Shutterfly (SFLY) Q1 2019 Earnings Call Transcript

Shutterfly (SFLY)
Q1 2019 Earnings Call
April 25, 2019 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to the Shutterfly, Inc. first-quarter 2019 financial results conference call. [Operator instructions] Please note that this event is being recorded. I'd now like to turn the conference over to Shawn Tabak, VP investor relations.

Shawn Tabak -- Vice President of Investor Relations

Thank you, operator. Good afternoon, everyone. Welcome to Shutterfly's first-quarter 2019 earnings call. With us today are Christopher North, our president and chief executive officer; and Mike Pope, chief financial officer.

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

Before we begin, I would like to note that our discussion 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 our risks relating to our business in general, we refer you to the risk factor section of our most recent Form 10-K 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. To the extent possible, 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 Chris.

Chris North -- Chief Executive Officer

Thanks, Shawn. I'd like to welcome everyone to Shutterfly's first-quarter 2019 earnings call. I'll make some brief opening remarks, and then I'll ask Mike to run through the results and the strategic progress we're making in more detail. Our results in the first quarter were solid across all three divisions, Shutterfly Consumer, Lifetouch and SBS.

We met our expectations on overall revenue and exceeded our expectations on adjusted EBITDA in the quarter. We made good progress against key initiatives including product range expansion, mobile and personalized marketing in Shutterfly Consumer. We continue to make strong progress on Lifetouch integration and won a large new client in SBS. Touching briefly on the key drivers of our results.

Starting with Shutterfly Consumer. On a shipped basis net revenue decreased 2% year over year consistent with our expectations. On an ordered basis, we saw 2% growth in the quarter with strong growth in paid personalized gifts and home decor and in calendars and continued solid growth in photo books. Shutterfly cards and stationery accelerated significantly over our disappointing Q4 performance, returning to solid growth.

In prints, last quarter we discussed improvements we're making, which we're rolling out over Q1 and Q2, and we expect to see improving results over the course of the year. Personalized gifts and home decor delivered a further acceleration on paid growth over Q4 supported by category and range expansion with the mix shift away from free promotions and toward paid purchases continuing to deliver higher quality revenues but dampening overall category growth. Strong mobile growth continued in Q1, and we made further progress in our strategy to deliver more targeted and personalized engagement with consumers. we're also delighted to welcome our new president of the Shutterfly Consumer business, Jim Hilt, who joined us in late March.

Jim is a strong addition to our leadership team and has already hit the ground running. At Lifetouch, performance was in line with expectations, led by the core schools and preschool businesses. Studios and Church declined modestly as anticipated. We continue to make good progress across a number of initiatives to drive revenue and cost synergies between Lifetouch and Shutterfly.

Against revenue synergies, our focus in 2019 is on delivering an integrated digital photo experience between Lifetouch and Shutterfly. We're adding business units and programs and expanding the proportion of Lifetouch packages eligible for digital delivery, which significantly expands the number of Lifetouch customers eligible for an integrated experience. At the same time, we're removing friction by launching common customer identity and payment systems so that customers can log in and pay using the same credentials across both Lifetouch and Shutterfly. Just this week, we deployed our first fully integrated experience for Lifetouch customers in the Preschool business unit.

And in Q2, we'll integrate with the Prestige business as well. Against cost synergies, our manufacturing integration, Project Aspen is well under way, which, as it rolls out, will let us offer faster delivery, higher quality and broader selection to customers, as well as generating significant cost savings. SBS also performed in line with our expectations and landed a large new client. Mike will share more details there shortly.

Before handing off to Mike, I'd like to give a brief update on our CEO search. As you know, I'll be stepping down at the end of August 2019 in order to return to the U.K. with my family. The board has formed a search committee that is actively engaged in recruiting and hiring my successor.

Our search process is making good progress with a number of highly qualified candidates. Finally, you'll recall that earlier this year, we announced that our board of directors had formed a strategic review committee and retained Morgan Stanley as financial advisor. A review of strategic alternatives is ongoing and beyond that we will not give further updates at this point. I'll remind you that the board has not set a timetable for the conclusion of its review of strategic alternatives and does not intend to comment further unless and until the Board has approved a specific course of action, or the company has otherwise determined that further disclosure is appropriate or required by law.

There can be no assurance that the review of strategic alternatives will result in a transaction or other outcome. With that, I'll turn it over to Mike.

Mike Pope -- Chief Financial Officer

Thanks, Chris. So starting with our Q1 2019 business results. Q1 non-GAAP net revenue was $325 million, meeting our expectations, driven by solid performance across all three divisions. Adjusted EBITDA loss, excluding an immaterial out-of-period adjustment of $2.8 million related to shipping services that were provided in the fourth quarter of 2018, was a loss of $42.5 million.

This was better than our expectations driven by solid performance in each of our divisions and strong expense control. Shutterfly Consumer net revenue was $149 million, a 2% year-over-year decrease. As a reminder, we started Q1 with a lower year-over-year backlog, which had a corresponding impact on our Q1 '19 Shutterfly Consumer overall growth, which is reported on a shipped basis rather than on ordered basis. In total, we had a negative year-over-year comp that impacted Q1 Shutterfly Consumer revenue by approximately $6 million.

Adjusting for this comp headwind and looking at revenue on an ordered basis, Shutterfly Consumer growth was 2% in Q1, driven by 7% ordered revenue growth in personalized gifts and home decor, and 1% ordered revenue growth in core paper-based products. Aside from the comp headwind, the largest impact on revenue in customer growth came from the continuing mix shift, away from free promotions and toward paid purchases. Looking at the mix of revenues on Shutterfly.com, revenues from free products in Q1 declined 16%, while revenues from paid products increased 6%. The mix of revenue coming from paid purchases increased from approximately 81% in Q1 of '18 to approximately 84% in Q1 of '19.

In Q1, the biggest driver of this mix shift was in personalized gifts and home decor, the paid segment of personalized gifts and home decor grew 26%, an acceleration from what we saw in the fourth quarter and the fastest growth in over two years. However, this paid growth was partially offset by a continued significant decline on revenues from free promotions. While free will continue to play a role in helping us acquire new customers and drive incremental engagement in the long-term value from existing customers, we expect that it will be a smaller part of our overall mix going forward. As Chris alluded to, we've made important progress against many of our strategic initiatives in Q1 including new products, mobile and personalized marketing.

One of our key strategic initiatives is accelerating the pace at which we launch new products in both existing and new categories. We launched 11 new personalized gifts and home decor products in the first quarter. New products such as canvas totes and large puzzles saw strong uptake from customers. We continue to see strong results from our category and range expansion initiatives as well.

Mobile continued its strong growth with the mix of mobile purchases increasing 470 basis points year over year to 31.7% of total Shutterfly revenue. In the first quarter, we had over 1 million app downloads and continue to see a high install-to-first-order ratio. We added several new products to the app in the first quarter and launched a range of initiatives focused on acquiring new customers, monetizing existing customers and enhancing the customer experience within the app. We made improvements to our machine learning-based automation product creation technology, which powers our personalized Made for You tile on the home screen of our app.

In the quarter, we increased the speed of the mobile tile by 25% and improved our photo quality ranking by 14%. Another area of focus is driving deeper and more personalized engagement with our customers. In Q1, we deployed several tests using our machine learning-based models around personalized promotional campaigns using model-driven product recommendations. In each of these campaigns where we deployed personalized content, we saw a lift in campaign effectiveness.

Throughout the year, we will continue to improve on our models while expanding our use of personalized content and campaigns. These learnings will be key to our success in the fourth quarter. Turning to Lifetouch. Non-GAAP net revenue was $130 million in the first quarter.

Relatively flat with the first quarter of 2018 when adjusting for the shutdown of iMemories. Overall, we were pleased with the Lifetouch performance in the quarter, and it was driven by solid performance across schools and preschool. In Q1, Lifetouch's largest business in the schools division is the seniors or graduation photography business, also known as Prestige Portraits, followed by early selling for spring photography. In the quarter, Prestige revenue was better than our expectation due to timing of revenue driven by marketing campaigns, shifting approximately $2 million of revenue from Q2 into Q1.

The studios and church business declined on a year-over-year basis but met our expectations for the quarter. As a reminder, approximately 80% of Lifetouch revenue and an even higher proportion of profits are generated in the schools and preschool divisions. Turning to the Lifetouch integration, we are focused on realizing substantial cost and revenue synergies over a multiyear period. Chris talked about our focus on technology integrations this year and our newly introduced integrated experience for Lifetouch customers in the preschool business unit.

By delivering these customers digital photos through Shutterfly Photos, we anticipate driving them to Shutterfly.com to store, organize and share their Lifetouch Photos, as well as any personal photos that they upload with ample opportunities to create and purchase additional products. And our plans to launch common customer identity in payment systems in the second quarter will remove friction by allowing customers to use the same credentials across both Lifetouch and Shutterfly. And finally, through Project Aspen, which we detailed on our last call, we are establishing a single next-generation manufacturing platform serving Shutterfly Consumer, Lifetouch and SBS. This project is well under way and the team is on track.

Turning to Shutterfly Business Solutions, or SBS, revenue was $47 million in the first quarter. We were excited to sign a multiyear deal with a large new client in the first quarter, which we expect to deliver over $10 million annually for the next several years. This client provides consumer products, programs and services to the education marketplace. Using our technology and manufacturing platforms, SBS will help our client provide educators a tech-driven online channel for creating and managing highly personalized academic planners.

The value proposition to end users is a better experience giving more control and choice by putting the right tools and technology directly into the hands of those building and customizing school agendas. Now I'll share more details of our Q1 financial results and our Q2 and 2019 guidance. I'll start by addressing a few housekeeping items. As anticipated, there were charges in Q1 related to restructuring, executive transitions and the strategic review.

And there were noncash purchase accounting adjustments in Q1 related to the Lifetouch deferred revenue writedown. These amounts quoted on the earnings call are normalized for these items as we believe they provide investors a better understanding of our business. We've included a bridge on Page 12 of our press release in Appendix 3.1 to help investors understand these adjustments. As I mentioned, non-GAAP net revenue normalized for the purchase accounting deferred revenue writedown, was $325 million in Q1 with Shutterfly Consumer representing 46%, Lifetouch 40% and SBS 14% of the total.

Q1 net revenue increased 63% over the prior year, driven by the Lifetouch acquisition. In the first quarter, Shutterfly Consumer metrics reflect a continued change in mix away from free and toward paid revenues and the backlog comp headwind that I mentioned earlier. Total unique customers were 2.9 million, a decrease of 11% over the first quarter of 2018. Of the 11% decrease, about half of it was due to backlog comp headwind.

We generated 4.1 million orders, a decrease of 19% over the first quarter of 2018. Of the 19% decrease, about 9 percentage points were due to a decline in free orders, 6 percentage points due to the backlog comp headwind and 3 percentage points due to an expected decrease in orders in GrooveBook, a small brand separate from Shutterfly that generates a large number of small orders. Average order value, or AOV, for the quarter was $36.23, a 21% increase over the first quarter of 2018. AOV increased primarily due to the mix shift away from free and toward paid revenues as well as due to product mix.

Non-GAAP gross margin was 35.3%, which was 95 basis points below the midpoint of our guidance range. Please note that Q1 gross margin was burdened by an immaterial out-of-period adjustment of $2.8 million for shipping services that were delivered in the fourth quarter of 2018. This immaterial out-of-period adjustment accounted for 85 basis points out of the 95-basis-point decline. Shutterfly Consumer non-GAAP gross margin was 39.3%, a decrease of 490 basis points over the first quarter of 2018.

The immaterial out-of-period adjustment accounted for 180 of the total 490-basis-point decline. For the remaining 310-basis-point decline, there was 130-basis-point tailwind from higher AOV and the mix shift away from free and toward paid revenues that was more than offset by volume and product mix and increase in the amortization cost of revenue from capitalized technology expenses related to our strategic initiatives and the implementation of a new lease accounting standard. Lifetouch non-GAAP gross margin was 39.7% in the first quarter. SBS non-GAAP gross margin in the first quarter was 18%, an increase of 170 basis points over the first quarter of 2018 due to product mix.

Non-GAAP operating expenses for the quarter totaled $214 million, and exclude charges related to restructuring, executive transitions and strategic review of $6.5 million. Lifetouch added approximately $110 million of non-GAAP operating expenses in the quarter. I will now move on and address our segment margins. Shutterfly Consumer non-GAAP segment margin in Q1 was a loss of $8.4 million, down from the prior year due to the decrease in gross margin and increase in expenses related to Project Aspen and technology investments directed toward creating a better experience for Lifetouch customers purchasing on Shutterfly.

Lifetouch non-GAAP segment margin in Q1 was a loss of $35 million. Q1 is a seasonally slow quarter for Lifetouch. SBS non-GAAP segment margin in Q1 was $3.7 million, an increase over the first quarter of 2018, driven by a higher gross margin. Total corporate expenses, which primarily consist of general and administrative expenses were $35 million and reflect the addition of Lifetouch.

Our non-GAAP operating loss in Q1 normalized for the purchase accounting deferred revenue writedown and to exclude charges related to restructuring and executive transitions and the strategic review was $99 million. In the first quarter, our adjusted EBITDA was a loss of $45 million, down from the prior year due to higher integration cost and cost related to Project Aspen, technology investments to support revenue synergies, higher labor-related expenses and the inclusion of Lifetouch. As a reminder, Lifetouch typically has an EBITDA loss in the first quarter, and we did not own Lifetouch during the first quarter of 2018. The GAAP effective tax rate for the quarter was 31.9%, our effective tax rate decreased 3.4 percentage points over the first quarter of 2018 due to a lower benefit from stock-based compensation.

Non-GAAP net loss normalized to exclude restructuring, executive transitions and the strategic review and purchase accounting adjustments totaled $83 million resulting in non-GAAP diluted net loss per share of $2.44 based on our weight -- our diluted weighted average shares of 33.9 million. Cash and investments as of March 31 totaled $187 million. As mentioned during our Q4 call in January 2019, we repaid $200 million of Term Loan B debt that was used to finance the acquisition of Lifetouch. Additionally, the other main driver of the decrease in cash from year end was working capital, as we paid vendors and suppliers that we used in the fourth quarter.

Capital expenditures were $28 million in the first quarter. Now I will turn to our non-GAAP second-quarter and full-year financial guidance. Our guidance excludes any cost related to executive transitions, the strategic review and the facility closures in 2019. Guidance also excludes any gains or losses from the sale of existing facilities.

For the second quarter of 2019, we expect total non-GAAP net revenue to range from $469 million to $479 million. Shutterfly Consumer net revenue to range from $166 million to $170 million, Lifetouch net revenue to range from $255 million to $258 million and SBS net revenue to range from $48 million to $51 million. We expect non-GAAP gross margins of approximately 51% and non-GAAP operating income ranging from breakeven to $5 million. We expect adjusted EBITDA to range from $59 million to $64 million with non-GAAP loss per share range of $0.27 to $0.17.

Similar to Q1 the year-over-year change in adjusted EBITDA in Q2 is impacted by an increase in integration costs and costs related to Project Aspen, net of cost synergies and technology investments and a better experience for Lifetouch customers purchasing on Shutterfly and higher labor-related expenses. For the full year, we are reiterating our guidance on revenue and adjusted EBITDA and capital expenditures but updating our guidance on operating income and earnings per share due to a decrease in share-based compensation in a higher effective tax rate. Total non-GAAP net revenue will be in the range of $2.13 billion to $2.21 billion. Shutterfly Consumer net revenue ranging from $975 million to $1.025 billion.

Lifetouch net revenue ranging from $915 million to $935 million and SBS net revenue ranging from $240 million to $250 million. Non-GAAP gross margins will be in the range of 51.4% to 51.7%, and non-GAAP operating income ranging from $80 million to $105 million. Adjusted EBITDA will be in the range of $315 million to $340 million with non-GAAP earnings per share ranging from $0.61 to $1.11 based on 34.8 million diluted weighted average shares outstanding and a non-GAAP effective tax rate of 30%. Capital expenditures will be in the range of $125 million to $130 million.

This concludes our prepared remarks, and we'll now open up the call for your questions. 

Questions and Answers:

Operator

[Operator instructions] And today's first question comes from Youssef Squali with SunTrust.

Youssef Squali -- SunTrust Robinson Humphrey -- Analyst

A couple of questions. Chris, I know you can't say a whole lot about the strategic review. But let me try this one on you in any case. So this is a question we often get from investors who are listening.

On the strategic review, is it an open-ended process? Could it extend beyond your planned August departure? And isn't that lack of visibility potentially a pretty big deterrent to hiring the right CEO before you leave? So that's one. And then maybe Michael, the -- your Q2 guidance for the consumer business is actually pretty healthy. It kind of shows a, I think, 1% or 2% of positive growth. Maybe help us understand or parse out the assumptions there between maybe the growth in customers and AOVs because Q1, the bulk of -- obviously, all of the growth came from the AOV, your customer growth declined, your orders declined.

Just what's kind of implied in your Q2? And maybe even in your 2019 growth for the consumer business?

Chris North -- Chief Executive Officer

Youssef, this is Chris. Well, let me try to take your first question. You're right, there's not a lot extra I can say on that. I'll remind you -- I'll direct you back to our February 5 announcement of the formation of the strategic review committee when we said clearly that we haven't set a timetable for the conclusion of the review of the strategic alternatives.

And we've repeated that and that the review of the strategic alternative is ongoing and that we won't be able to give further updates at this point. We've also said that we're making good progress in the CEO search, and that we've been able to engage with and identified a number of highly qualified candidates. So while I understand the question, certainly that has not been an impediment to us identifying some very qualified candidates and continuing with the progress on that search.

Mike Pope -- Chief Financial Officer

Youssef, thanks for the question. You're right. Our Q2 guidance for consumer revenue at the midpoint shows 2% revenue growth compared to what was, on a reported revenue basis, a 2% decline in the first quarter. As we called out specifically in our prepared remarks, when you eliminate out the headwind from the lower backlog entering Q1.

We actually saw ordered growth of 2% in the quarter. So sort of a similar trajectory in Q2 to what we saw in Q1 on an ordered basis. Also, just remind you that as we've said before, we had undertaken an initiative to drive the level of free to a lower level within our consumer business over a period of the last four quarters. And while that was still a headwind in Q1, we expect it to be less of a headwind going forward.

And the last thing I'll mention is that we're fortunate in all of our -- to have multiple levers to grow the business. They include customer growth, as you know, ordered growth and AOV. So, I guess I'll leave it at that. And then, I guess, I missed the second part of your question, which was for the year.

Again, I'd just give you a similar answer to the answer for Q2. For the full year, one addition I would make to that is as you know that Lifetouch customers that we have the great opportunity to transition to become Shutterfly customers, as well as Lifetouch customers really represents a back-end loaded plan for us, and the majority of that benefit will show up in the latter part of Q3 and into Q4 as we get through the Fall Picture Day season as well as enter the holiday season for the Shutterfly Consumer.

Operator

And the next question comes from Colin Sebastian with Baird.

Colin Sebastian -- Baird -- Analyst

First off, good to see the growth in some of the consumer product categories. I wonder if you could add a little more color on what's working well, how much of that may be is attributable to the machine learning. And does that also reflect more of an ability to convert that strong growth in photo uploads that you talked about before into orders? And then my second question is just on Project Aspen. Does the timing of the strategic review impact any of those decisions, for example, the new production facility? I think you said it's on track.

But is there any impact perhaps on the timing of bringing that facility online or taking the others offline?

Mike Pope -- Chief Financial Officer

Sure. No, you're exactly right, Colin. I mean there are a number of things are going well in our Consumer business. If you look to, sort of, the highlights, what you heard us talk about for the last several quarters is the success that we're having in mobile, where mobile continues to be both a good customer acquisition vehicle for us.

We have a high install-to-first-order ratio and that's becoming an increasing percent of the mix of the Shutterfly Consumer business. In addition to that, one of our initiatives was to be able to do -- introduce more products more quickly at a lower cost. And that's being reflected in the PGHD growth that -- overall growth has remained in the high single digits and gone into the double digits. As we highlighted this quarter, paid growth within PGHD was the fastest as we've seen in a couple of years.

So those things are going really well. You asked specifically about machine learning and one of the things that we continue to test is the use of machine learning and using our algorithmic product creation, particularly in the app. And we've seen a lift in the results that we get from customers that we expose to that capability.

Chris North -- Chief Executive Officer

Mike, I'll just might jump in because -- I mean, Colin, that also question included some category questions. And I think something we we're really pleased to see in Q1, just building on Mike's point is, first of all, our return to growth in our cards and stationery business. We had a really solid growth in cards and stationery after what you'll remember was a disappointing Q4 in cards. In addition, you would've seen that, that photo books and calendars have continued to be very steady and reliable categories for us just continuing to deliver steady growth.

Mike Pope -- Chief Financial Officer

So the second part of your question related to Project Aspen, which I'll just remind everybody is our integrated manufacturing project that delivers substantial cost savings over the course of the next three -- two and a half to three years. One of the key things that we discussed as we began our strategic -- formed our strategic review was Project Aspen and the financial ROI on that project is so compelling that we've decided to proceed with that. And as you know, we've announced the opening of a new facility in Texas. We've now said that it's going to be in Plano, Texas as well and that will be live during the first quarter of 2020.

So no delay from Project Aspen related to the strategic review.

Operator

And the next question comes from Aaron Kessler with Raymond James.

Aaron Kessler -- Raymond James -- Analyst

A couple of questions. First, I don't know if you -- I didn't hear it but maybe Easter shift. Can you guys talk about maybe the Q1 impact or impact for Q2 roughly? You mentioned greeting cards a couple of times, improvement there, which is nice. Any thoughts or just kind of what the drivers of the improvements there were? And finally, just maybe PGHD, kind of how much was kids and pets a factor of the strong growth there as well?

Chris North -- Chief Executive Officer

Thanks, Aaron, this is Chris. On the Easter shift, that was always -- there are some impacts that impact certain businesses, for example, on Lifetouch some of the order phasing is impacted by Easter timing but that was factored into our plans and largely came in as we expected. You also asked about cards and what was the underlying improvements in cards. I think you'll remember from last year that in the Q1, Q2 time frame, while there is still some holiday cards business, mostly New Year's cards.

We start to get into the season where graduation and wedding form a reasonable cards business for us certainly not as hard as holiday, and that's been a real position of strength for us as a company over the last year and this year as well. So I think it just highlights that there are some other challenges we had in cards in Q4 were really very specific to our holiday cards execution, and we feel really good that we have the right plan and the right range going into holiday 2019.

Mike Pope -- Chief Financial Officer

And lastly, you asked the impact of kids and pets within PGHD. That continues to be a positive year-over-year comparison. We didn't have kids and pets and that certainly contributed to the acceleration in that category on paid revenue.

Chris North -- Chief Executive Officer

I'll just add to that. I mean what -- Mike's right, we certainly are getting benefit of kids and pets. Kids and pets is really a subset of the overall benefit that we're getting from the faster introduction of products. And we're really seeing a really nice benefit from introducing more products at a faster pace year over year.

Aaron Kessler -- Raymond James -- Analyst

And just any updates on thoughts on kind of marketing strategy with the new CMO on board now for, I think, a few months. Just any changes? I think you talked about maybe increasing brand a little bit. Any updates there?

Chris North -- Chief Executive Officer

Yes. Sure. So you're right, Mickey Mericle joined us just prior to -- just around the fourth quarter of last year. As she's gone through the fourth quarter and done what we always do, which our postmortems.

What went well? What didn't go well through the fourth quarter of 2018? I think one of the things that she's increasingly focused on is how do we get more personalized promotions more quickly. And then as we've said a couple of times now, making sure that we have the right mix of our marketing spend across the paid channels as well as in brand. So I think as we go through 2019, you'll see us lean more incrementally toward brand than what we did in '18.

Operator

And the next question comes from Victor Anthony with Aegis Capital.

Victor Anthony -- Aegis Capital -- Analyst

Just three questions. So on the 11-or-so million customers of Lifetouch that you plan to bring over the Shutterfly. I think you may have suggested that you could probably capture a number of those in the third and fourth quarter. So wanted to get a sense of the magnitude of that capture this year, or is this somewhat of a multiyear proposition for you guys? That's one.

And second, the fourth quarter we saw a very heightened promotional environment. I'm kind of curious, you know you had better sales trends in some of the products in this first quarter. Did you not see the same level of competition that you saw in the fourth quarter? And third, just on the consumer gross margins. You called out a few items, volume, product mix, amortization, I think, also you mentioned accruals, that put pressure on the gross margins.

I wanted to get a sense of how should we think about the Consumer gross margins over the next several quarters?

Mike Pope -- Chief Financial Officer

Sure. So why don't I jump in. So I think you quoted the 11 million customer opportunity at Lifetouch. I think that was what we had previously said back at Analyst Day in the fall.

We actually think that the opportunity is a larger number than that. It certainly could be higher than even 15 million customers to go after. When we think about the third and fourth quarter of this year. What we have said publicly before, and we continue to believe and have confidence in is that we'll be able to generate $25 million worth of revenue synergies from Lifetouch customers converting to Shutterfly customers in 2019.

And again, the bulk of those will come in the fourth -- third and fourth quarter, mostly the fourth quarter of the year following Fall Picture Day and going into the holiday season. With regard to Q4, promos -- promotions and marketing spent being up, which we talked about on our last earnings call. It's a little bit harder to see. In the first quarter, we continued to see it as a promotional industry, which it will always be.

That said, Shutterfly has a pretty unique advantage over other competitors in the marketplace because of the breadth of our product offering. We're not just a cards and stationery business or just a prints business like many of the one-off apps are out there that compete with us in the fourth quarter. But the breadth of our product line across cards and stationery, photo books, PGHD and many more gives us an advantage over others in the first quarter, and we tend not to see it be quite as promotional. Lastly, your question on the gross margin, on the consumer guidance.

One of the things that I would encourage you to think about is to think about our gross margin on an annual basis, where you have relatively small quarters, you can see more fluctuation within gross margin. And if you look at the overall gross margin guidance across all of our businesses that we've provided for fiscal '19, you'll see at the midpoint of our range, it's about 51.6%. That compares to last year in 2018, a GAAP reported gross margin of 52.5%. But that's arbitrarily high as we did not own Lifetouch during the first quarter of the year.

If you were to include Lifetouch first quarter of 2018 impact in that, you'd see it at a very similar gross margin to our guidance for the year.

Victor Anthony -- Aegis Capital -- Analyst

Just a follow-up, guys. On the app. I know each quarter you mention different products that you add to the app. What's left to be added?

Chris North -- Chief Executive Officer

Victor, so you're right that one of the sources of growth for the app has been that as -- we've continued to expand the product range in the app, and that's included not only adding categories but closing the gap between the SKUs that are available on the website and in the app. And indeed starting to expand the range of designs and other services available within the app, too. So we're at the point now as we have been for a couple of quarters where we have representatives of every category in the app, and we certainly have migrated a lot of our best-selling products into the app, focusing on those that are most appropriate for that form factor. There are still more opportunities that continue to bring more of the things that customers can already do on our website on the app.

I think, increasingly, going forward though, a lot of our growth is coming not only in the app, but as -- it's coming not only from the fact that we continue to be able to acquire a significant number of customers into the app at favorable economics in terms of the cost per customer acquisition versus lifetime value. But also that increasingly the app is becoming our platform for a lot of our customer-facing innovation, where we're launching new and innovative programs in the app first. A good example of that in terms of our recent launches has been our Free Book A Month program where, while it's still early days, we're still -- we're seeing great customer engagement. So I'll just summarize by saying there's still some opportunity to drive growth in the app, through product expansion, product range expansion, and expansion of designs and features.

But increasingly it's really innovation such as Free Book A Month or the machine learning-based automation that is helping to power that growth.

Mike Pope -- Chief Financial Officer

Yes. Chris, one other thing I'd add just in mobile just as an example of innovation in the app outside of new products was improvements to machine learning-based automation product creation technology. From instance this quarter, the Made for You tile on the home screen of the app enabled customers to see products with their most recent pictures in them.

Chris North -- Chief Executive Officer

Yes, exactly.

Operator

And the next question comes from Edward Yruma with KeyBanc Capital.

Edward Yruma -- KeyBanc Capital Markets -- Analyst

On the new customer count, I know there are a lot of puts and takes. But as you kind of step back and think about it, how important is it to bend the curve on that new customer count? And specifically, are you starting to see customers transitioning from Lifetouch to the Shutterfly platform?

Mike Pope -- Chief Financial Officer

Sure. So I think we've said repeatedly over the last several quarters that the active number of customers has been -- growing that active number of customers more has been a very stable number at 10 million for the last several years is one of the fundamental challenges at Shutterfly. And one of the central thesis to acquiring Lifetouch was that we had a large audience there with a fairly minimal overlap that would allow us to go in and very cost effectively transition customers from Lifetouch to Shutterfly. And as we think about that, we don't think that that's our only vector for new customers, mobile is one -- an additional one, simplifying product creation is another one.

But as we think about Lifetouch, we think that, that is by far one of the biggest opportunities. And we have increasing confidence in that coming out of the fourth quarter of the year with what was less than optimal integration and really marketing tests within the fourth quarter and still getting north of $10 million worth of revenue in that quarter. We see large opportunity. We're also investing significantly in expanding and improving the customer experience as they move from Lifetouch to Shutterfly.

We're also expanding the audience that we will provide digital photo download or sharing capabilities within Shutterfly Photos to Lifetouch's four largest businesses, which will include preschools, it will include the Fall Picture Day, it will include the high school graduation that we referred to as Prestige Portraits, and it will include Studios as well.

Edward Yruma -- KeyBanc Capital Markets -- Analyst

Great. And one other follow-up. I know you guys highlighted the new SBS customer. Should we think about anything from a margin implication perspective? Is there anything atypical about this particular contract given its size versus kind of the margin profile of the core business?

Mike Pope -- Chief Financial Officer

Sure. So what I would continue to say as I've sort of said repeatedly, a bit like a broken record over the last couple of years. These things are lumpy, they tend to start off at a lower gross margin than where we can drive clients to over time. Part of that is just integration costs up front, the set up cost as well if we're managing multifaceted marketing program for them moving more of their printing away from traditional offset printing to digital printing, which in some cases is a year -- a six-month or a year or two transition.

I would say with regard to this new client, it will have a lower gross margin profile than what we saw in the quarter for the initial periods. And we'll continue to try and drive that higher as we go forward. But really excited about this new client as we said in our prepared remarks, that represents approximately more than $10 million annually over a multiyear period. And the last thing I'll remind you is the way that we tend to think about the SBS business is not purely on a gross margin basis but on an incremental EBITDA margin of how we can add incremental EBITDA dollars to the bottom line with some of our unused capacity in our factories and other technology that we're able to deploy.

Operator

And that concludes our question-and-answer session. I would like to turn the conference back over to Mike Pope for any closing remarks.

Mike Pope -- Chief Financial Officer

Yes. Well, again, thank you, everyone for joining us on the Q1 earnings call. We look forward to talking with you again in the near future. Thank you.

Operator

[Operator signoff]

Duration: 48 minutes

Call Participants:

Shawn Tabak -- Vice President of Investor Relations

Chris North -- Chief Executive Officer

Mike Pope -- Chief Financial Officer

Youssef Squali -- SunTrust Robinson Humphrey -- Analyst

Colin Sebastian -- Baird -- Analyst

Aaron Kessler -- Raymond James -- Analyst

Victor Anthony -- Aegis Capital -- Analyst

Edward Yruma -- KeyBanc Capital Markets -- Analyst

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