Shutterfly's CEO Discusses Q4 2011 Results - Earnings Call Transcript

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

Shutterfly (NASDAQ:SFLY)

Q4 2011 Earnings Call

February 01, 2012 5:00 pm ET

Executives

Michael Look -

Jeffrey Housenbold - Chief Executive Officer, President and Director

Mark J. Rubash - Chief Financial Officer, Senior Vice President and Secretary

Analysts

James H. Friedland - Cowen and Company, LLC, Research Division

Youssef H. Squali - Jefferies & Company, Inc., Research Division

Mark May - Barclays Capital, Research Division

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

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

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

Mitchell Barlett - Craig-Hallum Capital Group LLC, Research Division

Gregor Schauer - Robert W. Baird & Co. Incorporated, Research Division

Victor Anthony

Operator

Good day, ladies and gentlemen, and welcome to Shutterfly's Fourth Quarter and Full Year 2011 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to turn the conference over to Mr. Mike Look, Vice President of Investor Relations. Sir, you may begin.

Michael Look

Thank you, operator, and good afternoon, everyone. Welcome to Shutterfly's Fourth Quarter and Full Year 2011 Conference Call. With us today are Jeff Housenbold, Chief Executive Officer of Shutterfly; Mark Rubash, Chief Financial Officer; and Brian Manca, Chief Accounting Officer.

By now, you should have received a copy of our earnings press release, which crossed the wire approximately one 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 the 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, both in streaming online format and to a downloadable podcast, will be made available on our website within a few hours. You can access all of these formats 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 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 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 section 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 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 the 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 on our fourth quarter and full year 2011 earnings press release, which is posted under the Investor Relations section of our website at shutterfly.com.

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

Jeffrey Housenbold

Thanks, Mike, and good afternoon, everyone. I'll start today's discussion with an overview of our fourth quarter and full year 2011 results, followed by some initial thoughts on our strategy for the coming year. I will then turn the call over to Mark for a detailed review of our fourth quarter and full year 2011 financial results, as well as our initial financial guidance for 2012. We will then open up the call for your questions.

Let's start with a brief review of our Q4 financial metrics. We delivered solid financial results despite unprecedented levels of competitive discounting throughout the holiday season. Total net revenues for the fourth quarter were $264 million, up 59% year-over-year and just below the guidance range we originally provided during our Q3 conference call back in October. And equally important, fourth quarter adjusted EBITDA was $89 million, an increase of $29 million or 48% from the same period last year. This performance marks the 44th consecutive quarter of year-over-year growth for Shutterfly, and reflects the on-time shipments of more than 140 million greeting cards, photo books, calendars and photo gifts to more than 3.25 million customers.

Moving on to our full year performance. 2011 was another highly successful year for Shutterfly as we continued to expand our market leadership, enhance the richness of our customer experience, expand our customer base and further improve our operational efficiency.

Let me take a moment to highlight some of 2011's key accomplishments. First, we delivered very strong growth from our Personalized Products & Services, our largest and most important source of revenue; maintained solid revenue contributions from print; and made meaningful progress on our Commercial Print initiative. Net revenues for 2011 totaled $473 million, a reported 54% year-over-year increase. Organically, total net revenues for the Shutterfly brand, excluding Tiny Prints, grew 24% year-over-year versus our initial 2011 net revenue guidance of 18% to 21.2%.

Our continued commitment to innovation, outstanding product quality, stylish design, exceptional customer service and overall value enabled Shutterfly to serve approximately 5.5 million unique customers in 2011.

Second, we believe we have improved our ability to increase market share as the multiple billion-dollar social expression and personal publishing markets continue to transition from offline and generic content to online and personalized content. Through our acquisition of Tiny Prints, we established a multi-brand online platform that offers the broadest and deepest line of products, design and style at multiple price points.

Our Tiny Prints integration remains on track with many of the key systems and processes already migrated, and a meaningful percentage of Tiny Prints' order volume now being manufactured in-house. These successful integration efforts enabled improvements in Tiny Prints' profit contribution as evidenced by our full year 2011 EBITDA margin of 17.7%.

Lastly, we continue to make sizable investments in our products, services and infrastructure. These investments, many of which are only feasible for companies of our scale, will enable us to increase the rate of product and service innovation by creating more cost-efficient solutions for image rendering and massive data storage and maintain best-in-class automated manufacturing technologies. As a result, we believe that we are uniquely positioned to further differentiate our products and services, continue to achieve scale efficiencies and expand our product breadth in customer segments. We believe that all of these attributes will help strengthen our competitive position and increase the barriers for success in these early and large markets.

While 2011 was a good year for Shutterfly, we did see some industry challenges towards the back half of Q3 and into the fourth quarter. As we referenced at the start of the call, this past holiday season saw unprecedented levels of competitive discounting from both new and established companies. While early-season discounting has not been uncommon over the course of the past 12 years, this Q4 saw deeper and longer duration promotions throughout the peak holiday season. This environment made new customer acquisition more challenging. We believe that many of the competitive promotions were breakeven at best and will likely not be sustainable. Given our belief in the long-term market opportunity, as well as our superior value proposition, we chose to strike a balance between growth and profitability rather than pursue top line growth at any cost. As a result, our Q4 net revenues and profitability were below our expectations.

Moving forward into 2012, it is uncertain how long this promotional behavior will continue, and we recognize that an appropriate strategic response is required. While we will not be providing specific details about our strategy on this call for competitive reasons, we will share with you some of our high-level thoughts.

First, we continue to believe that our long-term strategy is intact and that the strategies that enabled us to emerge as the online market share leader will continue to drive the core of our activities.

Second, we made a number of improvements at the gross margin level, which were offset by the increased holiday discounting. Mainly, we achieved cost efficiencies in manufacturing and shipping, designer royalties and online marketing due to the scale of our multi-brand portfolio. We also optimized our promotional strategy in Q4, which we will deploy for the full year 2012.

Third, the biggest impact from the heavier promotional environment during Q4 centered on new customer growth as existing customer metrics remained very healthy during the fourth quarter and throughout the entire year. We believe that our existing customer performance confirms that our commitment to innovation, design flow of products and services, customer-friendly policies and industry-leading quality is resonating with consumers who are familiar with our products, services and overall customer experience.

And finally, our competitive landscape is complex and includes large established companies like Hewlett-Packard's Snapfish and American Greetings Cardstore, as well as many subscale companies focused on a single product category like photo books, cards, stationery, canvas prints or calendars.

With nearly all of our competitors outsourcing manufacturing and the prevalence of deeper discounts, there will likely be even greater pressure on the smaller players as they struggle to achieve unit volume scale and try to manage fulfillment across a network of independent manufacturers.

With these thoughts as a backdrop, you can expect that our approach for the coming year will encompass an expansion of our core product offering, investments in new product categories, customer segment and supported devices, further optimization of our promotional programs, as well as initiatives that could lower our overall operating cost. And though it is still very early in the year with many questions still outstanding about the economy, the team has already begun working on a number of initiatives that we believe will enhance our near-term and long-term competitive position.

In closing, 2011 was another highly successful year for Shutterfly. We delivered solid financial results, completed a major acquisition, introduced major innovations in the photo book category, achieved operational efficiencies and extended our market leadership position. We continue to make significant progress towards transforming the multibillion-dollar social expression and personal publishing market and remain confident in our strategy and in the early and large markets in which we operate.

I would like to congratulate the entire Shutterfly team for another successful year and extend my sincere thanks to all of our customers and shareholders for their continued support.

With that, I will turn the call over to Mark to review our financial results in detail. Mark?

Mark J. Rubash

Thanks, Jeff, and good afternoon, everyone. I'll begin my comments today with some observations about our fourth quarter performance, followed by a review of our key metrics and then a walk-through of this quarter's operating results. I'll then conclude my comments with an overview of our Q1 and initial full year 2012 financial guidance. Following that discussion, we'll open the call for your questions.

As Jeff mentioned earlier, throughout Q4, we experienced unusually heavy competitive discounting that had a dampening effect on our overall net revenue growth, particularly with respect to new customers. After considering our premium multi-brand position and the short but seasonally intense Q4 shopping period, we elected to take a balanced approach of growth and profitability to the market, rather than pursue growth at any cost. This thoughtful response to Q4 competitive conditions resulted in solid revenue growth and profitability and record-free cash flow.

So let's get started with the net revenue details. Net revenues for the quarter totaled $263.8 million, reflecting 59% year-over-year growth as reported and a 21% year-over-year growth on a pro forma organic basis. Personalized Products & Services increased 77% year-over-year to $219 million. Print revenues remained flat at $40 million and Commercial Print contributed $5 million, a $2.3 million increase from Q4 of last year. Excluding Commercial Print, net revenues from the core Shutterfly brand grew 20% year-over-year with 74% coming from existing customers and 26% coming from new.

For Tiny Prints, Q4 net revenues increased 33% year-over-year to $62.3 million, with new and existing customers representing 48% and 52% of Tiny Prints' net revenue respectively.

In terms of overall product mix in Q4, Personalized Products & Services represented 83% of total net revenues and prints and Commercial Print represented 15% and 2%, respectively.

For the full year, Personalized Products & Services represented 79% of total net revenues, prints contributed 18% and Commercial Print represented 3%.

During Q4, customer engagement metrics at our Shutterfly brand remain healthy with accelerating double-digit year-over-year growth in visits, registrations and orders, and a record number of shares sent. This activity translated into 2.8 million customers, generating 4.6 million orders with an average order value of $43.05.

On a year-over-year basis, our Shutterfly brand saw a 23% increase in customers, 24% increase in order volume and a 3% decline in average order value, which reflects the discount-intensive environment.

Customer engagement metrics at our Tiny Prints brand also saw a double-digit growth in visits, total customers and orders but lower customer conversion metrics. Our balanced promotional approach resulted in Tiny Prints' net revenues increasing 33% year-over-year to $62.3 million, a meaningful acceleration from Q3 growth level. In addition, excluding one-to-one greeting card, the Tiny Prints brands realized a 10% year-over-year of improvement in average order value, which increased to $116.81.

Moving to cost of net revenues and gross margin, we reported a gross margin of 58.9% in Q4, which is slightly below the low end of our original guidance and down from the 61.6% gross margin we reported last year. Our reported Q4 gross margin reflects the combined effect of deeper-than-normal discounting levels in our core products such as photo books, calendars and cards and lower-than-expected unit volume at Tiny Prints, partially offset by cost efficiencies in manufacturing and fulfillment and in designer royalties.

For Q4, approximately 38% of Tiny Prints' total unit volume was manufactured internally, a metric we expect to increase during 2012.

Turning now to operating expenses. Excluding stock-based compensation, overall operating expenses totaled $76.6 million, reflecting the cost structure of the combined businesses and purchase accounting amortization, partially offset by acquisition synergies and savings from other cost-management efforts.

Looking more specifically at our expense components, technology and development costs totaled $17.5 million for the quarter or 6.6% of revenues, which is down from the 7.3% incurred in Q4 of last year. Excluding stock-based compensation and depreciation, our tech and dev spending increased approximately $4 million or 41% year-over-year. This increase primarily reflects the incremental cost of the Tiny Prints business together with modest increases for power, colocation space and bandwidth.

Continuing down the income statement, sales and marketing expenses totaled $49.5 million in the quarter, representing 19% of total net revenue compared to 16% in 2010. Excluding stock-based compensation and purchase accounting amortization, Q4 sales and marketing expenses totaled $44.4 million, representing 17% of total net revenues compared to 15% on the same basis in 2010.

The majority of the year-over-year dollar increase is associated with the incremental cost of the Tiny Prints business, together with year-over-year increases in various marketing channels.

Total sales and marketing cost per customer across our 2 brands remained essentially flat compared to Q4 of last year as the company benefited from various operational efficiencies in online search and display marketing.

General and administrative expenses for the quarter totaled $15.7 million or 6% of net revenue compared to 8% of net revenues in Q4 of last year. Excluding stock-based compensation and credit card processing fees, which vary with revenue volume, G&A expenses represented 3% of net revenues in the quarter, down from 4% in Q4 2010.

Continuing the discussion. Adjusted EBITDA for the quarter increased $29.1 million over the prior year to $89.3 million, reflecting 48% year-over-year growth.

Our solid Q4 EBITDA performance reflects both the impact of the heavier promotional environment and the realized integration synergies and savings from other cost-management programs. For the year, adjusted EBITDA was $83.7 million or 17.7% of total net revenue.

Capital expenditures during the quarter totaled $7.2 million or 3% of total net revenues and included $3.7 million for technology, $1.3 million for manufacturing and building improvements and $2.2 million in capitalized development costs.

For the full year 2011, capital expenditures totaled $33.6 million or 7.1% of total net revenues, resulting in a record $50.1 million in free cash flows.

And finally, cash, cash equivalents and investments at December 31, 2011, totaled $180 million.

The effective tax rate for the quarter was 51.2%, bringing our full year rate to 8.6%. The year-over-year decrease in our full year effective tax rate is primarily the result of deductions from disqualifying dispositions of incentive stock options and from increased research and development tax credits. On a GAAP basis, our net income for the quarter was $35.4 million or $0.97 per share based upon $36.5 million weighted average diluted share.

In summary, 2011 was another successful year for Shutterfly. Despite the competitive pressures during this holiday season, we delivered solid net revenue growth, successfully completed a major acquisition, continued to make significant progress against our strategic objectives and generated record free cash flows.

We continue to believe that our long-term strategy remains on target and that the strategies that has enabled us to emerge as the online market share leader will continue to distinguish us from the competition.

To complete my discussion, I would now like to summarize our outlook for Q1 and the full year 2012, together with some insight into our underlying assumptions. As Jeff indicated earlier, we continue to believe that the deep discounting behavior that competitors exhibited throughout the holiday season was likely unprofitable, and for many, unsustainable. Unfortunately, we continue to see deep discounting even in these early days of 2012 and cannot confirm whether this will be a transient or permanent market dynamic.

This reality, combined with continued macroeconomic uncertainty, requires a very thoughtful strategic response and guidance that provides sufficient flexibility to execute on multiple dimensions, both short term and long term.

Currently, we expect Q1 net revenues to range from $83 million to $85 million, which reflects year-over-year growth of up to 49% on a reported basis and 10% growth on a pro forma organic basis. We expect our GAAP gross margin to range from 42% to 43% of net revenues and our GAAP operating loss to range from $25 million to $28 million. We expect our adjusted EBITDA will range between a loss of $6.5 million and a loss of $8 million and that our GAAP effective tax rate will range between 45% and 55%.

And finally, we expect the GAAP net loss per share to range from a loss of $0.31 to a loss of $0.43, based on approximately $35.9 million weighted average common share.

Turning now to the full year 2012. We estimate that net revenues will range from $550 million to $560 million, which reflects year-over-year growth of up to 18% on a reported basis and up to 12% on a pro forma organic basis. We expect the full year GAAP gross margin to range from 52% to 54% of net revenues. We expect that our GAAP operating income will range from approximately $17 million to $24 million and that our full year 2011 adjusted EBITDA margin will range from 17% to 18% of net revenue.

The full year GAAP effective tax rate is expected to range from 45% to 55%. We expect full year GAAP net income per share to range from $0.25 to $0.28 per share based on 38.9 million weighted average diluted share. And finally, we expect that 2012 capital expenditures will range from 7% to 7.5% of net revenues.

We believe that our initial Q1 and full year 2012 net revenue and profitability outlook gives appropriate weight to our most recent Q4 experience, anticipated 2012 market condition, our current investments and competitive strategy and to this early point in our annual business cycle.

So with that, I sincerely thank you for your time today and for your friendship and support throughout my time at Shutterfly. I 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 comes from Jim Friedland from Cowen and Company.

James H. Friedland - Cowen and Company, LLC, Research Division

I realize you're not going to go into the details of your strategic plan, but when you -- the guidance that you put in place for '12, does that contemplate a worst case scenario assuming that Snapfish and some of the other key players just are relentless in pricing, and even if you guys start either -- whether deep discounts or ramping marketing that -- is that the worst case -- is the worst case scenario baked in? And then second, follow-up question related to it is, what's your latest view on M&A potential in the space? We have KODAK Gallery is clearly up for sale and I'm sure you guys are likely to consolidate Snapfish and also what do you feel -- what's you're feeling on some of the smaller players in the space?

Jeffrey Housenbold

Thanks for your questions, Jim. This is Jeff and then, Mark, feel free to chime in here. As we indicated in the prepared remarks, what we tried to do was put an appropriate conservative guidance out there that gave us the flexibility from a strategic standpoint to continue to invest in the business, our new feature functionality, new products, new device capability that will enhance long-term revenue growth. And also give us the flexibility to try a number of tactical initiatives that will allow us to continue to increase our market share. I think what we're trying to say is that there was irrational pricing during the fourth quarter. We've seen continued heavier discounts than normal into the first, lighter than the fourth quarter, but heavier than the typical Q1 and that we assumed that, that's not sustainable. But if it is, our guidance reflects that kind of approach for the full year.

James H. Friedland - Cowen and Company, LLC, Research Division

And then thoughts on M&A?

Jeffrey Housenbold

On the M&A side, without referencing specific targets, I think we're in the best position to continue to consolidate this industry. We have the largest market share. We are one of the few, if not the only company in this space outside of Vistaprint who plays tangentially in our space that is profitable. We have a healthy balance sheet with about $140 million, $150 million in cash after paying off the payables. As of the December close, about $180 million. We got $200 million in line of credit and we have a public currency in terms of the stock. So we're evaluating a number of opportunities, but we're going to continue to do what we've always done, which is make sure it makes strategic sense, that we have the capability to integrate it post acquisition and that it's accretive to our shareholders over a reasonable period of time. And as you can imagine, many of the players are feeling a pinch of the competitive environment and we've seen many of their books, and there are very, very few that are even close to breakeven in the industry. So we think as they continue to run out of venture capital money, that the opportunities will increase for us to continue to consolidate.

James H. Friedland - Cowen and Company, LLC, Research Division

One quick follow-up on working capital. So you generally has been sort of have a positive benefit for the company. This year, it was a negative benefit for the -- or negative impact for the full year of, I think, $13 million. Were there any kind of onetime dynamics in timing that would explain that? And do you expect it to return to sort of a positive or beneficial cycle in '12?

Mark J. Rubash

Yes, the only thing I think that's fundamentally different in 2011 is we brought on the Tiny Prints business in total and their employee base in late April. And at the outset, they had a negative working capital burn just because of their scale compared to Shutterfly historically. Outside of that, the only thing meaningful that's incremental is we made a fairly meaningful investment in automation equipment in front of Q4 for both the Photo Book line and Cards & Stationery. That's not a annual recurring type of investment. So with the synergies we get from import, manufacturing on Tiny Prints and some of the other scale efficiencies and material waiver and shipping costs. And other parts of the P&L, that burn I think will be much more modest as we go across 2012.

Jeffrey Housenbold

And keep in mind the beauty of our business model remains intact. We're essentially 100% credit card. We get the cash before we even ship the product and we're just-in-time manufacturer, so we're sitting on very little inventory with high inventory turn.

James H. Friedland - Cowen and Company, LLC, Research Division

So the current guidance in -- will contemplate a return to the positive working capital cycle in '12?

Mark J. Rubash

I think, historically, Q3 has been the low point of our cash and cash equivalents and investments. And that's just seasonality at work. For the full year, we've been generating pretty meaningful cash since 2008.

Operator

Our next question comes from Youssef Squali from Jefferies & Company.

Youssef H. Squali - Jefferies & Company, Inc., Research Division

A couple of questions, please, and I guess the first is just a clarification. The 33% year-on-year growth in Tiny Prints, revenues in the quarter, that compares with 21% in the third quarter, is that correct, Mark?

Mark J. Rubash

That's correct.

Youssef H. Squali - Jefferies & Company, Inc., Research Division

Okay, great. So with regards to your guidance, I was just wondering if maybe you can go one step further down that 12% pro forma organic growth and maybe what's implied in terms of core Shutterfly versus Tiny Prints? And then on the -- I think in your prepared remarks, you said that roughly 38% of all Tiny Print unit volume was done internally. I was wondering what's the gating factor there. We would have thought that by now it would have been materially higher.

Jeffrey Housenbold

Youssef, this is Jeff. Let me start, then I'll pass it to Mark. One of the other kind of strategic collars, as we saw competitors do what we think is irrational pricing, we don't take 80% off as a business model, we took the long-term view and said, look, we're going to modestly increase our level of promotion to make sure we capture the high-value customers. So we're not going to become a non-profitable company and we're not going to diminish the brand equity that we've created across Tiny Prints, Shutterfly and Wedding Paper Divas. And so there was a slight miss on the top line. That incremental increase in promotional activity flows straight to the bottom line because it comes right out of net revenue. And so we took what we think is a strategic long-term appropriate response. And the guidance we're giving is assuming that, that approach remains static, that says we're not going to go chase that next unprofitable order, but we're going to continue to invest in the feature, functionality, new products, design, quality, customer service that allow us to attract long-term profitable customers. And you saw that in our retention rates and the growth rates of revenue out of our existing customers on both the brands during the fourth quarter. So the guidance assumes that. But it also provides us flexibility to test a number of different approaches that we might segment the market in different ways. And I don't want to go too far beyond that for competitive reasons, but that's kind of the philosophy as we went through guidance.

Youssef H. Squali - Jefferies & Company, Inc., Research Division

Just to follow up on that, does that imply maybe mid to high single-digit organic growth at the core Shutterfly and maybe high teens or maybe even 20% in Tiny Prints? Is that kind of a fair assessment of the breakdown of the 12%?

Jeffrey Housenbold

Yes, I think you're in the ballpark. I think something with a two-handle on Tiny Prints and something in the high-single digits on Shutterfly is in the ballpark. And again, that's assuming that we don't go out and rent an order, that we'll just continue to acquire profitable customers. That may have a dampening effect on the top line growth rate in the short term, but we believe the investments we're making, our competitive position, our profitability from a long-term standpoint is the right approach to go.

Mark J. Rubash

On the second question on insource Tiny Prints volumes, the focus in Q4 was predominantly on the Tiny Prints brand, primarily to capture as much as we could in the window we had post acquisition for Q4 holiday season. So there was virtually no insourcing of any of the Wedding Paper Divas SKUs, which tend to ramp up in Q1 and into the early part of Q2. So one is getting the Wedding Paper Diva product SKUs. In-houses is the next step. The second barrier, if you want to call that, I think that we have to sort through is the nature of attached products. So what our goal is to try and ensure that the maximum amount of delivery, everything is in a single order instead of splitting the order across vendors. And so this year, we took an approach of most attached products, we kept outsourced to enable that to occur. In 2012, we'll be bringing in some of those attached products internally, which will enable a higher level of penetration and likely take on a broader set of SKUs on the Tiny Prints platform. So it's 38% in Q4, that's roughly 18% of their annual volume, very rough math. If we didn't change a thing, the benefit would double in 2012 but same penetration, and we think there's room to meaningfully improve that.

Operator

Our next question comes from Mark May from Barclays.

Mark May - Barclays Capital, Research Division

I guess the -- some of the efforts that you're sort of alluding to that you'll start to implement in Q1 that are having the effect of causing EBITDA to decline on a year-over-year basis in Q1, and I think probably organically, your gross profit also to decline year-over-year. I haven't parsed through all the numbers, but I'm assuming that, that is not implied to continue throughout the rest of the year. So why -- is this sort of a onetime test or can you walk me through why would we not continue to see on a year-over-year basis kind of a negative impact on gross profit and EBITDA as you're implementing these new reactive strategies to what's going on in the marketplace?

Jeffrey Housenbold

So just to start, one thing, keep in mind is that in 2011 Q1, we didn't own Tiny Prints and they had an EBITDA loss. So with a growth rate that is lower this year, but a cost structure that is basically fully intact outside of the improvements we've made on the manufacturing side. If we did report Tiny Prints separately, well, I think there would still be, at a minimum, an effect of pulling down the EBITDA margin and likely a small EBITDA loss. Having said that, the dynamic is really about how does the competitive discount environment impact our P&L is really what that work. Our MLS cost, the material labor and shipping unit cost, all were very much improved over the course of the year. So it's really about how much more in volume are we going to run through our manufacturing plants to cover the fixed manufacturing overheads, and two, what's the ASP level on the pricing. And ASP, obviously, hits revenue and margin disproportionately because of 100% flow through. So in the guidance, there's basically an assumption that we will likely lose some volume because we aren't going to be discounting at 80% levels like some competitors. So that is fewer dollars from a historical perspective to cover the fixed manufacturing overhead. Likewise, we will probably continue to discount at a level that is somewhat deeper than Q1 of last year, which has an ASP impact at its top line and bottom line for the business that we do take in. So from a total EBITDA standpoint, the biggest point of pressure is really unit volume and where that comes from and the timing and then two, ASP levels. From a cost standpoint, I actually feel really good about where the cost of manufacturing and even operating costs. I think they're all moving in the right direction.

Mark May - Barclays Capital, Research Division

Okay. It does imply that your cash operating expenses -- I mean I don't know -- I don't have the detail of your P&L, obviously, but it looks like that maybe your sales and marketing ratio on a year-over-year basis is going up, around 200, 300, 400 basis points. But is that mainly due to the Tiny Prints not being in the year ago?

Mark J. Rubash

Primarily, so when you have to normalize that sort of for the full year. But keep in mind that Tiny Prints has an average order value of over $115 per order and it's a different customer characteristic. So historically, they have always paid a higher percentage of revenue in their sales and marketing total -- sales and marketing working dollars than Shutterfly. Particularly, they also don't have the broad product set that gets high repeat rates and longer-term consideration. So the increase in sales and marketing as a percent of total revenue is almost exclusively due to the combination of Tiny Prints model into the Shutterfly model. I think if you go back in my prepared remarks, we commented on the cost per customer was actually -- essentially flat year-over-year, even in our paid channels on a CPC or CPA level. On the Shutterfly side, they actually declined Q4 to Q4, and on Tiny Prints, they were up, I think it was like 4% to 6%, pretty modest because we are getting synergies on, particularly in paid search, but also in display advertising.

Operator

Our next question comes from Heath Terry from Goldman Sachs.

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

Jeff, I was wondering if you could give us a sense, when you look broadly across the industry and this competitive -- kind of hypercompetitive environment that we're in right now, can you kind of segment for us the degree of impact that you believe the deal channel, just overall price competition and then the higher marketing spend, whether on keywords or the other online channels is really driving that? How would you kind of weigh those 3 things or maybe something else that we're not thinking of in terms of where you're really seeing this competition manifest?

Jeffrey Housenbold

This is Jeff. Primarily, the discounting was led by Hewlett-Packard, Snapfish and then American Greetings Cardstore. That Cardstore is a new endeavor for American Greetings. They were starting from ground zero -- 0 customers onto -- and they decided to spend a meaningful amount of money on television advertising, as well as running 80% off on most of the season to try to get some brand recognition out there. And as you know, like you, I read, listened to the American Greetings earnings call, and it had a meaningful impact on their operating results from a margin standpoint. So they established what they were doing in the marketplace on Cards & Stationery. Snapfish was running buy 1 get 2 free primarily throughout most of the season so that was 66% off on cards and photo books and calendars predominantly. And so that impacts the broader base and more largely, Shutterfly. We saw that we had a negative 3% decline in the average order value on Shutterfly because we decided to step up promotion up somewhat, but certainly nowhere to the level of HP and American Greetings. But we saw average order value rise 10% on Tiny Prints. And so we made a strategic decision to preserve the pricing on the premium brand and take more margin there, and still saw healthy reacceleration of growth from 21% to 33%. So most of it, and hard to quantify exactly, but most of it was the pricing from those 2 competitors. And then you saw smaller subscale players who were trying to acquire revenue in the fourth quarter, start to do more discounting but primarily through the flash channels. So the large players did some of it, but most of the flash was filled by these third- and fourth-tier competitors, and they were doing it around photo books and canvas print predominantly throughout the quarter. And then on marketing spend, I think that was actually not a big issue. We saw normal rates for CPC. And as Mark indicated, we actually got quite a bit of efficiency from managing the multiple brands and optimizing the shelf space and the competitive dynamic between us and Tiny Prints, Shutterfly being the #1 card and stationery market share leader, TP, the second. Now that we are part of the same company, we were able to optimize that. So we saw some nice synergies and savings that we then redeployed some of those savings into the form of promotional dollars and into other channels. So predominantly, Snapfish and American Greetings with large discounts, it seems to me that, that plus flash, you end up renting a customer not acquiring a customer, and the lifetime values and the ROI of that spend to us and the analysis we do seems to be meaningfully negative, and hence, why we don't think it's sustainable over the long term. But our guidance for the full year assumes that competitors are going to continue to do irrational thing and assume that we'll have a modest approach to -- a balanced approach to pricing that will preserve the integrity and the brand equity.

Operator

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

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

I wonder if I could, Mark, just go back to the first quarter revenue outlook. I mean I can appreciate, coming out of the irrational pricing environment that's continuing to some extent in Q1. But again, the organic growth rates of both businesses are certainly below expectations. But on Shutterfly, again, nowhere near the 10% growth that you're guiding to in the first quarter. Is there something more you can add around that and then just one follow-up.

Mark J. Rubash

I think the main -- additional thing I would say, as we mentioned in the prepared remarks, there was a disproportionate impact on our business with respect to new customers. But keep in mind that new customers are generally new to the category. They don't fully understand the different value propositions across the brand, the different fulfillment capabilities, quality selection and so on. So not knowing that and seeing deep discounts by a range of competitors, that's where we felt the biggest impact. When you go to Q1 and assuming that same level of discounting environment by competitors, Q1 doesn't have the same kind of support from the existing customer base historically since it's slightly skewed towards new customers who, last year in particular, we had very strong new customer growth in Q1 and Q2. And our guidance assumes that we're not going to be as successful this year. So it's really taking an approach for Q1 does not benefit from the kind of sentimental importance of our products that Q4 does. And therefore, that is -- it's more dependent on existing customers, and existing customers are going to be more challenging for us to attract.

Jeffrey Housenbold

[indiscernible]

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

Yes, Jeff?

Jeffrey Housenbold

I was just saying that if the competitive landscape stays status quo, new customer growth will continue to be impacted.

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

And then secondly, just going back to -- I know your question about Tiny Prints in-sourcing of volume, that struck me also as a low number, one that really wasn't described at the time of the acquisition. Can you kind of piece some of that together with how Tiny Prints revenue ended up for the full year and maybe help us get down to what you would think Tiny Prints' EBITDA margin would be in fiscal '11 and how you can continue to take some cost out of that? In fiscal '12, obviously, there's -- you talked about more manufacturing in-house, but it just seems like in order to really get those cost synergies you're talking about at the time of the acquisition, there needs to be other changes.

Mark J. Rubash

Sure. The Tiny Prints, on a pro forma basis for the full year 2011, was roughly $119 million in total revenue if you include the pre-acquisition period in Q1 and the first month roughly of Q2 and a 36% year-on-year organic growth rate. I would agree that 38% was below our expected -- expectations of what we wanted to bring in, in Q4. Part of that I think is reflected in the unit volumes on Tiny Prints were lower than we had planned as well. And secondly, there's a dependency on the attached rates that all you can use is try to assume what the -- based on historical experience, what products are being attached and how many you can actually accommodate. I don't think the type -- getting to a higher penetration level, unless you go down into some of their very small volume SKUs. There's really nothing that is outside of our control. There are some things we'd have to do differently in workflow within the plants because there's different papers and substrates that come into play, and some of them we may have to take more to a batch processing environment and kind of a small job shop approach, where our current configuration is really a very real-time process environment where we don't do a lot of batching. So they're all things that the manufacturing teams understand well. They're very confident that they can increase that percentage, and I think we made the best of what we could in the time we had in front of Q4.

Jeffrey Housenbold

And if I can add to that, if you look at historically the growth rates for Tiny Prints 2009, '10 and '11, 50% year-over-year '09, 55% on acceleration on an easier comp because '09, as we all know, was a tough year and then 36% growth in 2011. And keep in mind, they had 2.5% EBITDA in 2010. So as we indicated, we were going to throttle back some of the inefficient marketing on the edges, get some operational efficiency, get some combination synergies and drive the EBITDA margin north of 2.5 versus our 21.8 as a standalone company in 2010. So we made good progress in 2011. There's more to be done in 2012 and into the early part of 2013. And as we start to combine more of the processes and the systems, get to understand the interaction of the brands and the marketing dollars, continue to take more the fulfillment in-house. We think that there is the opportunity for margin expansion as we fully integrate and fully optimize a multi-branded platform approach.

Operator

And our next question comes from Aaron Kessler from Raymond James.

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

A couple of questions. First can you remind us of your investment initiatives for 2012 and 2013? I think previously, you had talked about e-commerce platform 2012, and potentially, international in 2013?

Jeffrey Housenbold

Yes. We continue to make meaningful investments into our back-end architecture in infrastructure and technology platforms ranging from our photo product creation pack, to our rendering platform to our e-commerce platform to our data warehouse. So a number of those investments we've made nice progress through 2011, but those projects will continue throughout 2012. We'll get benefit throughout the year but more meaningful benefits from some of those investments will manifest itself somewhat in Q4 2012, and then throughout 2013. We're also making investments in our data mining CRM and our revenue optimization, through different various e-commerce flows, through promotional and pricing optimization, through further refinement of our customer segmentation and targeting capabilities, in both online, on site, e-mail and direct-mail based marketing. We're also working on how do these brands coexist or not, and how do we try to drive from our -- the Shutterfly brand's deep customer base. How do we get them exposed to things like Wedding Paper Divas that we don't really claim wedding today on the Shutterfly side, but now, we have this wonderful asset. So how do we take all those folks who are doing save the dates on Shutterfly, but we don't offer wedding invitation as an example. How do we better cross sell across the multiple brands? And then there's opportunities to further invest in automation in the manufacturing, we saw some nice returns from early investments in Photo Book automation, so we're going to continue that, further optimization and order consolidation. And then further, cost savings from bringing more of the fulfillment, as Mark had just mentioned from the Tiny Prints and Wedding Paper Divas business onto our manufacturing platform. And then lastly, I'd say we're making investments in new markets. We've talked about one-to-one greetings that we're making an investment in, and that business will launch in the first half of 2012. We're also investing in other areas that include different customer segments, commercial being one of those and a few we haven't yet talked about, haven't been reasoned. So I feel really good about their early signs on investments we're making. The ability for it to -- on a long-term basis, to continue to grow our market share. And for the opportunity, to continue to expand our margins after we fully digest the Tiny Prints acquisition.

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

As a quick follow up, is the one-to-one is that a mobile app? And then also, anything from the TV campaign? I don't know if you have any findings from that?

Jeffrey Housenbold

Sure. I think our one-to-one offering will be multidimensional. It will be both in mobile and a PC-based, or a desktop-based environment. We think there's interesting occasions, and a much better value proposition for the consumer, than walking into your drugstore, your mass merchant and buying a Hallmark or American Greeting Card that has static content, and that costs $4. And you have to be inconvenienced by hopping in your car and getting out of your car. We think sitting down, being able to choose from thousands of designs, adding personalization, which may or may not include a photo, original content, the ability to have a stamp and an address placed in our manufacturing and shipped right from the comfort of your keyboard or your mobile device, at a lower price point but higher-quality, better personalization and much better wow effect for the recipient. So we think we're uniquely positioned to be able to address that $6.5 billion market, which we're not really addressing today. And I'm more excited about that. On DRTV, we had indicated was a small test, we ended up spending about $400,000, including the production cost and the media on it. The results, we had some good learnings from it. We saw high cross sell and upsell from it. We saw that the -- in the markets in which we're dropping as the halo effects of an integrated marketing campaign impacted positively, all the marketing levers. And that we think while in that scale, that the standalone cost of acquisition didn't hit our typical threshold. We think there's opportunity at scale, and in combination with an integrated marketing approach for DRTV and other mass awareness channels to play in our overall marketing mix. So I call this successful experiment in Q4, we're going to continue to experiment and invest in new marketing channels, as we've done historically, as we branched into print, our own catalog, direct mail, house party and more than 41 active business partnerships, we think other mass reach media has a place in our overall integrated marketing mix. And as you know, we're very fact-based and ROI-based marketers, so we'll make sure that the numbers work.

Operator

And our next question comes from Mitch Barlett from Craig-Hallum.

Mitchell Barlett - Craig-Hallum Capital Group LLC, Research Division

I was just wondering you've been talking about the new customers, and how difficult it was within the promotional environment. So maybe we could just talk about your existing base, and how they performed during the quarter? You said they did well, were they loyal? Did they wander off towards the more promotional competitive offering? Their AOV, was it, did this also decline, or was it up year-over-year -- just a little bit more color.

Jeffrey Housenbold

Mitch, I'd point you to Page 13 in the Investor Relations deck that we ran concurrent with the call. I was very pleased with the response rates from our existing install base. And as we said over the years, we had exceptionally high net promoter scores. We had very strong loyalty from our customers, the overall experience, the brand, the customers’ centricity, the ease of use, the design selection and the overall value proposition, continues to resonate with our customers. We saw a 23% year-over-year growth of existing customers on the Shutterfly brand, and we saw 53% year-over-year revenue growth on the Tiny Prints brand. Jeff's opposed that against new customer revenue growth of 11% on Shutterfly and 17% on Tiny Prints. And that 17% again was in the face of raising prices in a fairly weak macroeconomic environment, and a fairly competitive pricing environment. So we were running an experiment there and we got some good data. So overall, pleased with the existing customer base. And as Mark said, we decided not to go buy unprofitable customers through 80% off in flash deal sites like our competitors, had dampened the new customer growth, and hence, the revenue growth rates from our base. But we believe that given the size of our install base, that provides kind of -- when you're looking at 74% and 52% of revenue from that base, that gives you quite a bit of comfort that we have kind of an installed revenue stream that we could count on, and that we're going to continue to find cost-efficient, long-term strategically oriented channels for new customer growth.

Mark J. Rubash

Also just add that, orders -- the existing customers -- Jeff described the growth. The orders from existing customers actually accelerated year-over-year, and remain in a very healthy double-digit level. AOV was down only slightly year-over-year, consistent with our overall AOV decline of about 3%. So it was a very good turnout, they submitted more orders than they had historically, a nice increase. And the Average Order Value held was pretty much intact and consistent with where we were last year.

Mitchell Barlett - Craig-Hallum Capital Group LLC, Research Division

And they don't appear to be pulled away from Shutterfly towards the competitive offering? You can't...

Jeffrey Housenbold

No, not -- yes, given that numbers that we just described, I think our -- the loyalty rates we've seen historically come from customers remains intact. And that they perceive and come to Shutterfly and Tiny Prints more than just price, that there's a certain segment of the market that will be chasing price, and there's a segment that values our free, unlimited storage, our non-compressed non-deleted non-downsampled image archive, they value our share sites, our thousands and thousands of designs, the ease of use, the embellishments in our next-generation custom Photo Book path, the ease with our simple path, on the way we talked to them, the relationship we have. And so the very price-sensitive customers, they're going to chase that extra 20% off of a flash deal site, but the high-value customers that have tended to come to the Tiny Prints and Shutterfly brands continue to do so and reward us with their loyalty.

Operator

Our next question comes from Colin Sebastian from RW Baird.

Gregor Schauer - Robert W. Baird & Co. Incorporated, Research Division

This is Gregor Schauer in for Colin. One thing that we really want to understand a little bit better is, why do you guys think that competitive dynamics, really hit in 2011, of all years? I mean, you guys have been in business for over 10 years, we've gone through the worst recession since World War II, and it seems like this is one that is an usual -- quite a change, I just had from a competitive [indiscernible] perspective. And most of the competitors, such as the larger ones are not new. American Greetings is probably new because of the cards, on that perspective, but can you shed any other light on what was your thoughts on why this unfolded now?

Jeffrey Housenbold

Yes so, again, these are hypotheses, you want answers from them, you should ask those companies. So here's the hypothesis, we continue to grow our market share, we continue to grow faster than the market, we continue to increase our profitability as a standalone company, and then we made a transformative and strategic acquisition in Tiny Prints, combining the #1 and #2 online players on -- in the April timeframe. And I think the competitors started to say, wow, you guys are really moving further ahead, and all the investments we continue to make during the worst of that recession as you may recall in our call, we said, look, we're cash flow positive, we have plenty of money on the balance sheet, we don't have any debt, we believe in the early stages of these markets, we believe they'll continue to transform from off-line and static, to online and dynamic content. We're going to invest in new feature functionality, like simple path, like our all new Custom Path, with expanding the design and assortment and choices. And so we accelerated coming out of the recession. So our take is that the competitors who didn't make those investments, who haven't been as thoughtful and focused in this space, had only one lever going into the fourth quarter. Where the vast majority, more than 50% of the sales and all, the profits come from. And they pulled the lever, which is the easiest one called price. So the big players pull the price lever. And then the smaller players who don't have the scale, and wanted to avoid further decline, decided to use new channel called the flash sales, to try to get their brand out there, in a way that they didn't have available to them before. You had to buy keywords and hope someone clicked on it, now Groupon will put your brand in front of 10 million people, and while that transaction is meaningfully unprofitable for them, at least they've gotten the transaction and that gives them some sense of hope that there's a real business model there. So I think that's what changed with the flash sale sites, and then the large competitors seen us continue to out-execute and pulling the only lever that was available to them.

Mark J. Rubash

We have time for one more question.

Operator

The final question for today comes from Victor Anthony from Lazard Capital.

Victor Anthony

I apologize if I have asked 2 questions. First one, I wanted to see if you could discuss your international expansion plan? Give us an update on what you're thinking. Different -- you made acquisition in Europe. Part of which, had some consumer component. I wanted to get your thoughts on that. And second, there is a school of thought developing, this is more of a longer-term question. There is a school of thought developing that the high level of competition within the space in this category, which, arguably, is tied to consumer discretionary spending, could lead to a market that becomes commoditized. And if that happens, then average order values decline. And so do revenues and profits. I wonder if you could just -- of that, if you could just give us your opinion of that.

Jeffrey Housenbold

I think there are 3 questions there. One is, we're not going to go into details, specifically, around our international expansion plans for obvious competitive reasons. I will say that it remains as part of our overall multi-year strategy, that we think the strength and the scale of the brand, and its consumer desire extends beyond the U.S. borders. We have the hope and the intention to be a global company over time. The second, we looked at the album-printer deal. It was shopped 4x to us over 18 months, each time we decided it didn't fit strategically, and the price was not right. You could look at the 2 recent acquisitions that Vistaprint made and the multiples that they paid were much higher than we were willing to pay. And strategically, as we think through Europe, we didn't think that the album printers acquisition was the right one for us to start beachhead. You'll have to ask Vistaprint specifically about their strategic rationale. On the high-level, competition, the commoditization, the AOV, I would say this is nothing new. We've been in business for 12 years and I've been at the helm of the company for 7-plus now, and we've the same thesis from the day we went on the IPO road show. How are you possibly going to compete with Walmart, Walgreen, CVS, Costco, Hewlett-Packard, Kodak, AOL, Microsoft, Yahoo, Hallmark, American Greetings, Sony, just to name a few. And we said, we're going to the same thing that many vertical players on the web did, which is have a relentless focus on the customer, innovation, not being afraid to eat our own lunch, and continue to out execute. And that strategy, along with our vertical integration, on our expertise in customer acquisition and conversion rates and e-commerce optimization, has allowed us, in my 7 years, to go from a $50 million business, to today's guidance of $550 million to $560 million. So in 7 years we've 10x-ed, and we've become the market share leader. During that period of time, we saw intense price competition in the 4x6 print arena. We saw large companies like HP and Kodak, Bio Photo and Snapfish, but yet, during that period of time, we continue to out execute. We've diversified the product assortment, we optimized our business. And today, in 2011, 4x6 prints represented a little under 7% of revenue. And our gross margins have remained fairly stable during that period of time as we expanded and increased our revenue base. So competition is always going to be, when you're playing in a $35 billion addressable market. But we think our scale, our singular focus, our extraordinary talented employee base and our true customer-centricity, will allow us to continue to win. And then lastly, I'd say people talk about commoditization. And as you can't make money in a commodity industry, and I just think that's a -- first of all I don't think there's commoditization. Second, I think that's just a completely false premise, because when you look at Chevron and Exxon, they make plenty of money in a commodity. If you look at Procter & Gamble, they throw a lot -- hundreds and millions and billions of dollars in profits playing in commodity spaces in soap and detergent and personal care products. If you look at Walmart and Amazon, they're throwing off billions of dollars in profits playing in a pure commodity, standardized SKUs. Our e-commerce business is unique and that every single product we sell is unique, created by our customers, and they care a lot more about the overall value proposition, than just simply price. So I think, as we indicated in our prepared remarks, that our strategy remains intact, that we're confident in our ability to continue to execute, and that we are confident in the early stages of these multibillion-dollar market, and that we're in the best position to transform from off-line to online markets.

So in summary, I'd just like to thank everyone for their continued support, and look forward to talking with all of you on the road in the next few days. Thank you.

Operator

Thank you. Ladies and gentlemen, thank you for participating in today's conference. This concludes our program for today, you may all disconnect and have a wonderful day.

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