SFLY
#I guess I will start with the last part of your question which was around Shutterfly Business Solutions and the gross margin.
I think as you have probably heard me say all too many times, the SBS business is a lumpy business for us and we are taking steps to improve and try and drive gross margin higher but it is going to bounce around from time to time.
Again, I think we are also starting to see some of the benefits of scale in that business and not only scale in absolute dollar amounts but scale by customers as customers get larger and as we do more for them and as we do it more often, we gain improvement in gross margin there.
And I think our overall gross margin guidance for Q4 reflects both a consumer and the SBS margin.
I think the other piece as we think about the SBS business is, we tend not to think about it on a pure margin basis but tend to think about it as incremental EBITDA dollars that we can drive to the bottom line in order to drive shareholder value.
With regard to ---+ I will turn it over to <UNK> to take the first two around Q3 being seasonally slower and any promotions around product mix.
I think Q3, there was nothing exceptional in Q3 in terms of special promotions we ran or unusual competitive circumstances.
I think it was very much a business as usual quarter for us.
As we noted earlier, the Shutterfly brand performance was pretty positive with the continued double-digit growth and while we saw solid performance across all the categories, the real standouts for us were mobile and personalized gifts.
I will remind you that within personalized gifts, that includes our new statement gifts line which are the first time we have offered a line of personalized but non-photo-based home decor and gifting products and that has gotten off to a nice start.
So I think as you have heard me say multiple times I think one of the things that the Company and <UNK> and I are very much aligned on is thinking about how we drive absolute EBITDA dollars to the bottom line while improving the quality of earnings as well.
So while we focus on margin, it is not the exclusive thing that we focus on.
With regard to tech and dev in particularly, a lot of our success over the last 17 years has been driven by being a technology innovator and I would expect that that will continue.
And so we don't expect any downward or any stepwise reduction in our technology and development spend over time.
I think 3.0 as we have said is a multi-year architectural vision for the Company where projects like the Shutterfly photos and the mobile app come out in a given year.
But we will have other ones next year and when we get through Shutterfly 3.0, there will be the next platform.
So that is where we stand on tech and dev.
With regard to the SBS business again, that business is a lumpy business.
We will continue to look for ways to improve the overall profitability of that business but the way that we think about it internally is how do we get the right customer that can be a multimillion dollar customer that meets our internal gross margin target and that allows us to drive incremental, substantial incremental EBITDA dollars to the bottom line.
I would just add to <UNK>'s point.
I mean I think the uniting theme of his points is our focus on the quality of earnings, on driving long-term free cash flow for shareholders.
And I think if you look at the ---+ our financial performance, you can see it is improving over time.
Today we are reiterating our guidance for revenue and adjusted EBITDA for the full-year and you can see the focus on the quality of earnings is showing in both the improvements in operating income and in earnings per share over time.
As I said earlier, there was nothing exceptional in Q3 in the promotional environment and of course every quarter is different.
Q4 we typically see a number of competitors go more aggressively on promotions.
I think one of the advantages of being the clear leader in this space with our brand recognition and our loyal customers is we can sit back and observe a little bit of what people are doing and we are able to adapt our promotions as necessary.
But we certainly haven't seen anything exceptional so far and if the promotional environment changes then we are certainly prepared.
I think in terms of your question about some of the technical products, the photo management service is what we are now calling Shutterfly Photos.
We talked about that a little bit in the prepared remarks.
We are really proud in Q3 of completing the milestone of migrating our most active users to the all-new Shutterfly Photos.
It is very early days for that.
We will need to go through a full Q4 peak in order to have a really accurate read on how that is changing customer's behavior and the extent to which it is driving incremental sales, higher engagement, etc.
But the early signs in terms of how customers are engaging with it is positive.
I think the second thing you referred to is what we sometimes refer to as algorithmic product creation and what we mean by that is how we use machine running algorithms to help make it very simple for customers to create products, to help them to automatically select their best photos, to lay those photos out in a product for them whether it be a simple product like a mug or a complicated product like a photo book.
And the idea there is that we want our algorithms to do all of the heavy lifting so it can be as simple as just deciding you want to purchase product A versus product B or making some small changes to customize it to your liking like maybe adding a title to the book.
I think when I put those two things together, the Shutterfly photos, cloud photo management service and the algorithmic product creation, what you get I think is a vision in which we are creating a lot of value for customers, we are helping them manage their photos but at the same time, we are able to use our technology to present them with more opportunities to purchase contextually relevant personalized products even when they might not have known they were in the market for a product.
And with Shutterfly Photos, we will get to see more of customer's photos and we anticipate to see those customers more frequently which again means more opportunities to present products to sell.
So the hypothesis about how that drives growth is pretty clear.
In the case of algorithmic product creation, we know from experience that this genuinely increases key metrics like conversion rates.
In the case of Shutterfly Photos, it is still pretty early days but we will have a better read on that as we go into next year.
<UNK>, this is <UNK>.
With regards to 2017, I totally appreciate the question.
We're going to provide guidance on 2017 at the end of January as is our tradition.
As you know, the fourth quarter is a big quarter for us so we will provide EBITDA and free cash flow growth and the traditional metrics that we do at the end of the January timeframe for 2017.
With regard to the second part of your question on the balance sheet, I think as you heard in our prepared remarks, the Company has used a substantive amount of its cash over the last several years buying back stock.
I think we highlighted that we bought back 8.9 million shares of stock over the last three or four years and have returned value to shareholders through that mechanism more than offsetting the shares that have been issued.
With regard to whether the Company can have more leverage on the balance sheet, I think a couple of things to remember on that is that we have an ongoing $100 million plus still available under our share repurchase program.
We evaluate it each and every quarter and I will remind you that we do have $300 million worth of leverage on the balance sheet today in our convertible.
Thanks for that question.
It is still really early days for us with Shutterfly Photos.
We just integrated the ThisLife platform earlier this year and it is only toward the end of the third quarter that we completed our goal of migrating our most active customers.
As I think you will know in these kinds of situations, you need to be able to follow cohorts of customers through the pipeline over an extended period of time to get any kind of statistically significant read on that.
So I would say the early signs of engagement with the different kinds of features of the Shutterfly Photos platform ranging from the organizational tools like tagging and albums, facial recognition, favoriting, all the way through to purchase where we are surfacing products, pre-created products for customers, we see positive signs of engagement.
But it is really early to say more than directionally what we are seeing.
I think we are really proud of what we one for Shutterfly Photos.
I think objectively if you go compare feature for feature it is clearly one of the very best cloud photo management solutions in the market.
It has been live on Shutterfly.com for only a couple of months and it is only very recently we have had a lot of users there.
And so our clear hypothesis here is that by providing this service to our customers we will see more of their photos, they will upload more their photos to us and we will see them more often with greater engagement.
And seeing more of their photos and seeing the customers more frequently combined with our machine learning capabilities to surface pre-created, contextually relevant personalized products will give us many more opportunities to sell products to customers which is our core business.
Possibly there are interesting directions that could take us longer-term but we feel like those investments will be fully justified in what it can generate for us in sales through that higher engagement and through seeing more customer's digital photos.
Sure.
So let's take the flat sales and marketing, the last couple of quarters on a non-GAAP basis.
We continue to look at trying to balance our sales and marketing across what we do both on the web and what we do on mobile and across all of our channels in sales and marketing.
Relatively speaking, the import of what we spend in sales and marketing for the first three quarters is to drive customers within the quarter but it is also to keep customers engaged so that they come back for the fourth quarter.
So as we look to the fourth quarter, we monitor that on a week-to-week, month-to-month basis depending on where we see the demand.
And I would expect that our guidance overall for the fourth quarter reflects a healthy spend in that area.
I will just add I mean I talked briefly in the prepared remarks about our plans for Q4.
As in every Q4 but perhaps more so than ever, we are entering Q4 with a really rich robust and varied set of channels and marketing messages to go out there.
So we have got campaigns that are going to span mobile, online, direct mail, television and our free CRM channels and others.
And we also complement that with partnerships with other retailers who help us promote our products through specific promotions at that retailer.
And even through the long-standing philanthropic partnership we have with the Ellen DeGeneres Show.
So we are always looking at that mix and trying to tweak the mix for efficiency and effectiveness and also strike a balance between what we are driving on a transactional level in quarter and what marketing investments are going to pay off longer-term.
No, I think what we do on an ongoing basis not only every quarter but ultimately every month, is we look at how every channel is performing, what the marginal efficiencies look like.
As you'll know, some channels you can measure very, very detailed very quickly, other channels like direct marketing or television spend, you can measure but the error of ours are larger and you need longer periods of time.
So I think we are constantly looking what the marginal return is in every channel and adjusting our spend.
I wouldn't say there is one channel that we have shut off or dialed down significantly but we are constantly reallocating.
I did mention earlier that we are excited about what we are seeing with our spend to acquire customers to mobile.
We think that is giving us a great return and so directionally I think you should expect to see us spending more there.
But we will offset that by moving money away from channels where we see lower marginal efficiency.
This is <UNK> <UNK>.
I just wanted to leave you with a couple of key takeaways.
I will remind you as we have talked about that we are seeing a significant improvement in our financial performance over time, that we are ready and excited for our fourth quarter, that we are continuing to see strong performance in the flagship Shutterfly brand while we continue to be pleased with the progress we are making in SBS.
And that we are continuing to build on the key areas of strength we see within the Company which are the Shutterfly brand, our loyal customer base, the talented team we have here, our manufacturing scale and the manufacturing capabilities and the differentiated customer facing capabilities that we have built over the last 17 years.
Thanks very much.
