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Shutterfly announces fourth quarter and full year 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 fourth quarter and full year ended December 31, 2018.
Christopher North, CEO, Shutterfly, will step down in August.

“2018 was a transformational year for Shutterfly, with the Lifetouch acquisition almost doubling the size of the company, and ending 2018 with $2 billion of Non-GAAP net revenue,” said Christopher North, President and Chief Executive Officer. “We articulated a unique value proposition for our customers going forward: together, Shutterfly and Lifetouch will help customers capture, preserve, and share the most important memories in their lives, bringing Shutterfly’s strengths as the leader in personalized photo-based products coupled with photo storage, together with Lifetouch’s strengths as the leader in school and family photography, to create the only end-to-end memory solution for families. In doing so, we’ve significantly increased our potential to create shareholder value. Looking forward, value creation will come from continuing to drive growth in all three of our divisions, from delivering substantial cost and revenue synergies from the Lifetouch integration, and from returning capital to shareholders.”

“Our results in the fourth quarter were mixed, with strong performance in Shutterfly Business Solutions and solid performance in Lifetouch offset by disappointing performance in Shutterfly Consumer, which had lower than expected growth of 1%.”

Please see the Company’s other two press releases issued today. The first announces that the Board of Directors has formed a Strategic Review Committee and retained a financial advisor, as it continues an ongoing review of strategic and financial alternatives. The second announces that Christopher North, President and CEO, will be stepping down at the end of August 2019, and that the Board of Directors has engaged an executive search firm to identify candidates to succeed him.

Fourth Quarter 2018 Financial Highlights

GAAP net revenue was $950 million. Shutterfly Consumer segment net revenue totaled $528 million, a 1% year-over-year increase. Lifetouch segment net revenue was $348 million. Shutterfly Business Solutions segment net revenue totaled $74 million, a 3% year-over-year increase. GAAP operating income totaled $259 million. Net income was $178 million or $5.19 per share.

Non-GAAP net revenue, excluding purchase accounting adjustments related to the deferred revenue write-down, was $952 million, a 60% year-over-year increase driven by the Lifetouch acquisition. Non-GAAP Lifetouch segment net revenue was $350 million. Normalized operating income, excluding restructuring, acquisition-related charges and purchase accounting adjustments related to the deferred rent and deferred revenue write-down, was $264 million. Normalized net income was $187 million. Adjusted EBITDA was $320 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.”

Full Year 2018 Financial Highlights

GAAP net revenue was $1,962 million. Shutterfly Consumer segment net revenue totaled $972 million, a 3% year-over-year decrease, as 3% organic Shutterfly Brand growth was offset by lost revenue from the brands and websites the Company shuttered in the 2017 platform consolidation and a year-over-year decline in the TinyPrints Boutique. Lifetouch segment net revenue was $759 million. Shutterfly Business Solutions segment net revenue totaled $231 million, a 19% year-over-year increase. GAAP operating income totaled $115 million. Net income was $50 million or $1.45 per share.

Non-GAAP net revenue, excluding purchase accounting adjustments related to the deferred revenue write-down, was $2,001 million, a 68% year-over-year increase driven by the Lifetouch acquisition. Non-GAAP Lifetouch segment net revenue was $799 million. Normalized operating income, excluding restructuring, acquisition-related charges and purchase accounting adjustments related to inventory, deferred rent and the deferred revenue write-down, was $186 million. Normalized net income was $106 million. Adjusted EBITDA was $385 million.

Project Aspen

In the fourth quarter of 2018, the Company further developed its long-term plans to establish a single, next-generation manufacturing platform serving Shutterfly Consumer, Lifetouch and SBS, an initiative the Company refers to as Project Aspen. Project Aspen will yield a total of approximately $130 million in cash savings over the next five years, with annual run-rate savings from manufacturing operations of approximately $35 million from 2022 onward. In addition, while Project Aspen requires net investment in 2019, it will deliver net cash savings in every year beginning in 2020. In the first phase of Project Aspen, the Company will close four legacy Lifetouch facilities, including the two sites previously announced, and two additional facility closures announced today: Chico, California and Chattanooga, Tennessee, both of which will close in the second half of 2019. The Company will also open a new 237,000 square foot facility in Texas, in the first half of 2020, which will serve both Lifetouch and Shutterfly. Further details about Project Aspen will be shared as it progresses.

Adjusted EBITDA Target Update

The revenue and cost synergies from the Lifetouch acquisition are expected to generate between $67 million and $75 million of incremental annual Adjusted EBITDA in the next three years. The Company is updating the previously communicated 2020 Adjusted EBITDA target of $450 million for two reasons. First, the Company had lower-than-expected Shutterfly Consumer growth in the fourth quarter of 2018 and has moderated Shutterfly Consumer growth expectations in the near term. Second, while Project Aspen is expected to generate greater run-rate savings, it will also delay some of our 2020 cost synergies by one year. The Company now expects to achieve between $400 million and $450 million of Adjusted EBITDA in 2021 as follows:

2021 Adjusted EBITDA Range[1]
Low-end High-end
FY19 Guidance range $ 315 $ 340
Incremental manufacturing cost synergies (between 2019 and 2021) 24 24
Reduced integration costs (between 2019 and 2021) 18 18
357 382
Baseline revenue growth (2020 and 2021)[2] 19 35
Revenue synergies (2020 and 2021)[3] 25 33
2021 Adjusted EBITDA range $ 400 $ 450
[1] The Company’s 2021 Adjusted EBITDA outlook is composed entirely of non-GAAP measures. The Company considers it unreasonably difficult to reconcile its outlook to comparable GAAP measures.
[2] Baseline revenue growth rate 3%-5% per year.
[3] Assumes $50 million – $65 million of revenue synergies at a 50% contribution margin.

Capital Update

Cash, cash equivalents, and investments as of December 31, 2018, totaled $566 million. In January 2019, as anticipated, the Company repaid $200 million of Term Loan B debt that was used to finance the acquisition of Lifetouch. The Company ended January with cash, cash equivalents, and investments of approximately $225 million, down from December 31, 2018, driven by the debt repayment, and working capital used to pay vendors and suppliers used in the fourth quarter.

The Board and management have also reviewed Shutterfly’s capital structure, including appropriate leverage levels and potential share buybacks. In the first quarter of 2019, the Company paid down $200 million of debt, consistent with its previous commitment to retain a BB debt rating, while remaining compliant with its debt covenants. As part of this review, the Company affirmed its objective of maintaining gross leverage of 2.5-3.0x Adjusted EBITDA on an annual basis, and to return cash in excess of our operating and financing needs to shareholders in the form of share repurchases, within the parameters of appropriate cash management that meets the needs of Shutterfly’s highly seasonal business, where substantially all of the Company’s cash flow is generated in the last four months of the year. Currently, management believes it will be in position to begin executing on a capital return plan during the fourth quarter of 2019.

Impact of New Lease Accounting Standard

The new lease accounting standard, ASC 842 (Leases) is effective for the Company on January 1, 2019. The Company is finalizing the evaluation of the effects to the Company’s Consolidated Financial Statements and disclosure. The Company expects the most significant impact relates to the leases designated as operating leases that will be recognized as right-of-use assets and corresponding lease liabilities on its Consolidated Balance Sheets upon adoption. Additionally, the Company derecognized its build-to-suit leases upon adoption of ASC 842. Post adoption of ASC 842, the Company’s build-to-suit leases will be accounted for as operating leases and will be recorded as right-of-use assets and lease liabilities, with lease expense recorded in the income statement. Prior to adoption of ASC 842, the Company’s build-to-suit leases were recorded as assets and financing obligations, with depreciation expense and interest expense recorded in the income statement, respectively. As a result, the Company expects that its Adjusted EBITDA in 2019 will be negatively impacted by approximately $5.0 million from the change in accounting treatment related to the Company’s build-to-suit leases.

Business Outlook[1][2]

Full Year 2019:

  • Net revenue to range from $2,130 million to $2,210 million
  • Shutterfly Consumer net revenue to range from $975 million to $1,025 million
  • Lifetouch net revenue to range from $915 million to $935 million
  • SBS net revenue to range from $240 million to $250 million
  • Gross profit margin to range from 51.4% to 51.7% of net revenue
  • Operating income to range from $76 million to $101 million
  • Effective tax rate of 28.0%
  • Net income per share to range from $0.55 to $1.06
  • Weighted average shares of approximately 34.8 million
  • Adjusted EBITDA to range from $315 million to $340 million
  • Capital expenditures to range from $125 million to $130 million

First Quarter 2019:

  • Net revenue to range from $317 million to $328 million
  • Shutterfly Consumer net revenue to range from $146 million to $150 million
  • Lifetouch net revenue to range from $126 million to $130 million
  • SBS net revenue to range from $45 million to $48 million
  • Gross profit margin to range from 35.8% to 36.7% of net revenue
  • Operating loss to range from $102 million to $107 million
  • Effective tax rate of 27.0%
  • Net loss per share to range from $2.49 to $2.59
  • Weighted average shares of approximately 33.9 million
  • Adjusted EBITDA loss to range from $43 million to $48 million

[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. It 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.

Notes to the Fourth Quarter and Full Year 2018 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, 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.

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 Twelve Months Ended
December 31, December 31,
2018 2017 2018 2017
Net revenue $ 949,966 $ 593,755 $ 1,961,820 $ 1,190,202
Cost of net revenue 377,562 254,218 961,575 619,650
Restructuring 1,475
Gross profit 572,404 339,537 1,000,245 569,077
Operating expenses:
Technology and development 49,342 43,415 177,001 168,383
Sales and marketing 202,095 78,503 505,833 197,708
General and administrative[1] 60,290 38,597 197,340 117,797
Capital lease termination 8,098
Restructuring[2] 1,667 4,618 15,491
Total operating expenses 313,394 160,515 884,792 507,477
Income from operations 259,010 179,022 115,453 61,600
Interest expense (17,176) (9,219) (61,239) (27,836)
Interest and other income, net 1,278 794 5,444 1,481
Income before income taxes 243,112 170,597 59,658 35,245
Provision for income taxes (65,496) (58,873) (9,262) (5,160)
Net income $ 177,616 $ 111,724 $ 50,396 $ 30,085
Net income per share:
Basic $ 5.28 $ 3.45 $ 1.52 $ 0.91
Diluted $ 5.19 $ 3.37 $ 1.45 $ 0.88
Weighted average shares outstanding:
Basic 33,614 32,372 33,258 33,113
Diluted 34,218 33,114 34,832 34,106
Stock-based compensation is allocated as follows:
Cost of net revenue $ 973 $ 1,055 $ 3,824 $ 4,339
Technology and development 2,445 2,391 9,990 9,778
Sales and marketing 3,287 3,211 12,790 12,229
General and administrative 5,695 4,206 21,117 17,227
Restructuring 814
$ 12,400 $ 10,863 $ 47,721 $ 44,387
Depreciation and amortization is allocated as follows:
Cost of net revenue $ 25,645 $ 15,682 $ 87,563 $ 60,415
Technology and development 6,881 6,935 26,721 28,457
Sales and marketing 9,786 2,122 31,002 10,393
General and administrative 1,571 985 5,841 4,597
Restructuring 805 805 5,999
$ 44,688 $ 25,724 $ 151,932 $ 109,861
[1] The General and administrative expenses of $60 million and $197 million for the three and twelve months ended December 31, 2018, respectively, include $0.6 million and $16 million, respectively, of acquisition-related charges.
[2] The exit of iMemories business in the second quarter of 2018 and the planned closure of two Lifetouch facilities in the fourth quarter of 2018 resulted in restructuring charges of $1.7 million and $4.6 million in the three and twelve months ended December 31, 2018, respectively.
Appendix 1.2
Shutterfly, Inc.
Consolidated Balance Sheets – GAAP
(In thousands, except par value amounts)
(Unaudited)
December 31, 2018 December 31, 2017
ASSETS
Current assets:
Cash and cash equivalents $ 521,567 $ 489,894
Short-term investments 34,011 178,021
Accounts receivable, net 87,023 82,317
Inventories 18,015 11,019
Prepaid expenses and other current assets 66,961 41,383
Total current assets 727,577 802,634
Long-term investments 10,808 9,242
Property and equipment, net 381,018 266,860
Intangible assets, net 316,154 29,671
Goodwill 843,607 408,975
Other assets 23,045 17,418
Total assets $ 2,302,209 $ 1,534,800
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt $ 14,203 $ 297,054
Accounts payable 105,407 91,473
Accrued liabilities 226,445 159,248
Deferred revenue, current portion 57,319 24,649
Total current liabilities 403,374 572,424
Long-term debt 1,090,442 292,457
Other liabilities 134,027 119,195
Total liabilities 1,627,843 984,076
Stockholders’ equity:
Common stock, $0.0001 par value; 100,000 shares authorized; 33,673 and 32,297 shares issued and outstanding on December 31, 2018 and 2017, respectively 3 3
Additional paid-in capital 1,065,531 996,301
Accumulated other comprehensive income 1,592 1,778
Accumulated deficit (392,760) (447,358)
Total stockholders’ equity 674,366 550,724
Total liabilities and stockholders’ equity $ 2,302,209 $ 1,534,800
Appendix 1.3
Shutterfly, Inc.
Consolidated Statements of Cash Flows – GAAP
(In thousands)
(Unaudited)
Year Ended December 31,
2018 2017
Cash flows from operating activities:
Net income $ 50,396 $ 30,085
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 110,703 88,946
Amortization of intangible assets 40,424 14,916
Amortization of debt discount and issuance costs 8,792 15,508
Repayment of convertible senior notes attributable to debt discount (63,510)
Stock-based compensation 47,721 43,573
(Gain) loss on disposal of property and equipment (252) 1,141
Deferred income taxes 5,630 (161)
Restructuring 2,418 10,882
Other (528)
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable 2,937 (24,952)
Inventories 12,766 (743)
Prepaid expenses and other assets 5,680 5,603
Accounts payable 4,223 32,189
Accrued and other liabilities (25,474) 22,537
Net cash provided by operating activities 201,926 239,524
Cash flows from investing activities:
Acquisition of business, net of cash acquired (890,204)
Purchases of property and equipment (41,396) (36,745)
Capitalization of software and website development costs (45,878) (34,006)
Purchases of investments (9,523) (205,466)
Proceeds from the maturities of investments 206,231 45,257
Proceeds from the sales of investments 46,879 13,874
Proceeds from sale of property and equipment 2,976 21,724
Net cash used in investing activities (730,915) (195,362)
Cash flows from financing activities:
Proceeds from issuance of common stock upon exercise of stock options 20,166 677
Repurchases of common stock (110,000)
Principal payments of borrowings (246,052)
Principal payments of capital lease and financing obligations (19,032) (29,380)
Proceeds from borrowings, net of issuance costs 806,652 295,211
Net cash provided by financing activities 561,734 156,508
Effect of exchange rate changes on cash and cash equivalents (1,072)
Net increase in cash and cash equivalents 31,673 200,670
Cash and cash equivalents, beginning of period 489,894 289,224
Cash and cash equivalents, end of period $ 521,567 $ 489,894
Supplemental schedule of non-cash investing / financing activities:
Net increase in accrued purchases of property and equipment $ 1,607 $ 2,693
Net increase (decrease) in accrued capitalized software and website development costs 69 (396)
Stock-based compensation capitalized with software and website development costs 1,345 1,373
Property and equipment acquired under capital leases 5,611 19,145
Appendix 1.4
Shutterfly, Inc.
Shutterfly Consumer Metrics Disclosure
(Unaudited)
Three Months Ended Twelve Month Ended
December 31, December 31,
2018 2017 2018 2017
Shutterfly Consumer Metrics
Customers [1] 6,066,885 6,110,833 9,766,578 10,048,431
year-over-year change (1) % (3) %
Orders 9,769,375 10,463,752 23,625,789 26,328,121
year-over-year change (7) % (10) %
Average order value [2] $54.03 $49.87 $41.13 $37.87
year-over-year change 8 % 9 %
[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, Sep. 30, Dec. 31, Dec. 31, Dec. 31,
2017 2017 2017 2017 2018 2018 2018 2018 2017 2018
Shutterfly Consumer net revenue
Shutterfly Brand Core $ 97,368 $ 104,779 $ 87,398 $ 372,136 $ 114,087 $ 116,808 $ 86,237 $ 372,567 $ 661,682 $ 689,700
Shutterfly Brand PGHD 26,535 35,129 28,485 92,411 28,577 37,373 29,227 $ 105,966 182,560 201,143
Tiny Prints Boutique 1,942 48,932 2,103 1,397 1,490 40,566 50,874 45,556
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 8,779 33,295 35,430
Total $ 160,645 $ 179,090 $ 135,418 $ 521,809 $ 152,059 $ 165,003 $ 126,888 $ 527,878 $ 996,963 $ 971,829
[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 Twelve Months Ended
December 31, December 31,
2018 2017 2018 2017
Shutterfly Consumer:
Net revenue $ 527,878 $ 521,809 $ 971,829 $ 996,963
Cost of net revenue 200,285 193,320 452,226 456,665
Technology and development 32,740 36,019 124,670 140,698
Sales and marketing 78,943 71,732 168,442 170,687
Credit card fees 12,997 12,936 25,072 25,645
Margin[1] $ 202,913 $ 207,802 $ 201,419 $ 203,268
Margin %

38.4 %

39.8 % 20.7 % 20.4 %
Lifetouch[2]:
Net revenue[3] $ 349,736 $ $ 798,718 $
Cost of net revenue[4] 114,131 299,467
Technology and development 7,461 21,711
Sales and marketing 108,925 288,578
Credit card fees 4,470 8,951
Margin[1] $ 114,749 $ $ 180,011 $
Margin % 32.8 % — % 22.5 % — %
Shutterfly Business Solutions:
Net revenue $ 74,358 $ 71,946 $ 230,588 $ 193,239
Cost of net revenue 59,899 58,812 187,392 154,068
Technology and development 3,430 5,006 13,614 17,907
Sales and marketing 1,525 1,444 6,067 4,476
Margin[1] $ 9,504 $ 6,684 $ 23,515 $ 16,788
Margin % 12.8 % 9.3 % 10.2 % 8.7 %
Consolidated Segments:
Net revenue[3] $ 951,972 $ 593,755 $ 2,001,135 $ 1,190,202
Cost of net revenue[4] 374,315 252,132 939,085 610,733
Technology and development 43,631 41,025 159,995 158,605
Sales and marketing 189,393 73,176 463,087 175,163
Credit card fees 17,467 12,936 34,023 25,645
Margin[1] $ 327,166 $ 214,486 $ 404,945 $ 220,056
Margin % 34.4 % 36.1 % 20.2 % 18.5 %
[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 income, operating segment net revenue to total net revenue, and operating segment cost of net revenue to total cost of net revenue:

Three Months Ended Twelve Months Ended
December 31, December 31,
2018 2017 2018 2017
Total margin for operating segments $ 327,166 $ 214,486 $ 404,945 $ 220,056
Purchase accounting deferred revenue adjustment[1] (2,006) (39,315)
Purchase accounting inventory adjustment[2] (10,931)
Purchase accounting deferred rent adjustment[3] (292) (292)
Corporate expenses[4] (38,519) (21,454) (130,642) (74,903)
Amortization of intangible assets (12,700) (3,147) (40,424) (14,916)
Stock-based compensation for operating segments (12,400) (10,863) (47,721) (43,573)
Restructuring (1,667) (4,618) (16,966)
Acquisition-related charges (572) (15,549)
Capital lease termination (8,098)
Operating income $ 259,010 $ 179,022 $ 115,453 $ 61,600
Operating margin 27.3 % 30.2 % 5.9 % 5.2 %
Total net revenue for all operating segments $ 951,972 $ 593,755 $ 2,001,135 $ 1,190,202
Purchase accounting deferred revenue adjustment[1] (2,006) (39,315)
Total net revenue $ 949,966 $ 593,755 $ 1,961,820 $ 1,190,202
Total cost of net revenue for all operating segments $ 374,315 $ 252,132 $ 939,085 $ 610,733
Purchase accounting inventory adjustment[2] 10,931
Stock-based compensation for cost of net revenue 973 1,055 3,824 4,339
Amortization of intangible assets for cost of net revenue 2,274 1,031 7,735 4,578
Total cost of net revenue $ 377,562 $ 254,218 $ 961,575 $ 619,650
[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] Segment reporting excludes this purchase accounting adjustment for deferred rent.
[4] 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 Three Months Ended
December 31, 2018 December 31, 2018
GAAP Income Non-GAAP Non-recurring Normalized
Statement Adjustments Adjustments Non-GAAP
Net revenue:
Shutterfly Consumer $ 527,878 $ 527,878
Lifetouch 347,730 2,006 [1] 349,736
Shutterfly Business Solutions 74,358 74,358
Total net revenue 949,966 2,006 951,972
Cost of net revenue 377,562 377,562
Gross profit 572,404 2,006 574,410
Gross profit margin 60.3 % 60.3 %
Operating expenses:
Technology and development 49,342 49,342
Sales and marketing 202,095 (217) [5] 201,878
General and administrative 60,290 (75) [5] (572) [3] 59,643
Restructuring 1,667 (1,667)
Total operating expenses 313,394 (292) (2,239) 310,863
Operating income 259,010 2,298 2,239 263,547
Operating margin 27.3 % 27.7 %
Interest expense (17,176) (17,176)
Interest and other income, net 1,278 1,278
Income before income taxes 243,112 2,298 2,239 247,649
Provision for income taxes (65,496) (60,446)
Net income $ 177,616 $ 187,203
Net income per share:
Basic $ 5.28 $ 5.57
Diluted $ 5.19 $ 5.47
Weighted-average shares outstanding:
Basic 33,614 33,614
Diluted 34,218 34,218
Operating income $ 259,010 $ 263,547
Stock-based compensation 12,400 12,400
Amortization of intangible assets 12,700 12,700
Depreciation 31,988 (805) 31,183
Adjusted EBITDA $ 319,830
Adjusted EBITDA margin 33.6 %
Twelve Months Ended Twelve Months Ended
December 31, 2018 December 31, 2018
GAAP Income Non-GAAP Non-recurring Normalized
Statement Adjustments Adjustments Non-GAAP
Net revenue:
Shutterfly Consumer $ 971,829 $ 971,829
Lifetouch 759,403 39,315 [1] 798,718
Shutterfly Business Solutions 230,588 230,588
Total net revenue 1,961,820 39,315 2,001,135
Cost of net revenue 961,575 (10,931) [2] 950,644
Gross profit 1,000,245 50,246 1,050,491
Gross profit margin 51.0 % 52.5 %
Operating expenses:
Technology and development 177,001 177,001
Sales and marketing 505,833 (217) [5] 505,616
General and administrative 197,340 (75) [5] (15,549) [3] 181,716
Restructuring 4,618 (4,618) [4]
Total operating expenses 884,792 (292) (20,167) 864,333
Operating income 115,453 50,538 20,167 186,158
Operating margin 5.9 % 9.3 %
Interest expense (61,239) (61,239)
Interest and other income, net 5,444 5,444
Income before income taxes 59,658 50,538 20,167 130,363
Provision for income taxes (9,262) (24,172)
Net income $ 50,396 $ 106,191
Net income per share – basic
Basic $ 1.52 $ 3.19
Diluted $ 1.45 $ 3.05
Weighted-average shares outstanding:
Basic 33,258 33,258
Diluted 34,832 34,832
Operating income 115,453 186,158
Stock-based compensation 47,721 47,721
Amortization of intangible assets 40,424 40,424
Depreciation 111,508 (805) 110,703
Adjusted EBITDA $ 385,006
Adjusted EBITDA margin 19.2 %
[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 and the planned closure of two Lifetouch facilities.
[5] Purchase accounting adjustment of deferred rent related to Lifetouch acquisition.
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, Sep. 30, Dec. 31, Dec. 31, Dec. 31,
2017 2017 2017 2017 2018 2018 2018 2018 2017 2018
GAAP net income (loss) $ (33,194) $ (22,838) $ (25,607) $ 111,724 $ (27,165) $ (26,512) $ (73,543) $ 177,616 $ 30,085 $ 50,396
Capital lease termination 8,098 8,098
Restructuring 8,976 4,673 3,317 2,952 1,667 16,966 4,618
Acquisition-related charges 4,585 8,000 2,392 572 15,549
Purchase accounting adjustments 44,282 3,958 2,298 50,538
Tax benefit impact of non-recurring items (3,948) (4,829) (1,669) (1,185) (15,171) (3,603) 5,050 (10,446) (14,910)
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) $ 187,203 $ 35,828 $ 106,191
GAAP diluted shares outstanding 33,712 33,579 32,878 33,114 32,702 33,234 33,470 34,218 34,106 34,832
Non-GAAP diluted shares outstanding 33,712 33,579 32,878 33,114 32,702 35,775 33,470 34,218 34,106 34,832
GAAP net income (loss) per share $ (0.98) $ (0.68) $ (0.78) $ 3.37 $ (0.83) $ (0.80) $ (2.20) $ 5.19 $ 0.88 $ 1.45
Non-GAAP net income (loss) per share $ (0.84) $ (0.44) $ (0.73) $ 3.11 $ (0.73) $ 0.38 $ (2.12) $ 5.47 $ 1.05 $ 3.05
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, Sep. 30, Dec 31, Dec. 31, Dec. 31,
2017 2017 2017 2017 2018 2018 2018 2018 2017 2018
GAAP net income (loss) $ (33,194) $ (22,838) $ (25,607) $ 111,724 $ (27,165) $ (26,512) $ (73,543) $ 177,616 $ 30,085 $ 50,396
Interest expense 5,964 5,955 6,699 9,219 9,633 17,769 16,660 17,176 27,836 61,239
Interest and other income, net (189) (244) (253) (794) (1,749) (1,561) (856) (1,278) (1,481) (5,444)
Tax (benefit) provision (22,341) (14,713) (16,660) 58,873 (14,829) (12,607) (28,797) 65,496 5,160 9,262
Depreciation and amortization 27,364 25,957 24,815 25,724 24,898 40,377 41,970 43,883 103,862 151,127
Stock-based compensation 11,505 10,469 10,736 10,863 11,692 11,697 11,931 12,400 43,573 47,721
Capital lease termination 8,098 8,098
Restructuring 8,976 4,673 3,317 2,952 1,667 16,966 4,618
Acquisition-related charges 4,585 8,000 2,392 572 15,549
Purchase accounting adjustments 44,282 3,958 2,298 50,538
Non-GAAP Adjusted EBITDA $ (1,915) $ 17,357 $ 3,047 $ 215,609 $ 7,065 $ 84,397 $ (26,285) $ 319,830 $ 234,099 $ 385,006
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, Sep. 30, Dec. 31, Dec. 31, Dec. 31,
2017 2017 2017 2017 2018 2018 [1] 2018 2018 2017 2018
Net cash provided by (used in) operating activities $ (72,386) $ 13,672 $ (21,945) $ 320,183 $ (124,332) $ (75,233) $ 27,041 $ 374,450 $ 239,524 $ 201,926
Interest expense 5,964 5,955 6,699 9,219 9,633 17,769 16,660 17,176 27,836 61,239
Interest and other income, net (189) (244) (253) (794) (1,749) (1,561) (856) (1,278) (1,481) (5,444)
Tax (benefit) provision (22,341) (14,713) (16,660) 58,873 (14,829) (12,607) (28,797) 65,496 5,160 9,262

Changes in operating assets and liabilities

92,194 (2,565) 35,336 (159,600) 142,368 53,888 (45,554) (150,834) (34,634) (132)
Other adjustments (6,265) 5,377 (2,575) (13,026) (8,611) 47,659 (1,129) 11,950 (16,488) 49,868
Cash restructuring 1,108 1,777 2,445 754 2,200 6,084 2,200
Capital lease termination 8,098 8,098
Acquisition-related charges 4,585 8,000 2,392 572 15,549
Purchase accounting adjustments 44,282 3,958 2,298 50,538
Non-GAAP Adjusted EBITDA $ (1,915) $ 17,357 $ 3,047 $ 215,609 $ 7,065 $ 84,397 $ (26,285) $ 319,830 $ 234,099 $ 385,006
[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.
Forward-Looking Guidance for Non-GAAP Financial Measures
(In millions, except per share amounts)
(Unaudited)
Forward-Looking Guidance[1][2]
Three Months Ending Twelve Months Ending
March 31, 2019 December 31, 2019
Low High Low High
Net revenue $317 $328 $2,130 $2,210
Shutterfly Consumer net revenue $146 $150 $975 $1,025
Lifetouch net revenue $126 $130 $915 $935
SBS net revenue $45 $48 $240 $250
Gross profit $114 $120 $1,095 $1,143
Gross profit margin 35.8 % 36.7 % 51.4 % 51.7 %
Operating income (loss) ($107) ($102) $76 $101
Operating margin (33.7) % (31.1) % 3.6 % 4.6 %
Operating income (loss) ($107) ($102) $76 $101
Stock-based compensation $13 $13 $54 $54
Amortization of intangible assets $13 $13 $51 $51
Depreciation $33 $33 $133 $133
Adjusted EBITDA ($48) ($43) $315 $340
Adjusted EBITDA margin (15.1) % (13.1) % 14.8 % 15.4 %
Capital Expenditures $125 $130
Capital expenditures as % of net revenue 5.9 % 5.9 %
Tax rate 27.0 % 27.0 % 28.0 % 28.0 %
Net income (loss) per share
Basic ($2.59) ($2.49)
Diluted $0.55 $1.06
Weighted average shares
Basic 33.9 33.9
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. It 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.
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