first, Brian, how was Kodak in the quarter? If you could give a little bit more color on that? And then, Jeff, just on the timing of the Minnesota expansion, it seems very quick on the heels of Fort Mill, suggesting perhaps you're further along and maybe using your balance sheet to consolidate the industry? Is there anything you can add on that?

Jeffrey T. Housenbold

Sure. Shawn, it's Brian. On Kodak, now that we've lapped the acquisition, we're not going to break out Kodak specifically. We can tell you that it pretty much performed as we expected -- according to our expectations. So for this year, nothing's really changing to our Kodak expectations to be just a little north of $35 million for the full year, and that our organic growth rate is the number for us to focus on for Q2. It was just under 20%. When you do normalize for that, it ain't going forward, of course, as Kodak -- former Kodak customers are migrating their accounts, it's becoming more and more difficult to break that out, so we won't be talking about that going forward. But performed as expected and we are just as enthused as we were on the performance for this year and in revenue, overall.

Jeffrey T. Housenbold

On the Minnesota, let me provide a little context. So if you think about our Phoenix facility that we opened about 5 years ago, 100,000 square feet on new 300,000 square foot facility in Fort Mill, that gives us West and East with the acquisition of MyPublisher. We picked up a facility in Westchester County that gives us Northeast. And see if you have a map of the United States, we have a very large chunk of customers that are sitting in the Midwest. And so we evaluated a number of states and we thought, Minnesota was the best. And as long as we get through the local county and state tax hearings and approvals, which we anticipate should go through smoothly over the next few weeks, we intend to break ground this quarter and open in time for the fourth quarter of next year. And what's driving that is our strategy that we started to elucidate on in our prepared remarks about trying to deliver next-day service to our customers, which we believe enhances overall customer satisfaction, creates further competitive and comparative advantages to us. And it saves us quite a bit on shipping. So if you look at the payback, it's slightly under 15 months driven largely from the shipping savings and the ability now, to in-source additional products that we're outsourcing to 1 of 26 different partners in our value chain -- in our supply chain. And so we think this is -- it's low-single-digit millions of dollars in CapEx, it has some hit in OpEx in '13 that was incorporated in our guidance today. Some hit in '14 but '15, '16, '17, that combined with our new colocation at this point looks like it will generate incremental $35 million of OpEx savings. And so we think it's the right strategic investment. It also provides us, as you indicated, flexibility should we be able to acquire additional companies to bring their manufacturing into our plant and gain better gross margins and EBITDA margins from continued acquisitions. So we think it provides great strategic flexibility, smart, and prudent use of the balance sheet and quick payback for our shareholders.

Operator

The next question comes from Colin Sebastian from Robert Baird.

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

First off, on the promotional environment, if you could provide some more color on what you're seeing early in Q3? And whether that's a good leading indicator for the holiday period? And then secondly on the new storage and colo facility, are you able, Jeff, to utilize Cloud services such as AWS or are you going to own the servers and use for proprietary facility?

Jeffrey T. Housenbold

Sure. If you look over the last 6, 7 quarters, of promotional activity from our competitors, I would say, Q2 has been pretty consistent, not a whole lot of changes. You'll see people do more promotions around the key drive periods like Mother's Day, Father's Day and graduation in Q2. You'll see people typically in Q3 do deeper discounting because there's no holiday so people are trying to create more demand. In Q3 it's not necessarily a read historically on to Q4. People will do their typical discounting around Q4, but you get more of a natural demand flow than you would in Q3. So obviously, given the performance in the last few quarters from Shutterfly, the investments we're making in new features, functionality, products and services and diversification. I think we have a really good handle on the pricing environment and continue to drive record revenues and profitability, so I feel good about where the industry overall is. I think these are personalized products that consumers are willing to pay for. Balanced against, still a soft macroeconomic and under and unemployment rates, but I think we're continuing to take market share evidenced by the InfoTrends' study and that we continue to execute well. With respect to our colocation, today, we're colocated with Terremark here in the Valley. California suffers from the highest energy costs in the nation and in our colo, our colleagues at Amazon and Facebook are in the same location and all 3 of us are growing our businesses and there's just no more space in that location so we were being forced from the lack of growth capacity to look at additional solutions. And so we decided in that analysis to actually, instead of move into an incremental space to actually go build a brand new space in a state-of-the-art facility outside of California. And it looks to me that we'll be able to save about 40% to 45% per kilowatt of energy, which is a substantial savings for us. So in 2014, a little bit of this hits in '13, but in 2014, we'll have some redundant OpEx cost as we keep our Silicon Valley facility open and we open a new facility. And then in 2015 and beyond, we make meaningful savings in OpEx and so again the payback period is rather quick and any MPV or IR analysis shows this is a very smart thing to do. We don't use AWS or other third parties. Our storage costs are about 1/7 that of the rack rate that AWS charges on their website. Their cost may be cheaper but our cost relative to their price is cheaper. So we build our own proprietary storage bricks and put our own proprietary file system and manage that. We don't own the building. The cooling and the real estate that's owned by the folks, like Terremark and Econex and level 3s out there. But we do own the servers and we have our own people in the knock and the colo managing the service.

Operator

The next question comes from Paul Bieber from Bank of America.

Paul Judd Bieber - BofA Merrill Lynch, Research Division

First, I was wondering if you give a little bit more color on what drove the increase in AOV in 2Q, $35 seems the highest for a non-holiday period that I have in my model. And then secondly, I just wonder if you could briefly comment on -- when you guys look out at the consolidation opportunities, do you have a preference for international expansion or for the consolidation in the U.S. market?

Jeffrey T. Housenbold

Great. We did have record non-Q4 AOV of $35, partly what was driving that was MyPublisher acquisition. If you took that out, AOV is still was up about 8%...

Michael Look

Just almost 9%.

Jeffrey T. Housenbold

9% to $34.48, so I'm very pleased with the average order value. What was driving that was positive mix shift and consumers choosing more of our premium offerings along with us continuing to offer kind of good, better and best, so that people can migrate to a leather cover or matte cover or a padded cover or our flat cards or rounded corners or aligned envelopes or Super Rush and so we're trying to provide the spectrum and assortment, so people can choose relative to their budget and our consumers given that the they have a higher per capita disposable income and favorable demographics to the average U.S. are choosing the more expensive stuff. So you'll see our team continue to lean into that trend as we enter into the fourth quarter. As it relates to consolidation, we, over the last few years, have consolidated MyPublisher and Kodak, Sony and Yahoo and Fuji and a few other tiny players. There's a few other players either in the Photo Books base cards and stationary or broad space left. And we've seen close to 70 M&A opportunities this year that we've evaluated and so we'll continue to do that. But consolidation isn't our biggest bogey. It's really the 90% of the economic ramps[ph] that are occurring in this $30 billion to $35 billion market, that's still transacting in an offline and generic way. And so while we think continued consolidation is good for Shutterfly,and our shareholders, and we'll continue to evaluate that. We're really focused on making it easier for people to migrate from an offline to an online world. As it relates to international or domestic, domestic would have just naturally more synergies. So if I have to choose between domestic consolidation or international -- I don't really think about international as consolidation because we don't have any play there yet. It would really be expansion. So the domestic would have higher synergy.

Operator

The next question comes from Kevin Kopelman from Cowen and Company.

Andrew Marok

This is Andrew Marok on for Kevin. Just have 2 questions. How were the graduation season and Mother's and Father's Day specifically relative to your expectations? And then switching gears a bit. How would you quantify differences in AOV between mobile and desktop, if there are any appreciable differences?

Jeffrey T. Housenbold

Sure. So we've been talking about this trend for a number of quarters and years now that, we're seeing the peaks be higher and the troughs be softer. And I think that is partly reflected in our Q2 over-delivering our Q3 guidance while we still expanded full year, implying a stronger Q4. And so with no holidays in the third quarter, it's a little softer. Q2, we over-delivered on all 5 of our consumer-facing brands, and our Enterprise business. So everything was at to above our internal numbers, driven by the strength of Mother's Day, Father's Day and Graduation, along with save the dates, weddings, birth announcements and the other key core offerings on Tiny Prints and Shutterfly and Wedding Paper Divas. And then, while it's a small brand and it's a new initiative for us, Treats are 88% year-over-year growth and that resonated for Mother's Day and Father's Day as it's mostly a 1-to-1 greeting card business. So very pleased with the execution by the teams. Our designs, our products, our ease of use continue to resonate with our new and prospective customers. In terms of AOV, it's lower on mobile than it is on the website for a number of factors. First of all, most of our mobile revenue is coming through the iOS app for iPhone, which does not have Photo Books and does not have cards and stationery. So it's largely prints and some photo merchandise. While canvas prints have a higher AOV on average, largely people are making prints out of those applications. And we saw a bit stronger 4x6 print growth in the quarter than we had expected, partly driven by mobile. So it's naturally a little lower. What you've seen us announce on this call was we just launched a new application for iPad, which we're quite excited about. We launched a new Android app. And I indicated that there will be and several other apps coming in this quarter. I think -- we think that will drive additional commerce, as well as higher AOV. And then as we continue to invest in our M.dot in T.dot enabled sites, that will help conversion rates and hopefully AOV over the long-term. So clearly, a difference today, but we believe the investments we're making should narrow that gap over time.

Brian M. Regan

And Andrew, it's Brian, one last point I'd add is that is even though -- even before any of the announcements today on the continued mobile improvements and additional features, it's still moving in the right direction, even though it's going to be an average lower, AOV continues to rise and moving in the right direction and is partially responsible for the continued growth of the overall Shutterfly brand revenue coming from all mobile sources. Now coming this last quarter and that nearly 5%.

Operator

The next question comes from Brian Fitzgerald from Jefferies.

Brian Patrick Fitzgerald - Jefferies LLC, Research Division

In terms of the MyPublisher integration, are there any overlap in terms of cost structure that could be reduced? I guess, would kind of what innings are you in, in terms of the total completed integration there? And maybe if you had to handicap it, were you more interested in the manufacturing piece or the technology there?

Jeffrey T. Housenbold

Sure. MyPublisher shared a number of common elements to Shutterfly. One, they were focused on the high-end of the market in terms of price point and feature functionality and they were focused on high-quality and they were vertically integrated. So when we looked at it, we were mostly interested in the customer base and the manufacturing, not the technology, though that is a nice benefit that we picked up a desktop client-based way to make Photo Books that is a nice complement to our Web service and our mobile apps that will come in the future. So there was some overlap. Most of the cost redundancy, we did a small reduction in force at the time of the acquisition, a lot of that was around the G&A functions that we would get some synergies and customer's support, but manufacturing and other key elements remain in place. So I wouldn't expect additional cost synergies. I think it's really a revenue synergies story where we now have the ability during the fourth quarter, particularly, to market our non-Photo Book products, i.e. cards and stationery and personalized Photo Gifts to the MyPublisher-installed base driving incremental revenue which will have flow-through of profit for us.

Operator

The next question comes from Kerry Rice from Needham & Company.

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

This is Shawn Yasui[ph]for Kerry Rice. Most of my questions have been answered but maybe on Enterprise, revenue grew 24% sequentially. It was up nicely. I was wondering if you could tell us how much of that growth was from orders that were pushed out last quarter, you mentioned there was a customer that was delaying so much project. And then maybe if you just talk about your visibility into that business, going to the back half and what we can expect?

Jeffrey T. Housenbold

Sure. On the Q1 earnings call, we talked about a anticipated order being delayed and pushed into the second quarter from one of our largest customers and that, in fact, came through early in the quarter. So I think the key is looking at the first 6 months versus the same period of time last year when we grew quite robustly. So a large part of what I'll call the increased sequential growth was from that order, but if you normalize across the 6-month period, the Enterprise business continues to grow at a very healthy clip. And we're very happy with our investments and the returns on that investment that we're getting from Enterprise. We've also discussed previously that it is an Enterprise sales cycle which takes longer, it's uncertain, you're dealing with large companies, you're trying to unseat incumbents and so the visibility is not as predictable as our Consumer business where we have tens of millions of transactions a year coming from 9 million to 10 million transacting customers and long history that we could have much more sophisticated predictive models. We do have a sales pipeline. We manage that like most sales teams do and we feel pretty good about the full-year projections for Enterprise. But what I'm more excited about is that, it's starting to get to a size and scale that in a couple of short years, it should have a more of a meaningful impact on our free cash flow and that has been a strategic and financial intent since the beginning of that initiative.

Operator

Next question comes from Heath Terry from Goldman Sachs.

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

Jeff, I'm curious. On the Cloud offering, if you've given sort of any thought beyond just the comments and I know you have. The comments around the premium model in terms of how pricing for a product like this looks, whether it varies based on the amount of storage that they're using, or the degree that you're using to various services that you're offering? And if you gotten to the point that you can sort of share with us how this product gets rolled out, not only if your existing Shutterfly customers but particularly the Shutterfly -- to the potential Shutterfly customers that haven't been big printers but they have a lot of photos stored that they want to keep protected within the Cloud, the way you're planning on offering?

Jeffrey T. Housenbold

Yes, it's a great question. Thanks. So the way we price it, if you think about what is the key cost driver. Today, we offer free unlimited non-compressed, non-down sampled storage and we hold our customers' precious memories in 3 different locations should their hard drive crash or a natural disaster happen, their memories are safe with us. And again, because we're holding the birth of their child or their wedding or their 50th wedding anniversary versus what they had for lunch today and very different type of nature -- we think, making sure that the safety and security of our customers' precious memories are paramount. And so the drivers, the number of photos and to a larger extent, the number of videos because video is a much larger file size and much more expensive to store and interact with. And so the way we're thinking about pricing is a premium model, we're going to give away the service up to a level and in the initial forays, that level will be kind of number of photo and video driven but in the future, it may include feature functionality as we add additional components. And then people who like the service or want to use it at a larger scale, have the option to pay us and we'll price that competitively to the market and given that we make back-end revenue from it, we have a greater flexibility to do that. We also will offer with and without video, which again is a key driver of the economics. We think that this will solve a number of things. One, drive increased flow of product creation and sell-through. Second, have the ability to monetize customers that have just been using us for our free services because they find more value in this and some percentage of those will move from premium to a paid subscription. It will allow us to attract new customers, who may not want to print or may not find it easy enough to print today and this will provide a unique service for them and because we don't have to necessarily print internationally, this is actually international, if you will, at roll out. That someone sitting in -- Qatar or in London wants to manage their photos, they could give us their credit card and get a subscription revenue stream from them as well. So we think this is uniquely positioned. We think it is completely on brand. We think that feature functionalities are distinguished in the marketplace and we're going to go out there and try different things. We'll play with price and do different testing cells. We'll look at premium to conversion rates. We'll look at the ability to give it away for free to everyone and take all the back-end commerce so we don't a priori know the exact answer though we have strong hypotheses but you know, our organization is one of test and learn and let the data drive the decisions and that's what we'll do in this case as well.

Operator

The next question comes from Aaron Kessler from Raymond James.

Aaron M. Kessler - Raymond James & Associates, Inc., Research Division

A couple of questions. Just first, in terms of the -- you think you talked about some operating expense savings as you go into maybe 2015. Can you just give us a sense on what you think maybe the newer, kind of, long-term ranges could be for an EBITDA or gross margin? And just secondly, any updates on Treat? I know that's been launched for a while, I think maybe still on beta, can you just give us an update on the Treat greeting cards?

Jeffrey T. Housenbold

Sure. You know we haven't a provided a long-term model but I think the comment we've made before is that, we think -- when we come out of this what I would call, strategic investment phase, that EBITDA could have a 2 handle back on it and that CapEx should normalize back to kind of that 7% to 8%, 8.5% range as we come out of some of these key strategic investments, in colo, in manufacturing facilities. We also have, from a gross margin standpoint, we have quite a bit of intangibles and purchase amortization flowing through from some of the M&As. So we think the gross margin will move a bit from the mix shift and as Treat continues to gain scale, that will bring AOV down but we'll utilize our facility as Enterprise scales, that will be more of a contributor versus a dilutive nature to the overall margins. So we feel pretty good of where we're headed. We think the margins on EBITDA should expand and that CapEx should normalize in the near future as we kind of get past the big buildouts in 2014, 2015. As it relates to Treat, I think some of the comments in my prepared remarks about, it's starting to resonate, still small base, but up 88%. We launched a set of new services. We're starting to see greater traction on our subscription, our card club offering and we're starting to see early days again, but attach rates on our gifts and our gift cards which drive higher profitability and average order value. So right now, we're not spending hard-marketing dollars on Treat. We're really just continuing to introduce it to our installed base and that's the same kind of approach we'll do with our Cloud services as we launch it, it's get adoption from the installed base, that kind of starts to cover the fixed cost, if you will and gives you greater flexibility to spend marketing dollars to expand the reach and the uptake of the various brands as they come out of incubation Phase 2, young growth phase.

Brian M. Regan

And Brian, one last thing on the gross margin. And I think that we've said a couple of times that we have been ramping up our Fort Mill facility and in-sourcing customer service and so we're really have been truly getting ready for our peak in Q4, so we're fully prepared with capacity and with overall continuing to delight our consumers. And you can see from our implied Q4 guidance that our GAAP gross margin should be at or above, then, the kind of historically high Q4 of 2012 gross margin overall. So we're really are seeing that cost hit as we have previously discussed, both with customer service and the ramp up for the seasonal peak and we should be back to or above that very historically high Q4 2012 gross margin.

Operator

The next question comes from Victor Anthony from Topeka Capital Markets.

Victor B. Anthony - Topeka Capital Markets Inc., Research Division

I just have 2 quick questions. One is, I wonder if you guys -- if you guys can give us an update on the how your marketing strategies are changing across the various channels and how are you using social media to [indiscernible] size maybe. And the results you've seen from these are about to be new channels. And our second, as you gear up for the fourth quarter, is anything different that you need to do this time to prepare for the new orders that you're going to get in the fourth quarter and I know you've talked about shifting some of your customer service reps to the domestic market.

Jeffrey T. Housenbold

Sure. Our marketing strategy is always evolving but I don't think there's any major shifts in it, we've been an early pioneer and a leader in social media from a Facebook and a Twitter standpoint and the blog sphere, where we have thousands and thousands of blogs that follow us on a daily basis. Our number of Facebook fans across all of our brands are market-leading even against large companies like American Greetings and Kodak and HP. We have more fans and I think it's a testament to our market share and our brand equity that we've built up. So we'll continue to make investments there. As you guys know, we've been early adopters of the Flash sale channel and that's been evolving our strategy as that vertical channel maturates. We think some of the changes is, it's becoming conversion rates in Flash overall are decreasing. The Flash providers are having to offer more of the economics back to the advertisers to get people to want to use that channel. But the lifetime value of the customer is acquired through Flash channels. For Shutterfly, as my experience with other companies I'm involved with and in the industry in general, are typically, meaningfully lower than those -- through other channels and so we all do an effective ROI and we adjust the marketing expenditure through that channel accordingly. And then as it relates to Facebook, we were early adopters of Facebook exchange and some of the new Facebook offerings and we continue to see traction there because it's still ever green and new and they're adding new features and functionality. Google remains important to us, but we're also doing a lot more in offline that is showing very positive return on invested dollars in terms of our catalog, in terms of our television, our direct mail capabilities and the more than 100 active business development partnerships that we have, which really drive new customer and retention spending on the platform. As it relates to Q4, there's really nothing dramatically new about getting prepared for Q4. This is our 14th Q4, my 9th Q4. Our customer service teams are ramping up as we speak. Fort Mill is open, the teams are training, we're starting to interview to higher thousands of temporaries. We're buying forward the inventory we need in terms of digital presses and paper and ink. And we are more prepared and the lineup of products and services and designs and innovation is the highest it's ever been in the company's history going into this Q4. So everything that is in our control, we are really firing on all cylinders and proud of the team and I think we're -- I'm very prepared for the upcoming holiday season.

Operator

The next question comes from [indiscernible] Casper from Wells Fargo.

Unknown Analyst

I'm on for Trish Dill[ph]. I'm just wondering if you could elaborate and it kind of goes to the last question of what's behind kind of the customer growth? And then again you spoke about some of the new marketing strategies in the previous question. But you also mentioned marketing efficiency. Can you mention how are you guys getting that, it's not a lower marketing spend, it doesn't look like, but are you gaining scale or can you talk about that a little bit?

Jeffrey T. Housenbold

Sure. Customer growth comes from all of the marketing channels I just mentioned based upon Victor's question. And we're seeing varying degrees of growth out of the different channels from quarter-to-quarter, different lifetime values, different return on invested marketing dollars, different rapidity of the payback period and we manage that and we say, what's the highest ROI channel? We maximize the dollars we could spend there until we hit a Parado [ph] efficient frontier and then we move to the next channel. And we balance across the traditional marketing value chain of awareness, consideration, trial and repeat and we have different channels that work better for different stages. And so as we continue to grow market share, as people become more comfortable doing things online and purchasing personalized products, as our brand equity strengthens, we're able to get marketing efficiency and that's part of your second question. And so more people know about Shutterfly today than they did last year or 3 years ago, as people send 100, 150 holiday cards and on the back of it, it says Tiny Prints or Shutterfly, that kind of endorsement and viral word-of-mouth for us, as people are waxing about how much they love us on Facebook that helps drive new customers. And so the equity in our brand is helping to drive efficiency. But our team gets smarter every day, every quarter and every year and as you have more scale, you get to automated services, you get to have more purchasing power with vendors and agencies as you're managing investments in CRM and technology to get it to more pinpointed ROI and portfolio management than you can on smaller scale. And that goes to some of the comparative advantages that we're building as the market leader.

Brian M. Regan

And Marion[ph], it's Brian. Just one last thing I'd add and Jeff alluded to, just in the last question -- the question's answer was, we're really scaling up further and continue to optimize paid search certainly with the benefit of branded keywords from our of offline brand campaigns certainly supported their -- Facebook continues to ramp up and do very nicely for us, still very efficient growth that we're seeing there. And then lastly, we've done a lot of optimization, the customer acquisition team has done a great job around display optimization. So they're kind of the 3 main channels where we were still seeing really nice improvements and we still have a ways to go, I think they continue to do all the things that we could do. So it's been very broad and across-the-board. And as Jeff alluded to earlier as well, it's been very much a test-and-learn and optimize environment. So we feel very good about that.

Operator

The next question comes from Mitch Bartlett from Craig-Hallum.

Mitchell O. Bartlett - Craig-Hallum Capital Group LLC, Research Division

In light of the manufacturing capacity additions, maybe you could just remind us, the percentage of the revenues that came in 2012 from the in-sourcing, what that might be this year? And where it might be in 2 or 3 years? And then the gross margin impact associated with that, assuming it's going up?

Jeffrey T. Housenbold

Sure. We won't quantify exactly, Mitch, but we thought you'd be happy, we're opening in your home state of Minnesota. And at Tiny Prints, that's been an evolution. We said our target was kind of 70% to 80% of the volume in-source. The lower volume kind of new stuff we continued to outsource until it hits a scale that warrants the capital investment in either new equipment or finishing equipment or bindery equipment or printing equipment. And so we kind of target that ratio. And we're at about 50% right now and that will increase significantly going into the fourth quarter as it relates to Tiny Prints. Historically, we've always outsourced all of our photo merchandise. And over the last few years, we started to take some of that in-house, particularly starting with canvas prints because we thought that captured margin there was greatest. And we have canvas prints all in-house now today. So we look at -- the products, the volumes they're driving, what the cost of the capital is, do we think this is a product that's going to be around for a long time or is it more of a hit fad kind of driven product and then we make investment decisions based upon scale, scope, cost, investment level, return on investment, payback period, and cost to capital. And so with Minnesota and with South Carolina, along with Phoenix and New York, we think we now have the country covered in an efficient way for the types of volumes that we anticipate for next few years. If I said there is 1 area that -- the 100,000 square feet in Arizona is probably going to run out pretty quick and we'll need to expand our capability for the West Coast but we can take a little bit higher shipping cost and do it about other plans for some period of time. But we think we have a fairly optimized supply chain and manufacturing footprint and it should drive higher gross margins and better EBITDA margins, drive higher quality, lower customer service contact rates because we're controlling it. It's coming in our packaging, out of our facility and a higher customer delight. So we think these are all the right and smart investments to make.

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

'

You did over $600 million [ph] out of 200,000 square feet last year. And by next year, that's going to be 650,000 square feet. So just to put -- for a finer point on it, the percentage in-source that's got to be going up pretty dramatically. Is that ...

Jeffrey T. Housenbold

Yes, I think that's mathematically true. In addition, Enterprise is growing, right? The business continues to roughly double every year and so we're taking in Enterprise. Remember, the volume on Enterprise is much higher than the revenue, the per price. The price per piece is much lower. So in some cases, if you take a 5x7 card we're selling for $2.00 or $2.29 to a consumer, we're selling that to an Enterprise client at 1/8, 1/7 of that cost and so the volumes are much higher. And then, so we will in-source more, we'll drive more Enterprise, the Consumer business is growing. We believe there's further consolidation opportunities and we think owning and operating is strategically sound and it allows us to drive our next-day delivery strategy, which we don't think anyone else in the industry has the capability, the capital or the footprint to be able to do at the same level, speed and quality that we can.

Operator

The next question comes from Bill Lennan from Monness, Crespi, Hardt.

Bill Lennan

Just one. First, just a clarification of an item on the -- a couple of items on the cash flow. Accounts payable and accrued and other liabilities seems to be an unusual use of cash for quarter. I know if it's kind of -- Maybe splitting hairs. I just want to understand if that's, like a one-time timing thing? And then the...

Brian M. Regan

Go ahead and finish.

Bill Lennan

Okay. And then on a larger note, obviously the things you're doing maybe expansion, it's quite exciting, the right thing for the business. I'm wondering if you had a Snapfish 2011 type of event concurrent with these expenditures, it could make the financials difficult in the short-term. And long-term investors will see right through that, obviously. But I'm wondering -- in addition to being the right thing to do for the business, does your aggression in terms of expansion and spending money right now, does that reflect a higher degree of confidence that we might not go back to the dark days of Snapfish '11?

Jeffrey T. Housenbold

Yes, if you keep in mind what happened in the fourth quarter of 2011, we missed top line revenue by a little less than 2% but we had increased our guidance throughout the year by almost $40 million. So we still had a great year. And the revenue growth rates and the order volumes were quite strong. The investments we're making, if you will, in Fort Mill, which we indicated was about $14 million. In Minnesota, which we indicated was kind of mid-single-digit millions to build out the colo facility. Those are all coming off the balance sheet and we have ample cash and we believe in the long-term of this industry. So if there was another momentary kind of blip in the pricing and promotional environment, I don't think that changes at all our long-term strategy and investments. In fact, if you go back to 2008 and '09 during the great financial crisis, many of our competitors had pulled back dramatically on marketing and technology innovation. We went the opposite way. While we did a few things less, we did the things we did much greater and as 2009 and '10 as we came out of the recession, we grew much faster than the competition because of that. So given that we believe these are very large markets, it's early days, about 90% of the economics are occurring offline. We're the leader, we're best positioned, we're singly focused. I'm not sure that would change our investment decisions. Again, we're not owning the real estate, we're not owning the buildings, we're leasing these things. We have flexibility in our balance sheet. We have ample cash. So I'm not really adjusting the strategy based upon near-term competitive reactions as we continue to pull ahead in the industry.

Brian M. Regan

Bill, it's Brian. Just to address your first question. The balance sheet, we've got to recall this a full 6 months, so you go from the seasonal high at year end. So you're actually comparing -- that working capital is only about $12 million difference since March 31 balance sheet. And so when you look at what we're seeing there is a small seasonal increase of accounts payable of roughly only around $10 million and those bunch of other puts and takes, there's some tax benefits to other current assets and the only others, I would say, sizable use of cash really went towards probably plant and equipment, that's around the $14 million change since the March 31 balance sheet and that was almost entirely driven off of our Fort Mill, the opening of our Fort Mill facility down in South Carolina.

Bill Lennan

Okay. So organically, there's really no change in the cash flow characteristics of when you -- when you're paying bills and receiving payments and so on and so forth?

Brian M. Regan

That's exactly right. It's just the normal seasonal flow in here.

Operator

At this time I'm showing no further questions. I would now like to turn the call back over to Jeff Housenbold for closing remarks.

Jeffrey T. Housenbold

Thank you, everyone, for joining us today. As you can see from our Q2 results, we were firing on all cylinders, as all 5 of our consumer-facing brands plus our Enterprise business exceeded our expectations in the quarter. Average order value is growing from our premium content and services. We're making important investments in innovation as it relates to our growing assets in the Wedding industry, in Treat, in Enterprise, in mobile and in our Enhanced Cloud Service. And we're laying the foundation for future growth through our investments in the new colocation and storage facility, as well as a new state-of-the-art manufacturing facility in Minnesota. We are as prepared and the lineup looks fantastic for the fourth quarter. And I look forward to updating you guys in 3 months from now, on our progress. Thank you.

Operator

Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation. You may all disconnect. Have a good day.

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