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Shutterfly Announces Second Quarter 2018 Financial Results

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Shutterfly, Inc. (NASDAQ:SFLY), the leading online retailer and
manufacturer of high-quality personalized products and services, today
announced financial results for the second quarter ended June 30, 2018.

"With the closing of the Lifetouch acquisition, the second quarter of
2018 marks the beginning of a new stage of Shutterfly's growth," said
Christopher North, President and Chief Executive Officer of Shutterfly.
"Shutterfly now comprises three divisions: Shutterfly Consumer,
Lifetouch, and Shutterfly Business Solutions. All three are large,
profitable businesses that are the leaders in their respective
industries, and all three have significant opportunities ahead of them.
As we continue to integrate Lifetouch, all three divisions will both
contribute to and benefit from the combined scale and capabilities of
the overall company, most significantly via our world-class
manufacturing platform. This sets Shutterfly on a long-term path for
sustained, profitable growth."

"After three full months of Lifetouch ownership, we're pleased with the
business results, the Lifetouch leadership, and the close alignment of
mission and culture between the two companies. While the full
integration of Lifetouch will take several years, the early integration
work is off to a strong start and confirms our excitement about the
potential for the combined company."

Second Quarter 2018 Financial Highlights

GAAP net revenue was $443.4 million, which includes Lifetouch from the
acquisition date of April 2, 2018. Shutterfly Consumer segment net
revenue totaled $165.0 million, an 8% year-over-year decrease. GAAP
Lifetouch segment net revenue was $228.6 million. Shutterfly Business
Solutions segment net revenue totaled $49.8 million, a 66%
year-over-year increase. GAAP operating loss totaled $22.9 million. Net
loss was $26.5 million, or a loss of $0.80 per share.

Non-GAAP net revenue, excluding purchase accounting adjustments related
to the deferred revenue write-down, was $476.7 million. Shutterfly
Consumer brand like-for-like revenue growth was 4%, compared to the
second quarter of 2017. Non-GAAP Lifetouch segment net revenue was
$261.9 million. Normalized operating income, excluding restructuring,
acquisition-related charges and purchase accounting adjustments related
to the deferred revenue write-down and inventory write-up, was $32.3
million. Normalized net income was $13.6 million. Adjusted EBITDA was
$84.4 million.

The Company expanded its segment reporting which will help investors
better understand the trends in the business (see Appendix 2.1, page 10
and 11).

Capital Structure Update

In the second quarter of 2018, the Company settled its $300.0 million of
convertible notes in cash, as planned and communicated previously. As
expected, the conversion option settled in the money. Therefore, the
Company transferred 1,108,176 shares to the noteholders, and pursuant to
the Company's bond hedge, received shares from the bond hedge
counterparties offsetting any dilution from the conversion option. The
warrants initially sold with the convertible notes settle in the third
quarter of 2018. There are 4,675,408 warrants that will settle ratably
over an 80-day period commencing on August 15. The Company intends to
net share settle the warrants.

As a reminder, in the near term the Company anticipates using cash to
pay down its acquisition debt, and maintaining a BB rating profile.
Longer term, the Company will continue to focus on optimizing capital
allocation across organic re-investment in the business, further M&A,
and returning excess capital to shareholders.

iMemories Update

At the time the Company purchased Lifetouch, the Company anticipated
that it would exit the iMemories business, as Shutterfly Photos was a
more complete and advanced solution. As communicated on the Q1 earnings
call, the Company decided to accelerate the process of exiting
iMemories. The Company completed the divestiture in the second quarter,
resulting in restructuring charges of $3.0 million.

Business Outlook[1]

On a full-year 2018 basis the Company is raising its guidance on net
revenue and adjusted EBITDA, and is updating non-GAAP guidance to the
following (in millions, except per share amounts):

     

Prior Non-GAAP
Guidance Midpoint
as of
May 2, 2018

Updated Non-GAAP
Guidance Midpoint

Twelve Months Ending
December 31, 2018

Change

Twelve Months Ending
December 31, 2018

 
Net revenue $2,035 $3 $2,038
Shutterfly Consumer net revenue $1,035 ($22 ) $1,013
Lifetouch net revenue $785 $15 $800
SBS net revenue $215 $10 $225
 
Gross profit margin[2] 62.4 % 53.7 %
 
Operating income $196

$9

$205

Adjusted EBITDA $400 $10 $410
 
Earnings per share $3.06 $0.21 $3.27
 
Capital expenditures $100 $100
 

[1] Excludes restructuring, acquisition-related charges and
purchase accounting adjustments related to the deferred revenue
write-down and inventory write-up.

[2] The Company substantially completed its assessment of
Lifetouch accounting policies during the second quarter of 2018, which
resulted in the presentation of photography expenses as cost of net
revenue, whereas it had previously been reflected in sales and
marketing. Please note, this only impacts income statement presentation
and does not impact operating income or adjusted EBITDA. Q2 results and
updated guidance reflect this presentation.

Notes to the Second Quarter 2018 Financial Results and Operating
Metrics and 2018 Business Outlook

Adjusted EBITDA is a non-GAAP financial measure that the Company defines
as earnings before interest, taxes, depreciation, amortization,
stock-based compensation, capital lease termination, restructuring and
acquisition-related costs.

The Company expanded segment reporting in the second quarter of 2018,
which now includes segment margin. Segment reporting will continue to
report net revenue and cost of net revenue, consistent with previous
reporting, but now will also include technology and development, sales
and marketing, and credit card fees, arriving at a margin for the
segment. The margin of the Company's three segments compares to non-GAAP
operating income by adding corporate expenses, amortization of
intangible assets, stock-based compensation, and other non-recurring
items including restructuring and acquisition-related charges.

Shutterfly Consumer segment includes sales from the Shutterfly brand,
the Tiny Prints boutique and BorrowLenses, and are derived from the sale
of a variety of products such as, professionally-bound photo books,
cards and stationery, custom home décor products and unique photo gifts,
calendars and prints, and the related shipping revenue, as well as
rental revenue from the BorrowLenses brand. Consumer also includes
revenue from advertising displayed on the Company's website.

Lifetouch segment includes net revenue from professional photography
services for schools, preschools and churches, as well as retail studios
operated by Lifetouch under the JCPenney Portrait brand.

Shutterfly Business Solutions ("SBS") segment includes net revenue from
personalized direct marketing and other end-consumer communications as
well as just-in-time, inventory-free printing for the Company's business
customers.

Average Order Value ("AOV") is defined as total net revenue (excluding
Lifetouch and SBS) divided by total orders.

The Company substantially completed its assessment of Lifetouch
accounting policies during the second quarter of 2018, which resulted in
the presentation of photography expenses as cost of net revenue, whereas
it had previously been reflected in sales and marketing. Please note
this only impacts income statement presentation, and does not impact
operating income or adjusted EBITDA. Q2 results and updated guidance
reflect this presentation.

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

Second Quarter Conference Call

Management will review the second quarter 2018 financial results and its
expectations for the third quarter and full year 2018 on a conference
call on Tuesday, August 7, 2018 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 (888) 243-4451 or (412) 542-4135, and ask to be to be
joined into the Shutterfly call. The webcast will be archived and
available at http://www.shutterflyinc.com
in the Investor Relations section. A replay of the conference call will
be available through Tuesday, August 21, 2018. To hear the replay,
please dial (877) 344-7529 or (412) 317-0088 and enter access code
10121786.

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 net revenue, operating income (loss), net income (loss), net
income (loss) per share and adjusted EBITDA. 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, the Company believes 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 website 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, that
involve risks and uncertainties. These forward-looking statements
include statements regarding expected opportunities in each of the
Company's three segments; the Company's expectation that all three
segments will contribute to and benefit from the combined scale and
capabilities of the overall Company; the Company's expectation of being
on a long-term path for sustained, profitable growth; the Company's
excitement about the potential for the combined Company; the Company's
intention to net share settle its outstanding warrants; the Company's
intention to use cash to pay down acquisition debt and maintain a BB
rating profile; the Company's expected continued focus on methods for
optimizing capital allocation; the Company's business outlooks for the
third and fourth quarters of 2018, and the full year 2018; and the
Company's intention to provide additional disclosure about the Company's
non-Lifetouch businesses through the second quarter of 2019. You can
identify these statements by the use of terminology such as "guidance",
"believe", "expect", "will", "should", "could", "estimate", "anticipate"
or similar forward-looking terms. You should not rely on these
forward-looking statements as they involve risks and uncertainties that
may cause actual results to vary materially from the forward-looking
statements. Factors that might contribute to such differences include,
among others, decreased consumer discretionary spending as a result of
general economic conditions; the Company's ability to expand its
customer base and increase sales to existing customers; the Company's
ability to meet production requirements; the Company's ability to retain
and hire necessary employees, including seasonal personnel, and
appropriately staff its operations; the impact of seasonality on the
Company's business; the Company's ability to develop innovative, new
products and services on a timely and cost-effective basis; failure to
realize the anticipated benefits of the Company's 2017 restructuring
activities or of the Lifetouch acquisition; consumer acceptance of the
Company's products and services; the Company's ability to develop
additional adjacent lines of business; unforeseen changes in expense
levels; competition and the pricing strategies of the Company's
competitors, which could lead to pricing pressure; the retention of
Lifetouch employees and the Company's ability to successfully integrate
the Lifetouch businesses; risks inherent in the achievement of
anticipated synergies and the timing thereof; and general economic
conditions and changes in laws and regulations. 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 the Company's
business in general, the Company refers you to the "Risk Factors"
section of its Securities and Exchange Commission ("SEC") filings,
including the Company's most recent Form 10-K and 10-Q, which are
available on the SEC's website 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 retailer and manufacturing platform for
high-quality personalized products. Founded in 1999, Shutterfly, Inc.
helps customers capture, preserve and share life's joy through its
Shutterfly and Lifetouch brands. Shutterfly brings photos to life in
photo books, gifts, home décor, and cards and stationery, through its
flagship Shutterfly.com website, including premium offerings in its Tiny
Prints boutique. Lifetouch is the national leader in school photography,
built on the enduring tradition of "Picture Day", as well as serving
families through portrait studios and partnerships with churches.
Additionally, Shutterfly, Inc. operates Shutterfly Business Solutions,
delivering digital printing services to businesses, and BorrowLenses,
the premier online marketplace for photographic and video equipment
rentals. For more information about Shutterfly, Inc. (NASDAQ:SFLY),
visit www.shutterflyinc.com.

 

Appendix 1.1

Shutterfly, Inc.

Consolidated Statements of Operations - GAAP

(In thousands, except per share amounts)

(Unaudited)

  Three Months Ended   Six Months Ended
June 30, June 30,
2018   2017 2018   2017
 
Net revenue $ 443,372 $ 209,032 $ 643,097 $ 401,004
Cost of net revenue 233,228 118,205 359,275 234,324
Restructuring   196     1,436  
Gross profit 210,144   90,631   283,822   165,244  
Operating expenses:
Technology and development 44,420 39,398 82,924 85,353
Sales and marketing 130,643 42,987 168,363 85,874
General and administrative[1] 55,040 27,511 86,604 55,306
Capital lease termination 8,098 8,098
Restructuring[2] 2,952   4,477   2,952   12,213  
Total operating expenses 233,055   122,471   340,843   246,844  
Loss from operations (22,911 ) (31,840 ) (57,021 ) (81,600 )
Interest expense (17,769 ) (5,955 ) (27,402 ) (11,919 )
Interest and other income, net 1,561   244   3,310   433  
Loss before income taxes (39,119 ) (37,551 ) (81,113 ) (93,086 )
Benefit from income taxes 12,607   14,713   27,436   37,054  
Net loss $ (26,512 ) $ (22,838 ) $ (53,677 ) $ (56,032 )
 
Net loss per share - basic and diluted $ (0.80 ) $ (0.68 ) $ (1.63 ) $ (1.67 )
 
Weighted-average shares outstanding - basic and diluted 33,234   33,579   32,970   33,646  
 
Stock-based compensation is allocated as follows:
Cost of net revenue $ 943 $ 1,074 $ 1,942 $ 2,243
Technology and development 2,571 2,179 5,001 4,875
Sales and marketing 2,941 2,980 6,445 6,153
General and administrative 5,242 4,236 10,001 8,703
Restructuring       814  
$ 11,697   $ 10,469   $ 23,389   $ 22,788  
 
Depreciation and amortization is allocated as follows:
Cost of net revenue $ 21,944 $ 15,069 $ 37,386 $ 30,052
Technology and development 7,418 7,099 13,715 14,888
Sales and marketing 9,530 2,693 11,571 5,787
General and administrative 1,485 1,096 2,603 2,594
Restructuring   2,493     5,335  
$ 40,377   $ 28,450   $ 65,275   $ 58,656  

[1] The General and administrative expenses of $55.0 million
and $86.6 million for the three and six months ended June 30, 2018,
respectively, include $8.0 million and $12.6 million, respectively, of
acquisition-related charges.

[2] The divestiture of iMemories resulted in restructuring
charges of $3.0 million for the three and six months ended June 30, 2018.

 

Appendix 1.2

Shutterfly, Inc.

Consolidated Balance Sheets - GAAP

(In thousands, except par value amounts)

(Unaudited)

  June 30, 2018   December 31, 2017
ASSETS
Current assets:
Cash and cash equivalents $ 146,701 $ 489,894
Short-term investments 53,890 178,021
Accounts receivable, net 58,578 82,317
Inventories 15,269 11,019
Prepaid expenses and other current assets 112,196   41,383  
Total current assets 386,634 802,634
Long-term investments 24,974 9,242
Property and equipment, net 392,662 266,860
Intangible assets, net 341,769 29,671
Goodwill 841,374 408,975
Other assets 23,623   17,418  
Total assets $ 2,011,036   $ 1,534,800  
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 15,249 $ 297,054
Accounts payable 33,178 91,473
Accrued liabilities 146,372 159,248
Deferred revenue 29,448   24,649  
Total current liabilities 224,247 572,424
Long-term debt 1,094,347 292,457
Other liabilities 148,146   119,195  
Total liabilities 1,466,740   984,076  
Stockholders' equity:
Common stock, $0.0001 par value; 100,000 shares authorized; 33,381
and 32,297 shares issued and outstanding on June 30, 2018 and
December 31, 2017, respectively
3 3
Additional paid-in capital 1,036,962 996,301
Accumulated other comprehensive income 4,164 1,778
Accumulated deficit (496,833 ) (447,358 )
Total stockholders' equity 544,296   550,724  
Total liabilities and stockholders' equity $ 2,011,036   $ 1,534,800  
 

Appendix 1.3

Shutterfly, Inc.

Consolidated Statements of Cash Flows - GAAP

(In thousands)

(Unaudited)

  Six Months Ended
June 30,
2018   2017
Cash flows from operating activities:
Net loss $ (53,677 ) $ (56,032 )
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 50,111 45,121
Amortization of intangible assets 15,164 8,200
Amortization of debt discount and issuance costs 7,009 7,524
Stock-based compensation, net of forfeitures 23,389 21,974
Loss on disposal of property and equipment 154 467
Deferred income taxes 17,571 (7,103 )
Restructuring 752 10,764
Other (272 )
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable 30,767 27,286
Inventories 15,607 1,415
Prepaid expenses and other assets (42,795 ) (19,776 )
Accounts payable (69,708 ) (39,949 )
Accrued and other liabilities (130,127 ) (58,605 )
Net cash used in operating activities (136,055 ) (58,714 )
Cash flows from investing activities:
Acquisition of business, net of cash acquired (890,052 )
Purchases of property and equipment (17,692 ) (8,176 )
Capitalization of software and website development costs (21,392 ) (17,058 )
Purchases of investments (9,523 ) (39,805 )
Proceeds from the maturities of investments 174,329 19,033
Proceeds from the sales of investments 45,106
Proceeds from sale of property and equipment 1,132   11,678  
Net cash used in investing activities (718,092 ) (34,328 )
Cash flows from financing activities:
Proceeds from issuance of common stock upon exercise of stock options 16,577 520
Repurchases of common stock (50,000 )
Principal payments of borrowings (302,608 )
Principal payments of capital lease and financing obligations (9,396 ) (20,621 )
Proceeds from borrowings, net of issuance costs 806,652    
Net cash provided by (used in) financing activities 511,225   (70,101 )
Effect of exchange rate changes on cash and cash equivalents (271 )
Net decrease in cash and cash equivalents (343,193 ) (163,143 )
Cash and cash equivalents, beginning of period 489,894   289,224  
Cash and cash equivalents, end of period $ 146,701   $ 126,081  
 
Supplemental schedule of non-cash investing / financing
activities:
Net (decrease) increase in accrued purchases of property and
equipment
$ (1,200 ) $ 745
Net increase in accrued capitalized software and website development
costs
1,119 270
Stock-based compensation capitalized with software and website
development costs
697 758
Property and equipment acquired under capital leases 2,969 6,228
Net increase in receivable proceeds from the sale of property and
equipment
9,250
 

Appendix 1.4

Shutterfly, Inc.

Shutterfly Consumer Metrics Disclosure

(Unaudited)

  Three Months Ended
June 30,
2018   2017
Shutterfly Consumer Metrics
Customers [1] 3,140,246 3,350,434
year-over-year change (6 )%
 
Orders 4,788,564 5,467,763
year-over-year change (12 )%
 
Average order value [2] $34.46 $32.75
year-over-year change 5 %

[1] An active customer is defined as one that has
transacted in the last trailing twelve months.

[2] Average order value excludes Lifetouch and SBS revenue.

 

Appendix 1.5

Shutterfly, Inc.

Shutterfly Consumer net revenue by Brand

(In thousands)

(Unaudited)

  Three Months Ended   Year Ended
Mar. 31,   Jun. 30,   Sep. 30,   Dec. 31,   Mar. 31,   Jun. 30, Dec. 31,
2017 2017 2017 2017 2018 2018 2017
 
Shutterfly Consumer net revenue
Shutterfly brand $ 123,903 $ 139,908 $ 115,883 $ 464,547 $ 142,664 $ 154,181 $ 844,242
Tiny Prints Boutique 1,942 48,932 2,103 1,397 50,874
Tiny Prints [1] 10,465 12,917 23,382
Wedding Paper Divas [2] 14,290 11,365 8,523 34,178
MyPublisher [3] 4,936 6,056 10,992
Other 7,051   8,844   9,070   8,330   7,292   9,425   33,295
Total $ 160,645   $ 179,090   $ 135,418   $ 521,809   $ 152,059   $ 165,003   $ 996,963
 
[1] Tiny Prints website shut down on June 28, 2017.
[2] Wedding Paper Divas website shut down on September
13, 2017.
[3] MyPublisher website shut down on May 15, 2017.
 

Appendix 2.1

Shutterfly, Inc.

Segment Disclosure

(In thousands)

(Unaudited)

 
The Company expanded segment reporting, which now includes segment
margin. Segment reporting will continue to report net revenue and
cost of net revenue, consistent with previous reporting, but now
will also include technology and development, sales and marketing,
and credit card fees, arriving at a margin for the segment. The
margin of the Company's three segments compares to non-GAAP
operating income by adding corporate expenses, amortization of
intangible assets, stock-based compensation, and other non-recurring
items including restructuring and acquisition-related charges.
Three Months Ended   Six Months Ended
June 30, June 30,
2018   2017 2018   2017
Shutterfly Consumer:
Net revenue $ 165,003 $ 179,090 $ 317,062 $ 339,735
Cost of net revenue 86,065 92,049 170,909 181,903
Technology and development 29,830 33,037 61,959 71,966
Sales and marketing 29,956 36,406 60,681 72,144
Credit card fees 4,349   4,654   8,548   8,943  
Margin[1] $ 14,803   $ 12,944   $ 14,965   $ 4,779  
Margin % 9 % 7 % 5 % 1 %
 
Lifetouch[2]:
Net revenue[3] $ 261,911 $ $ 261,911 $
Cost of net revenue[4] 91,148 91,148
Technology and development 7,109 7,109
Sales and marketing 86,960 86,960
Credit card fees 1,165     1,165    
Margin[1] $ 75,529   $   $ 75,529   $  
Margin % 29 % % 29 % %
 
Shutterfly Business Solutions:
Net revenue $ 49,809 $ 29,942 $ 97,475 $ 61,269
Cost of net revenue 41,610 23,900 81,519 47,738
Technology and development 3,049 4,182 6,994 8,511
Sales and marketing 1,619   931   3,069   1,839  
Margin[1] $ 3,531   $ 929   $ 5,893   $ 3,181  
Margin % 7 % 3 % 6 % 5 %
 
Consolidated Segments:
Net revenue[3] $ 476,723 $ 209,032 $ 676,448 $ 401,004
Cost of net revenue[4] 218,823 115,949 343,576 229,641
Technology and development 39,988 37,219 76,062 80,477
Sales and marketing 118,535 37,337 150,710 73,983
Credit card fees 5,514   4,654   9,713   8,943  
Margin[1] $ 93,863   $ 13,873   $ 96,387   $ 7,960  
Margin % 20 % 7 % 14 % 2 %

 

[1] The margins reported reflect only costs that are directly
attributable or allocable to a specific segment and exclude corporate
expenses, amortization of intangible assets, stock-based compensation
and other one-time charges.

[2] The Company acquired Lifetouch on April 2, 2018.

[3] Yearbook sales and collections are made throughout the
school year, whereas yearbooks are typically delivered toward the end of
the school year in the second quarter. Business combination accounting
principles require the Company to write down to fair value the deferred
revenue assumed in acquisitions based on the cost to manufacture and
deliver the yearbooks, plus a profit margin. Therefore, GAAP revenue
after an acquisition does not reflect the full amount that would have
been reported if the acquired deferred revenue was not written down to
fair value. The non-GAAP adjustments eliminate the effect of the
deferred revenue write-down. The Company believes these adjustments are
useful to investors as an additional means to reflect revenue and gross
margin trends of the Company's business.

[4] Business combination accounting principles require the
Company to measure acquired inventory at fair value. The fair value of
inventory reflects the acquired company's cost of manufacturing plus a
portion of the expected profit margin. The non-GAAP adjustment to the
Company's cost of net revenue excludes the expected profit margin
component that is recorded under business combination accounting
principles. The Company believes the adjustment is useful to investors
as an additional means to reflect cost of net revenue and gross profit
trends of the Company's business.

The following table reconciles operating segment margin to total
operating income (loss), operating segment net revenue to total net
revenue and operating segment cost of net revenue to total cost of net
revenue:

   
Three Months Ended Six Months Ended
June 30, June 30,
2018   2017 2018   2017
 
Total margin for operating segments $ 93,863 $ 13,873 $ 96,387 $ 7,960
Purchase accounting deferred revenue adjustment[1] (33,351 ) (33,351 )
Purchase accounting inventory adjustment[2] (10,931 ) (10,931 )
Corporate expenses[3] (37,012 ) (18,613 ) (55,036 ) (36,825 )
Amortization of intangible assets (12,831 ) (3,860 ) (15,164 ) (8,200 )
Stock-based compensation for operating segments (11,697 ) (10,469 ) (23,389 ) (22,788 )
Restructuring (2,952 ) (4,673 ) (2,952 ) (13,649 )
Acquisition-related charges (8,000 ) (12,585 )
Capital lease termination   (8,098 )   (8,098 )
Operating income (loss) $ (22,911 ) $ (31,840 ) $ (57,021 ) $ (81,600 )
Operating margin (5 )% (15 )%

(9

)% (20 )%
 
 
 
Total net revenue for all operating segments $ 476,723 $ 209,032 $ 676,448 $ 401,004
Purchase accounting deferred revenue adjustment[1] (33,351 )   (33,351 )  
Total net revenue $ 443,372   $ 209,032   $ 643,097   $ 401,004  
 
Total cost of net revenue for all operating segments $ 218,823 $ 115,949 $ 343,576 $ 229,641
Purchase accounting inventory adjustment[2] 10,931 10,931
Stock-based compensation for cost of net revenue 943 1,074 1,942 2,243
Amortization of intangible assets for cost of net revenue 2,531   1,182   2,826   2,440  
Total cost of net revenue $ 233,228   $ 118,205   $ 359,275   $ 234,324  

 

[1] Yearbook sales and collections are made throughout the
school year, whereas yearbooks are typically delivered toward the end of
the school year in the second quarter. Business combination accounting
principles require the Company to write down to fair value the deferred
revenue assumed in acquisitions based on the cost to manufacture and
deliver the yearbooks, plus a profit margin. Therefore, GAAP revenue
after an acquisition does not reflect the full amount that would have
been reported if the acquired deferred revenue was not written down to
fair value. The non-GAAP adjustments eliminate the effect of the
deferred revenue write-down. The Company believes these adjustments are
useful to investors as an additional means to reflect revenue and gross
margin trends of the Company's business.

[2] Business combination accounting principles require the
Company to measure acquired inventory at fair value. The fair value of
inventory reflects the acquired company's cost of manufacturing plus a
portion of the expected profit margin. The non-GAAP adjustment to the
Company's cost of net revenue excludes the expected profit margin
component that is recorded under business combination accounting
principles. The Company believes the adjustment is useful to investors
as an additional means to reflect cost of net revenue and gross profit
trends of the Company's business.

[3] Corporate expenses include activities that are not
directly attributable or allocable to a specific segment. This category
consists primarily of expenses related to certain functions performed at
the corporate level such as non-manufacturing facilities, human
resources, finance and accounting, legal, information technology,
integration, etc.

 

Appendix 3.1

Shutterfly, Inc.

Reconciliation of Non-GAAP Financial Measures

(In thousands)

(Unaudited)

 
The Company substantially completed its assessment of Lifetouch
accounting policies during the second quarter of 2018, which
resulted in the presentation of photography expenses as cost of net
revenue, whereas it had previously been reflected in sales and
marketing, which has the impact of reducing sales and marketing
expense by $48 million and increasing cost of net revenue by a
corresponding amount. There is no impact to operating income or
adjusted EBITDA.
 
  Three Months Ended   Three Months Ended
June 30, 2018 June 30, 2018
GAAP Income Non-GAAP Non-recurring Normalized
Statement Adjustments Adjustments Non-GAAP
Net revenue
Shutterfly consumer $ 165,003 $ 165,003
Lifetouch 228,560 33,351 [1] 261,911
Shutterfly business solutions 49,809     49,809  
Total net revenue 443,372 33,351 476,723
Cost of net revenue 233,228   (10,931 ) [2] 222,297  
Gross profit 210,144   44,282 254,426  
Gross profit margin 47.4

 %

53.4 %
 
Operating expenses
Technology and development 44,420 44,420
Sales and marketing 130,643 130,643
General and administrative 55,040 (8,000 ) [3] 47,040
Restructuring 2,952   (2,952 ) [4]  
Total operating expenses 233,055   (10,952 ) 222,103  
Operating (loss) income (22,911 ) 32,323
Operating margin (5.2 )% 6.8 %
 
Interest expense (17,769 ) (17,769 )
Interest and other income, net 1,561   1,561  
(Loss) income before income taxes (39,119 ) 44,282 10,952 16,115
(Provision for) benefit from income taxes 12,607   (2,564 )
Net (loss) income $ (26,512 ) $ 13,551  
 
Net (loss) income per share:
Basic $ (0.80 ) $ 0.41  
Diluted $ (0.80 ) $ 0.38  
 
Weighted-average shares outstanding
Basic 33,234   33,234  
Diluted 33,234   35,775  
 
Operating (loss) income 32,323
Stock-based compensation 11,697
Amortization of intangible assets 12,831
Depreciation 27,546  
Adjusted EBITDA $ 84,397  
Adjusted EBITDA margin 17.7 %
 
Six Months Ended   Six Months Ended
June 30, 2018 June 30, 2018
GAAP Income Non-GAAP Non-recurring Normalized
Statement Adjustments Adjustments Non-GAAP
Net revenue
Shutterfly consumer $ 317,062 $ 317,062
Lifetouch 228,560 33,351 [1] 261,911
Shutterfly business solutions 97,475     97,475  
Total net revenue 643,097 33,351 676,448
Cost of net revenue 359,275   (10,931 ) [2] 348,344  
Gross profit 283,822   44,282 328,104  
Gross profit margin 44.1

 %

48.5

 %

 
Operating expenses
Technology and development 82,924 82,924
Sales and marketing 168,363 168,363
General and administrative 86,604 (12,585 ) [3] 74,019
Restructuring 2,952   (2,952 ) [4]  
Total operating expenses 340,843   (15,537 ) 325,306  
Operating (loss) income (57,021 ) 2,798
Operating margin (8.9 )% 0.4

 %

 
Interest expense (27,402 ) (27,402 )
Interest and other income, net 3,310   3,310  
Loss before income taxes (81,113 ) 44,282 15,537 (21,294 )
Benefit from income taxes 27,436   11,080  
Net loss $ (53,677 ) $ (10,214 )
 
Net loss per share - basic and diluted $ (1.63 ) $ (0.31 )
 
Weighted-average shares outstanding 32,970   32,970  
 
Operating (loss) income 2,798
Stock-based compensation 23,389
Amortization of intangible assets 15,164
Depreciation 50,111  
Adjusted EBITDA $ 91,462  
Adjusted EBITDA margin 13.5

 %

 

[1] Yearbook sales and collections are made throughout the
school year, whereas yearbooks are typically delivered toward the end of
the school year in the second quarter. Business combination accounting
principles require the Company to write down to fair value the deferred
revenue assumed in acquisitions based on the cost to manufacture and
deliver the yearbooks, plus a profit margin. Therefore, GAAP revenue
after an acquisition does not reflect the full amount that would have
been reported if the acquired deferred revenue was not written down to
fair value. The non-GAAP adjustments eliminate the effect of the
deferred revenue write-down. The Company believes these adjustments are
useful to investors as an additional means to reflect revenue and gross
margin trends of the Company's business.

[2] Business combination accounting principles require the
Company to measure acquired inventory at fair value. The fair value of
inventory reflects the acquired company's cost of manufacturing plus a
portion of the expected profit margin. The non-GAAP adjustment to the
Company's cost of net revenue excludes the expected profit margin
component that is recorded under business combination accounting
principles. The Company believes the adjustment is useful to investors
as an additional means to reflect cost of net revenue and gross profit
trends of the Company's business.

[3] Acquisition-related charges for Lifetouch acquisition.

[4] Restructuring charge related to divestiture of iMemories.

 

Appendix 4.1

Shutterfly, Inc.

Reconciliation of Net Income (Loss) to Non-GAAP Net Income
(Loss) and Non-GAAP Net Income (Loss) per Share

(In thousands, except per share amounts)

(Unaudited)

  Three Months Ended   Year Ended
Mar. 31,   Jun. 30,   Sep. 30,   Dec. 31,   Mar. 31,   Jun. 30, Dec. 31,
2017 2017 2017 2017 2018 2018 2017
 
GAAP net income (loss) $ (33,194 ) $ (22,838 ) $ (25,607 ) $ 111,724 $ (27,165 ) $ (26,512 ) $ 30,085
Capital lease termination 8,098 8,098
Restructuring 8,976 4,673 3,317 2,952 16,966
Acquisition-related charges 4,585 8,000
Purchase accounting adjustments 44,282
Tax benefit impact of non-recurring items (3,948 ) (4,829 ) (1,669 ) (1,185 ) (15,171 ) (10,446 )
Benefit from 2017 tax reform legislation       (8,875 )     (8,875 )
Non-GAAP net income (loss) $ (28,166 ) $ (14,896 ) $ (23,959 ) $ 102,849   $ (23,765 ) $ 13,551   $ 35,828  
 
GAAP diluted shares outstanding 33,712   33,579   32,878   33,114   32,702   33,234   34,106  
Non-GAAP diluted shares outstanding 33,712   33,579   32,878   33,114   32,702   35,775   34,106  
 
GAAP net income (loss) per share $ (0.98 ) $ (0.68 ) $ (0.78 ) $ 3.37   $ (0.83 ) $ (0.80 ) $ 0.88  
Non-GAAP net income (loss) per share $ (0.84 ) $ (0.44 ) $ (0.73 ) $ 3.11   $ (0.73 ) $ 0.38   $ 1.05  
 

Appendix 4.2

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, Dec. 31,
2017 2017 2017 2017 2018 2018 2017
 
GAAP net income (loss) $ (33,194 ) $ (22,838 ) $ (25,607 ) $ 111,724 $ (27,165 ) $ (26,512 ) $ 30,085
Interest expense 5,964 5,955 6,699 9,219 9,633 17,769 27,836
Interest and other income, net (189 ) (244 ) (253 ) (794 ) (1,749 ) (1,561 ) (1,481 )
Tax (benefit) provision (22,341 ) (14,713 ) (16,660 ) 58,873 (14,829 ) (12,607 ) 5,160
Depreciation and amortization 27,364 25,957 24,815 25,724 24,898 40,377 103,862
Stock-based compensation 11,505 10,469 10,736 10,863 11,692 11,697 43,573
Capital lease termination 8,098 8,098
Restructuring 8,976 4,673 3,317 2,952 16,966
Acquisition-related charges 4,585 8,000
Purchase accounting adjustments           44,282    
Non-GAAP Adjusted EBITDA $ (1,915 ) $ 17,357   $ 3,047   $ 215,609   $ 7,065   $ 84,397   $ 234,099  
 

Appendix 4.3

Shutterfly, Inc.

Reconciliation of Cash Flow from Operating Activities 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, Dec. 31,
2017 2017 2017 2017 2018 2018 2017
 
Net cash provided by (used in) operating activities $ (72,386 ) $ 13,672 $ (21,945 ) $ 320,183 $ (124,332 ) $ (11,723 ) $ 239,524
Interest expense 5,964 5,955 6,699 9,219 9,633 17,769 27,836
Interest and other income, net (189 ) (244 ) (253 ) (794 ) (1,749 ) (1,561 ) (1,481 )
Tax (benefit) provision (22,341 ) (14,713 ) (16,660 ) 58,873 (14,829 ) (12,607 ) 5,160
Changes in operating assets and liabilities 92,194 (2,565 ) 35,336 (159,600 ) 142,368 53,888 (34,634 )
Other adjustments (6,265 ) 5,377 (2,575 ) (13,026 ) (8,611 ) (15,851 ) (16,488 )
Cash restructuring 1,108 1,777 2,445 754 2,200 6,084
Capital lease termination 8,098 8,098
Acquisition-related charges 4,585 8,000
Purchase accounting adjustments           44,282    
Non-GAAP Adjusted EBITDA $ (1,915 ) $ 17,357   $ 3,047   $ 215,609   $ 7,065   $ 84,397   $ 234,099  
 

Appendix 5.1

Shutterfly, Inc.

Reconciliation of Forward-Looking Guidance for Non-GAAP
Financial Measures

(In millions, except per share amounts)

(Unaudited)

 
Forward-Looking Guidance [1]
GAAP   Non-GAAP
Twelve Months Ending
December 31, 2018
Non-GAAP Adjustment Twelve Months Ending

December 31, 2018

Low   High Low   High
 
Net revenue $1,972 $2,027 $38 [2] $2,010 $2,065
Shutterfly Consumer net revenue $1,000 $1,025 $1,000 $1,025
Lifetouch net revenue $752 $772 $38 [2] $790 $810
SBS net revenue $220 $230 $220 $230
 
Cost of net revenue $942 $966 ($11 ) [3] $931 $956
Gross profit $1,030 $1,060 $49 [2][3] $1,079 $1,109
Gross profit margin 52.2 % 52.3 % 53.7 % 53.7 %
 
Operating income $146 $166 $49 [2][3] $196 $215
Operating margin 7.4 % 8.2 % 9.7 % 10.4 %
 
Operating income $146 $166 $49 [2][3] $196 $215
Stock-based compensation $51 $51
Amortization of intangible assets $39 $39
Depreciation $114   $114  
Adjusted EBITDA $400   $420  
Adjusted EBITDA margin 19.9 % 20.3 %
 
Capital expenditures $100 $100 $100 $100
Capital expenditures as % of net revenue 5.1 % 4.9 % 5.0 % 4.8 %
 
Tax rate [4] 21.0 % 21.0 % 21.0 % 21.0 %
 
Net income per share
Basic and Diluted $1.94 $2.39 $1.11 $3.05 $3.50
 
Weighted average shares
Basic and Diluted 35.0 35.0 35.0 35.0

 

[1] Excludes restructuring and acquisition-related charges.

[2] Yearbook sales and collections are made throughout the
school year, whereas yearbooks are typically delivered toward the end of
the school year in the second quarter. Business combination accounting
principles require the Company to write down to fair value the deferred
revenue assumed in acquisitions based on the cost to manufacture and
deliver the yearbooks, plus a profit margin. Therefore, GAAP revenue
after an acquisition does not reflect the full amount that would have
been reported if the acquired deferred revenue was not written down to
fair value. The non-GAAP adjustments eliminate the effect of the
deferred revenue write-down. The Company believes these adjustments are
useful to investors as an additional means to reflect revenue and gross
margin trends of the Company's business.

[3] Business combination accounting principles require the
Company to measure acquired inventory at fair value. The fair value of
inventory reflects the acquired company's cost of manufacturing plus a
portion of the expected profit margin. The non-GAAP adjustment to the
Company's cost of net revenue excludes the expected profit margin
component that is recorded under business combination accounting
principles. The Company believes the adjustment is useful to investors
as an additional means to reflect cost of net revenue and gross margin
trends of the Company's business.

[4] Effective tax rate assumes windfall from stock-based
compensation for shares expected to vest for the remainder of 2018,
based on the Company's average stock price over the last three months.

 

Appendix 5.2

Shutterfly, Inc.

Supplemental Information on Forward-Looking Guidance

(In millions, except per share amounts)

(Unaudited)

  Actuals   Non-GAAP Quarterly Midpoint Targets[1]  
Three Months Ended Three Months Ending Twelve Months Ending
March 31, 2018   June 30, 2018 September 30, 2018   December 31, 2018 December 31, 2018
 
Net revenue $200 $477 $379 $982 $2,038
Shutterfly Consumer net revenue $152 $165 $133 $563 $1,013
Lifetouch net revenue $262 $190 $348 $800
SBS net revenue $48 $50 $56 $72 $225
 
Gross profit $74 $254 $163 $603 $1,093
Gross profit margin 36.9 % 53.4 % 43.0 % 61.4 % 53.7 %
 
Operating income (loss) ($30 ) $32 ($92 ) $294

$205

Operating margin (14.8 %)

6.8

% (24.2 %) 29.9 %

10.1

%
 
Operating income (loss) ($30 ) $32 ($92 ) $294

$205

Stock-based compensation $12 $12 $13 $15 $51
Amortization of intangible assets $2 $12 $12 $13 $39
Depreciation $23   $28   $31   $33   $114  
Adjusted EBITDA $7   $84   ($36 ) $354   $410  
Adjusted EBITDA margin 3.5 % 17.7 % (9.4 %) 36.1 % 20.1 %
 
Tax rate 36.5 % 15.9 % 24.2 % 24.3 % 21.0 %
 
Net income (loss) per share
Basic ($0.73 ) ($2.44 )
Diluted $0.38 $5.89 $3.27
 
Weighted average shares
Basic 32.7 33.4
Diluted 35.8 35.1 35.0

 

[1] Sum of quarterly targets equal the mid-point of 2018
annual non-GAAP guidance. Excludes restructuring and acquisition-related
charges.

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