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Shutterfly (NASDAQ:SFLY)

Q2 2011 Earnings Call

July 27, 2011 5:00 pm ET

Executives

Jeffrey Housenbold - Chief Executive Officer, President and Director

Annie Leschin - IR

Mark Rubash - Chief Financial Officer, Principal Accounting Officer, Senior Vice President and Secretary

Analysts

James Cakmak - Sidoti & Company, LLC

Shawn Milne - Janney Montgomery Scott LLC

Colin Sebastian - Robert W. Baird & Co. Incorporated

Youssef Squali - Jefferies & Company, Inc.

James Friedland - Cowen and Company, LLC

Aaron Kessler - ThinkEquity LLC

Mitch Barlett - Craig-Hallum Capital Group LLC

Bill Lennan - Wedbush Morgan

Heath Terry - Canaccord Genuity

Operator

Good day, ladies and gentlemen, and welcome to the Shutterfly Second Quarter 2011 Financial Results Call. [Operator Instructions] As a reminder, this conference is being recorded. And now I would like to turn the conference over to your host, Annie Leschin. Please begin.

Annie Leschin

Thank you, operator. Good afternoon, everyone, and welcome to our call today. With us on the call are Jeff Housenbold, Chief Executive Officer of Shutterfly; and Mark Rubash, Chief Financial Officer. The press release detailing our results is available on shutterfly.com and the archived copy will be kept on our website as well. We have also posted some slides that we will use as we go through this call. Additionally, within a few hours, we will release a recording of this call, both in a streaming online format and through a downloadable podcast. You can access all of these 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 Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements related to the acquisition of Tiny Prints, our business outlook and strategy and statements about historical results that may suggest trends for our business. Actual results could differ materially from those projected in the forward-looking statements or from those expressed or implied in the forward-looking statements. For more information regarding these risks and uncertainties that could cause actual results to differ materially, including risks related to the integration of Tiny Prints and our business in general, we refer you to sections entitled Risk Factors in the company's last annual report on Form 10-K and its other SEC filings. I would also like to note today that any forward-looking statements made on this call reflect our 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. The quantitative reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures is available in our second quarter 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.

Jeffrey Housenbold

Thanks, Annie, and welcome, everyone. I'll start today's discussion with the review about second quarter progress and our summary of financial results, and then turn the call over to Mark to review our financials in detail and provide financial guidance for Q3 and full year 2011. We'll then open up the call for questions.

During the second quarter, we had robust revenue growth, made meaningful progress with our Tiny Prints integration, launched our all-new Custom Path photo book experience, made a number of noteworthy improvements to our products, services and infrastructure as we prepare for the seasonally strong fourth quarter. Now let me quickly highlight the key themes for today's call. First, Q2 net revenue growth was primarily driven by Cards & Stationery and Photo Books. Together, these 2 categories contributed over 70% of total quarterly net revenues and contributed meaningfully to our 85% year-over-year PPS growth. With the Tiny Prints acquisition, Cards & Stationery has now become our largest and fastest-growing product category, validating our strategy and confirming the large and early-stage market opportunity.

Second, our recent Tiny Prints acquisition is already proving successful, evidenced by the 44% year-over-year pro forma second quarter revenue growth, an expanding customer base and solid improvements in average order value. We've made meaningful progress on our integration plan, with best practice sharing across all departments, migration of finance and HR systems, finalization of our manufacturing and fulfillment plans and coordination of key marketing and merchandising strategies. We are excited at the prospect of our initial cross-selling opportunity and the potential for new products as we position Shutterfly, Tiny Prints and Wedding Paper Divas as the premium brands in the online Cards & Stationery market.

And finally, we've continued our focused on delivering the highest quality products and services in the social expression and personal publishing market. Consistent with our investment strategy, during Q2 we launched a number of new products and services, strengthened our infrastructure platform and added key members to our already talented and enthusiastic teams. The investments we're making today will help us drive future growth, increased market share and long-term shareholder value.

With this as a backdrop, let me summarize our second quarter financial results. Total net revenues for the quarter were $75.8 million, a 62% increase over last year, including Tiny Prints. Excluding Commercial Print, net revenues from our core Shutterfly business grew 27% over last year, and we were once again driven by 38% year-over-year growth in our line of Personalized Products & Services. Q2 marks the 42nd consecutive quarter of year-over-year net revenue growth for Shutterfly, and we believe our unique combination of customer orientation, with unmatched execution, continues to distinguish us from the competition.

Now I'll briefly recap some of the progress we made during the quarter. Turning first to Tiny Prints. After less than a quarter of combined results, we believe our long-term vision of creating a world-class online Cards & Stationery offering is well on the way to becoming a reality. I'm happy to report that the integration of Tiny Prints is proceeding smoothly and largely as expected, with all signs pointing to a greater opportunity than originally envisioned. Our primary goal was to ensure that this transition was as seamless as possible for our customers. We believe we have taken the first strides towards accomplishing this objective. We have made significant progress in moving the majority of Tiny Prints product offerings onto Shutterfly's in-house manufacturing platform. Organizationally, we are working hard to ensure that our teams are well-coordinated in everything from back-end systems to sales and marketing, so that our priorities and our strategies are aligned.

On the revenue side, we are developing initial cross-selling between brands, including the introduction of Photo Books and Calendars to Tiny Prints customers and Tiny Prints and Wedding Paper Divas offerings to Shutterfly's customers. We feel very good about the acquisition and state of the integration. Combined, we have the ability to offer customers exceptional, high-quality products at multiple price points to meet their ever-growing requirements of the social expression and personal publishing industry. Next year, we plan to work on greater organizational efficiency and even more cross-sell and upsell opportunities between our brands.

A key component of our Cards & Stationery strategy is an expanding array of occasions, designs and sentiments, together with constant improvements in the online shopping experience. This quarter we introduced a new store platform, which provides us the ability to quickly test new products and services, optimize site content and vary page designs across product offerings. We also made some exciting updates to the Shutterfly Cards & Stationery shopping experience, including the browse and search capabilities. Together, these changes will allow customers to quickly and easily find their perfect card. Overall, the new platform provides a rich environment that both enhances the customer experience and enables greater revenue efficiency.

Moving on to Photo Books. As we announced last quarter, we launched our most significant innovation in Photo Books since the category emerged several years ago. The all-new Custom Path, with over 40 new design styles, gives customers the creative control they desire, combined with the tools to tell their story the way they want, with the quality, ease of use and variety of designs they've come to expect. With about 3 months of experience, we've already seen a strong transition from the old to the new Custom Path. Customers are excited by the combination of guided creation with creative control. We are continuing to optimize the performance, add new styles and finalize the feature set as we prepare for the upcoming holiday season. Together with Simple Path, our photo books now offer solutions for every type of consumer and occasion and solidifies our leadership position in the rapidly growing market for online photo books.

Moving on to our Share Sites. We ended the quarter with 3.3 million share sites and continued double-digit year-over-year growth in the number of shares sent. As we approach the back-to-school and upcoming youth sports seasons, we have made some important improvements that further enhance the customer experience, including the redesign of the welcome page and site creation paths. In particular, an optimized welcome page now provides a cleaner, more current look and feel, providing more interactivity, as well as a helpful guide to simplify permission choices. A new Events & Celebrations category has been added to assist users with one-time events and occasions, wide sample sites are available with interactive illustrations of key site features and options have been added. And we enhanced the creation path, where users can now explicitly choose the type of site they want to create, preview site styles, capture event date and type and be guided through the creation process using interactive contextual help. To promote awareness and drive new Share Site users, we are also launching a classroom marketing campaign in the next few weeks. This campaign is centered on driving greater parent engagement through the creation of Share Sites at the district, administrator and teacher levels. By proactively supporting teachers' needs for parent engagement, we believe Shutterfly Share Sites will further penetrate the education category. This integrated marketing campaign will be supported by online and print advertisements in top educational media outlets in addition to outreach to key educational influencers.

Turning now to our business development efforts. We continue to expand our distribution opportunities this quarter through a new business relationship with The Knot and a co-branded website with Costco, that should benefit the Tiny Prints and Wedding Paper Divas brands. One of the ways we are capitalizing on our cloud infrastructure is to offer customers access to their photos and products, regardless of device, platform or location. We continue to build and update applications for desktops, laptops and mobile devices on both the Mac and PC platforms. In addition, we updated our iPad and iPhone releases, incorporating a number of new features requested by our users.

In social media, we are continuing our efforts in this channel to promote awareness of the category as a whole and increase brand recognition for Shutterfly. We continue to optimize our social media activities in an effort to attract new customers and simplify the user experience for existing customers. During Q2, we grew our Shutterfly Facebook fan base to 243,000, and our Twitter followers to 30,000. We are putting greater focus on impact and analytics tracking with an eye towards viral and word-of-mouth activities in time for the Q4 holiday season. Specifically, we have begun more integrated viral marketing campaigns, such as our recent photo book campaign, where we revealed the 10 most joyous cities in America for 2011. We also announced the appointment of a chief storyteller and launched a word-of-mouth program that encourages consumers to share their moments of joy through photography.

Finally, in manufacturing, our unit volumes have reached a point where automated manufacturing processes for both Photo Books and Cards & Stationery products are now cost effective and will become a competitive advantage. Fully reflected in our financial guidance, during 2011, we expect to invest up to $6 million in automation equipment that will increase quality, lower unit cost, improve throughput and reduce our variable labor requirement during the peak season.

In summary, Q2 was another very successful quarter. We maintained growth in our core PP&S categories, completed the acquisition and initial integration of Tiny Prints and released the biggest innovation yet through our flagship photo book product line. We are very excited about the opportunity we see ahead, as we fully integrate the Tiny Prints brand and lay out our roadmap for the future. Our commitment to developing unique, innovative and compelling offerings across our multi-brand, customer-centric product lines remains at the forefront of our strategy. We are taking a significant step forward in growing our business and transforming the online personal expression and personal publishing market and believe the opportunity ahead is vast and growing.

With that, I'll turn the call over to Mark to review our financials in detail. Mark?

Mark Rubash

Thanks, Jeff, and thank you all for joining our call today. I'll start today's discussion with some observations about our second quarter performance followed by a review of our key metrics and operating results and end with our third quarter and revised full year 2011 financial guidance. Following my prepared remarks, we'll open the call for your questions.

Please note that we completed the acquisition of Tiny Prints on April 25, and that our Q2 financial results reflect Tiny Prints' operations from that date through the end of June. Net revenues from Tiny Prints transactions are included as a component of our Cards & Stationery category and are reflected in Personalized Products & Services. To help you understand the business impact of this acquisition, today's discussion includes certain separate financial information for Tiny Prints. As we continue our efforts to fully integrate the business and deploy our multi-brand strategy, we may choose to omit this or other financial information in future periods.

Our solid second quarter performance was once again driven by strong top level metrics and by our 2 key product lines: Photo Books and Cards & Stationery. For Shutterfly, these categories together increased 31% year-over-year and Tiny Prints' pro forma net revenues for the full quarter increased 44% year-over-year. On a combined basis, these 2 categories represented approximately 71% of our total quarterly net revenues. In terms of top level metrics for Shutterfly, we saw accelerating double-digit growth in visits, registrations, unique uploaders and uploaded images, and the second highest quarter ever in the number of shares sent.

The Shutterfly activity translated into 1.4 million transacting customers. We generated 2.2 million orders with an average order value of $26.10. On a year-over-year basis, we saw a 26% growth in customers, 24% growth in order volumes and 2% growth in average order value.

Bolstered by the spring, Mother's Day, Father's Day and graduation occasions, together with a healthy wedding season, Tiny Prints also experienced seasonally strong top level demand. On a pro forma basis for the full second quarter, Tiny Prints saw accelerating double-digit growth in visits, 224,000 transacting customers, 362,000 orders and an average order value of $56.43. Excluding the early but promising contribution from one-to-one greeting cards, Tiny Prints' average order value increased 12% year-over-year to $112.13.

Let's now move to a more detailed look at our results, starting with net revenues. Net revenues for the quarter totaled $75.8 million, a 62% increase over the prior year. Net revenues from Personalized Products & Services totaled $58.5 million, an 85% year-over-year increase. Net revenues from Prints increased 1% to $14.5 million and Commercial Print net revenues totaled $2.8 million. Excluding Commercial Print, net revenues from the core Shutterfly business accelerated 27% year-over-year, with 72% of net revenues coming from existing customers and 24% from new customers. For Tiny Prints, net revenues recognized in the quarter totaled $14.7 million.

In terms of overall product mix, Personalized Products & Services represented 77% of net revenues, total Prints represented 19% of net revenues and Commercial Print net revenues represented 4%. And finally, net revenues from 4x6 prints declined to 9% of total net revenues.

Moving now to cost of net revenues and gross margin. We reported a gross margin of 47.4% in Q2, in line with our guidance and below the 50.5% margin we reported last year. The decrease in margin reflects the higher Tiny Prints outsourced cost structure, increased Commercial Print contribution, lower ASPs driven by trial promotion programs and slightly higher shipping costs. These items were partially offset by margin benefits from favorable product mix. Continuing down to operating expenses, overall, excluding stock-based compensation, operating expenses were less than anticipated due to lower-than-expected merger integration cost and continued company-wide efforts to manage our cost structure in line with our revenue growth.

Looking more specifically at our key functions, technology and development costs totaled $17 million for the quarter, representing 22.4% of net revenues compared to 26.7% in Q2 of last year. Excluding stock-based compensation and depreciation, our technology and development spending increased approximately $3.2 million or 36.3% from the prior year, reflecting the addition of the Tiny Prints technology team for a partial quarter, together with incremental investments in engineering headcount. Sales and marketing expenses totaled $24.9 million in the quarter, representing 32.9% of net revenues compared to 24.2% in Q2 of 2010. The year-over-year increase reflects the addition of the Tiny Prints marketing team for a partial quarter, together with planned promotional spending associated with key Q2 occasions and gift-giving periods. General and administrative expenses for the quarter totaled $15.5 million or 20.5% of net revenues, relatively consistent with G&A as a percent of net revenues in Q2 of last year. Excluding stock-based compensation and credit card processing fees, G&A expenses represented 12% of quarterly net revenues, down from the 13.1% in Q2 of last year.

Adjusted EBITDA for the quarter was a loss of $283,000, significantly better than our most recent guidance. The favorable EBITDA performance was driven largely by strong revenue growth, overall cost management and savings realized in the initial Tiny Prints integration. The effective tax rate for the quarter was 83%, primarily reflecting non-deductible stock-based compensation and transaction expenses, offset by tax benefits resulting from disqualifying dispositions of employee incentive stock options.

On a GAAP basis, our net loss for the quarter totaled $3.6 million or $0.11 per share based on 33.2 million outstanding shares. And finally, capital expenditures during the quarter totaled $6.5 million, including $1.9 million for technology, equipment and software, $1.9 million for manufacturing equipment and building improvements and $2.7 million in capitalized research and development costs. Cash and liquid investments at quarter end totaled $75.9 million.

Now I'd like to provide a brief update on our Q2 Tiny Prints integration effort. During the quarter, we completed the migration of all Tiny Prints accounting, procurement, legal and HR processes to our ERP and HRIS environments and made meaningful progress integrating or coordinating teams across the company. We also made significant progress on our 2011 manufacturing integration plan and successfully completed a number of important vendor and partner negotiations to reflect the substantially increased unit volumes. In addition, we're already deployed a number of best practices in website operations, marketing and merchandising and look forward to further integration opportunity as the year progresses. And finally, we achieved all of the financial synergies planned for Q2, and based on the work to date, believe that the full year plans are also intact.

To complete my discussion today, I would now like to summarize our outlook for the third quarter and the full year 2011. As we look at the second half of 2011, we're enthusiastic about our core growth markets. However, as a consumer-facing business, we're also mindful of the current state of the U.S. economy and the impact various external factors may have on discretionary spending, including rising gas prices and unemployment rates. Though these factors could impact consumer activity in the coming quarters, we continue to see healthy demand for Shutterfly's products and services as we approach the all-important holiday season. For the third quarter, we expect normal summer seasonality as the consumer markets slow for summer vacations and a lack of key occasions and gift-giving holidays. And for our Commercial Print business, we remain on track to deliver full year net revenues in the range of $8 million to $10 million, which is included in today's financial guidance. In terms of our cost structure for Q3 and Q4, we remain committed to balancing our investments for growth with our commitment to increase profitability and free cash flow. Specifically, we'll continue our efforts on a number of important technology initiatives focused on longer-term efficiency, as well as continuing our planned Tiny Prints integration. And finally, please note that our Q3 and Q4 financial results will reflect the full quarter impact of the Tiny Prints cost structure together with various integration costs and expected synergies.

With these points as a backdrop, I'll now summarize our revised financial guidance starting with Q3. We expect net revenues to range from $73 million to $75 million, reflecting year-over-year growth of up to 53%. We expect our GAAP gross margin to range from 45% to 46% of net revenues, and our GAAP operating loss to range from $25 million to $28 million. We expect our adjusted EBITDA will range from a loss of $6 million and a loss of $7 million, and that our effective tax rate will range from 45% and 55%. We expect the GAAP net loss per share to range from a loss of $0.32 to a loss of $0.44, based on approximately 34.8 million weighted average common shares.

Turning now to the full year 2011. We now estimate that net revenues will total between $475 million and $485 million, reflecting year-over-year increases ranging from 54% to 58%. We expect the full year GAAP gross margin to range from 54.5% to 55.5% of net revenues. We expect that our GAAP operating income will range from approximately $18 million to $25 million, and that our full year 2011 adjusted EBITDA margin will now range from 18.7% to 19.7% of net revenues. The full year GAAP effective tax rate is expected to range from 25% to 35%. We expect full year GAAP net income per share to range from $0.38 to $0.46 per share, based on 35.5 million weighted average diluted shares. And finally, we now expect that 2011 capital expenditures will range from 7% to 7.5% of net revenues. The increase in the low end of our capital expenditure guidance is primarily driven by our investments in Photo Book and Cards & Stationery manufacturing automation equipment. This range also includes approximately $2.1 million for landlord-funded tenant improvements and up to $10.9 million in capitalized R&D cost.

In summary, we are pleased with our year-to-date results and remain optimistic about the second half of 2011. Though economic conditions are ever changing, from our current vantage point, we are confident of our market position and product offering heading into the all-important holiday season. And lastly, as we move forward with our integration plans, we look forward to providing you with additional updates on our progress.

So with that, I sincerely thank you for your time today and look forward to speaking with many of you in the days and weeks ahead. We'll now open the call for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Youssef Squali of Jefferies & Company.

Youssef Squali - Jefferies & Company, Inc.

A couple of questions, please. Mark, on your Q3 guidance, even in the heart of the last recession, you guys eked out sequential revenue growth, Q2 to Q3. So in fact, in going back to IPO time, you guys have never showed a sequential decline, which is what seems to be indicated in your -- at the midpoint of your Q3 guidance. So what is it that's making you this cautious on Q3 outside of just, maybe -- you talked about -- just maybe a macro environment, a consumer that may not be as strong as he or she was maybe 6 months ago? And my second question speaks to Tiny Prints, to a certain degree, so can you speak to maybe or -- I guess, let me phrase it this way. The growth that Tiny Prints saw in 2010, and correct me if I'm wrong, was over 60%. I think the last data point you showed was 44%. Did any of that 44% of growth benefit from any cross-selling from Shutterfly or to Shutterfly or is that still not in place yet?

Mark Rubash

Sure. On the first point on Q3 and seasonality, I think one of the trends that we do see developing and it's, I think, the case in Shutterfly and probably more so in the case of Tiny Prints is that the nature of the products tend to be most receptive consumers in the key holidays and the gift-giving periods. And as the base become larger, you see kind of more pronounced seasonality. On Shutterfly's case, we're certainly mindful of Q3 and I think most of these e-commerce as well, that consumer attention is almost always less because of the vacation. I think we also have an overlay -- maybe a little more caution this year just because of the uncertainty of which way sentiment, gas prices, unemployment, the whole debt debate in Washington and where that's going to play out. I think it has the potential to make the landscape a little more nervous than it needs to be. With respect to Tiny Prints, their business has always been really focused on some of the key life events, whether they be births and weddings, as well as Q4 for holiday and other greeting cards. In terms of their growth last year, the full year was 54%, the strongest growth was in Q4 and, in fact, historically for them, the strongest growth has always been Q4 and Q1. Q2 tends to be -- have a benefit early in the quarter, because of the -- particularly the save-the-date part of the wedding cycle, and then Q3 is always their softest quarter. So I think if you look at our guidance for Q3, I think there is a level of conservatism because of the macro and because of the more pronounced seasonality. But we've also had very strong customer growth and activity in the first half of the year. And our data analysis really shows that when customers engage any one of the first 3 quarters, there's a very high correlation to repeat in Q4. So really, if the world stays as it is and we run our playbook and we focus on the things that matter, I think we're lined up very well for Q4 and the full year, and Q3, I think, at least has the potential to be a little bit softer than what we've seen in prior years.

Jeffrey Housenbold

Yes. If I could just add to that. In addition, keep in mind, Tiny Prints and wedding season is not Q3 heavy, that's Q2 heavy. And so that goes to the mix that Mark was referring to. We think that, historically, we've seen 53% to 54% of revenue in the fourth quarter. With the Tiny Prints acquisition, guys go back into the numbers based upon the data provided. We're expecting about 57% because now our Cards & Stationery is a greater mix. In fact, it's the largest and fastest-growing category and given the holiday focus of Cards & Stationery, we were expecting a little bit more seasonality in the fourth quarter. Though for 11 straight years, we've always executed, and executed well, in fourth quarter, hence the full year guidance being up this quarter over last quarter's guidance.

Youssef Squali - Jefferies & Company, Inc.

That's very helpful. So let me just clarify something. So far, have you seen any of the softness that you're cautious about in the first, I guess, month of the quarter?

Mark Rubash

I would say, we see the trends we expect for Q3. In other words, what we're seeing through the month of July has been consistent with our internal thinking. It's not outside of that. But I think any time that there's a potential to -- external factors or otherwise, that cause consumers to be nervous about spending, we are a consumer discretionary business. So layering that environment, whether it passes quickly or it turns into something worse than where we are today, nobody knows. But I also think over the longer term, and this is true of my experience in e-commerce beyond just Shutterfly, is that seasonal patterns over time will tend to become more pronounced where the peaks gets a little bit more intense and the valleys starts to develop shape. So I think we're starting to see some of that.

Jeffrey Housenbold

And then lastly, Youssef, you asked about cross-sell. We just turned on the first phase of cross-sell this Monday. So we don't have -- we have 2 days of data. And so we're very optimistic about the ability to sell Calendars and Photo Books to the Tiny Prints customer base as we indicated on the last call, that was the #1 and #2 products requested by that customer base, and we've turned on Wedding Paper Divas at the link from our site when Shutterfly customers are looking for wedding invitations, save the dates and engagement parties. So we're optimistic about the ability to cross-sell through Q4 in 2011 and as we do deeper integration into 2012.

Operator

Our next question is from Colin Sebastian of Robert W. Baird.

Colin Sebastian - Robert W. Baird & Co. Incorporated

First off, just wanted to follow-up on the guidance question. In the core Shutterfly PP&S segment, should we be assuming there are slowdowns in the growth rate of that segment, is that experiencing similar seasonal patterns that you talked about? And then secondly, trying to understand the magnitude of the Q2 EBITDA upside in contrast to the Q3 EBITDA guidance, if there's any meaningful shift in the timing of integration expenses at play there? And then lastly, you mentioned the one-to-one greeting card market, and was curious, how much of a priority that is? It seems like that can be an enormous growth opportunity across all the sites, and maybe how quickly you plan to roll that out will be helpful.

Mark Rubash

So on PPS, a couple of things to keep in mind. From the prepared remark, total PPS when you include Tiny Prints is about 77% of our total revenue in the quarter. Of that, the Shutterfly or historical Shutterfly PPS grew 38%. And if you look at Tiny Prints for the full quarter -- we only have been for 2 months and 4 days, I believe. Their business which is all PPS, Cards & Stationery, grew 44%. So what you have in Q2 is 77% of our revenues, that growing in the neighborhood of 40-plus percent, which we feel very good about. In terms of the products that are going to be more seasonal, it's certainly going to be more pronounced in the Cards & Stationery category, which now is our largest category of products and primarily because they tend to be driven by holidays, key life occasions, where sending a card is part of that occasion. So I think we'll see a little bit more pronounced seasonality with the Cards & Stationery business. Photo Books historically have been -- tend to be quite popular late in the quarter, early in Q4, as families get back from vacations and some of the summer activities turn into memories in the form of Photo Books. So I think that's what will happen from a seasonal standpoint. In terms of EBITDA, a couple of things. I know there's a lot of moving parts, so we're trying to be as transparent so to help you guys get clear on where the dollars are landing. In Q2, I would say that all of the things we had planned from an integration standpoint went very well. The biggest source of upside, if you will, from where we guided was we had anticipated a need to spend external dollars for assistance with sites ability diagnostic work on the Tiny Prints side on migrating to our ERP environment, and a number of other G&A kind of transition areas. And virtually, all of that work was done by the internal teams without incremental cost. So those are, I would say, permanent savings at the bottom line. The balance of that is really driven by the revenue upside relative to our internal plan and to guidance. When you go to Q3, a number of things happen there. One, slightly softer from a revenue standpoint and revenue mix. We're also -- and the biggest piece of this is, we'll have the Tiny Prints cost structure in place for the full quarter instead of just 2 months and that's the primary thing that is shifting. Normally, it's also the period of time, particularly in the second half of the quarter where we start ramping up our CS and temporary hiring environments and start building capacity ahead of Q4. So you'll see a little bit of normal seasonal spending also on the marketing side in Q3. But from our perspective, we actually feel like we're ahead of plan relative to our full year profitability goal. We're certainly ahead of plan from where we thought we might be on the revenue and cost synergies for the full year, and that's the basis for being able to increase our full year EBITDA guidance, though modestly, still an increase.

Jeffrey Housenbold

And then on your last question on one to one and priority. One of the strategic rationales for acquiring Tiny Prints was to expand into additional markets. And in doing so, we picked up both a wedding business, as well as a one-to-one card business that is aimed at occasions that are not holiday based, but are individual like birthdays, anniversaries, graduations, sweet 16s, thank you cards, teacher appreciation day. And it's a very small nascent recently launched business, but we are very excited about the opportunity, because keep in mind, 2/3 of the greeting card industry is non-holiday, yet something like 84% of all Shutterfly cards are holiday. So this gives us an opportunity to take our front-end systems, our back-end print on demand, our CRM, our customer loyalty and expand into more use occasions across the year driving greater share of wallet. So we are putting focus and investment and energy into that business and are excited about the possibilities. But it's going to take multiple quarters and multiple years until that grows into a robust contributor to our revenue base.

Operator

Our next question is from Aaron Kessler of ThinkEquity.

Aaron Kessler - ThinkEquity LLC

In terms of the last quarter, I think you talked about $6 million of one-time expense, and if you can just provide us an update. I mean, how much was in Q2 and kind of expectations for the remainder of the year. And just to clarify on Tiny Prints, I think you said around $14.7 million in revenues, I think, for Q2. If you can just give a pro forma number for that and also maybe what Tiny Prints saw last year in seasonality from Q2 to Q3, the magnitude of the -- maybe the decline last year. I mean, it's probably in hyper growth phase last year, but any color on that would help.

Mark Rubash

On the first point, on the $6 million and one-time, when we spoke last quarter, we thought about $3 million of that was going to land in the Q2 period. It turned out about half of that, the rest of it, kind of permanent savings. So we still have probably about $3 million split through Q3 and Q4 to finalize the things we have on tap for integration activities. In terms of Tiny Prints, $14.7 million was the revenue we recognized in the short quarter. For the full quarter, it was $20.4 million. And in terms of seasonality -- so that was -- the $20.4 million was the basis for the 44% growth. And if you look at -- there's seasonality, particularly Q2 to Q3, almost from their inception, Q3 has always been flat to slightly down. Last year, I believe, it was down about $1 million from Q2 levels. So they started to see the seasonal patterns develop and the particular category for them that gets much softer in Q3 than in the springtime is wedding, because there's certainly many fewer weddings in the fall and winter compared to the spring and those are high ASP, high order value transactions.

Aaron Kessler - ThinkEquity LLC

Great. And finally, just given the pace of your kind of integration of Tiny Prints, any changes in your thoughts in kind of a timing on in maybe getting Tiny Prints margins up similar to your overall corporate margin. Is that going to happen sooner than expected now?

Mark Rubash

No, I think everything is really going on track. I mentioned in the prepared remarks that we have had a number of successful negotiations with our key vendors in terms of digital press and shipping and some of the others that are -- I think are going to help us out over the long term. In terms of being prepared for Q4, I think we're right on track. We're actually doing some very small volumes in both of our plants starting this week and next week. That's going to ramp up very gradually. So I think the back half of the quarter, yes, we may see a little bit of a benefit from that more optimal cost structure versus outsourcing, but it's really queued up so that Q4 is where the lion's share of the benefit will come from.

Operator

Our next question is from Shawn Milne of Janney Capital Markets.

Shawn Milne - Janney Montgomery Scott LLC

Just wanted to, Mark, kind of go back to what you were just talking about, some of the one-time costs in the third quarter and understanding that seasonally it might be a little bit more pronounced, but you've made roughly almost $3 million of EBITDA in Q3 last year. So I'm trying to understand the magnitude, if you have any integration costs and even with that included, if you get $6 million to $7 million, is part of what's going on there -- is that the added automation? Is some of that flowing through the quarter? And can you help us with Tiny Prints on a full quarter of expenses, is that slightly dilutive in Q3? If you can add any more color on that. And -- go ahead.

Mark Rubash

I was going to say, really, the bulk of it is bringing the Tiny Prints cost structure on for the full quarter, relative to where we were last year. Last year, in Q3, we had a couple of very successful photo book promotions, one that we launched with our internal base, one that we did with Groupon. We haven't made any -- certainly any public announcements of what we're planning for this year. But I would say, we're trying to be cautious, given that we are seeing some seasonal patterns develop, and I'm certainly a little more cautious going into this Q3 than I was last year from a macro standpoint. But in terms of what's happening with the cost structure, there's nothing, I would say, significantly different. We are bringing on a number of digital presses. We'll get some of that cost in Q3 as we -- digital presses to take on the Tiny Prints volumes. That was all anticipated in our historical guidance. So certainly, from where we were last quarter, nothing has really changed other than, I think, we're tracking a little bit better from a synergy standpoint than where we were at the beginning -- at the end of last quarter.

Shawn Milne - Janney Montgomery Scott LLC

Okay. And just as you rolled out the -- some of the improvements on Custom Path -- I mean, the core PPS growth of 38% is certainly a very, very strong number. I think you were at 40% and 41% in the first couple quarters. And I think in your prepared remarks you talked about optimizing that. Was there some transition during the quarter that -- where we might actually see ultimately the growth rate on Custom Path pick up again?

Jeffrey Housenbold

I don't think we remarked about growth rate of custom versus old or simple. I think in my prepared remarks, I talked about new Custom Path photo book users are choosing the new over the old. In fact, more than 90% of new Photo Books being made in the Custom Path versus simple is now choosing our all-new versus the classic custom. And so part of that is navigation and merchandising on the website and part of that is people are seeing the inherent benefits of the more personalization tools, the embellishment, the new designs, the ability to move text anywhere, photo as a background, all the enhancements that we rolled out there. And so we expect to see continued adoption of Simple Path, as well as Custom Path as we extend and expand the overall photo book market.

Mark Rubash

Some of the things we are continuing to work on -- we do expect to bring additional enhancements through the balance of the year in front of Q4, so there will be additional design templates or design kits as we call them here, potentially some new functionality. We're also continuing to work on the code base to optimize performance, not only for an individual user experience, but because of anticipated volumes as we get into Q4. So that is a platform that -- it's still very early, but it's getting very favorable adoption. And I think the real potential is that it expands the number of use cases because of the design flexibility. Whether you're a creative professional or a work-at-home mom, there's something there for everybody, and it's actually fun to use once you get into the experience. So we think over the long term, it's going to be the platform of choice, if it's not there already. And that's where it has the potential to, I think, improve the adoption rate for Photo Books overall.

Shawn Milne - Janney Montgomery Scott LLC

Okay. Just lastly, a quick one, just on sales and marketing. Has there been any change in the customer acquisition cost of Shutterfly. And I know it's very early, but are you -- Jeff, have you guys seen any opportunity, paid searches, you worked together with the Tiny Prints team as you move closer to the holiday?

Mark Rubash

Well, I would say, overall, if you look at our sales and marketing costs, Shutterfly historical per customer, that was still under $10 in the quarter. It was slightly up sequentially, pretty consistent year-over-year. Tiny Prints cost per customer or total sales and marketing is about 3x higher than Shutterfly, but their average order value, particularly if you exclude the one-to-one category for the much smaller ASP is well north of $100. So they have about 3 to 4x the average order size -- 4x the average order size, 3x the customer cost. But we're still at a point today where we're largely 2 separate teams on 2 separate marketing platforms. We did make progress, certainly from a planning standpoint and sharing of best practices and coordinating some of the joint insights on pricing and search optimization. But I think a lot of where that benefit is going to come through organizational and data integration, and that's more of a 2012 and beyond than a 2011.

Jeffrey Housenbold

And just to add to that, we're sharing best practices on SCO, on SCN and bid strategy, best practices, on site merchandising, on promotional optimization and as we further link the sites, we'll start to get benefits from a link to standpoint in the Google search engine, and that will roll through, some of that we'll see in Q4 and into 2012. So I think we kind of said on the last call, job one was to ensure Q4 as we integrate and so we're doing the right back-end integration, some right front-end integration. So we make sure that we execute well in Q4 and we'll do deeper integration and rationalization of the marketing spends into 2012. So we're excited about where we are. We're ahead of where we thought we would be today. I think that's reflected in the increase in the EBITDA margin on a full year basis. Mark talked about some avoidance of integration costs that we had expected, and I'm very optimistic about the talented teams working together and doing the right thing for our joint customers into 2012.

Operator

Our next question is from Jim Friedland of Cowen and Company.

James Friedland - Cowen and Company, LLC

Do you guys have a sense about the -- you've had a chance to work more closely with Tiny Prints, the percentage of Tiny Prints customers that are active Shutterfly customers? And then, separately, looking at the Costco partnership that you announced, if you put the sort of offline/online partnerships Costco, Target, et cetera, together, are those partnerships a material driver of revenues for the company?

Jeffrey Housenbold

So we have done internal analysis now that we're a same company on the overlap, and it was very close to our approximations when we were in due diligence. It's around 1/3 of the customers at Tiny Prints had shopped at Shutterfly in the recent history. And I think there's opportunity, A, to penetrate that 2/3 that hasn't. But also, as you integrate more closely, the further apart you are, the more of a drop off you have as you integrate and you do things that are contextually relevant into their 500,000 unit customer base, there's opportunity to even get more out of the people who are already shopping on both sites. In terms of our overall co-marketing partnerships, I think we have something in the order of 45 active partnerships. Tiny Prints has had only a few partnerships, Costco and The Knot being the 2 largest. And so it has not been a meaningful part of their overall go-to market strategy to date, and I think that's part of the benefit. We're already seeing opportunities brought to us by our existing partners saying, "Hey, can we have Tiny Prints or Wedding Paper Divas?" And I think that will help that business. Overall, however, those kind of co-marketing partnerships are a nice part of the overall customer acquisition mix, but by no means the majority. Direct to our brands and online search and online media is much more meaningful and impactful than co-marketing partnerships to date. But as we get greater scale and awareness of our joint company, increases, we're starting to see a meaningful pick up in inbound calls for people seeking partnerships, and that was part and parcel the strategy and rationale for acquiring Tiny Prints and it's exciting as it may bode for the future.

Operator

Our next question is from James Cakmak of Sidoti & Company.

James Cakmak - Sidoti & Company, LLC

To follow-up on your comments on the marketing spend, you guys talked about how you wanted to -- you're going through the increased ROI threshold for Tiny Prints and that was really going to be a big part of the driver to get the cost structure aligned to where you guys were prior to the deal. To try to quantify that, you pointed the 8% to 10% potential improvement in the Tiny Prints margin from the increases in the threshold, are you guys thinking that we can attain those numbers? Is that how we're trending?

Jeffrey Housenbold

I think there are a couple of parts of the synergies that we're already realizing. The ones that are back-end infrastructure oriented are very notable, and we're starting to see fruit from that labor already, particularly in manufacturing, in negotiations with our vendors on materials and on shipping. We're starting to see greater utilization, which helps on labor. So all the manufacturing stuff is coming to fruition faster and a little stronger than we expected. We're also seeing some improvements in the avoidance of costs to move them on to our systems, as Mark had talked about. And then in marketing, what the Tiny Prints team is doing now, as we indicated in the last call, was we moderate their rate of growth on the top line to achieve greater margin and that team has done some of that and we're now testing what is the right point that we want to be internally, trading up margin versus revenue, making sure we run a series of tests here in Q3 so that we're best informed as we head into the seasonally strong fourth quarter. So that we have the levers at our disposal as we move through the quarter to either drive more revenue or more profit depending on what objective we're trying to achieve and how the overall business is doing. At the macro level, given that we are the market leader in this space in the consolidation of the Cards & Stationery under the Shutterfly, Inc. brand, I think we have greater flexibility to invest more, to grow the category and capture more of the economic rent [ph]. But also, over time, as we've learned that formula to get greater optimization in the overall rate pricing, the discounts, the promotions, the loyalty programs. And so that's what's exciting from a future standpoint where there might be more margin upside as we work through that in 2012.

James Cakmak - Sidoti & Company, LLC

Okay. And lastly, I'm looking at your full year guidance -- coming back to that. I guess, is the biggest driver of confidence for you to raise your outlook for the full year despite the slight sequential decline is the fact that the correlation of purchases that you see historically in the fourth quarter from repeat customers? Is that -- would you say that, that is the primary reason you feel comfortable right now in this economy to raise your top and bottom line guidance?

Jeffrey Housenbold

Yes, I think certainly with 75% to 77% revenue coming from repeat business on Shutterfly kind of gives you a base, right? And then, you -- we get to see the customer acquisition trends, which continue to be very healthy and as we've indicated over the last few quarters, new customers actually activating with a higher average order value than existing customers, so that gives us a very strong confidence. And then we also see the product lineup that we have, the new designs, the new cross-sell, the new site optimization, the new CRM capabilities, all the integrated marketing efforts that we're doing that we're able to see site visits, site conversions, other customer metrics we don't report externally, and that has given us confidence on the full year, not only on the top line, but as Mark indicated, continued expense management and realization of synergies to expand the bottom line as well.

Operator

Our next question is from Heath Terry of Canaccord.

Heath Terry - Canaccord Genuity

On average order size, with that basically been up a couple of percentage points year-over-year and the mixes of prints shifting towards more PPS, would that suggest that we saw a decline, or that we saw a decline in average order size within that PPS segment? Or the average order size is between the two, a little more equal that where you're maybe given it credit for?

Jeffrey Housenbold

Average order size on a year-over-year basis, because the mix is probably better looked at year-over-year than sequentially because of the timing of different holidays and special occasions. But on the Shutterfly side, it was up just nominally, I think about 2% year-over-year. On the Tiny Prints side, which is more occasion base, pricing is closer to 12% improvement. So we actually see strength in the PPS, but mostly driven by the mix of products in the basket versus pricing or discounting.

Heath Terry - Canaccord Genuity

Okay, no, that's helpful. And the gap between the 2 companies on the basis of existing orders from existing customers, that's pretty wide ahead of the cross-selling initiative that you put in or started to roll out on Monday. What kind of change do you expect to see in those numbers from the improvement in cross-selling, particularly as we go into the fourth quarter? So how much are you going to be relying on existing customers versus new customer acquisition?

Jeffrey Housenbold

Without getting into specifics, let me talk a little bit about the philosophy as we think about it. Tiny Prints is a little more of a one-and-done type of business because of wedding and birth, and because they didn't have memory keeping, memory sharing products. So I do my birth announcements on Tiny Prints, I do my wedding invitations on Wedding Paper Divas, and then they didn't have a full offering as expansive as Shutterfly and so those customers went somewhere else. We got 1/3 of those customers and 2/3 are going somewhere else, either retail or other online competitors. As we're able to cross-sell the full breadth of Shutterfly's products from Photo Books, Calendars, mugs, other photo merchandise, we believe because of the tight integration, because of our CRM capabilities, because of the closeness in the brands in terms of premium and quality and our customer service and our differentiated manufacturing that we'll be able to get a greater share of their memory keeping wallet, if you will. And so that's the goal, over time, is to get greater lifetime value out of all of our customers. Internally, we're largely agnostic as to which brand they're shopping on, right, because it all now comes to Shutterfly, Inc. and our job is to optimize lifetime value and margin profile of the customers over time. So again, it's brand new. It went out on Monday. This is just sticking our toe in the water for Q3, we'll do more for Q4. But 2012 is where we'll do a lot more integration, and that's where I think we'll see a full year of the benefits of the things that we're testing and rolling out this year.

Operator

Our next question is from Mitch Bartlett of Craig-Hallum.

Mitch Barlett - Craig-Hallum Capital Group LLC

In your prepared remarks, you talked about classroom initiative with Share Sites and that you're about to launch on that. Could you expand on that? How much noise, how much effort are you putting behind this? Is this a big deal? And then, separately, you also talked about social networks and Facebook and Twitter and the like. I'm just curious, are the initial marketing efforts on the social networks, are they a good spend? Is it a good return on your marketing dollar?

Jeffrey Housenbold

On the first one, we're excited about our classroom connections program as it's the first time we're spending hard dollars, if you will, advertising dollars in the form of co-marketing here to drive awareness about Shutterfly Share Sites. So the 3.3 million sites that we mentioned on the call have largely been driven by our installed user base, on-site merchandising and word-of-mouth. And now through a focused integrated marketing campaign, we're going to go out and make a splash around these new features and functionality geared towards the classroom, and that will come in the form of PR. It will come in the form of print. It will come in the form of some online advertising and integrated campaign. So we're excited about what that means given the receptivity that we've had to date organically through teachers, administrators and other people involved in educating our youth. On top of that, in terms of Share Sites, we're also excited about going into the second full year with AYSO. It was a great successful first year and both sides of that partnership learned a lot through that first implementation, and we're excited about the -- making what we did better and adding some new things as partners. And then taking that learning in AYSO and rolling that out to other youth-based organization. So continue to be excited about where Share Sites are going in terms of adoption, what it does for customer awareness, registration and ultimately conversion into customers. In terms of social networks and Twitter alike, we think about it in 2 or 3 ways. The first is, how do we drive viral word-of-mouth through those platforms, and that's a large part of what we do with a very, very minimal amount of cost, given the evangelical nature of our customers, the nature of our products that they touch people's hearts, the high Net Promoter Scores we have, how customers are doing the work on our behalf, which is exciting. The second thing we think about is, those channels provide a real-time feedback from the voice of the customer and allows us to be able to see how new product launches are going or in the rare case where we make a misstep, we learn about it really quick and we're able to fix that. So we like that real-time in our activity with our customer base. And then third, particularly on Facebook, it's also an advertising platform and Facebook offers 6 or 7 different ways you can advertise across that network. And our team is continuing to optimize and learn which ones work for our brand, given that we're an online consumer, we sell a physical good, that we are relatively young brand. So where is it a direct response medium, where is it part of awareness campaign, what's the ultimate mix? It's a very small part of our advertising spend today, but we're learning and adopting various components of the Facebook platform as we continue to scale and they continue to add features.

Operator

Our next question is from Bill Lennan of Monness, Crespi, Hardt.

Bill Lennan - Wedbush Morgan

Also, a question on Share Sites. I wanted to know if, Jeff, you mentioned conversion. How was conversion relative to your expectations on Share Sites tracking? And then, when somebody does become a new customer through that channel, do they look like every other customer on average, or are they more active and/or profitable? And then secondly, I wonder if you can give us your bird's eye view of the competitive landscape and -- I'll make it a tight group of competitors, mainly Snapfish and Kodak, do you think they are still in this for the long haul given the fact that some of their comments suggests that you're taking gobs of share from them and trying to kill them with scale?

Jeffrey Housenbold

Sure. On Share Sites, we've been pleased by the execution and the adoption of our Shared Sites, and they're consistent with our expectations because we continue to perform we ratchet up our expectations as you would expect a successful company to do. And so it's still relatively early days. We think our Share Sites have a unique position in the marketplace, that it's about password protected, safe, secure; it's around a tightknit community that often has a real life shared experience, where they want to stay connected. It has very vertically focused features and functionality that will speak to various contextually relevant communities, like youth sports, classrooms, families. And so we're very pleased by that and think there's continued growth ahead of us there. In terms of conversions, the answer is, it really depends. And so we think about building awareness of our Share Sites and Shutterfly and Tiny Prints in general, and then getting them to convert. Some customers convert within the Share Site they joined, i.e., let's say, a kid's soccer team. They buy the photo book at the end of the year that celebrates that season. Others, just participate by posting pictures or just being a, if you will, participant in the Share Site but not an active one. But then we find them go and say, "Hey, this is pretty cool. I'm going to create one for my family," or "I'm going to do it for my kid's little league." And so it has this viral multiplier effect that isn't always seen on day 1. And so the answer -- there is no hard and fast answer, because site by site, team by team, season by season tends to be -- moves around, but in average Share Site is the single largest driver of new customer registrations for us and it's a true differentiator in the marketplace against our traditional competitors, as well as other social networks. In terms of the competitive landscape, I can't speak to what the corporate intent of HP or Kodak is. What I can talk about is what we see through third-party indicators like Compete and Alexis and comScore, as well as our own financial results and what our vendors, where we have shared vendors, tells us about our scale. And it is, in fact, what you indicated, we continue to take market share. We continue to have the most valuable customers, given the highest average order value, most focused in PP&S and because of our scale, our vertical integration, our singular focus, we are by far and away driving the most profits per customer. And so the scale with Tiny Prints, we're excited about continuing to leverage in the marketplace, which frees up dollars for us to continue to innovate, allows us to continue to drive differentiated quality, design sensibility and customer service. And that play we've been running for the 7 years that I've been here, to a great degree of success, and we're confident that if we continue to execute, we'll continue to take share from our traditional competitors.

Bill Lennan - Wedbush Morgan

If I could just ask one more quick one. Is there any risk or should we be concerned about commoditization of non-4x6 prints over the next year? Are you seeing any of that taking shape?

Jeffrey Housenbold

We're not seeing -- in commoditization, if you mean a decrease in prices, we're not in anyone driving price of Photo Books on a rack rate down. What we're seeing is very small, very under scaled players who are doing sub-$10 million in total revenue. They're doing much more discounting and use of Flash sales sites and coupon sites to try to drive awareness. And as we look at the totality of the efforts they're doing, we know the hard numbers having used the same channels, and it cannot be profitable for them. And so to me, it's not a long-term strategy that will be sustainable and has, again, over the 7 years, I've been here, we've seen hundreds of venture back companies come and go in this space because they've been subscale, and they haven't offered a true differentiated product, which is hard to do, again, when you're a small company. So we watch it, but it's something we lose sleep at all by and believe that our scale, our profitability and our strategy will allow us to continue to win in this space.

Operator

This ends the Q&A portion of today's conference. I would like to turn the call over to Jeff Housenbold for any closing remarks.

Jeffrey Housenbold

Thanks everyone for joining us once again. As hopefully you got from our prepared remarks and the Q&A session, we're very pleased with Q2 results. 62% top line growth, increasing contributions from PP&S, ahead of our guidance and Street expectations on profitability, integration with Tiny Prints ahead of plan. So Q2 was a really good quarter and that bodes very well for the full year. We are very confident in that we have the right product with the right user experience with the right designs and the right integrated marketing approach as we head into the busy Q4 season, and we look forward to updating you 3 months from now on our progress. So with that, Mark and I will see you guys out on the road and thanks for your attention today.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect and have a wonderful day.

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