Shutterfly announces first quarter 2019 financial results

Shutterfly announced first-quarter 2019 financial results, coinciding with rumours from reputables sites like Bloomberg that the leading online photo personalization service has drawn acquisition interest from Apollo Global Management LLC and Cerberus Capital Management. As noted below, the company’s board is not officially commenting.

Overall, the company’s results were in line with expectations, management said. Shutterfly’s struggling Consumer segment saw a 2% drop in revenue and the business services/commercial printing segment saw a similar percentage decline.  In the Consumer segment, Shutterfly saw an 11 percent drop in customers and a 19 percent drop in orders, but the average value increased 21% to $36.23 from $29.96, compared to the same quarter last year. Lifetouch first-quarter revenue was $129,952.

Highlights of the press release are reproduced below. The full release is here.

Shutterfly Announces First Quarter 2019 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 first quarter ended March 31, 2019.

Christopher North, Shutterfly

“Our first-quarter results were solid across all three divisions, Shutterfly Consumer, Lifetouch, and SBS,” said Christopher North, President and Chief Executive Officer. “We met our expectations on revenue and exceeded our expectations on Adjusted EBITDA in the quarter. In addition, we made good progress against key initiatives across the company, including product range expansion, mobile, and personalized marketing in Shutterfly Consumer, and integration with Lifetouch. We also won a new client in SBS.”

Earlier this year, the Company announced that its Board of Directors had formed a Strategic Review Committee and retained Morgan Stanley as a financial advisor. The Committee continues its ongoing review of strategic alternatives and has no further update at this time. The Board has not set a timetable for the conclusion of its review of strategic alternatives. There can be no assurance that the review of strategic alternatives will result in a transaction or other outcome.

First Quarter 2019 Financial Highlights

GAAP net revenue was $325 million. Shutterfly Consumer segment net revenue totaled $149 million, a 2% year-over-year decrease. Shutterfly Consumer revenue was negatively impacted in the first quarter of 2019 by approximately $6.0 million primarily due to exiting the fourth quarter of 2018 with a lower year-over-year backlog. Lifetouch segment net revenue was $129 million. Shutterfly Business Solutions segment net revenue totaled $47 million, a 2% year-over-year decrease. GAAP operating loss totaled $106 million. Net loss was $84 million or a loss of $2.47 per share.

Non-GAAP net revenue, excluding purchase accounting adjustments related to the deferred revenue write-down, due to the Lifetouch acquisition, was $325 million, a 63% year-over-year increase driven by the Lifetouch acquisition. Non-GAAP Lifetouch segment net revenue was $130 million. Normalized operating loss, excluding restructuring, executive transition and strategic review charges, and purchase accounting adjustment related to the deferred revenue write-down, was $99 million. Normalized net loss was $83 million. Adjusted EBITDA loss was $45 million.

In the first quarter of 2019, the Company had an immaterial out-of-period adjustment for shipping services provided in the fourth quarter of 2018 of $2.8 million, which lowered our Adjusted EBITDA. Excluding this immaterial out-of-period adjustment, Adjusted EBITDA loss would have been $42.5 million.

A reconciliation of GAAP to non-GAAP financial measures has been provided in the financial statement tables included in this press release. An explanation of these measures is also included below under the heading “Non-GAAP Financial Information.”

Business Outlook

The Company is revising its guidance on operating income and earnings per share due to a decrease in share-based compensation, and is updating non-GAAP guidance for the year ending December 31, 2019 to the following (in millions, except per share amounts):

Prior Non-GAAP Guidance 
as of February 5, 2019 for 
the Twelve Months Ending 
December 31, 2019

Updated Non-GAAP 
Guidance for the Twelve 
Months Ending 
December 31, 2019

Low High Change Low High
Net revenue $2,130 $2,210 $2,130 $2,210
Shutterfly Consumer net revenue $975 $1,025 $975 $1,025
Lifetouch net revenue $915 $935 $915 $935
SBS net revenue $240 $250 $240 $250
Gross profit margin 51.4 % 51.7 % 51.4 % 51.7 %
Operating income $76 $101 $4 $80 $105
Adjusted EBITDA $315 $340 $315 $340
Earnings per share $0.55 $1.06 $0.05 $0.61 $1.11
Capital Expenditures $125 $130 $125 $130
[1] Excludes any costs related to executive transition, the strategic review and the facility closures in 2019. Also excludes any proceeds from the sale of existing facilities.
[2] The Company’s business outlook is composed entirely of non-GAAP measures. The Company considers it unreasonably difficult to reconcile its outlook to comparable GAAP measures. For additional information, see “Non-GAAP Information” below.

Notes to the First Quarter 2019 Financial Results and Operating Metrics and 2019 Business Outlook

Adjusted EBITDA is a non-GAAP financial measure that the Company defines as earnings before interest, taxes, depreciation, amortization, stock-based compensation, restructuring, acquisition-related costs, and executive transition and strategic review 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. Shutterfly 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 (Shutterfly Consumer revenue only) 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.

Selected Appendix notes

Appendix 1.4
Shutterfly, Inc.
Shutterfly Consumer Metrics Disclosure
(Unaudited)
Three Months Ended
March 31,
2019 2018
Shutterfly Consumer Metrics
Customers [1] 2,872,369 3,220,881
year-over-year change (11) %
Orders 4,108,645 5,076,150
year-over-year change (19) %
Average order value [2] $36.23 $29.96
year-over-year change 21 %
[1] An active customer is defined as one that has transacted in the last trailing-twelve months.
[2] Average order value solely includes Shutterfly Consumer 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, Dec. 31,
2018 2018 2018 2018 2019 2018
Shutterfly Consumer net revenue[1]
Shutterfly Brand Core $ 111,668 $ 116,041 $ 85,502 $ 369,016 $ 105,076 $ 682,228
Shutterfly Brand PGHD 30,965 38,163 30,006 110,173 34,585 209,307
Tiny Prints Boutique 2,134 1,374 1,446 39,910 1,695 44,864
Other 7,292 9,425 9,934 8,779 7,491 35,430
Total $ 152,059 $ 165,003 $ 126,888 $ 527,878 $ 148,847 $ 971,829
[1] This 2018 quarterly net revenue by brand table has been updated to allocate order-to-billed adjustments to each brand of Shutterfly Consumer net revenue.

Appendix 3.1

Shutterfly, Inc.

Reconciliation of Non-GAAP Financial Measures

(In thousands)

(Unaudited)

The GAAP and Non-GAAP amounts presented below for the three months ended March 31, 2019 are impacted by an immaterial out-of-period adjustment for shipping services provided in the fourth quarter of 2018 of $2.8 million, which increased cost of net revenue and burdened gross margin, operating loss, net loss, and Adjusted EBITDA loss.
Three Months Ended Three Months Ended
March 31, 2019 March 31, 2019
GAAP Income Normalized
Statement Adjustments Non-GAAP
Net revenue:
Shutterfly Consumer $ 148,847 $ 148,847
Lifetouch 129,307 645 [2] 129,952
Shutterfly Business Solutions 46,527 46,527
Total net revenue 324,681 645 325,326
Cost of net revenue 210,399 [1] 210,399
Gross profit 114,282 [1] 645 114,927
Gross profit margin 35.2 % [1] 35.3 %
Operating expenses:
Technology and development 48,332 48,332
Sales and marketing 119,370 (379) [3] 118,991
General and administrative 48,388 (2,186) [3] 46,202
Restructuring 3,973 (3,973) [4]
Total operating expenses 220,063 (6,538) 213,525
Operating loss (105,781) [1] 7,183 (98,598)
Operating margin (32.6) % [1] (30.3) %
Interest expense (18,253) 3,886 [5] (14,367)
Interest and other income, net 1,178 1,178
Income before income taxes (122,856) [1] 11,069 (111,787)
Benefit from income taxes 39,237 [1] 29,069
Net loss $ (83,619) [1] $ (82,718)
Net loss per share – basic and diluted $ (2.47) [1] $ (2.44)
Weighted-average shares outstanding – basic and diluted 33,918 33,918
Operating loss $ (105,781) $ (98,598)
Stock-based compensation 12,039 (911) [3] 11,128
Amortization of intangible assets 12,825 12,825
Depreciation 30,629 (1,296) [4] 29,333
Adjusted EBITDA $ (45,312)

Adjusted EBITDA margin

(13.9) %
[1] Includes an immaterial out-of-period adjustment for shipping services provided in the fourth quarter of 2018 of $2.8 million, which increased cost of net revenue, and burdened gross margin, operating loss, net loss, and Adjusted EBITDA loss.
[2] Lifetouch net revenue presented in management reporting related to certain obligations that would have otherwise been recorded by Lifetouch as an independent entity but were not recognized in our condensed consolidated financial statements for the three months ended March 31, 2019 due to business combination accounting requirements.
[3] Charges related to executive transition and the strategic review of which $0.9 million was related to stock-based compensation expense.
[4] Restructuring charge related to the planned closure of four Lifetouch facilities of which $1.3 million was related to depreciation expense.
[5] Non-cash charges related to the $200 million debt repayment made in January 2019 that is considered a partial early debt extinguishment.

Appendix 5.1

Shutterfly, Inc.
Forward-Looking Guidance for Non-GAAP Financial Measures
(In millions, except per share amounts)
(Unaudited)
Forward-Looking Guidance[1][2]

Three Months Ending
June 30, 2019

Twelve Months Ending 
December 31, 2019

Low High Low High
Net revenue $469 $479 $2,130 $2,210
Shutterfly Consumer net revenue $166 $170 $975 $1,025
Lifetouch net revenue $255 $258 $915 $935
SBS net revenue $48 $51 $240 $250
Gross profit $239 $244 $1,095 $1,143
Gross profit margin 51.0 % 51.0 % 51.4 % 51.7 %
Operating income (loss) $0 $5 $80 $105
Operating margin % 1.1 % 3.8 % 4.8 %
Operating income (loss) $0 $5 $80 $105
Stock-based compensation $13 $13 $50 $50
Amortization of intangible assets $13 $13 $51 $51
Depreciation $33 $33 $133 $133
Adjusted EBITDA $59 $64 $315 $340
Adjusted EBITDA margin 12.6 % 13.4 % 14.8 % 15.4 %
Capital Expenditures $125 $130
Capital expenditures as % of net revenue 5.9 % 5.9 %
Tax rate 22.0 % 22.0 % 30.0 % 30.0 %
Net income (loss) per share
Basic

($0.27)

($0.17)
Diluted $0.61 $1.11
Weighted average shares
Basic 34.5 34.5
Diluted 34.8 34.8
[1] Excludes any costs related to executive transition, the strategic review, the facility closures in 2019, and any non-recurring charges related to the $200 million debt repayment made in January 2019. Also excludes any proceeds from the sale of existing facilities.
[2] The Company’s business outlook is composed entirely of non-GAAP measures. The Company considers it unreasonably difficult to reconcile its outlook to comparable GAAP measures.

The full release is here.