Shutterfly (SFLY) Jeffrey T. Housenbold on Q4 2015 Results - Earnings Call Transcript

| About: Shutterfly, Inc. (SFLY)

Shutterfly, Inc. (NASDAQ:SFLY)

Q4 2015 Earnings Call

February 03, 2016 5:00 pm ET

Executives

Christiane Pelz - Vice President of Investor Relations and Risk Management

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

Philip A. Marineau - Chairman

Michael W. Pope - Chief Financial Officer & Senior Vice President

Analysts

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

Heath Patrick Terry - Goldman Sachs & Co.

Colin A. Sebastian - Robert W. Baird & Co., Inc. (Broker)

Paul Judd Bieber - Bank of America Merrill Lynch

Youssef Squali - Cantor Fitzgerald Securities

Kerry Rice - Needham & Co. LLC

Chris Merwin - Barclays Capital, Inc.

Brian P. Fitzgerald - Jefferies LLC

Rohit Kulkarni - RBC Capital Markets LLC

Kevin Kopelman - Cowen & Co. LLC

Trisha Dill - Wells Fargo Securities LLC

Victor Anthony - Axiom Capital Management, Inc.

Mitchell Palmer Bartlett - Craig-Hallum Capital Group LLC

Operator

Good afternoon and welcome to the Shutterfly, Inc. Fourth Quarter Fiscal 2015 Financial Results. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.

I would now like to turn the conference over to Christiane Pelz, Vice President, Investor Relations and Risk Management. Please, go ahead.

Christiane Pelz - Vice President of Investor Relations and Risk Management

Thank you, Amy. Good afternoon, everyone. Welcome to Shutterfly's fourth quarter and fiscal 2015 earnings conference call. With us today are Jeff Housenbold, Chief Executive Officer of Shutterfly; Phil Marineau, Chairman and incoming Interim CEO; and Mike Pope, Chief Financial Officer.

By now, you should have received a copy of our earnings press release, which crossed the wire just after the market closed. If you need a copy of the press release, please go to shutterflyinc.com under the Investor Relations link to find an electronic copy. The audio of this conference call is being recorded for playback purposes and a replay will be made within a few hours.

Before we begin, I would like to note that our discussions today may 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 the assumptions underlying those statements and statements about historical results that may suggest trends for our business.

For more information regarding the 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 Risk Factors section of our most recent Form 10-K and Form 10-Q and our other filings with the SEC. I would also like to note that any forward-looking statements made on this call reflect information and analyses as of today, and we assume no obligation to update this information.

This information may contain certain financial performance measures that are different from financial measures calculated in accordance with GAAP and may be different from calculations or measures made by other companies. A quantitative reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures is available on the Investor Relations section of our website at shutterflyinc.com.

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

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

Thanks, Christiane. Good afternoon, everyone, and thank you for joining us on our fourth quarter and full-year 2015 earnings call. I'll start with a high-level review of our key accomplishments during the year and then introduce our Chairman, Phil Marineau, who will serve as Interim CEO upon my departure.

Phil will then handoff to Mike Pope, our CFO, to review our fourth quarter financial performance in detail and provide our initial financial guidance for 2016. After my closing remarks, we will open up the call to your questions.

2015 was another outstanding year for the company as we delivered record financial results and made progress on our strategic imperatives, focused on delighting our customers, driving sustained revenue growth, and improving free cash flow.

We surpassed $1 billion in revenue, making a significant milestone for the company. We are thrilled to be the first $1 billion company in the personalized photo products and memory management industry, and we are honored how our tens of millions of customers have entrusted us billions of their precious memories to Shutterfly.

We are dedicated to delivering continuous innovation, targeted at reducing friction in the memory creation and preservation process and helping our customers make the world a better place by sharing life's joy. The team executed very well during 2015 and I want to thank them for their ongoing loyalty, focus, and customer centricity. It was a busy and a very productive year.

We achieved record sales, while also significantly increasing our adjusted EBITDA, free cash flow, and free cash flow per share. We introduced dozens of innovative new products and services.

We increased market share and growth in our top brands, including Shutterfly, Tiny Prints, and Wedding Paper Divas. We grew our Enterprise business beyond our expectations; signed a multi-year $350 million contract with a Fortune 50 client; and made progress on our Enterprise platform.

We completed a three-year process of building a state-of-the-art network of production and fulfillment centers. We kicked off the multi-year process to build the next-generation platform called Shutterfly 3.0 and we tax-efficiently returned excess capital to our shareholders through the repurchase of 13% or 4.9 million shares of our outstanding float for a total of $216 million.

During the holiday season, we shined on many fronts. Our major Consumer brands performed well. Our products sparkled and we attracted new customers with products, like foil and glitter cards, and services, such as Make My Book.

Our customer loyalty remained high, with approximately 75% of our revenues coming from repeat customers. Our manufacturing facilities produced record volume without any major hitches, which was critical as it was the first fourth quarter with all three of our new manufacturing facilities up and running.

Our websites and systems performed well in this record volume environment, including quickly addressing the minor site glitches we talked about in early December. The investments we made during the year helped keep our sites available when several of our competitors experienced meaningful technical issues.

For the year, revenues increased 15% to $1.06 billion, coming in at the high-end of our guidance range. Our Consumer business delivered solid results with 10% growth, while our Enterprise business outperformed, growing 94%.

Adjusted EBITDA grew 15% and came in at a record $192 million, or 18.1% of net revenues. Excluding $1.9 million in executive severance charges, our adjusted EBITDA margin would have been 18.3%.

Free cash flow, or adjusted EBITDA less capital expenditures, increased 45% to a record $110.6 million, and free cash flow per share increased a spectacular 51% to $3.01 per share.

Total unique transacting customers for the year grew 6% to 9.8 million. Orders increased even faster, resulting in a 19% increase, or 25.8 million orders at an average order value of $37.26.

Excluding the impact of our GrooveBook acquisition at the end of October 2014, average order value for 2015 was $40.98 essentially flat with last year. In addition, we continued to see strong order growth in mobile resulting in a 38% increase in revenue year-over-year.

I'm very proud of our holiday execution particularly across our largest brands. Our top three Consumer brands, Shutterfly, Tiny Prints, and Wedding Paper Divas, grew through innovations in premium products and advertising.

Shutterfly and Tiny Prints continued to delight customers and increase their loyalty through our industry-leading lineup of design-forward products and services. Both brands benefited from the popularity of our premium add-on options, such as foil, envelope liners, and special finishing touches; premium services; mobile; and home décor.

Shutterfly's introduction of foil cards proved to be a big hit. We also added several premium options, such as colored envelopes and a variety of envelope liners in different designs, a selection of trim options on cards, and new address labels.

Home décor continued its strong growth, driven by new product introductions, especially on new ornaments. We launched art prints, featuring high-quality wall art in various mediums with an option to upgrade to higher-quality paper.

We also officially launched Make My Book in October, which offers customers the option of having Shutterfly create their photo album, removing time as a barrier to conversion. Tiny Prints launched a new glitter offering, with glitter that stays on the card, not the floor, which was unique in the marketplace.

The team focused on providing full solutions or suites that helped our customers stand out at the mailbox and from the crowd. Our affluent customer cares about these details, and we made it easy for them to add premium features such as liners and color to our themed envelopes, including designs on the back, which lifted our average order value.

Wedding Paper Divas launched new products under the affordable luxury category, including premium designs, foil, thermography, personalized letterpress, and an expanded laser-cut collection. We went to market with a simpler free sample kit, which drove sample growth and reduced the time to get the product in the customers' hands.

Wedding Paper Divas also benefited from coordinated marketing messages to reinforce the affordability of our products and increased direct mail touch points to encourage purchase. We also launched a new campaign, True to the Two of You, featuring real-world couples, not just brides.

Mobile revenue rose during the fourth quarter to 12% of Shutterfly brand revenues, from 10% in Q4 2014. We improved the mobile experience, adding new features, functionality, and products to our apps in 2015, with a focus on universal iOS mobile app. We also made several new products available on mobile, including playing cards, fleece blankets, pillows, and metal ornaments. We will continue to introduce more features and products to mobile to capture the growing opportunity.

During Q4, we benefited from our integrated marketing strategy, with a balance of direct response and brand awareness activities that enabled the company to reach new levels of brand awareness and engagement. We continued our philanthropic partnership with Ellen DeGeneres and our marketing partnership with Baby2Baby, a non-profit that supports low-income babies and families. Tiny Prints featured exclusive holiday cards from Baby2Baby's board member and celebrity Jessica Alba.

With respect to major partners, we became the official photo partner for Carnival Cruises. Our promotional offers are now integrated into Carnival's onboard photo rewards program.

In Q4, we expanded our catalog distribution to new and prospective customers and added a television campaign after an inaugural launch last year. We also launched the first-time radio campaign in several major metro markets.

And lastly, we continue to work closely with our key advertising partners, participating in a new program such as Facebook's Instagram platform. The campaign was very successful and featured on Facebook's earnings call last week.

We made great progress in enhancing and optimizing our manufacturing capabilities and supply chain. We derive significant scale and scope economies from our vertically integrated manufacturing and supply chain, which enables us to extend our competitive position, drive industry-leading profitability, and improve overall customer satisfaction.

In June 2015, we opened our new production facility in Tempe, Arizona, adding to our other two state-of-the-art facilities in Shakopee, Minnesota, which opened in June 2014, and our Fort Mill facility in South Carolina, opened in June 2013. The combination of these three facilities enables us to deliver faster to customers, achieve an additional level of network redundancy, reduce shipping costs, minimize time to market for new product introductions, and enable wider SKU in-sourcing.

We brought over 10 products in-house last year, including mouse pads, metal prints, playing cards, and magnets. Through the in-sourcing process, we rethink, innovate, and improve on product quality, delighting our customer and capturing more margin.

Our Enterprise business, also known as Shutterfly Business Solutions, or SBS, performed above expectations in revenues and gross margin. SBS nearly doubled its revenues in 2015 to $98 million, up from $50.6 million in 2014, with gross margins of 18.6%, an increase of 440 basis points from 2014, leading to improved adjusted EBITDA and EBITDA margin.

This performance was achieved through better scope and scale efficiencies, automation, and a more focused sales approach. As announced on our second quarter call, SBS signed a seven-year contract valued at up to $350 million with a Fortune 50 client. In December, the team produced record volumes for this client, with a fantastic on-time rate. We achieved this while servicing our current customers and attracting new clients.

Customers are coming to SBS because they value that we are much more than a traditional printer. We're an integrated marketing partner that happens to have the largest footprint of digital presses in the world.

SBS is building a scalable platform that enables our clients' teams to do everything from creative to pre-press to printing to post-press and data analytics, allowing them to optimize their integrated marketing campaigns. We believe our platform investments will further differentiate SBS and position us to capitalize on an important new market opportunity.

Finally, we made progress toward our vision of creating a platform and device-agnostic, world-class memory management service connected to the smartest personalized e-commerce solutions, we call that Shutterfly 3.0. By modernizing our technology platform, focusing on mobile, and introducing new customer-friendly features, we aim to address the friction points caused by multiple devices, fragmented storage options, and limited organization and search capabilities for interacting with photos and videos.

The 3.0 initiative also includes delivering a better overall user experience with more products and innovations to our customers. This experience will also be portable to partners, enabling us to offer third parties the ability to leverage our platform, while better serving their customers and creating a revenue and profit stream.

Phase one, integrating ThisLife into Shutterfly, is being completed, and we will begin migrating customers to the new integrated platform during the first quarter, and we'll continue this process throughout 2016. ThisLife's features and functionality will improve the customer experience; one service, one site, one set of apps, and one well-known brand, and drive greater usage and monetization. Concurrently, we will also be making other improvements to our mobile capabilities and our site to enable it to scale for the full 3.0 platform throughout the year.

In summary, I'm very pleased with our 2015 record performance and believe we are entering 2016 with good momentum in our core Consumer brands and our Enterprise business.

As announced in December, after 11 fantastic years building a market-leading company, delivering more than $1 billion of revenue with record free cash flow, it is time for me to find my next career adventure and hand the baton over to a new CEO to build on our strong market position. We are making good progress on the CEO search and I'm delighted to say that our long-term Chairman, Phil Marineau, has agreed to step in as Interim CEO upon my departure on February 19. He has been Chairman of the Shutterfly board for nine years and previously served as CEO of Levi Strauss, President and CEO of Pepsi-Cola North America, President and COO of Dean Foods, and President and COO of Quaker Oats. He has a great background to provide counsel to our executive team.

With that, I will turn it over to Phil.

Philip A. Marineau - Chairman

Thank you, Jeff. I want to take a moment to thank Jeff for his world-class leadership and many accomplishments since taking the helm of Shutterfly in 2005. He has grown Shutterfly from a little-known private company with 103 employees focused on 4x6 prints and $54 million in revenue and negative free cash flow, to what is today a very successful, publicly-traded, $1 billion-plus business with record free cash flow and record market share.

During his tenure, he built a 2,000-person organization and a fantastic culture that has been widely admired and recognized. Shutterfly is now a diversified business, consisting of a portfolio of seven premium lifestyle brands and a fast-growing Enterprise business loved by its customers.

Jeff is leaving the company in great shape from an organizational and a business standpoint. It will be difficult to replace Jeff, but I am very encouraged by the strong pool of candidates that we are now meeting through the search process.

During this transition, I will be Acting CEO, working hand in hand with our very talented executive team to ensure we execute on our 2016 plan with a focus on driving growth and taking market share, while improving profitability and making strategic investments to compete effectively.

We expect to maintain our customer-centric focus and unwavering commitment to high-quality, design-forward products and services. We will continue to drive innovation and growth in our core Consumer business, broaden our overall brand awareness, modernize our platform with Shutterfly 3.0, and build our Enterprise platform.

I will now turn it over to Mike Pope to review our financial performance and to provide guidance.

Michael W. Pope - Chief Financial Officer & Senior Vice President

Thank you, Phil, and good afternoon, everyone. I will begin my comments today with some observations about our fourth quarter performance and then conclude with an overview of our initial 2016 financial guidance.

Net revenues for the fourth quarter totaled $548.1 million, representing an increase of 13% over the prior year, essentially at the high-end of our guidance range. As Jeff mentioned, we delivered $1.06 billion in revenue for the full year, an increase of 15% over 2014.

For the fourth quarter, Consumer revenue grew 9% year-over-year to $503.3 million, with double-digit growth at our Shutterfly flagship brand. Net revenues from our SBS business grew 119% over the prior year to $44.7 million, including approximately $14 million in non-recurring shipping revenue at zero margin.

In Q4, total unique customers grew 8.2% to 6.1 million and resulted in 10.3 million orders being generated across our portfolio of premium lifestyle brands. Orders were up 7.2%. Average order value, or AOV, for the fourth quarter was $48.96, up 1.5% from the same period a year ago, reflecting the effect of higher list prices and a shift to premium products, offset by deeper discounts and an increase in promotional offers to first-time trial customers.

GAAP gross margin in the fourth quarter was 58.3%, up 40 basis points from a year ago, mainly driven by manufacturing scale efficiencies. Q4 gross margin came in under the low-end of our guidance, due to the non-recurring SBS shipping revenue.

Excluding the $14 million shipping revenue, gross margin would have been 59.8%. Q4 Consumer gross margin was 62.4% and Enterprise gross margin was 17.1%. Operating expenses for the quarter totaled $177.4 million, up 11% over the prior year. Operating expenses, excluding stock-based compensation, totaled $167.8 million, up 17% year-over-year.

Looking more specifically at our operating expense components, technology and development costs totaled $43 million for the quarter, up 19% over the prior year or 8% of net revenues.

Excluding stock-based compensation, depreciation, and intangible amortization, our technology and development spending increased approximately $5.9 million or 23% from the prior year.

Q4's increase in technology and development spending was largely driven by incremental costs associated with continuing investments in head count for Shutterfly 3.0 and investments required to scale our Enterprise business.

Sales and marketing expenses totaled $99 million in the quarter, up 13% over prior year or 18% of net revenues, in line with Q4 of last year. Excluding stock-based compensation, depreciation, and amortization, sales and marketing expense increased 17% to $89.7 million.

The growth in sales and marketing expense was largely driven by modest increases in head count and higher customer acquisition costs due to rising media prices.

General and administrative expense for the quarter totaled $35 million or 6% of net revenues, down 1% from the prior year. Excluding stock-based compensation, depreciation, and amortization, executive severance, and credit card processing fees, G&A expenses represented 2.9% of quarterly net revenues, down from 3.0% in Q4 of last year.

Operating income for the quarter was $141.9 million, ahead of guidance of $128.8 million to $139.5 million, or approximately 6% better than the midpoint of our guidance. Pre-tax income was $136.4 million, after factoring in non-cash interest expense on our convertible note. This improved profitability was largely driven by lower-than-expected stock-based compensation.

Adjusted EBITDA for Q4 increased by $17 million or 10% year-over-year to $181.6 million, or $183.5 million excluding severance charges. Our Q4 adjusted EBITDA performance was largely driven by healthy revenue growth, scale efficiencies in manufacturing, and measured operating expense growth.

For the full year 2015, adjusted EBITDA increased 15% over the prior year to a record $192 million or 18.1% of total net revenues. Excluding executive severance, adjusted EBITDA was $193.9 million or 18.3% of sales.

The effective tax rate for the quarter was 3.9%, bringing our full year tax rate to 57.6%, up from 21.2% in 2014. The year-over-year change in our full-year effective tax rate was primarily the result of a smaller-than-expected loss, coupled with the benefit of the federal R&D credit reenactment.

Net income for the quarter on a GAAP basis totaled $131.1 million or $3.57 per diluted share. The weighted average shares used to calculate the net income per share total was 36.7 million shares.

Capital expenditures during the quarter totaled $19.3 million, including $6.9 million for technology equipment and software, $6.3 million in capitalized software development costs, $5.4 million for manufacturing and building improvements, and $0.7 million for rental equipment. For the full year, CapEx was $81.4 million or 7.7% of total net revenues and reflects the build-out costs associated with our Arizona facility and incremental growth investments in equipment at our production facilities.

Free cash flow, measured as adjusted EBITDA less capital expenditures, totaled $162.3 million for the fourth quarter, bringing our full-year free cash flow to $110.6 million, up 45% over last year. Free cash flow per diluted share for the year totaled $3.01 per share, up 51% for the year.

Cash and total investments as of December 31 totaled $341 million, decreasing $134 million year-over-year. Our decrease in cash was largely driven by our share repurchase program and a modest amount of additional working capital required to scale our SBS business.

In the fourth quarter, we repurchased a total of 1.1 million shares for $45 million. During all of 2015, we returned excess capital to shareholders in a tax-efficient manner, repurchasing 4.9 million shares for a total of $216 million or $43.99 per share.

Our share repurchase program is consistent with our long-term capital allocation strategy, which aims to maximize shareholder value, while maintaining flexibility to make strategic investments and acquisitions. Given our business momentum, our profitable business model, and our anticipated future cash balance, we believe we can prudently repurchase our shares and still be able to make smart investments for the future. At year-end, we had $95 million remaining under our previously authorized share repurchase program.

As we look towards 2016, we are investing in additional customer-facing enhancements with Shutterfly 3.0 and our SBS business, while leveraging our investments in operations to achieve scale efficiencies. As planned, our capital expenditures have returned to a more normalized rate, which positively impacts free cash flow.

Looking forward to our current year outlook, we expect solid growth to continue with our Shutterfly flagship brand, as well as our SBS business. While our SBS clients generate incremental margin dollars and cash flows and provide modest seasonal smoothing to our manufacturing capacity, overall consolidated gross margins are negatively impacted by our SBS business.

The following guidance we will provide for both Q1 2016 and the full year exclude the remaining $3.3 million of severance payments to our departing executives. With the context of these assumptions as a backdrop, we expect Q1 net revenues to range from $173 million to $180 million, which reflects year-over-year growth of 10.3% at the midpoint.

We expect our Q1 GAAP gross margin to range from 40% to 41% of net revenues and our GAAP operating loss to range from $39.9 million to $42.9 million. We expect our adjusted EBITDA will range between a loss of $1.5 million to positive $1.5 million. Our GAAP effective tax rate will range between 31% and 34% and we expect a GAAP net loss per share to range from a loss of $0.86 per share to a loss of $0.95 per share, based on approximately 35 million weighted average common shares.

Turning now to full year 2016, we estimate that net revenues will range from $1.12 billion to $1.16 billion. Eliminating the $10 million flash revenue benefit and the Q4 SBS shipping revenue of $14 million from 2015, our 2016 net revenue anticipated growth rates would range from 8% to 12%.

Lastly, we expect acceleration in Consumer growth in the second half of 2016, driven by the benefits from our Shutterfly 3.0 efforts. We expect the full-year GAAP gross margin to range from 50.9% to 51.7% of net revenues.

We expect that our GAAP operating income will range from approximately $36 million to $57 million and that our full year 2016 adjusted EBITDA margin will range from 18.5% to 19.5% of net revenues.

The full year GAAP effective tax rate is expected to range from 31% to 34%. We expect full-year GAAP earnings per share to range from $0.26 to $0.64 per share, based on 36 million weighted average diluted shares. We expect that 2016 capital expenditures will range from 7.1% to 7.8% of net revenues or between $80 million and $90 million. Lastly, we expect free cash flow, as defined earlier, to be between 11% and 12% of net sales.

I will now turn it back to Jeff for some closing remarks.

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

Thanks, Mike. In closing, 2015 was an outstanding year for Shutterfly. We delivered record results for revenue, adjusted EBITDA, free cash flow, free cash flow per share, transacting customers, and orders; continued our robust pace of innovation; broadened and increased our brand awareness; significantly enhanced our manufacturing and operations capabilities; began leveraging our investments; and returned a record $216 million of capital back to our shareholders.

I have had an amazing 11 years at Shutterfly and I am so proud of the team for achieving what we only dreamed of in 2005, building a $1 billion company with a world-class brand and a great company culture. We delivered 60 consecutive quarters of revenue growth and nine straight years of adjusted EBITDA growth since Shutterfly went public in late 2006.

I'm excited about the future prospects for Shutterfly and I'm confident the team will continue to build Shutterfly into an even greater company. I'd like to thank my team and employees for their passion and dedication and our shareholders and analysts for believing in the company and supporting us over the years. Thank you.

That concludes our prepared remarks. We will now open the call for your questions.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. Our first question is from Aaron Kessler at Raymond James.

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

Hi, guys. Congrats, Jeff. I'm sure we'll run into each other soon, but look forward to your next career. Maybe if you can just give a little color on the EBITDA guidance, kind of the range, kind of the plus and maybe negative factors that go into the thinking there, and if you could maybe give us what's the normalized 2015 EBITDA would have been excluding some of the one-time costs. I was going to expect a low-$200 million range. Thanks.

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

Yeah, thanks, Aaron, for the kind words and I'll tee up kind of the broad guidance. I'll let Mike talk about the non-recurring or one-time charges and how to normalize that for 2015. At the high end of our revenue guidance, you see EBITDA margin without the severance at 19.5%. So we're making good improvement over where we came in during 2015.

So we're getting leverage from our modernized manufacturing footprint, scale and scope economies. We're getting leverage in being able to cross-sell and up-sell to our customers and also a reduction in areas of OpEx and stock-based comp.

Places where we're making investments is the continued focus on Shutterfly 3.0 on mobile and on our Enterprise platform build out, so that we could continue to attract both end consumers, as well as new Enterprise clients. So it's a balanced approach as we're continuing to make investments in Shutterfly 3.0.

The other thing to keep in mind is with Enterprise growing quicker than we had anticipated and the signing of an up to $350 million deal, Enterprise carries a meaningfully lower EBITDA margin than our Consumer business. And so that creates some headwind in the overall EBITDA margin for the company.

We have been, as you know, over the years focused on adjusted EBITDA as a key metric. And over the last 12 months, we've been focusing and talking to you guys more and more about free cash flow. And you saw a significant improvement in free cash flow of 51% per share during the year and free cash flow up 45%, and we believe, as I said consistently for the last 18 months, that free cash flow – free cash flow per share, adjusted EBITDA will grow meaningfully quicker than our overall revenue.

Michael W. Pope - Chief Financial Officer & Senior Vice President

Great. So, yeah – this is Mike, I would reiterate what Jeff said in terms of the guidance for 2016. At the low-end of the guidance, we're still showing operating improvement at 18.5% EBITDA margins and at the high-end at 19.5%. Obviously, we get leverage as we get larger there.

With regard to your question related to the non-recurring items in 2015, there was about – just under $13 million of non-recurring items, including the $1.9 million of severance that we took in the fourth quarter. About half of that we save in 2016. As we go forward, we had some – obviously things that went both ways. We had some shutdown of facilities that won't recur. We had some write-offs of capitalized R&D costs that won't recur. But we also had some gains on the flash (36:36) revenue, which was EBITDA margin in 2015.

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

Great. Thank you.

Operator

Our next question is from Heath Terry at Goldman Sachs.

Heath Patrick Terry - Goldman Sachs & Co.

Great. Thanks. I was wondering if you could give us a little bit more detail on sort of where ThisLife, Shutterfly 3.0, specifically the subscription revenue side of things is, what kind of adoption you're seeing among the customers that you've gone out to to push. And I know we've talked about it for it feels like years now, but to the extent that you get that product to a point where you feel comfortable enough really marketing it to a broader audience, would be curious sort of what the hurdle you're looking for, either from a customer engagement standpoint or a technology standpoint, to commit more there?

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

Thanks, Heath. This is Jeff.

Heath Patrick Terry - Goldman Sachs & Co.

Thanks Jeff.

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

So, about six months ago, we talked about our shift in monetization for ThisLife from a standalone product with a standalone brand and a freemium model to integrating it into the core Shutterfly which is rolling out in Q1, and then we will migrate Shutterfly customers throughout 2016. And so, we went from a freemium model to being a free model, and instead of asking people to download a separate application and engage with a separate brand, the ThisLife brand is going away this month and it's just going to become the all-new Shutterfly.

So all of that rich feature functionality will be embedded into the Consumer workflow on the core Shutterfly with one brand, and we won't have to drive adoption because customers aren't going to have a choice there. This Shutterfly or their lightbox or their interaction with their pictures are going to be replaced by the ThisLife capability.

And when we did the math, we believe the increase in customer acquisition and in conversion rate and lifetime value is more meaningful to Shutterfly than the incremental subscription revenue that we would have got if we put a governor and narrowed the front end of that funnel.

We have not given up on the concept that there might be extra feature functionality that people would be willing to pay for in the next-generation Shutterfly. We still believe we have some robust ideas around that. That's not the core focus for the next 18 months. And so, we're excited that we're doing the rollout internally as we speak now, and then it will start to roll out to customers throughout the rest of Q1 and the rest of the year, so we're very excited about the final launch.

And once that launches and we're getting actual data about the lifetime value and engagement metrics, then we'll make determinations about how much hard marketing dollars we'll spend to acquire new customers versus let the viral word-of-mouth component from our large installed base drive adoption of the new features.

Heath Patrick Terry - Goldman Sachs & Co.

Got you. Thanks, Jeff.

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

My pleasure.

Operator

The next question is from Colin Sebastian at Robert Baird.

Colin A. Sebastian - Robert W. Baird & Co., Inc. (Broker)

Thanks. Good afternoon. Jeff, first off, congratulations and best wishes on your next endeavors.

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

Thank you.

Colin A. Sebastian - Robert W. Baird & Co., Inc. (Broker)

I guess, can you provide any qualitative commentary, if not breakout, on the relative performance of the Consumer product lines over the holidays, photo books and greeting cards, and whether the discounting you mentioned in the script was pre-planned ahead of those key holidays?

And then secondly, Phil, I wonder in your upcoming tenure as Interim CEO, is your focus there on ensuring the rollout of the remaining pieces of 3.0? Or are you more actively looking for Jeff's replacement or are there other strategic opportunities on the whiteboard, so to speak? Thanks.

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

So, Colin, on kind of giving a little bit of qualitative during the quarter, we saw double-digit growth on the core Shutterfly brand during the quarter, which is a very positive thing, given that it's the vast majority of our Consumer revenue, and it was across all of our categories. With particular strength, we saw photo books coming in a little stronger than we thought, cards and stationery was really solid and, as you know, that line item has the highest margins of what we sell. Some of the new features, like foil and glitter that we rolled out across our cards and stationery lineup, matching envelope liners, address labels, customized stamps, all the cross-sell, up-sell drove nice uptake for us.

We were a little bit soft in some of the photo merchandise and calendar stuff. Mostly, we shot ourselves in the foot a little bit with a rollout of a new user interface that didn't have the receptivity that we thought. So we made some tinkering to that during the quarter and think we're teed up well for Q4 of 2016, having gone through that learning. But, overall, it was a solid quarter.

As it relates to discounting, it was pretty much what we were expecting. Given our market share position, many of the competitors are struggling because they don't have the innovation, the user interface, the mobile investments, the design, or the premium positioning that we have. And so, the only lever they really have as they're struggling to stay afloat and remain in business has been one in pulling in discounting. We saw that and we also saw some rising media costs on keyword bidding particularly. But we managed through that very successfully and landed at the high-end of our guidance and with a good EBITDA margin. So, overall, Consumer was a solid execution for us.

And then, I'll turn it over to Phil, and as Phil said in his prepared remarks, he's really here as counsel to a very, very seasoned, established executive team who has a strategic plan that they're executing against and is overseeing the rollout of 3.0 and looking for a new CEO. And so, he's playing more of a traditional coach than a player role. But we're thrilled to have him be able to step in, given his deep knowledge of the business and his business experience.

So, let me hand it over to Phil.

Philip A. Marineau - Chairman

So, yeah, I think Jeff got it mostly right. I'm not sure it's just a coach. My role as the Interim CEO is to lead this excellent management team to execute the 2016 plan that was unanimously approved by the board, and I think it's a plan that the team believes in and owns and I think we can accomplish it.

And then, the second is to participate with my other – with fellow board members in finding a new CEO, and I hope the intersection of these two activities leads to an outstanding CEO who joins the company and inherits a plan that we are well on our way to executing.

Colin A. Sebastian - Robert W. Baird & Co., Inc. (Broker)

Great. Thanks. Jeff, if I could sneak one more in, a more academic question. But given all the investment in machine learning around photos and facial recognition that we're hearing about from large platform companies, should we look at that as a changing risk profile for Shutterfly? Or is this more about an area you guys are tapping into with 3.0 and just perhaps more utility in terms of photo storage, utilization of those photos? Thanks.

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

Yeah. No, we're excited about the advent of proprietary algorithms, machine learning, and AI as it helps consumers take this ever-growing array of personalized videos and photos and be able to automatically make sense of those. We have dozens and dozens of employees sitting in Haifa, Israel, with deep experience in this area that's adding value to our own proprietary algorithms.

And then because we're opening 3.0 to be both device and platform agnostic, you can then overlay what the Google photos is doing or Amazon might do or Apple and still be able to use the world-class creation paths and the e-commerce capabilities of our platform. So part of 3.0 is to modernize our platform and make it more advantageous for large ecosystem players to be able to partner with us through a series of robust APIs.

Colin A. Sebastian - Robert W. Baird & Co., Inc. (Broker)

Thank you.

Operator

The next question is from Paul Bieber at Bank of America Merrill Lynch.

Paul Judd Bieber - Bank of America Merrill Lynch

Hi. Thank you for taking my question and, Jeff, good luck with your next adventure.

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

Thank you.

Paul Judd Bieber - Bank of America Merrill Lynch

I was hoping that you could give a little bit of color on the mix of revenue implied in the 2016 outlook between Enterprise and Consumer. Obviously, they have very different growth profiles and margin profiles, gross margin profiles. So I was just hoping for some qualitative comments on how we should think about that this year.

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

Yeah. So, as you know, we don't typically break out the guidance. We'll report the actuals, but don't break out the guidance. You saw Enterprise grow 94% in the year, which was just phenomenal for a business in its sixth year, and that business approached $100 million with increasing margins, with increasing sophistication, and a stronger value proposition to Fortune 1000 companies. And so we're really excited about that.

Consumer growth rates are facing the law of large numbers as we're adding between $70 million and $100 million of incremental business, which is almost as large as our largest competitor.

So we're basically adding our large – the number two player in the industry this year, and we've been doing that year-over-year-over-year. So the growth rate is slowing down to high-single-digits in Consumer, but the core Shutterfly brand has been outperforming the other smaller brands.

And so, that gives us a basis of confidence as we head throughout this year, with the vast majority of our Consumer engineering and product R&D resources going into the core Shutterfly brand, with a focus on 3.0 and mobile. And so, we think that tees us up well for the back half of 2016 and going into 2017 and 2018.

And then on top of the investments we're making on revenue growth, we also have been pivoting as the company matures to really driving to have a more sustained and faster growing free cash flow and free cash flow per share outlook than we did in the key investment years that have occurred over the last three years.

Paul Judd Bieber - Bank of America Merrill Lynch

And one quick follow-up question on the Enterprise business. Can we expect gross margins to expand in the Enterprise business again in 2016?

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

I think the team is doing some interesting stuff around automation. We pruned our client list last year, basically dropping unprofitable customers. In the fourth quarter, gross margins were pulled down in that we had kind of a one-time $14 million component of a large product – project which was related to shipping, but you don't get to mark up shipping to Enterprise clients, where you get to mark it up slightly to Consumers.

So if you normalize for that $14 million, we saw a very nice healthy improvement in gross and EBITDA margins on the Enterprise business and I think there is some more improvement and leverage to have there, but again it will never approach what the Consumer business is. But it leverages our fixed assets, our people, and our depreciation in the stack, and so the flow-through to cash flow is better than the gross margin would imply.

Paul Judd Bieber - Bank of America Merrill Lynch

Okay. Thank you. And once again, good luck, Jeff.

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

Thank you.

Operator

The next question is from Youssef Squali at Cantor Fitzgerald.

Youssef Squali - Cantor Fitzgerald Securities

Thank you very much. Jeff, best of luck in your future endeavors. Two questions, I guess, starting with one for Mike or maybe Jeff. So, I just want to dig a little deeper within the Consumer business, which I think grew 9% in the quarter. You did say that Shutterfly the brand grew double-digits. Last quarter and the quarter before that, you also commented on growth in Tiny Prints and Wedding Paper Divas. I was wondering if maybe you can call these out in terms of what kind of growth they saw and any issues this past quarter, and then I have a follow-up.

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

Sure. On the Consumer side, we really like having a premium portfolio of brands that allows us to segment and micro-segment the industry more effectively than single-brand competitors can and be able to capture the economic rents in these micro-segments.

And so, we're committed to Tiny Prints and Wedding Paper Divas brands. But we've been making more investment in the future in the core brand of Shutterfly, leveraging that large brand equity and the fact that the photos are hosted and saved on that platform and that mobile and 3.0 investments are occurring on that platform, and it has the broadest assortment of product SKUs where Tiny Prints and Wedding Paper Divas is primarily a paper-based business with some augmentation around the merchandising. So, we're not breaking it out, but it was single-digit growth, both of the brands grew and we've been focused more on profitability around those two brands.

As we move forward over the course of the next zero to 24 months on 3.0, we'll even get further leverage in those brands as we unify the backend technology platform to have a single platform running across our Consumer brands and so we believe profitability on those brands will increase again.

And once you're on a common brand, the entire product catalog will be available to all brands, seamlessly to the consumers and we believe that will drive growth in the smaller brands once we complete that single platform execution.

Youssef Squali - Cantor Fitzgerald Securities

Okay. That's very helpful. Thanks, Jeff. And then I guess a quick question for Phil. The – in your search for a permanent CEO, is there a timeframe that you guys are working under or is this open-ended until you kind of find the perfect candidate?

And then on the – SBC has been historically a thorny issue, just wanted to see your views on SBC as we move forward in 2016 and beyond as a percentage of revenue? Thanks.

Philip A. Marineau - Chairman

We initiated the search in December. They usually take four months to six months. We've been progressing very well. We've met a number of candidates that have high interest in. And so I would expect to be successful in this search sometime in the spring of this year. Can you rely on that? I can't – nothing is certain in this world, but I'm optimistic about that.

And secondly, stock-based comp, the comp committee is well aware of the issues on stock-based comp. We've tried to deal with that in the last proxy statement, the last proxy that we did and shareholders agreed with us and we're going to be very judicious in stock-based comp, but it is the currency of Silicon Valley and we have to be very aware of that.

Youssef Squali - Cantor Fitzgerald Securities

Does it go down in 2016 as a percentage of revenue?

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

Youssef, we don't forecast SBC, but you saw a very nice moderation in 2015 over 2014, and the decline with some of the executive departures. And in our proxy, we committed to a lower burn rate which has been coming down for the last four years consistently.

So, I believe you're going to see a continued moderation in burn rate, plus we're buying back shares offsetting any dilution. But as Phil said, we need to make sure that we're paying competitively to attract and retain talent necessary to execute against that vision and continue to grow both the top and the bottom line.

Youssef Squali - Cantor Fitzgerald Securities

Got it. Thanks a lot.

Operator

The next question is from Kerry Rice at Needham.

Kerry Rice - Needham & Co. LLC

Thanks a lot. A couple of questions, mostly clarifications. On the acceleration you expect to see in the second half of 2016, is that over first half or is that, again, kind of a year-over-year comparison? And then, on gross margin guidance, you have a nice – on the pro forma basis, just a nice uptick in general and you're doing obviously a lot investments, Enterprise is coming up, so that has a lower margin. Is there anything else you would call out that's helping drive that increase in gross margin? Thanks.

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

Yeah, your first question about the guidance, it's both. So we would expect, as you know, the peaks are getting peakier and we still remain 50%, 52% of our revenue occurs in the fourth quarter and given the lineup of products and features and 3.0 and investments in mobile that we're planning on making throughout this year and building on last year's investment, we think we're going to have a very strong Q4 of 2016. And so, the year-over-year growth rate should improve, but the back half should be stronger than the first half, all things being equal sitting here in early February.

And then on the gross margin, I'll let Mike talk about the specifics, but we're continuing to see leverage from the build-out of our facilities and the volume going through those facilities from both a capacity utilization and throughout automation standpoint as well.

Michael W. Pope - Chief Financial Officer & Senior Vice President

Yeah, I would echo what Jeff said, it's really efficiency is being driven by our manufacturing plants as we put more volume through them and then continued improvement in SBS business.

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

Yeah, and you'll see in our press release and obviously in the 10-K, we breakout from a segment reporting standpoint Enterprise versus Consumer, which shows you that the Consumer business as a standalone has even higher margins than the overall Inc., and it's still the vast majority of our revenue.

Kerry Rice - Needham & Co. LLC

Great. Thank you.

Operator

The next question is from Chris Merwin at Barclays.

Chris Merwin - Barclays Capital, Inc.

Thanks for taking my question. And, Jeff, I wish you all the best in your next chapter. So I just had one on capital allocation really and just in terms of what your priorities are at this point between buying back stock, M&A, investing in future growth, international expansion? And as a related question, are you more focused on driving margins through Shutterfly 3.0 or trying to reaccelerate Consumer revenue? Thanks.

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

Yeah, let me tackle the second one first. So 3.0 is a series of very large projects all brought under this nomenclature of 3.0. And essentially the vision is to build the modernized technology platform that allows us to innovate more quickly, delight our customers, drive lifetime value and acquire new customers that's platform and device and ecosystem agnostic. Within 3.0, there are components that I think are going to drive – the near-term components are going to drive more customer acquisition and enhancements in frequency and lifetime value.

As we get to the next stage of projects within 3.0 over kind of 12 months to 24 months, you'll start to see efficiencies from a cost structure as we move towards more of the modernized single platform. So 3.0 will address both, but it's revenue conversion first, margin second.

As it relates to capital allocation, I've been very consistent, I think Mike's prepared comments today echo that is that we think we have a very healthy balance to remaining strategically flexible to invest in organic initiatives that we believe have a positive NPV and benefit the ultimate size of both the franchise and the enterprise value of the business while being able to return excess capital to our shareholders in a tax-efficient manner.

International is last – what I said on the last call was that we'd be prepared to go international from a platform standpoint in 2018 that doesn't preclude us from buying something internationally, but as you have seen over the course of the 16 years of the company's history we haven't done that.

So international is not a top priority at this juncture for the company and that would be last. So I would say organic growth and investment, return of excess capital, opportunistic strategic accretive acquisitions, and international to answer your prioritization question.

Chris Merwin - Barclays Capital, Inc.

All right. Thank you.

Operator

The next question is from Brian Fitzgerald at Jefferies.

Brian P. Fitzgerald - Jefferies LLC

Congrats again, Jeff. We wish you the best also. Couple of questions around mobile, how does the average order value and the order patterns differ there maybe versus what you see in desktop ordering? And then around your advertising campaigns, how do you feel they have been performing, are there any channels that you have found particularly effective in terms of reaching, demos that you previously were struggling to reach? Thanks.

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

Great. Yeah, thanks for asking about mobile, because it's something we're very excited about around here. If you look, mobile grew 38% during the year. And as you guys covering have seen as Facebook made that pivot from a desktop to a truly mobile company that took them a little bit of time but was really value enhancing and accretive for the shareholders. You saw that from Alphabet's report this week as mobile is kicking-in for them from an advertising standpoint. For us, we're equally as excited about the future of mobile and the investments we're making in 3.0 are paramount to the success in mobile on a go-forward basis.

And so the average order value today is lower, because the full product assortment and library and catalog is not available in mobile today. When 3.0 continues to rollout, you will see a parity between desktop, tablet, and a smartphone and customers can start a project and finish the project and check-out across all those devices across Android, Kindle, and iOS. And so we believe the investments we're making are going to drive AOV up and also frequency, because we're going to be using our machine learning and algorithms to essentially take the creation and time aspects that are friction out of the value proposition and be able to delight customers with more instantaneous and impulse purchasing. So, we're very excited about mobile and where that's headed.

From an integrated marketing standpoint, we've always been on the leading edge of the industry and executing both fact-based multi-touch attribution in our core advertising both on and offline and then preserving enough of our marketing dollars to be on the forefront of experimentation in new channels.

And that's based upon the relationships I've had in the industry and the talent of my marketing group, but we were the second customer for Groupon, we were one of the first three customers for Facebook FBX, we were one of the first five customers for Pinterest. And on Facebook's earning call last week, Sheryl even called out what we're doing with Instagram as a case study of how consumer brands are engaging with Millennials in a mobile environment with a high degree of success.

And so, we constantly are tweaking our integrated marketing campaign quarter-to-quarter based upon our products, the competitive landscape, consumer taste, technological shifts. And I'm very, very proud of how well the team has their hands on the dial and use multi-touch attribution to drive the return on advertising spend.

Brian P. Fitzgerald - Jefferies LLC

Great. Thanks, Jeff.

Operator

The next question is from Rohit Kulkarni at RBC Capital.

Rohit Kulkarni - RBC Capital Markets LLC

A quick question. Most of them have been answered. On CapEx, on a percentage basis it steps down little bit, but on an absolute dollar amount, it's going up from 2014 to 2015. Anything you would call out, any incremental investments? And then I have a quick follow-up.

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

Yeah, you know, what we've said consistently over the last few years is that we were in an investment phase in 2013, 2014, 2015, where you saw our CapEx rise from its normalized range of 7% to 8% to the high-9%s, low-10%s, and that that would be coming down in 2016, 2017, 2018, but I think we were ahead of schedule there with lower CapEx in 2015 leading to increased free cash and free cash flow per share and you're seeing a continued moderation of that here in 2016 with the guidance of 7.1% to 7.8% of revenue.

We're still making investments in three key areas: one is Shutterfly 3.0; the second is mobile; and the third is the Enterprise platform that we're building to attract further Fortune 1000 clients. Some of that is expensed in period and a large part of that, because it's new feature functionality, is capitalized under software and development. And so, we're finding a healthy balance of increasing free cash flow while making smart investments for the future of the company.

But if you're modeling out over the next three years to five years, I think the guidance that we've given is 7% to 8%, you see us already in the mid-7%s, at the midpoint of guidance. And so, I think that might improve as the company moves forward through 3.0. Over the next 18 months, you might get to a high-6%, but I think modeling in the 7%s is a good place for now.

Rohit Kulkarni - RBC Capital Markets LLC

Okay. And on the SBS segment, do you have any new investments planned as you have learned through working with this new large client and potentially building on that success to get similar such clients over the next 12 months, 24 months? Are you doing any new investments that you perhaps did not have planned maybe six months back?

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

Not six months back, but 18 months back, yes. So the key focus here is that we don't want to just be a printers, we articulated and I think there is some information in our investor deck, we're becoming a full service integrated marketing partner to Fortune 1000 companies, helping them get greater ROI on their advertising spend. And so they're coming to us for our platform, for our analytics, for our pre-press, for our printing, for our post-press and for our account management, which is a great place to be because the margins are in the service layer, not just – more so than in the printing layer.

And so, we are taking the learnings from working with this Fortune 50 client and building a robust Enterprise-class platform that will be customized depending on which vertical the client is in, but that provides all of the components in a cloud-based service so that we can help our clients be more successful. So we're excited about that and we're spending – I think the last time I talked about it, it was $10 million to $14 million of investment over a series of two years there. That is still directionally correct.

The return on that investment is going to be fantastic and already paying off with this one client that we signed. And so, once we have that executed, you should see the benefits start to roll in and an expanded client list for our SBS business.

Rohit Kulkarni - RBC Capital Markets LLC

Okay. Great. Again, thanks a lot, Jeff, and good luck.

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

Thanks, Rohit.

Operator

The next question is from Kevin Kopelman at Cowen & Co.

Kevin Kopelman - Cowen & Co. LLC

Thanks a lot. First of all, Jeff, all the best wishes for you in the future. Just wanted to ask a couple of quick questions. First, can you help us out with just thinking about Enterprise seasonality at all? The last couple of years, Q1 was a seasonal low point. Should we think of that as kind of similar Q-over-Q trends as the last couple of years? And then should we take away the non-recurring revenue when we're doing that math?

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

Yeah. So there's $14 million in non-recurring revenue out of Q4. You should normalize for that, because we don't see that moving forward. And Q1 has been slower. Keep in mind, we are getting additional business from this Fortune 50 customer this Q1 that we didn't have in last Q1, so that will benefit us. And then we will roll through that on the back half of Q3 going into Q4 of 2016's model.

I think the seasonality of Enterprise is going to be dependent upon – it's less seasonal than the Consumer business today and what we're focused on from a strategic sales pipeline standpoint is finding kind of anchor tenants within six to eight verticals that have counter seasonality to the Consumer business so that we could utilize our manufacturing more efficiently. That is easier said than done because so many of our Enterprise clients sell to the consumer and, as you know, the vast majority of discretionary spending is spent in the fourth quarter.

But we are working hard against that and you could think about verticals in the notion of financial services, insurance, healthcare, retail, education, leisure and entertainment. And we're looking for kind of an anchor tenant across that to give us both economic, seasonal, industry, and client diversification as that business continues to scale.

Kevin Kopelman - Cowen & Co. LLC

Okay. Great. And then another one on marketing, are Enterprise commissions in that sales and marketing line, and how should we think about that playing out? And then also how are you thinking about the Consumer ad budget?

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

I'll take the ad budget. I'll let Mike talk about Enterprise commissions and where it hits on the P&L. So advertising, if you look at our sales and marketing, year-over-year was relatively flat, a slight increase in head count, but relatively flat year-over-year.

And, as you know, media costs are rising and that's offset by two things, one is the awareness of our brand continues to grow, driving viral word of mouth acquisition, which brings down the overall, the high degree of retentive transactions approaching 75% helps bring that down, and then a great team that is constantly driving for efficiency in our advertising spend.

So as I think about where there's leverage in the model in the near-term, call it the next two years, tech and dev, we're making investments there, sales and marketing relatively flat. The team runs a pretty good G&A. I think there's small OpEx leverage, continue to have, there's gross margin benefits in the Consumer and SBS business as we continue to automate and get scale and scope efficiencies. And then there's leverage in SBC, and the fact that we're reducing the outstanding float driving -and CapEx coming down, all that leading to increases in free cash flow and free cash flow per share. Mike, do you want to handle commissions?

Michael W. Pope - Chief Financial Officer & Senior Vice President

Yeah, absolutely. So you're correct. The commissions related to our SBS business are reflected in the sales and marketing line. And I think what you'll see – what you saw from 2014 to 2015 was that was held relatively flat as a percent of sales and so any increases there, we obviously have to offset by efficiencies in other parts of our business.

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

And keep in mind, we only have five or six salespeople generating a $100 million business. There's account managers that support that business, but when that Enterprise platform is built, you can add two or three or four more salespeople because they now have an even more stronger value proposition to go to market. But our efficiency from a salesperson standpoint relative to their book of business is phenomenal.

Kevin Kopelman - Cowen & Co. LLC

Okay. Thanks, Jeff. Thanks, Mike.

Michael W. Pope - Chief Financial Officer & Senior Vice President

Yeah.

Operator

The next question is from Trisha Dill at Wells Fargo Securities.

Trisha Dill - Wells Fargo Securities LLC

Great. Thanks. Just a couple of quick ones. Just first on the EBITDA guidance, is it possible to quantify some of the continued investments that are impacting EBITDA from the rollout of Shutterfly 3.0 in 2016?

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

No, we're not breaking those out today, Trish. It's part of just kind of the ongoing investments we make in the business. We called out the executive severance of...

Michael W. Pope - Chief Financial Officer & Senior Vice President

It'd be $3.3 million in the first quarter.

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

...$3.3 million and some of the non-recurring from the proxy costs and also the shutdown at Elmsford and our Treat brand. But the 3.0 is baked in, we're not breaking that out.

Michael W. Pope - Chief Financial Officer & Senior Vice President

You should remember that some of those, as I said earlier, are offset by the benefit to EBITDA that we got from flash revenue.

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

Right.

Trisha Dill - Wells Fargo Securities LLC

Great. Okay and then just a follow-up on mobile. I think, Jeff, you recently made a comment about how mobile is incremental to the business. If you can just talk about how you measure that incrementality, it's a question that we have been talking about quite a bit lately versus just thinking about mobile as a shift in the way consumers transact? Thanks.

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

Yeah. It's a great question. Most e-commerce and traditional retailers are trying to understand that. We have an amazing team of PhDs and Masters and econometrics and statistics and some proprietary stitching of various datasets into our proprietary data mark, allows us to get a much more granular handle over incrementality across the various touch points. Obviously, some of it is cannibalistic; some of it is multi-touch that someone will open an e-mail on their mobile, start the project on their tablet, and order on Monday when they are in an office on a high speed network. We're able to measure that too through cookie sessions, through sign-in, through some of that is direct measurable, some of it is inference from big statistical models and then a good chunk of it is incremental.

These are new customers into the Shutterfly ecosystem that tend to be younger and tend to be mobile-only. So we weren't going to get them on the desktop. And so we like that it's driving both increased revenue from our existing customers and attracting a new younger Millennial customer base that gives us a longer runway in the future.

Trisha Dill - Wells Fargo Securities LLC

Great. Thanks so much. Best of luck, Jeff.

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

Thank you.

Operator

Our next question is from Victor Anthony at Axiom Capital.

Victor Anthony - Axiom Capital Management, Inc.

Thanks. Best wishes to you, Jeff. I just had a one question on just the overall margin profile for the business going out over the next several years. So you are investing in – I think you've called out Shutterfly 3.0, mobile, Enterprise as key investment areas and, clearly, you've called out Enterprise going significantly faster and has lower margins. But overall, how should we think about, I guess, your optimal margin profile for this business, how we model it over the next several years?

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

Yeah, Vic, we don't give a long-term model. And what I've said in the past and I said on the last call was I believe the business will return to a two handle on EBITDA that will be lower than as a combined entity with Enterprise as part of the mix, the standalone Consumer business is higher, but the overall will be reduced by Enterprise, but that increases free cash flow. So we're not giving a long-term model today. I think returning to a two handle over the next few years is what I said three months ago, I think that statement still remains true.

I think as I said on this call, a shift in the focus from management and the team as the business continues to grow and mature is a focus on free cash flow per share as a key metric. And I think it's something that you want to add to kind of the arsenal as you think about the business. But we have the highest margins of any publicly-traded e-commerce company. And the reason is because we make a proprietary product through our vertically integrated manufacturing that is not usually bought on Amazon's website, plus it has a very high emotional and inspirational component not just a rational functional one.

We're talking about peoples' memories. And so, we're able to capture a very nice margin for a retailer and an e-commerce player. And I believe that will continue to be the case and the investments we're making in 3.0 from both the revenue, customer engagement, but also ultimately from a cost structure standpoint on the platform will continue allow us to expand the profitability of the entity over 2016, 2017, 2018.

Michael W. Pope - Chief Financial Officer & Senior Vice President

Yeah. I would add just to that, if you look at the guidance that we've provided for 2016, again, we're stepping back in that direction at the low-end of the range in 18.5% margin versus 18.3% this year excluding the severance charge to 19.5% at the upper-end of our range. I would also note that operating income at the middle of our range is more than doubling over the operating income in the past year.

Victor Anthony - Axiom Capital Management, Inc.

Okay, thank you.

Operator

Our last question is from Mitch Bartlett at Craig-Hallum.

Mitchell Palmer Bartlett - Craig-Hallum Capital Group LLC

Hi, guys. So, a numbers of questions on sales and marketing and your answers have been interesting, you've been talking about customer acquisition and the new channels and whatnot. But I've just directly, I mean, some of the prepared remarks were about the rising media costs and the like. Just wonder if you're seeing diminishing returns on your marketing investments earlier in the process than you have before and that's kind of going to the overall growth rate?

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

Yeah, Not so much, Mitch. If you look at our cohort curves, they're relatively consistent over the last six years or seven years. If you look at our cost to acquire customer, while it inches up, it's been relatively flat and very healthy and industry-leading. What we were calling out which you saw demonstrating Google's results is that as people are making their shift from desktop to mobile, that tends to drive their acquisition costs up because – and for us, even more so, because the full product suite is not available on mobile and we're not a standardized SKU that you just see a picture and you decrement to inventory, our customers have to make it.

And so, the efficiency of our marketing is being diluted somewhat from both the marketplace rise in CPCs, the advent of PLAs, and mobile becoming more than half of our traffic to our websites, if you will, or our properties. And so, the investments we're making in 3.0 should help fix that and we should start to get leverage in the back half of 2016 and throughout 2017.

Mitchell Palmer Bartlett - Craig-Hallum Capital Group LLC

Got it. Thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Jeff Housenbold for any closing remarks.

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

Great. Again, let me just thank all of you on the sell-side for your tremendous support over the last 11 years. I think you guys do a very important service for the overall ecosystem and for taking time to really understand our business and help educate the buy-side and for that I thank you.

I'm leaving Shutterfly at the top. The business is in a great position. The investments we're making in 3.0, mobile, and Enterprise will bode well for the company and our financial results. We have an amazing team who has a clear vision and a strategy for the future who has a demonstrable record of executing and delivering results.

As we said, 60 consecutive quarters of year-on-year revenue growth and nine consecutive years of expanding EBITDA, we ended 2015 with free cash flow per share up 51% and we should deliver a nice robust improvement upon that in 2016. So I look forward to staying in touch with you guys and watching the great things that are in the future for Shutterfly.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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