Shutterfly Announces Third Quarter 2013 Financial Results

REDWOOD CITY, Calif.--(BUSINESS WIRE)--

Shutterfly, Inc. SFLY, the leading manufacturer and digital retailer of high-quality personalized products and services offered through a family of lifestyle brands, today announced financial results for the third quarter ended September 30, 2013.

“We delivered another quarter of strong execution resulting in a 25% year over year increase in revenue with improved profitability,” said Jeffrey Housenbold, President and CEO. “We are now managing a portfolio of seven consumer premium brands, along with our enterprise business, as we continue to augment our organic growth with strategic and disciplined acquisitions. We have a great line up of new products and services across our portfolio and are prepared to delight our customers in the important fourth quarter.”

Third Quarter 2013 Financial Highlights

• Net revenues totaled $122.7 million, a 25% year-over-year increase.
• Third quarter 2013 represents the 51^st consecutive quarter of year-over-year net revenue growth.
• Consumer net revenues totaled $112.7 million, a 25% year-over-year increase.
• Enterprise net revenues totaled $10.0 million, a 22% year-over-year increase.
• Gross profit margin was 42% of net revenues, compared to 44% in the third quarter of 2012.
• Operating expenses, excluding $13.3 million of stock-based compensation, totaled $72.7 million.
• GAAP net loss was ($10.1) million, compared to ($10.5) million in the third quarter of 2012.
• GAAP net loss per diluted share was ($0.27), compared to ($0.29) in the third quarter of 2012.
• Non-GAAP net loss per diluted share was ($0.24), compared to ($0.29) in the third quarter of 2012.
• Adjusted EBITDA loss was ($1.1) million, compared to ($3.1) million in the third quarter of 2012.
• At September 30, 2013, cash and cash equivalents totaled $335.1 million.

Third Quarter 2013 Operating Metrics

• Transacting customers totaled 2.4 million, a 6% year-over-year increase.
• Orders totaled 3.9 million, an 8% year-over-year increase.
• Average order value was $29.07, an increase of 16% year-over-year.

Business Outlook

Fourth Quarter 2013:

• Net revenues to range from $392.1 million to $405.1 million, a year-over-year increase of 11.5% to 15.2%.
• GAAP gross profit margin to range from 60.3% to 61.3% of net revenues.
• Non-GAAP gross profit margin to range from 61.1% to 62.1% of net revenues.
• GAAP operating income to range from $94.9 million to $105.0 million.
• Non-GAAP operating income to range from $116.6 million to $126.7 million.
• GAAP effective tax rate to range from 57.6% to 59.9%.
• GAAP net income per diluted share to range from $0.92 to $1.08.
• Non-GAAP net income per diluted share to range from $0.95 to $1.11.
• Weighted average diluted shares of approximately 39.9 million.
• Adjusted EBITDA to range from $129.2 million to $139.3 million.

Full Year 2013:

• Net revenues to range from $765.0 million to $778.0 million, a year-over-year increase of 19.4% to 21.4%.
• GAAP gross profit margin to range from 52.9% to 53.5% of net revenues.
• Non-GAAP gross profit margin to range from 54.5% to 55.2% of net revenues.
• GAAP operating income to range from $12.4 million to $22.5 million.
• Non-GAAP operating income to range from $94.5 million to $104.6 million.
• GAAP effective tax rate to range from 30% to 35%.
• GAAP net income per diluted share to range from $0.06 to $0.22.
• Non-GAAP net income per diluted share to range from $0.20 to $0.35.
• Weighted average diluted shares of approximately 39.6 million.
• Adjusted EBITDA to range from $137.7 million to $147.8 million, or 18% to 19% of net revenues.
• Capital expenditures to range from 9.8% to 10.4% of net revenues.

Notes to the Third Quarter 2013 Financial Results and Business Outlook

Adjusted EBITDA is a non-GAAP financial measure that the Company defines as earnings before interest, taxes, depreciation, amortization and stock-based compensation.

Free cash flow is a non-GAAP financial measure that the Company defines as Adjusted EBITDA less purchases of property, plant, and equipment and capitalization of software development costs.

Non-GAAP earnings per share is defined as non-GAAP net income (loss), which excludes interest expense related to the issuance of 0.25% convertible senior notes in May 2013, divided by diluted non-GAAP shares outstanding, which is GAAP diluted weighted average shares outstanding less any shares issuable under the Company's convertible senior notes.

Consumer category includes net revenues from stationery and greeting cards, photo books, calendars and photo-based merchandise, photo prints, and the related shipping revenues. Consumer also includes net revenues from advertising and sponsorship programs.

Enterprise category includes net revenues primarily from variable, four-color direct marketing collateral manufactured and fulfilled for business customers.

Average Order Value (AOV) is defined as total net revenues (excluding Enterprise) divided by total orders.

The foregoing financial guidance replaces any of the Company's previously issued financial guidance which should no longer be relied upon.

Third Quarter 2013 Conference Call

Management will review the third quarter 2013 financial results and its expectations for the fourth quarter and full year 2013 on a conference call on Tuesday, October 29, 2013 at 2:00 p.m. Pacific Time (5:00 p.m. Eastern Time). To listen to the call and view the accompanying slides, please visit http://www.shutterflyinc.com. In the Investor Relations area click on the link provided for the webcast, or dial 970-315-0490. The webcast, as well as a podcast, will be archived and available at http://www.shutterflyinc.com. A replay of the conference call will be available through Tuesday, November 12, 2013. To hear the replay, please dial (404) 537-3406, replay passcode 77208774.

Non-GAAP Financial Information

This press release contains certain non-GAAP financial measures. Tables are provided at the end of this press release that reconcile the non-GAAP financial measures to the most directly comparable financial measures prepared in accordance with Generally Accepted Accounting Principles (GAAP). These non-GAAP financial measures include non-GAAP gross profit margins, non-GAAP operating income (loss) and the related operating income (loss) margins, adjusted EBITDA, free cash flow, and non-GAAP net income (loss) per share. The method the Company uses to produce non-GAAP financial measures is not computed according to GAAP and may differ from methods used by other companies.

To supplement the Company's consolidated financial statements presented on a GAAP basis, we believe that these non-GAAP measures provide useful information about the Company's core operating results and thus are appropriate to enhance the overall understanding of the Company's past financial performance and its prospects for the future. These adjustments to the Company's GAAP results are made with the intent of providing both management and investors a more complete understanding of the Company's underlying operational results and trends and performance. Management uses these non-GAAP measures to evaluate the Company's financial results, develop budgets, manage expenditures, and determine employee compensation. The presentation of additional information is not meant to be considered in isolation or as a substitute for or superior to gross margins, operating income (loss), net income (loss) or net income (loss) per share determined in accordance with GAAP. For more information, please see Shutterfly's SEC Filings, including the most recent Form 10-K and Form 10-Q, which are available on the Securities and Exchange Commission's Web site at www.sec.gov.

Notice Regarding Forward-Looking Statements

This media release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which involve risks and uncertainties. These forward-looking statements include statements regarding the Company's growth, customer satisfaction with the Company's products and services and financial expectations for the fourth quarter and full year 2013 set forth under the caption "Business Outlook." The Company's actual results may differ materially from those anticipated in these forward-looking statements. Factors that might contribute to such differences include, among others, economic downturns and the general state of the economy; decreased consumer discretionary spending as a result of the macroeconomic environment; the loss of sales partners for our products; our ability to expand our customer base and increase sales to existing customers and meet production requirements; our ability to successfully integrate acquired businesses and assets; our ability to retain and hire necessary employees, including seasonal personnel, and appropriately staff our operations; the impact of seasonality on our business; our ability to develop innovative, new products and services on a timely and cost-effective basis; consumer acceptance of our products and services; our ability to develop additional adjacent lines of business; unforeseen changes in expense levels; and competition, which could lead to pricing pressure. 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 the Company's most recent Form 10-K and Form 10-Q, and the Company's other filings, which are available on the Securities and Exchange Commission's Web site at www.sec.gov. These forward-looking statements are based on current expectations and the Company assumes no obligation to update this information.

About Shutterfly, Inc.

Shutterfly, Inc. is the leading manufacturer and digital retailer of high-quality personalized products and services offered through a family of lifestyle brands. Founded in 1999, the Shutterfly, Inc. family of brands includes: Shutterfly, where your photos come to life in photo books, cards and gifts; Tiny Prints, premium cards and stationery for all life's occasions; Wedding Paper Divas, wedding invitations and stationery for every step of the planning process; and Treat, personalized greeting cards that really stand out. For more information about Shutterfly, Inc. SFLY, visit www.shutterfly-inc.com.

Shutterfly, Inc.
Consolidated Statements of Income
(In thousands, except per share amounts)
(Unaudited)
		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2013				2012				2013				2012
Net revenues		$	122,685			$	98,536			$	372,854			$	288,847
Cost of net revenues			71,308				55,129				204,877				155,892
Gross profit			51,377				43,407				167,977				132,955
Operating expenses:
Technology and development			27,508				21,538				78,032				60,976
Sales and marketing			36,774				29,575				109,946				86,615
General and administrative			21,717				16,039				62,518				45,975
Total operating expenses			85,999				67,152				250,496				193,566
Loss from operations			(34,622	)			(23,745	)			(82,519	)			(60,611	)
Interest expense			(3,609	)			(148	)			(5,684	)			(456	)
Interest and other income, net			139				14				181				30
Loss before income taxes			(38,092	)			(23,879	)			(88,022	)			(61,037	)
Benefit from income taxes			27,944				13,401				53,658				31,008
Net loss		$	(10,148	)		$	(10,478	)		$	(34,364	)		$	(30,029	)
Net loss per share - basic and diluted		$	(0.27	)		$	(0.29	)		$	(0.92	)		$	(0.84	)
Weighted-average shares outstanding - basic and diluted			37,814				36,062				37,541				35,691
Stock-based compensation is allocated as follows:
Cost of net revenues		$	646			$	424			$	1,802			$	1,329
Technology and development			2,459				1,502				6,843				6,465
Sales and marketing			5,774				2,613				14,030				8,508
General and administrative			5,103				3,826				15,494				11,206
		$	13,982			$	8,365			$	38,169			$	27,508

Shutterfly, Inc.
Consolidated Balance Sheets
(In thousands, except par value amounts)
(Unaudited)
		September 30,				December 31,
		2013				2012
ASSETS
Current assets:
Cash and cash equivalents		$	335,140			$	245,088
Accounts receivable, net			15,640				13,574
Inventories			8,373				5,032
Deferred tax asset, current portion			20,811				7,713
Prepaid expenses and other current assets			70,758				15,268
Total current assets			450,722				286,675
Property and equipment, net			135,593				92,667
Intangible assets, net			120,241				122,269
Goodwill			379,675				358,349
Deferred tax asset, net of current portion			731				854
Other assets			15,783				4,310
Total assets		$	1,102,745			$	865,124
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable		$	20,424			$	31,503
Accrued liabilities			40,751				88,472
Deferred revenue			21,025				17,845
Total current liabilities			82,200				137,820
Convertible senior notes, net			240,662				-
Deferred tax liability			28,817				24,298
Other liabilities			21,382				11,720
Total liabilities			373,061				173,838
Stockholders' equity
Common stock, $0.0001 par value; 100,000 shares authorized; 37,958 and 36,358 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively			4				4
Additional paid-in-capital			757,113				652,110
Accumulated earnings/ (deficit)			(27,433	)			39,172
Total stockholders' equity			729,684				691,286
Total liabilities and stockholders' equity		$	1,102,745			$	865,124

Shutterfly, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
		Nine Months Ended
		September 30,
		2013				2012
Cash flows from operating activities:
Net loss		$	(34,364	)		$	(30,029	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			30,652				19,327
Amortization of intangible assets			22,239				14,761
Amortization of debt discount and transaction costs			4,592				-
Stock-based compensation, net of forfeitures			38,169				27,508
(Gain) / Loss on disposal of property and equipment			10				(895	)
Deferred income taxes			(7,988	)			(4,729	)
Tax benefit from stock-based compensation			4,745				14,938
Excess tax benefits from stock-based compensation			(5,385	)			(14,938	)
Changes in operating assets and liabilities:
Accounts receivable, net			(1,455	)			(1,587	)
Inventories			(2,426	)			(1,843	)
Prepaid expenses and other current assets			(53,774	)			(44,349	)
Other assets			(7,427	)			(30	)
Accounts payable			(10,670	)			3,790
Accrued and other liabilities			(50,735	)			(27,327	)
Deferred revenue			2,188				3,620
Other non-current liabilities			357				(407	)
Net cash used in operating activities			(71,272	)			(42,190	)
Cash flows from investing activities:
Acquisition of business and intangibles, net of cash acquired			(41,120	)			(35,683	)
Purchases of property and equipment			(48,550	)			(26,912	)
Capitalization of software and website development costs			(12,057	)			(9,603	)
Proceeds from sale of equipment			173				982
Net cash used in investing activities			(101,554	)			(71,216	)
Cash flows from financing activities:
Proceeds from borrowings of convertible senior notes, net of issuance costs			291,897				-
Proceeds from issuance of warrants			43,560				-
Purchase of convertible note hedge			(63,510	)			-
Principal payments of capital lease obligations			(488	)		-
Proceeds from issuance of common stock upon exercise of stock options			18,275				8,538
Repurchases of common stock			(32,241	)			-
Excess tax benefits from stock-based compensation			5,385				14,938
Net cash provided by financing activities			262,878				23,476
Net increase/ (decrease) in cash and cash equivalents			90,052				(89,930	)
Cash and cash equivalents, beginning of period			245,088				179,915
Cash and cash equivalents, end of period		$	335,140			$	89,985
Supplemental schedule of non-cash activities
Net increase/ (decrease) in accrued purchases of property and equipment		$	(1,506	)		$	8,479
Increase in estimated fair market value of building under build-to-suit lease			4,552				4,850
Amount due from adjustment of net working capital from acquired business			73				-
Amount due for acquisition of business			-				165

Shutterfly, Inc.
Consumer Metrics Disclosure
		Three Months Ended
		September 30,
		2013		2012
Consumer Metrics
Customers		2,380,513		2,247,174
year-over-year growth		6%
Orders		3,877,182		3,605,959
year-over-year growth		8%
Average order value*		$29.07		$25.06
year-over-year growth		16%
* Average order value excludes Enterprise revenue.

Shutterfly, Inc.
Reconciliation of Forward-Looking Guidance for Non-GAAP Financial Measures to GAAP Measures
(In millions, except per share amounts)
				Forward-Looking Guidance
				GAAP										Non-GAAP
				Range of Estimate				Adjustments						Range of Estimate
				From		To		From		To				From		To
		Three Months Ending December 31, 2013
		Net revenues		$392.1		$405.1		-		-				$392.1		$405.1
		Gross profit margin		60.3%		61.3%		0.8%		0.8%		[a]		61.1%		62.1%
		Operating income		$94.9		$105.0		$21.7		$21.7		[b]		$116.6		$126.7
		Operating margin		24%		26%		6%		5%		[b]		30%		31%
		Stock-based compensation		$13.5		$13.5		$13.5		$13.5				-		-
		Amortization of intangible assets		$8.2		$8.2		$8.2		$8.2				-		-
		Adjusted EBITDA*												$129.2		$139.3
		Diluted earnings per share		$0.92		$1.08		$0.03		$0.04		[e]		$0.95		$1.11
		Diluted shares		39.9		39.9
		Effective tax rate		59.9%		57.6%
		Twelve Months Ending December 31, 2013
		Net revenues		$765.0		$778.0		-		-				$765.0		$778.0
		Gross profit margin		52.9%		53.5%		1.7%		1.7%		[c]		54.5%		55.2%
		Operating income		$12.4		$22.5		$82.1		$82.1		[d]		$94.5		$104.6
		Operating margin		2%		3%		10%		10%		[d]		12%		13%
		Stock-based compensation		$51.7		$51.7		$51.7		$51.7				-		-
		Amortization of intangible assets		$30.4		$30.4		$30.4		$30.4				-		-
		Adjusted EBITDA*												$137.7		$147.8
		Adjusted EBITDA* margin												18.0%		19.0%
		Diluted earnings per share		$0.06		$0.22		$0.14		$0.13		[f]		$0.20		$0.35
		Diluted shares		39.6		39.6
		Effective tax rate		30%		35%
		Capital expenditures - % of net revenues		9.8%		10.4%
*		Adjusted EBITDA is a non-GAAP financial measure defined as earnings before interest, taxes, depreciation, amortization and stock-based compensation.
[a]		Reflects estimated adjustments for stock-based compensation expense of approximately $700K and amortization of purchased intangible assets of approximately $2.8 million.
[b]		Reflects estimated adjustments for stock-based compensation expense of approximately $13.5 million and amortization of purchased intangible assets of approximately $8.2 million.
[c]		Reflects estimated adjustments for stock-based compensation expense of approximately $2.5 million and amortization of purchased intangible assets of approximately $10.4 million.
[d]		Reflects estimated adjustments for stock-based compensation expense of approximately $51.7 million and amortization of purchased intangible assets of approximately $30.4 million.
[e]		Reflects estimated adjustments for interest expense of approximately $1.3 million, net of tax.
[f]		Reflects estimated adjustments for interest expense of approximately $5.7 million, net of tax.

Shutterfly, Inc.
Reconciliation of GAAP Gross Profit Margin to Non-GAAP Gross Profit Margin
(In thousands)
(Unaudited)
		Three Months Ended																												Year Ended
		Mar. 31,				Jun. 30,				Sep. 30,				Dec. 31,				Mar. 31,				Jun. 30,				Sep. 30,				Dec. 31,
		2012				2012				2012				2012				2013				2013				2013				2012
GAAP gross profit		$	41,238			$	48,310			$	43,407			$	212,812			$	54,855			$	61,745			$	51,377			$	345,767
Stock-based compensation			462				443				424				367				564				592				646				1,696
Amortization of intangible assets			1,454				1,516				1,570				1,856				2,390				2,608				2,685				6,396
Non-GAAP gross profit		$	43,154			$	50,269			$	45,401			$	215,035			$	57,809			$	64,945			$	54,708			$	353,859
Non-GAAP gross profit margin			47	%			51	%			46	%			61	%			50	%			49	%			45	%			55	%
Shutterfly, Inc.
Reconciliation of GAAP Operating Margin to Non-GAAP Operating Margin
(In thousands)
(Unaudited)
		Three Months Ended																												Year Ended
		Mar. 31,				Jun. 30,				Sep. 30,				Dec. 31,				Mar. 31,				Jun. 30,				Sep. 30,				Dec. 31,
		2012				2012				2012				2012				2013				2013				2013				2012
GAAP operating income (loss)		$	(19,080	)		$	(17,786	)		$	(23,745	)		$	101,324			$	(23,964	)		$	(23,933	)		$	(34,622	)		$	40,713
Stock-based compensation			9,617				9,526				8,365				9,814				11,538				12,649				13,982				37,322
Amortization of intangible assets			4,013				5,090				5,658				5,924				6,511				7,539				8,189				20,685
Non-GAAP operating income (loss)		$	(5,450	)		$	(3,170	)		$	(9,722	)		$	117,062			$	(5,915	)		$	(3,745	)		$	(12,451	)		$	98,720
Non-GAAP operating margin			(6	%)			(3	%)			(10	%)			33	%			(5	%)			(3	%)			(10	%)			15	%
Shutterfly, Inc.
Reconciliation of Net Income (Loss) to Non-GAAP Adjusted EBITDA
(In thousands)
(Unaudited)
		Three Months Ended																												Year Ended
		Mar. 31,				Jun. 30,				Sep. 30,				Dec. 31,				Mar. 31,				Jun. 30,				Sep. 30,				Dec. 31,
		2012				2012				2012				2012				2013				2013				2013				2012
GAAP net income (loss)		$	(10,040	)		$	(9,511	)		$	(10,478	)		$	53,027			$	(12,405	)		$	(11,811	)		$	(10,148	)		$	22,998
Interest expense			152				156				148				141				139				1,936				3,609				597
Interest and other income, net			(7	)			(9	)			(14	)			(12	)			(7	)			(35	)			(139	)			(42	)
Tax (benefit) provision			(9,185	)			(8,422	)			(13,401	)			48,168				(11,691	)			(14,023	)			(27,944	)			17,160
Depreciation and amortization			10,024				11,820				12,244				16,021				15,738				17,580				19,573				50,109
Stock-based compensation			9,617				9,526				8,365				9,814				11,538				12,649				13,982				37,322
Non-GAAP Adjusted EBITDA		$	561			$	3,560			$	(3,136	)		$	127,159			$	3,312			$	6,296			$	(1,067	)		$	128,144
Shutterfly, Inc.
Reconciliation of Cash Flow from Operating Activities to Non-GAAP Adjusted EBITDA and Free Cash Flow
(In thousands)
(Unaudited)
		Three Months Ended																												Year Ended
		Mar. 31,				Jun. 30,				Sep. 30,				Dec. 31,				Mar. 31,				Jun. 30,				Sep. 30,				Dec. 31,
		2012				2012				2012				2012				2013				2013				2013				2012
Net cash provided by (used in) operating activities		$	(47,961	)		$	9,339			$	(3,568	)		$	193,571			$	(83,504	)		$	11,923			$	309			$	151,381
Interest expense			152				156				148				141				139				1,936				3,609				597
Interest and other income, net			(7	)			(9	)			(14	)			(12	)			(7	)			(35	)		(139		)			(42	)
Tax (benefit) provision			(9,185	)			(8,422	)			(13,401	)			48,168				(11,691	)			(14,023	)			(27,944	)			17,160
Changes in operating assets and liabilities			55,912				739				11,482				(111,895	)			101,426				2,555				19,961				(43,762	)
Other adjustments			1,650				1,757				2,217				(2,814	)			(3,051	)			3,940				3,137				2,810
Non-GAAP Adjusted EBITDA			561				3,560				(3,136	)			127,159				3,312				6,296				(1,067	)			128,144
Less: Purchases of property and equipment			(6,499	)			(12,264	)			(16,628	)			(12,838	)			(10,832	)			(15,869	)			(20,343	)			(48,229	)
Less: Capitalized technology & development costs			(3,072	)			(2,801	)			(3,730	)			(2,925	)			(3,495	)			(4,255	)			(4,307	)			(12,528	)
Free cash flow		$	(9,010	)		$	(11,505	)		$	(23,494	)		$	111,396			$	(11,015	)		$	(13,828	)		$	(25,717	)		$	67,387
Shutterfly, Inc.
Reconciliation of Net Income/(Loss) per Share to Non-GAAP Net Income/(Loss) per Share
(In thousands)
(Unaudited)
		Three Months Ended																												Year Ended
		Mar. 31,				Jun. 30,				Sep. 30,				Dec. 31,				Mar. 31,				Jun. 30,				Sep. 30,				Dec. 31,
		2012				2012				2012				2012				2013				2013				2013				2012
GAAP net income (loss)		$	(10,040	)		$	(9,511	)		$	(10,478	)		$	53,027			$	(12,405	)		$	(11,811	)		$	(10,148	)		$	22,998
Add back interest expense related to:
Amortization of debt discount			-				-				-				-				-				1,401				2,771				-
Amortization of debt issuance costs			-				-				-				-				-				160				260				-
0.25% coupon			-				-				-				-				-				93				188				-
Tax effect			-				-				-				-				-				(770	)			(2,046	)			-
Non-GAAP net income (loss)			(10,040	)			(9,511	)			(10,478	)			53,027				(12,405	)			(10,927	)			(8,975	)			22,998
GAAP diluted shares outstanding			35,199				35,812				36,062				37,764				37,034				37,775				37,814				37,432
Add back:
Dilutive effect of convertible notes			-				-				-				-				-				-				-				-
Non-GAAP diluted shares outstanding			35,199				35,812				36,062				37,764				37,034				37,775				37,814				37,432
GAAP net income (loss) per share		$	(0.29	)		$	(0.27	)		$	(0.29	)		$	1.40			$	(0.33	)		$	(0.31	)		$	(0.27	)		$	0.61
Non-GAAP net income (loss) per share		$	(0.29	)		$	(0.27	)		$	(0.29	)		$	1.40			$	(0.33	)		$	(0.29	)		$	(0.24	)		$	0.61