SFLY
$70.53
Shutterfly
$.38
.54%
Earnings Details
2nd Quarter June 2018
Tuesday, August 7, 2018 4:02:00 PM
Tweet Share Watch
Summary

Shutterfly Raises 2018 Guidance

Shutterfly (SFLY) reported 2nd Quarter June 2018 earnings of $0.38 per share on revenue of $443.4 million. The consensus estimate was a loss of $0.43 per share on revenue of $438.3 million. Revenue grew 112.1% on a year-over-year basis.

The company said it expects a third quarter loss of approximately $2.44 per share on revenue of approximately $379.0 million. The current consensus estimate is a loss of $1.96 per share on revenue of $385.7 million for the quarter ending September 30, 2018. However, the company also said it expects 2018 earnings of $3.05 to $3.50 per share on revenue of $2.01 billion to $2.065 billion. The company's previous guidance was earnings of $2.83 to $3.28 per share on revenue of $2.01 billion to $2.06 billion and the current consensus earnings estimate is $3.03 per share on revenue of $2.02 billion for the year ending December 31, 2018.

Shutterfly Inc manufacturers and digitally retails personalized products and services offered through a family of lifestyle brands.

Results
Reported Earnings
$0.38
Earnings Whisper
-
Consensus Estimate
($0.43)
Reported Revenue
$443.4 Mil
Revenue Estimate
$438.3 Mil
Growth
Earnings Growth
Revenue Growth
Power Rating
Grade
Earnings Release

Shutterfly Announces Second Quarter 2018 Financial Results

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

Shutterfly, Inc.
Investor Relations:
Shawn Tabak, 650-610-6026
stabak@shutterfly.com
or
Media Relations:
Sondra Harding, 650-610-5129
sharding@shutterfly.com

Source: Shutterfly, Inc.