SFLY
$51.07
Shutterfly
($.13)
(.25%)
Earnings Details
3rd Quarter September 2018
Tuesday, October 30, 2018 4:02:00 PM
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Summary

Shutterfly Lowers Guidance

Shutterfly (SFLY) reported a 3rd Quarter September 2018 loss of $2.12 per share on revenue of $368.8 million. The consensus estimate was a loss of $2.42 per share on revenue of $377.1 million. Revenue grew 88.7% on a year-over-year basis.

The company said it expects fourth quarter earnings of approximately $5.36 per share on revenue of approximately $970.0 million. The company's previous guidance was earnings of $5.89 per share on revenue of $982.0 million and the current consensus earnings estimate is $5.92 per share on revenue of $979.8 million for the quarter ending December 31, 2018.

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

Results
Reported Earnings
($2.12)
Earnings Whisper
-
Consensus Estimate
($2.42)
Reported Revenue
$368.8 Mil
Revenue Estimate
$377.1 Mil
Growth
Earnings Growth
Revenue Growth
Power Rating
Grade
Earnings Release

Shutterfly Announces Third Quarter 2018 Financial Results

REDWOOD CITY, Calif.--(BUSINESS WIRE)-- Shutterfly, Inc. (NASDAQ:SFLY), the leading retailer and manufacturing platform dedicated to helping capture, preserve, and share life’s important moments, today announced financial results for the third quarter ended September 30, 2018.

“With the closing of the Lifetouch acquisition earlier this year, Shutterfly, Inc. now encompasses a portfolio of large, industry-leading businesses with loyal customers and significant cash flow,” said Christopher North, President and Chief Executive Officer. “Thanks to the Lifetouch acquisition, our non-GAAP net revenues increased 91% year-over-year. We have large opportunities to create shareholder value through organic growth, by realizing key synergies between Lifetouch and Shutterfly, through M&A that leverages our manufacturing and technology platforms, as well as through return of capital.”

“Our results in the third quarter were mixed, with strong performance in Lifetouch and solid results in SBS offset by disappointing performance in Shutterfly Consumer. Coming out of the quarter, we’ve identified clear opportunities to improve the consistency of our results in Shutterfly Consumer. At the same time, we made good progress against key initiatives including a good start to the Lifetouch Fall picture day peak season. Across Shutterfly Consumer, we launched new categories and products, rolled out significant new mobile app features and simplified product creation experiences, and put in place strong preparations for Q4.”

Third Quarter 2018 Financial Highlights

GAAP net revenue was $369 million. Shutterfly Consumer segment net revenue totaled $127 million, a 6% year-over-year decrease. Lifetouch segment net revenue was $183 million. Shutterfly Business Solutions segment net revenue totaled $59 million, a 2% year-over-year decrease. GAAP operating loss totaled $87 million. Net loss was $74 million, or a loss of $2.20 per share.

Non-GAAP net revenue, excluding purchase accounting adjustments related to the deferred revenue write-down, was $373 million, a 91% year-over-year increase driven by the Lifetouch acquisition. Non-GAAP Lifetouch segment net revenue was $187 million. Normalized operating loss, excluding acquisition-related charges and purchase accounting adjustments related to the deferred revenue write-down, was $80 million. Normalized net loss was $71 million. Adjusted EBITDA loss was $26 million.

Today the Company announced it will be closing two Lifetouch facilities in 2019; Loves Park, Illinois and Bloomington, Minnesota, and will consolidate this volume into existing Shutterfly facilities. Given the adjacent peak periods in its Shutterfly Consumer and Lifetouch divisions, the Company expects these facility closures to reduce its reliance on temporary labor while improving the utilization of its existing assets.

Business Outlook[1][2]

The Company is revising its guidance on net revenue and adjusted EBITDA, and is updating non-GAAP quarterly target for the fourth quarter of 2018 to the following (in millions, except per share amounts):

 
     

Prior Non-GAAP Midpoint
Target as of
August 7, 2018

   

Updated Non-GAAP
Midpoint Target

Three Months Ending
December 31, 2018
Change Three Months Ending
December 31, 2018
 
Net revenue $982 ($13) $970
Shutterfly Consumer net revenue $563 ($13) $550
Lifetouch net revenue $348 $3 $351
SBS net revenue $72 ($3) $69
 
Gross profit margin 61.4% 61.6%
 
Operating income $294 ($21) $273
Adjusted EBITDA $354 ($19) $335
 
Earnings per share $5.89 ($0.53) $5.36
 
[1] Excludes restructuring, acquisition-related charges and purchase accounting adjustments related to the deferred revenue write-down and inventory write-up.
[2] Excludes any severance or retention related to facility closures.
 

Notes to the Third 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 continues to report net revenue and cost of net revenue, consistent with previous reporting, but now it also includes 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 financial guidance herein replaces any of the Company’s previously issued financial guidance which should no longer be relied upon.

Third Quarter Conference Call

Management will review the third quarter 2018 financial results and its expectations for the fourth quarter and full year 2018 on a conference call on Tuesday, October 30, 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 (844) 763-8274 or (412) 717-9224, 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, November 13, 2018. To hear the replay, please dial (877) 344-7529 or (412) 317-0088 and enter access code 10125033.

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 cash flow generation in each of the Company's three segments; the Company's expectations of opportunities to create shareholder value through organic growth through realizing synergies, M&A, and return of capital; the Company's expectations about improving the consistency of results in Shutterfly Consumer; the Company’s expectations around the performance of the Lifetouch Fall picture day peak season; expectations around the impact of facility closures on reducing reliance on temporary labor and improving utilization of existing assets; and the Company's business outlook for the full year 2018. 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; refining our promotional strategies; 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 personalized products and communications. Founded in 1999, Shutterfly, Inc. has three divisions: Shutterfly Consumer, Lifetouch, and Shutterfly Business Solutions. Shutterfly Consumer and Lifetouch help consumers capture, preserve, and share life’s important moments through professional and personal photography, and personalized products. The Shutterfly brand brings photos to life in photo books, gifts, home décor, and cards and stationery. Lifetouch is the national leader in school photography, built on the enduring tradition of “Picture Day,” and also serves families through portrait studios and other partnerships. Shutterfly Business Solutions delivers digital printing services that enable efficient and effective customer engagement through personalized communications. 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
September 30,
  Nine Months Ended
September 30,
2018   2017 2018   2017
 
Net revenue $ 368,757 $ 195,443 $ 1,011,853 $ 596,447
Cost of net revenue 224,738 131,108 584,012 365,432
Restructuring 39 1,475
Gross profit 144,019 64,296 427,841 229,540
Operating expenses:
Technology and development 44,735 39,614 127,659 124,968
Sales and marketing 135,375 33,331 303,737 119,205
General and administrative[1] 50,445 23,894 137,050 79,200
Capital lease termination 8,098
Restructuring[2] 3,278 2,952 15,491
Total operating expenses 230,555 100,117 571,398 346,962
Loss from operations (86,536) (35,821) (143,557) (117,422)
Interest expense (16,660) (6,699) (44,063) (18,617)
Interest and other income, net 856 253 4,166 687
Loss before income taxes (102,340) (42,267) (183,454) (135,352)
Benefit from income taxes 28,797 16,660 56,234 53,713
Net loss $ (73,543) $ (25,607) $ (127,220) $ (81,639)
 
Net loss per share - basic and diluted $ (2.20) $ (0.78) $ (3.84) $ (2.45)
 
Weighted-average shares outstanding - basic and diluted 33,470 32,878 33,139 33,363
 
Stock-based compensation is allocated as follows:
Cost of net revenue $ 909 $ 1,041 $ 2,851 $ 3,284
Technology and development 2,545 2,512 7,546 7,388
Sales and marketing 3,057 2,864 9,502 9,017
General and administrative 5,420 4,319 15,422 13,021
Restructuring 814
$ 11,931 $ 10,736 $ 35,321 $ 33,524
 
Depreciation and amortization is allocated as follows:
Cost of net revenue $ 24,533 $ 14,681 $ 61,918 $ 44,733
Technology and development 6,125 6,634 19,841 21,522
Sales and marketing 9,645 2,484 21,215 8,271
General and administrative 1,667 1,016 4,271 3,611
Restructuring 665 5,999
$ 41,970 $ 25,480 $ 107,245 $ 84,136
 

[1] The General and administrative expenses of $50 million and $137 million for the three and nine months ended September 30, 2018, respectively, include $2.4 million and $15 million, respectively, of acquisition-related charges.

[2] The exit of iMemories business resulted in restructuring charges of $3.0 million for the nine months ended September 30, 2018.

 

 

Appendix 1.2
Shutterfly, Inc.
Consolidated Balance Sheets - GAAP
(In thousands, except par value amounts)
(Unaudited)

 
      September 30, 2018   December 31, 2017
ASSETS
Current assets:
Cash and cash equivalents $ 165,929 $ 489,894
Short-term investments 38,915 178,021
Accounts receivable, net 75,224 82,317
Inventories 18,081 11,019
Prepaid expenses and other current assets 144,853 41,383
Total current assets 443,002 802,634
Long-term investments 18,626 9,242
Property and equipment, net 388,862 266,860
Intangible assets, net 328,756 29,671
Goodwill 842,917 408,975
Other assets 24,253 17,418
Total assets $ 2,046,416 $ 1,534,800
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt $ 14,407 $ 297,054
Accounts payable 33,271 91,473
Accrued liabilities 159,783 159,248
Deferred revenue 110,736 24,649
Total current liabilities 318,197 572,424
Long-term debt 1,092,084 292,457
Other liabilities 148,932 119,195
Total liabilities 1,559,213 984,076
Stockholders’ equity:
Common stock, $0.0001 par value; 100,000 shares authorized; 33,534 and 32,297 shares issued and outstanding on September 30, 2018 and December 31, 2017, respectively 3 3
Additional paid-in capital 1,052,383 996,301
Accumulated other comprehensive income 5,193 1,778
Accumulated deficit (570,376) (447,358)
Total stockholders' equity 487,203 550,724
Total liabilities and stockholders' equity $ 2,046,416 $ 1,534,800
 
 

Appendix 1.3
Shutterfly, Inc.
Consolidated Statements of Cash Flows - GAAP
(In thousands)
(Unaudited)

 
      Nine Months Ended
September 30,
2018   2017
Cash flows from operating activities:
Net loss $ (127,220) $ (81,639)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 79,522 66,367
Amortization of intangible assets 27,723 11,770
Amortization of debt discount and issuance costs 7,901 11,365
Repayment of convertible senior notes attributable to debt discount[1] (63,510)
Stock-based compensation 35,321 32,710
(Gain) loss on disposal of property and equipment (175) 705
Deferred income taxes 17,656 (8,607)
Restructuring 752 11,636
Other 208
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable 14,121 (4,103)
Inventories 12,795 (1,782)
Prepaid expenses and other assets (73,462) (34,064)
Accounts payable (68,060) (35,819)
Accrued and other liabilities (36,096) (49,198)
Net cash used in operating activities (172,524) (80,659)
Cash flows from investing activities:
Acquisition of business, net of cash acquired (889,587)
Purchases of property and equipment (28,984) (22,960)
Capitalization of software and website development costs (34,602) (25,977)
Purchases of investments (9,523) (44,381)
Proceeds from the maturities of investments 193,399 28,456
Proceeds from the sales of investments 46,879
Proceeds from sale of property and equipment 2,088 21,232
Net cash used in investing activities (720,330) (43,630)
Cash flows from financing activities:
Proceeds from issuance of common stock upon exercise of stock options 19,698 626
Repurchases of common stock (80,000)
Principal payments of borrowings[1] (243,018)
Principal payments of capital lease and financing obligations (14,222) (24,813)
Payment of debt issuance costs (4,789)
Proceeds from borrowings, net of issuance costs 806,652
Net cash provided by (used in) financing activities 569,110 (108,976)
Effect of exchange rate changes on cash and cash equivalents (221)
Net decrease in cash and cash equivalents (323,965) (233,265)
Cash and cash equivalents, beginning of period 489,894 289,224
Cash and cash equivalents, end of period $ 165,929 $ 55,959
 
Supplemental schedule of non-cash investing / financing activities:
Net (decrease) increase in accrued purchases of property and equipment $ (1,450) $ 4,263
Net increase (decrease) in accrued capitalized software and website development costs 241 (161)
Stock-based compensation capitalized with software and website development costs 1,065 1,084
Property and equipment acquired under capital leases 5,611 18,224
 

[1] During the third quarter of 2018, the Company identified certain amounts attributable to the repayment of accreted interest on its convertible senior notes that should have been classified as cash used in operating activities instead of cash used in financing activities. Such error resulted in a $64 million understatement of net cash used in operating activities with a corresponding understatement of cash provided by financing activities in the statement of cash flows for the six months ended June 30, 2018. The statement of cash flows for the nine months ended September 30, 2018 reflects the appropriate classification of such repayment between financing and operating activities.

 
 

Appendix 1.4
Shutterfly, Inc.
Shutterfly Consumer Metrics Disclosure
(Unaudited)

 
      Three Months Ended
September 30,
2018   2017
Shutterfly Consumer Metrics
Customers [1] 2,776,523 2,969,451
year-over-year change (6) %
 
Orders 4,274,418 4,861,262
year-over-year change (12) %
 
Average order value [2] $29.69 $27.86
year-over-year change 7 %
 

[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,
2017
  Jun. 30,
2017
  Sep. 30,
2017
  Dec. 31,
2017
  Mar. 31,
2018
  Jun. 30,
2018
  Sep. 30,
2018
Dec. 31,
2017
 
Shutterfly Consumer net revenue
Shutterfly brand $ 123,903 $ 139,908 $ 115,883 $ 464,547 $ 142,664 $ 154,181 $ 115,464 $ 844,242
Tiny Prints Boutique 1,942 48,932 2,103 1,397 1,490 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 9,934 33,295
Total $ 160,645 $ 179,090 $ 135,418 $ 521,809 $ 152,059 $ 165,003 $ 126,888 $ 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 continues to report net revenue and cost of net revenue, consistent with previous reporting, but now it also includes 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
September 30,
  Nine Months Ended
September 30,
2018   2017 2018   2017
Shutterfly Consumer:
Net revenue $ 126,888 $ 135,418 $ 443,950 $ 475,153
Cost of net revenue 81,031 81,439 251,940 263,345
Technology and development 29,971 32,712 91,930 104,679
Sales and marketing 28,819 26,811 89,500 98,955
Credit card fees 3,527 3,766 12,075 12,709
Margin[1] $ (16,460) $ (9,310) $ (1,495) $ (4,535)
Margin % (13.0) % (6.9) % (0.3) % (1.0) %
 
Lifetouch[2]:
Net revenue[3] $ 187,071 $ $ 448,982 $
Cost of net revenue[4] 94,188 185,336
Technology and development 7,142 14,251
Sales and marketing 92,693 179,653
Credit card fees 3,316 4,481
Margin[1] $ (10,268) $ $ 65,261 $
Margin % (5.5) % — % 14.5 % — %
 
Shutterfly Business Solutions:
Net revenue $ 58,756 $ 60,025 $ 156,230 $ 121,294
Cost of net revenue 45,973 47,520 127,493 95,256
Technology and development 3,190 4,390 10,184 12,901
Sales and marketing 1,473 1,193 4,542 3,032
Margin[1] $ 8,120 $ 6,922 $ 14,011 $ 10,105
Margin % 13.8 % 11.5 % 9.0 % 8.3 %
 
Consolidated Segments:
Net revenue[3] $ 372,715 $ 195,443 $ 1,049,162 $ 596,447
Cost of net revenue[4] 221,192 128,959 564,769 358,601
Technology and development 40,303 37,102 116,365 117,580
Sales and marketing 122,985 28,004 273,695 101,987
Credit card fees 6,843 3,766 16,556 12,709
Margin[1] $ (18,608) $ (2,388) $ 77,777 $ 5,570
Margin % (5.0) % (1.2) % 7.4 % 0.9 %
 
[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 non-recurring charges.
[2] The Company acquired Lifetouch on April 2, 2018.
[3] Yearbook sales and collections for the Lifetouch segment are made throughout the school year, whereas yearbooks are typically delivered toward the end of the school year in the second quarter of the fiscal year. Business combination accounting principles require the Company to record the assumed deferred revenue at fair value on the acquisition date measured based on the cost to manufacture and deliver the yearbooks, plus a profit margin. Segment reporting includes this purchase accounting adjustment which primarily relates to yearbook sales in net revenue for the Lifetouch segment.
[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. Segment reporting excludes this purchase accounting adjustment from cost of net revenue for the Lifetouch segment.
 

The following table reconciles operating segment margin to total operating 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
September 30,
  Nine Months Ended
September 30,
2018   2017 2018   2017
 
Total margin for operating segments $ (18,608) $ (2,388) $ 77,777 $ 5,570
Purchase accounting deferred revenue adjustment[1] (3,958) (37,309)
Purchase accounting inventory adjustment[2] (10,931)
Corporate expenses[3] (37,088) (15,810) (92,121) (52,634)
Amortization of intangible assets (12,559) (3,570) (27,723) (11,770)
Stock-based compensation for operating segments (11,931) (10,736) (35,321) (33,524)
Restructuring (3,317) (2,952) (16,966)
Acquisition-related charges (2,392) (14,977)
Capital lease termination (8,098)
Operating loss $ (86,536) $ (35,821) $ (143,557) $ (117,422)
Operating margin (23.2) % (18.3) % (13.7) % (19.7) %
 
 
 
Total net revenue for all operating segments $ 372,715 $ 195,443 $ 1,049,162 $ 596,447
Purchase accounting deferred revenue adjustment[1] (3,958) (37,309)
Total net revenue $ 368,757 $ 195,443 $ 1,011,853 $ 596,447
 
Total cost of net revenue for all operating segments $ 221,192 $ 128,959 $ 564,769 $ 358,601
Purchase accounting inventory adjustment[2] 10,931
Stock-based compensation for cost of net revenue 909 1,041 2,851 3,284
Amortization of intangible assets for cost of net revenue 2,637 1,108 5,461 3,547
Total cost of net revenue $ 224,738 $ 131,108 $ 584,012 $ 365,432
 
[1] Yearbook sales and collections for the Lifetouch segment are made throughout the school year, whereas yearbooks are typically delivered toward the end of the school year in the second quarter of the fiscal year. Business combination accounting principles require the Company to record the assumed deferred revenue at fair value on the acquisition date measured based on the cost to manufacture and deliver the yearbooks, plus a profit margin. Segment reporting includes this purchase accounting adjustment which primarily relates to yearbook sales in net revenue for the Lifetouch segment.
[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. Segment reporting excludes this purchase accounting adjustment from cost of net revenue for the Lifetouch segment.
[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)

 
      Three Months Ended
September 30, 2018
GAAP Income
Statement
    Non-GAAP
Adjustments
  Non-recurring
Adjustments
    Three Months Ended
September 30, 2018
Normalized
Non-GAAP
Net revenue:
Shutterfly consumer $ 126,888 $ 126,888
Lifetouch 183,113 3,958 [1] 187,071
Shutterfly business solutions 58,756   58,756
Total net revenue 368,757 3,958 372,715
Cost of net revenue 224,738   224,738
Gross profit 144,019 3,958 147,977
Gross profit margin 39.1 % 39.7 %
 
Operating expenses:
Technology and development 44,735 44,735
Sales and marketing 135,375 135,375
General and administrative 50,445 (2,392) [3] 48,053
Total operating expenses 230,555 (2,392) 228,163
Operating loss (86,536) (80,186)
Operating margin (23.5) % (21.5) %
 
Interest expense (16,660) (16,660)
Interest and other income, net 856 856
Loss before income taxes (102,340) 3,958 2,392 (95,990)
Benefit from income taxes 28,797 25,194
Net loss $ (73,543) $ (70,796)
 
Net loss per share - basic and diluted $ (2.20) $ (2.12)
 
Weighted-average shares outstanding - basic and diluted 33,470 33,470
 
Operating loss (80,186)
Stock-based compensation 11,931
Amortization of intangible assets 12,559
Depreciation 29,411
Adjusted EBITDA $ (26,285)
Adjusted EBITDA margin (7.1) %
 
 
      Nine Months Ended
September 30, 2018
GAAP Income
Statement
    Non-GAAP
Adjustments
  Non-recurring
Adjustments
    Nine Months Ended
September 30, 2018
Normalized
Non-GAAP
Net revenue:
Shutterfly consumer $ 443,950 $ 443,950
Lifetouch 411,673 37,309 [1] 448,982
Shutterfly business solutions 156,230   156,230
Total net revenue 1,011,853 37,309 1,049,162
Cost of net revenue 584,012 (10,931) [2] 573,081
Gross profit 427,841 48,240 476,081
Gross profit margin 42.3 % 45.4 %
 
Operating expenses:
Technology and development 127,659 127,659
Sales and marketing 303,737 303,737
General and administrative 137,050 (14,977) [3] 122,073
Restructuring 2,952 (2,952) [4]
Total operating expenses 571,398 (17,929) 553,469
Operating loss (143,557) (77,388)
Operating margin (14.2) % (7.4) %
 
Interest expense (44,063) (44,063)
Interest and other income, net 4,166 4,166
Loss before income taxes (183,454) 48,240 17,929 (117,285)
Benefit from income taxes 56,234 36,274
Net loss $ (127,220) $ (81,011)
 
Net loss per share - basic and diluted $ (3.84) $ (2.44)
 
Weighted-average shares outstanding - basic and diluted 33,139 33,139
 
Operating loss (77,388)
Stock-based compensation 35,321
Amortization of intangible assets 27,723
Depreciation 79,522
Adjusted EBITDA $ 65,178
Adjusted EBITDA margin 6.2 %
 
[1] Yearbook sales and collections for the Lifetouch segment are made throughout the school year, whereas yearbooks are typically delivered toward the end of the school year in the second quarter of the fiscal year. Business combination accounting principles require the Company to record the assumed deferred revenue at fair value on the acquisition date measured based on the cost to manufacture and deliver the yearbooks, plus a profit margin. Segment reporting includes this purchase accounting adjustment which primarily relates to yearbook sales in net revenue for the Lifetouch segment.
[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. Segment reporting excludes this purchase accounting adjustment from cost of net revenue for the Lifetouch segment.
[3] Acquisition-related charges for Lifetouch acquisition.
[4] Restructuring charge related to the exit 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,
2017
  Jun. 30,
2017
  Sep. 30,
2017
  Dec. 31,
2017
  Mar. 31,
2018
  Jun. 30,
2018
  Sep. 30,
2018
Dec. 31,
2017
 
GAAP net income (loss) $ (33,194) $ (22,838) $ (25,607) $ 111,724 $ (27,165) $ (26,512) $ (73,543) $ 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 2,392
Purchase accounting adjustments 44,282 3,958
Tax benefit impact of non-recurring items (3,948) (4,829) (1,669) (1,185) (15,171) (3,603) (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 $ (70,796) $ 35,828
 
GAAP diluted shares outstanding 33,712 33,579 32,878 33,114 32,702 33,234 33,470 34,106
Non-GAAP diluted shares outstanding 33,712 33,579 32,878 33,114 32,702 35,775 33,470 34,106
 
GAAP net income (loss) per share $ (0.98) $ (0.68) $ (0.78) $ 3.37 $ (0.83) $ (0.80) $ (2.20) $ 0.88
Non-GAAP net income (loss) per share $ (0.84) $ (0.44) $ (0.73) $ 3.11 $ (0.73) $ 0.38 $ (2.12) $ 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,
2017
  Jun. 30,
2017
  Sep. 30,
2017
  Dec. 31,
2017
  Mar. 31,
2018
  Jun. 30,
2018
  Sep. 30,
2018
Dec. 31,
2017
 
GAAP net income (loss) $ (33,194) $ (22,838) $ (25,607) $ 111,724 $ (27,165) $ (26,512) $ (73,543) $ 30,085
Interest expense 5,964 5,955 6,699 9,219 9,633 17,769 16,660 27,836
Interest and other income, net (189) (244) (253) (794) (1,749) (1,561) (856) (1,481)
Tax (benefit) provision (22,341) (14,713) (16,660) 58,873 (14,829) (12,607) (28,797) 5,160
Depreciation and amortization 27,364 25,957 24,815 25,724 24,898 40,377 41,970 103,862
Stock-based compensation 11,505 10,469 10,736 10,863 11,692 11,697 11,931 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 2,392
Purchase accounting adjustments 44,282 3,958
Non-GAAP Adjusted EBITDA $ (1,915) $ 17,357 $ 3,047 $ 215,609 $ 7,065 $ 84,397 $ (26,285) $ 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,
2017
  Jun. 30,
2017
  Sep. 30,
2017
  Dec. 31,
2017
  Mar. 31,
2018
  Jun. 30,
2018 [1]
  Sep. 30,
2018
Dec. 31,
2017
 
Net cash provided by (used in) operating activities $ (72,386) $ 13,672 $ (21,945) $ 320,183 $ (124,332) $ (75,233) $ 27,041 $ 239,524
Interest expense 5,964 5,955 6,699 9,219 9,633 17,769 16,660 27,836
Interest and other income, net (189) (244) (253) (794) (1,749) (1,561) (856) (1,481)
Tax (benefit) provision (22,341) (14,713) (16,660) 58,873 (14,829) (12,607) (28,797) 5,160
Changes in operating assets and liabilities 92,194 (2,565) 35,336 (159,600) 142,368 53,888 (45,554) (34,634)
Other adjustments (6,265) 5,377 (2,575) (13,026) (8,611) 47,659 (1,129) (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 2,392
Purchase accounting adjustments 44,282 3,958
Non-GAAP Adjusted EBITDA $ (1,915) $ 17,357 $ 3,047 $ 215,609 $ 7,065 $ 84,397 $ (26,285) $ 234,099
 
[1] During the third quarter of 2018, the Company identified certain amounts attributable to the repayment of accreted interest on its convertible senior notes that were misclassified within the statement of cash flows. This misclassification resulted in a $64 million understatement of net cash used in operating activities with a corresponding understatement of cash provided by financing activities for the second quarter of 2018. The quarterly amounts in the above table have been revised to appropriately reflect such repayment of accreted interest in cash used in operating activities during the second quarter of 2018.
 
 

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
Three Months Ending
December 31, 2018

Non-GAAP
Adjustment

Three Months Ending
December 31, 2018

Low   High Low   High
 
Net revenue $943 $993 $2 [2] $945 $995
Shutterfly Consumer net revenue $540 $560 $540 $560
Lifetouch net revenue $339 $359 $2 [2] $341 $361
SBS net revenue $64 $74 $64 $74
 
Cost of net revenue $363 $382 $363 $382
Gross profit $580 $611 $2 [2] $582 $613
Gross profit margin 61.5 % 61.5 % 61.6 % 61.6 %
 
Operating income $261 $281 $2 [2] $263 $283
Operating margin 27.6 % 28.3 % 27.8 % 28.4 %
 
Operating income $261 $281 $2 [2] $263 $283
Stock-based compensation $16 $16
Amortization of intangible assets $11 $11
Depreciation $35 $35
Adjusted EBITDA $325 $345
Adjusted EBITDA margin 34.4 % 34.7 %
 
Tax rate [4] 26.1 % 25.7 % 26.1 % 25.7 %
 
Net income per share
Basic and Diluted $5.09 $5.54 $0.05 $5.14 $5.59
 
Weighted average shares
Basic and Diluted 34.8 34.8 34.8 34.8
 
 
      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 $1,954 $2,004 $40 [2] $1,994 $2,044
Shutterfly Consumer net revenue $984 $1,004 $984 $1,004
Lifetouch net revenue $750 $770 $40 [2] $790 $810
SBS net revenue $220 $230 $220 $230
 
Cost of net revenue $947 $966 ($11) [3] $936 $955
Gross profit $1,007 $1,038 $51 [2][3] $1,058 $1,089
Gross profit margin 51.5 % 51.8 % 53.1 % 53.3 %
 
Operating income $135 $155 $51 [2][3] $185 $205
Operating margin 6.9 % 7.7 % 9.3 % 10.1 %
 
Operating income $135 $155 $51 [2][3] $185 $205
Stock-based compensation $51 $51
Amortization of intangible assets $39 $39
Depreciation $114 $114
Adjusted EBITDA $390 $410
Adjusted EBITDA margin 19.6 % 20.1 %
 
Capital expenditures $100 $100 $100 $100
Capital expenditures as % of net revenue 5.1 % 5.0 % 5.0 % 4.9 %
 
Tax rate [4] 21.5 % 21.5 % 21.5 % 21.5 %
 
Net income per share
Basic and Diluted $1.66 $2.11 $1.14 $2.80 $3.25
 
Weighted average shares
Basic and Diluted 35.0 35.0 35.0 35.0
 
[1] Excludes restructuring, acquisition-related charges, and any severance or retention related to facility closures.
[2] Yearbook sales and collections for the Lifetouch segment are made throughout the school year, whereas yearbooks are typically delivered toward the end of the school year in the second quarter of the fiscal year. Business combination accounting principles require the Company to record the assumed deferred revenue at fair value on the acquisition date measured based on the cost to manufacture and deliver the yearbooks, plus a profit margin. Management reporting includes this purchase accounting adjustment which primarily relates to yearbook sales in net revenue for the Lifetouch segment.
[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. Management reporting excludes this purchase accounting adjustment from cost of net revenue for the Lifetouch segment.
[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)

 
      Actual  

Non-GAAP
Quarterly
Midpoint
Target[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 $373 $970 $2,019
Shutterfly Consumer net revenue $152 $165 $127 $550 $994
Lifetouch net revenue $262 $187 $351 $800
SBS net revenue $48 $50 $59 $69 $225
 
Gross profit $74 $254 $148 $597 $1,074
Gross profit margin 36.9 % 53.4 % 39.7 % 61.6 % 53.2 %
 
Operating income (loss) ($30) $32 ($80) $273 $195
Operating margin (14.8) % 6.8 % (21.5) % 28.1 % 9.7 %
 
Operating income (loss) ($30) $32 ($80) $273 $195
Stock-based compensation $12 $12 $12 $16 $51
Amortization of intangible assets $2 $13 $13 $11 $39
Depreciation $23 $28 $29 $35 $114
Adjusted EBITDA $7 $84 ($26) $335 $400
Adjusted EBITDA margin 3.5 % 17.7 % (7.1) % 34.5 % 19.8 %
 
Tax rate 36.5 % 15.9 % 26.2 % 25.9 % 21.5 %
 
Net income (loss) per share
Basic ($0.73) ($2.12)
Diluted $0.38 $5.36 $3.02
 
Weighted average shares
Basic 32.7 33.5
Diluted 35.8 34.8 35.0
 
[1] Sum of quarterly targets equal the mid-point of 2018 annual non-GAAP guidance. Excludes restructuring, acquisition-related charges, and any severance or retention related to facility closures.
 

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.