Shutterfly Announces First Quarter 2014 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 first quarter ended March 31, 2014.

“Q1 was a strong start to the fiscal year, with solid growth in our consumer business,” said Jeffrey Housenbold, president and CEO. “Leveraging our integrated marketing approach and data driven pricing and promotional strategies, we were able to improve our brand awareness and customer engagement and drive healthy increases in customers, orders and average order value. I am pleased with our sustained high level of execution and remain confident in our strategy and ability to transform the multi-billion dollar memories, social expression and personalized products markets from offline to online.”

First Quarter 2014 Financial Highlights

• Net revenues totaled $137.1 million, a 17.5% year-over-year increase.
• First quarter 2014 represents the 53^rd consecutive quarter of year-over-year net revenue growth.
• Consumer net revenues totaled $130.6 million, a 19% year-over-year increase.
• Enterprise net revenues totaled $6.5 million, a 6% year-over-year decrease.
• Gross profit margin was 44.3% of net revenues, compared to 47.0% in the first quarter of 2013.
• Operating expenses, excluding $15.0 million of stock-based compensation, totaled $84.4 million.
• GAAP net loss was ($34.2) million, compared to ($12.4) million in the first quarter of 2013.
• GAAP net loss per share was ($0.89), compared to ($0.33) in the first quarter of 2013.
• Adjusted EBITDA was $0.2 million, compared to $3.3 million in the first quarter of 2013.
• At March 31, 2014, cash and cash equivalents and investments totaled $370.3 million.

First Quarter 2014 Operating Metrics

• Transacting customers totaled 2.6 million, a 14% year-over-year increase.
• Orders totaled 3.9 million, a 13% year-over-year increase.
• Average order value was $33.76, an increase of 5% year-over-year.

Business Outlook

Second Quarter 2014:

• Net revenues to range from $154.0 million to $158.0 million, a year-over-year increase of 15.4% to 18.4%.
• GAAP gross profit margin to range from 46.0% to 47.0% of net revenues.
• Non-GAAP gross profit margin to range from 48.4% to 49.3% of net revenues.
• GAAP operating loss to range from ($32.9) million to ($33.2) million.
• Non-GAAP operating loss to range from ($8.2) million to ($9.0) million.
• GAAP effective tax rate to range from 22.0% to 25.0%.
• GAAP net loss per share to range from ($0.72) to ($0.75).
• Weighted average shares of approximately 38.5 million.
• Adjusted EBITDA to range from $6.0 million to $7.0 million.

Full Year 2014:

• Net revenues to range from $903.0 million to $920.0 million, a year-over-year increase of 15.2% to 17.4%.
• GAAP gross profit margin to range from 52.0% to 53.0% of net revenues.
• Non-GAAP gross profit margin to range from 53.6% to 54.6% of net revenues.
• GAAP operating income/(loss) to range from ($0.6) million to $9.2 million.
• Non-GAAP operating income to range from $96.7 million to $109.1 million.
• GAAP effective tax rate to range from 15% to 23%.
• GAAP net loss per share to range from ($0.38) to ($0.15).
• Weighted average shares of approximately 38.6 million.
• Adjusted EBITDA to range from $160.6 million to $174.8 million, or 17.8% to 19.0% of net revenues.
• Capital expenditures to range from 9.5% to 10.5% of net revenues.

Notes to the First Quarter 2014 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 Company's 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 and rental revenue. 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.

First Quarter 2014 Conference Call

Management will review the first quarter 2014 financial results and its expectations for the second quarter and full year 2014 on a conference call on Wednesday, April 30, 2014 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.shutterfly.com. In the Investor Relations area, found in the "About Us" section, 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.shutterfly.com. A replay of the conference call will be available through Wednesday, May 14, 2014. To hear the replay, please dial 404-537-3406, replay passcode 23607371.

Non-GAAP Financial Information

This press release contains non-GAAP financial measures. Tables are provided at the end of this press release that reconcile the non-GAAP financial measures that the Company uses 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 margin, non-GAAP operating income (loss) and operating margin, 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 and financial expectations for the second quarter and full year 2014 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 and the pricing strategies of our competitors, 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; Treat, personalized greeting cards that really stand out; MyPublisher, one of the pioneers in the photo book industry and creator of easy-to-use photo book-making software; ThisLife,a private, cloud-based solution that makes it easy for consumers to find, share and enjoy their photos and videos, all in one place; and BorrowLenses, the premier online marketplace for photographic and video equipment rentals. For more information about Shutterfly, Inc. SFLY, visit www.shutterflyinc.com.

Shutterfly, Inc.
Consolidated Statements of Income
(In thousands, except per share amounts)
(Unaudited)
		Three Months Ended
		March 31,
			2014				2013
Net revenues		$	137,099			$	116,708
Cost of net revenues			76,343				61,853
Gross profit			60,756				54,855
Operating expenses:
Technology and development			31,483				24,027
Sales and marketing			42,133				34,895
General and administrative			25,751				19,897
Total operating expenses			99,367				78,819
Loss from operations			(38,611	)			(23,964	)
Interest expense			(3,947	)			(139	)
Interest and other income, net			227				7
Loss before income taxes			(42,331	)			(24,096	)
Benefit from income taxes			8,117				11,691
Net loss		$	(34,214	)		$	(12,405	)
Net loss per share - basic and diluted		$	(0.89	)		$	(0.33	)
Weighted-average shares outstanding - basic and diluted			38,503				37,034
Stock-based compensation is allocated as follows:
Cost of net revenues		$	1,002			$	564
Technology and development			2,424				1,932
Sales and marketing			5,628				3,705
General and administrative			6,938				5,337
		$	15,992			$	11,538

Shutterfly, Inc.
Consolidated Balance Sheets
(In thousands, except par value amounts)
(Unaudited)
		March 31,				December 31,
		2014				2013
ASSETS
Current assets:
Cash and cash equivalents		$	314,918			$	499,084
Short-term investments			24,115				-
Accounts receivable, net			14,536				21,641
Inventories			8,512				9,629
Deferred tax asset, current portion			20,471				26,942
Prepaid expenses and other current assets			44,719				21,260
Total current assets			427,271				578,556
Long-term investments			31,295				-
Property and equipment, net			171,400				155,727
Intangible assets, net			110,430				118,621
Goodwill			397,242				397,306
Deferred tax asset, net of current portion			520				520
Other assets			19,610				15,412
Total assets		$	1,157,768			$	1,266,142
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable		$	17,418			$	33,656
Accrued liabilities			42,466				107,448
Deferred revenue			26,640				24,114
Total current liabilities			86,524				165,218
Convertible senior notes, net			246,362				243,493
Deferred tax liability			37,814				42,995
Other liabilities			33,720				26,341
Total liabilities			404,420				478,047
Stockholders' equity:
Accumulated other comprehensive loss			(27	)			-
Common stock, $0.0001 par value; 100,000 shares authorized; 38,505 and 38,196 shares issued and outstanding at March 31, 2014 and December 31, 2013, respectively			4				4
Additional paid-in-capital			805,979				771,875
Accumulated earnings / (deficit)			(52,608	)			16,216
Total stockholders' equity			753,348				788,095
Total liabilities and stockholders' equity		$	1,157,768			$	1,266,142

Shutterfly, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
		Three Months Ended
		March 31,
			2014				2013
Cash flows from operating activities:
Net loss		$	(34,214	)		$	(12,405	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			14,222				9,227
Amortization of intangible assets			8,583				6,511
Amortization of debt discount and transaction costs			3,158				-
Stock-based compensation, net of forfeitures			15,992				11,538
Loss on disposal of property and equipment and rental assets			55				188
Deferred income taxes			1,309				3,387
Tax benefit from stock-based compensation			16,281				11,755
Excess tax benefits from stock-based compensation			(16,328	)			(12,279	)
Changes in operating assets and liabilities:
Accounts receivable, net			7,106				2,859
Inventories			1,117				186
Prepaid expenses and other current assets			(23,345	)			(28,349	)
Other assets			(5,484	)			(6,897	)
Accounts payable			(19,982	)			(13,944	)
Accrued and other liabilities			(68,226	)			(54,599	)
Deferred revenue			2,527				(337	)
Other non-current liabilities			(244	)			(345	)
Net cash used in operating activities			(97,473	)			(83,504	)
Cash flows from investing activities:
Acquisition of business and intangible assets, net of cash acquired			-				(1,031	)
Purchases of property and equipment			(10,285	)			(15,033	)
Capitalization of software and website development costs			(4,326	)			(3,495	)
Purchases of investments			(54,850	)			-
Proceeds from sale of equipment and rental assets			128				-
Net cash used in investing activities			(69,333	)			(19,559	)
Cash flows from financing activities:
Proceeds from issuance of common stock upon exercise of stock options			1,358				12,390
Repurchases of common stock			(34,610	)			(2,241	)
Excess tax benefits from stock-based compensation			16,328				12,279
Principal payments of capital lease and financing obligations			(436	)			-
Net cash provided by / (used in) financing activities			(17,360	)			22,428
Net decrease in cash and cash equivalents			(184,166	)			(80,635	)
Cash and cash equivalents, beginning of period			499,084				245,088
Cash and cash equivalents, end of period		$	314,918			$	164,453
Supplemental schedule of non-cash activities
Net increase/ (decrease) in accrued purchases of property and equipment		$	6,134			$	(4,201	)
Net increase/ (decrease) in accrued capitalized software and website development costs			786				-
Increase in estimated fair market value of building under build-to-suit leases			7,998				2,716
Amount due from adjustment of net working capital from acquired business			110				465

Shutterfly, Inc.
Consumer Metrics Disclosure
		Three Months Ended
		March 31,
		2014			2013
Consumer Metrics
Customers		2,557,245			2,248,858
year-over-year growth		14	%
Orders		3,869,201			3,417,312
year-over-year growth		13	%
Average order value*		$33.76			$32.13
year-over-year growth		5	%
* 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 June 30, 2014
Net revenues		$154.0		$158.0		-		-				$154.0		$158.0
Gross profit margin		46.0%		47.0%		2.4%		2.3%		[a]		48.4%		49.3%
Operating loss		($33.2)		($32.9)		$24.2		$24.7		[b]		($9.0)		($8.2)
Operating margin		(22%)		(21%)		16%		16%		[b]		(6%)		(5%)
Stock-based compensation		$15.7		$16.2		$15.7		$16.2				-		-
Amortization of intangible assets		$8.5		$8.5		$8.5		$8.5				-		-
Adjusted EBITDA*												$6.0		$7.0
Net loss per share		($0.75)		($0.72)		$0.07		$0.07		[e]		($0.68)		($0.65)
Weighted average shares		38.5		38.5
Effective tax rate		22.0%		25.0%
Twelve Months Ending December 31, 2014
Net revenues		$903.0		$920.0		-		-				$903.0		$920.0
Gross profit margin		52.0%		53.0%		1.6%		1.6%		[c]		53.6%		54.6%
Operating income / (loss)		($0.6)		$9.2		$97.3		$100.0		[d]		$96.7		$109.1
Operating margin		0%		1%		11%		11%		[d]		11%		12%
Stock-based compensation		$63.8		$65.0		$63.8		$65.0				-		-
Amortization of intangible assets		$33.5		$35.0		$33.5		$35.0				-		-
Adjusted EBITDA*												$160.6		$174.8
Adjusted EBITDA* margin												17.8%		19.0%
Net income / (loss) per share		($0.38)		($0.15)		$0.30		$0.28		[f]		($0.08)		$0.13
Weighted average shares		38.6		38.6
Effective tax rate		15%		23%
Capital expenditures - % of net revenues		9.5%		10.5%

*		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 $0.9 million and amortization of purchased intangible assets of approximately $2.8 million.
[b]		Reflects estimated adjustments for stock-based compensation expense of approximately $15.7 million to $16.2 million and amortization of purchased intangible assets of approximately $8.5 million.
[c]		Reflects estimated adjustments for stock-based compensation expense of approximately $3.6 million and amortization of purchased intangible assets of approximately $11.3 million.
[d]		Reflects estimated adjustments for stock-based compensation expense of approximately $63.8 million to $65.0 million and amortization of purchased intangible assets of approximately $33.5 million to $35.0 million.
[e]		Reflects estimated adjustments for interest expense of approximately $2.6 million to $2.5 million, net of tax.
[f]		Reflects estimated adjustments for interest expense of approximately $11.6 million to $10.5 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,				Dec. 31,
			2013				2013				2013				2013				2014				2013
GAAP gross profit		$	54,855			$	61,745			$	51,377			$	246,072			$	60,756			$	414,049
Stock-based compensation			564				592				646				683				1,002				2,485
Amortization of intangible assets			2,390				2,608				2,685				2,800				2,823				10,483
Non-GAAP gross profit		$	57,809			$	64,945			$	54,708			$	249,555			$	64,581			$	427,017
Non-GAAP gross profit margin			50	%			49	%			45	%			61	%			47	%			54	%
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,				Dec. 31,
			2013				2013				2013				2013				2014				2013
GAAP operating income (loss)		$	(23,964	)		$	(23,933	)		$	(34,622	)		$	104,577			$	(38,611	)		$	22,058
Stock-based compensation			11,538				12,649				13,982				15,359				15,992				53,528
Amortization of intangible assets			6,511				7,539				8,189				8,730				8,583				30,969
Non-GAAP operating income (loss)		$	(5,915	)		$	(3,745	)		$	(12,451	)		$	128,666			$	(14,036	)		$	106,555
Non-GAAP operating margin			(5	%)			(3	%)			(10	%)			31	%			(10	%)			14	%
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,				Dec. 31,
			2013				2013				2013				2013				2014				2013
GAAP net income (loss)		$	(12,405	)		$	(11,811	)		$	(10,148	)		$	43,649			$	(34,214	)		$	9,285
Interest expense			139				1,936				3,609				3,762				3,947				9,446
Interest and other income, net			(7	)			(35	)			(139	)			(127	)			(227	)			(308	)
Tax (benefit) provision			(11,691	)			(14,023	)			(27,944	)			57,293				(8,117	)			3,635
Depreciation and amortization			15,738				17,580				19,573				21,965				22,805				74,856
Stock-based compensation			11,538				12,649				13,982				15,359				15,992				53,528
Non-GAAP Adjusted EBITDA		$	3,312			$	6,296			$	(1,067	)		$	141,901			$	186			$	150,442

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,				Dec. 31,
			2013				2013				2013				2013				2014				2013
Net cash provided by (used in) operating activities		$	(83,504	)		$	11,923			$	309			$	218,540			$	(97,473	)		$	147,268
Interest expense			139				1,936				3,609				3,762				3,947				9,446
Interest and other income, net			(7	)			(35	)			(139	)			(127	)			(227	)			(308	)
Tax (benefit) provision			(11,691	)			(14,023	)			(27,944	)			57,293				(8,117	)			3,635
Changes in operating assets and liabilities			101,426				2,555				19,961				(126,168	)			106,531				(2,226	)
Other adjustments			(3,051	)			3,940				3,137				(11,399	)			(4,475	)			(7,373	)
Non-GAAP Adjusted EBITDA			3,312				6,296				(1,067	)			141,901				186				150,442
Less: Purchases of property and equipment			(10,832	)			(15,869	)			(20,343	)			(12,166	)			(16,419	)			(59,210	)
Less: Capitalized technology & development costs			(3,495	)			(4,255	)			(4,307	)			(3,703	)			(5,112	)			(15,760	)
Free cash flow		$	(11,015	)		$	(13,828	)		$	(25,717	)		$	126,032			$	(21,345	)		$	75,472
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,				Dec. 31,
			2013				2013				2013				2013				2014				2013
GAAP net income (loss)		$	(12,405	)		$	(11,811	)		$	(10,148	)		$	43,649			$	(34,214	)		$	9,285
Add back interest expense related to:
Amortization of debt discount			-				1,401				2,771				2,830				2,870				7,002
Amortization of debt issuance costs			-				160				260				285				288				705
0.25% coupon			-				93				188				188				188				469
Tax effect			-				(770	)			(2,046	)			516				(637	)			(2,300	)
Non-GAAP net income (loss)		$	(12,405	)		$	(10,927	)		$	(8,975	)		$	47,468			$	(31,505	)		$	15,161
GAAP diluted shares outstanding			37,034				37,775				37,814				39,713				38,503				39,493
Add back:
Dilutive effect of convertible notes			-				-				-				-				-				-
Non-GAAP diluted shares outstanding			37,034				37,775				37,814				39,713				38,503				39,493
GAAP net income (loss) per share		$	(0.33	)		$	(0.31	)		$	(0.27	)		$	1.10			$	(0.89	)		$	0.24
Non-GAAP net income (loss) per share		$	(0.33	)		$	(0.29	)		$	(0.24	)		$	1.20			$	(0.82	)		$	0.38