Shutterfly Announces Second Quarter 2019 Financial Results

August 7, 2019August 8, 2019 GaryPageau Apollo Global Management, Shutterfly, Snapfish

Shutterfly announced second-quarter financial highlights, for the period ending June 30. (To read the entire press release, click here.) The company, which entered into an agreement in June to be acquired by Apollo Global Management in a deal expected to be concluded early in the fourth quarter.

Shutterfly reported net revenue of $473 million, with an operating loss of $7.9 million and a net loss of $13 million. Shutterfly Consumer segment net revenue totaled $170 million, a 3% year-over-year increase. Lifetouch segment GAAP net revenue was $254 million, an 11% year-over-year increase, while segment non-GAAP net revenue was $254 million, a 3% year-over-year decrease. Shutterfly Business Solutions segment net revenue remained relatively flat at $50 million.

Due to the pending acquisition, management is not holding the customary earnings call. Also, the company announced the early termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 was granted on July 17, 2019, effective immediately. That means it’s less likely the Department of Justice will throw up early roadblocks.

Selected financial tables are shown below:


Appendix 1.1
Shutterfly, Inc.
Consolidated Statements of Operations – GAAP
(In thousands, except per share amounts)
(Unaudited)

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018

Net revenue	$	473,416	$	443,372	$	798,097	$	643,097
Cost of net revenue	240,513		233,228		450,912		359,275
Gross profit	232,903		210,144		347,185		283,822
Operating expenses:
Technology and development	49,606		44,420		97,939		82,924
Sales and marketing	135,468		130,643		254,837		168,363
General and administrative^[1]	52,491		55,040		100,878		86,604
Restructuring^[2]	3,274		2,952		7,247		2,952
Total operating expenses	240,839		233,055		460,901		340,843
Loss from operations	(7,936)		(22,911)		(113,716)		(57,021)
Interest expense	(13,312)		(17,769)		(31,566)		(27,402)
Interest and other income, net	1,088		1,561		2,266		3,310
Loss before income taxes	(20,160)		(39,119)		(143,016)		(81,113)
Benefit from income taxes	7,428		12,607		46,665		27,436
Net loss	$	(12,732)	$	(26,512)	$	(96,351)	$	(53,677)

Net loss per share – basic and diluted	$	(0.37)	$	(0.80)	$	(2.83)	$	(1.63)

Weighted-average shares outstanding – basic and diluted	34,254		33,234		34,089		32,970

Stock-based compensation is allocated as follows:
Cost of net revenue	$	844	$	943	$	1,736	$	1,942
Technology and development	2,268		2,571		4,566		5,001
Sales and marketing	3,574		2,941		7,039		6,445
General and administrative	4,821		5,242		10,204		10,001
	$	11,507	$	11,697	$	23,545	$	23,389

Depreciation and amortization is allocated as follows:
Cost of net revenue	$	24,566	$	21,944	$	48,853	$	37,386
Technology and development	6,344		7,418		12,814		13,715
Sales and marketing	9,893		9,530		19,759		11,571
General and administrative	1,625		1,485		3,161		2,603
Restructuring	937		—		2,232		—
	$	43,365	$	40,377	$	86,819	$	65,275

^[1] The General and administrative expenses of $52.5 million and $100.9 million for the three and six months ended June 30, 2019, respectively, include $7.5 million and $9.7 million, respectively, of costs related to executive transition and the strategic review. The General and administrative expenses of $55.0 million and $86.6 million for the three and six months ended June 30, 2018, respectively, include $8.0 million and $12.6 million, respectively, of acquisition-related charges.

^[2]The restructuring plan approved in the fourth quarter of 2018 to close four Lifetouch facilities resulted in restructuring charges of $3.3 million and $7.2 million for the three and six months ended June 30, 2019, respectively. The exit of iMemories business in the second quarter of 2018 resulted in restructuring charges of $3.0 million for the three and six months ended June 30, 2018.


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

	Six Months Ended
	June 30,
	2019		2018
Cash flows from operating activities:
Net loss	$	(96,351)	$	(53,677)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	58,967		50,111
Amortization of intangible assets	25,620		15,164
Amortization of debt discount and issuance costs	5,533		7,009
Amortization of operating lease assets	11,150		—
Repayment of convertible senior notes attributable to debt discount^[1]	—		(63,510)
Stock-based compensation	23,545		23,389
(Gain) loss on disposal of property and equipment	(426)		154
Deferred income taxes	3,808		17,571
Restructuring	2,301		752
Other	(57)		(272)
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable	26,605		30,767
Inventories	(2,959)		15,607
Prepaid expenses and other assets	(48,994)		(42,795)
Accounts payable	(60,267)		(69,708)
Accrued and other liabilities	(114,092)		(130,127)
Net cash used in operating activities	(165,617)		(199,565)

Cash flows from investing activities:
Acquisition of business, net of cash acquired	—		(890,052)
Purchases of property and equipment	(27,129)		(17,692)
Capitalization of software and website development costs	(30,642)		(21,392)
Purchases of investments	—		(9,523)
Proceeds from maturities of investments	21,184		174,329
Proceeds from sales of investments	—		45,106
Proceeds from sales of property and equipment	1,136		1,132
Net cash used in investing activities	(35,451)		(718,092)

Cash flows from financing activities:
Proceeds from issuance of common stock upon exercise of stock options	1,007		16,577
Principal payments of borrowings^[1]	(207,292)		(239,098)
Principal payments of finance lease liabilities and financing obligations	(9,587)		(9,396)
Proceeds from borrowings, net of issuance costs	—		806,652
Net cash (used in) provided by financing activities	(215,872)		574,735

Effect of exchange rate changes on cash and cash equivalents	711		(271)
Net decrease in cash and cash equivalents	(416,229)		(343,193)
Cash and cash equivalents, beginning of period	521,567		489,894
Cash and cash equivalents, end of period	$	105,338	$	146,701

Supplemental schedule of non-cash investing / financing activities:
Net decrease in accrued purchases of property and equipment	$	(1,915)	$	(1,200)
Net increase in accrued capitalized software and website development costs	2,532		1,119
Stock-based compensation capitalized with software and website development costs	612		697
Leased assets obtained in exchange for finance lease liabilities	2,973		2,969

^[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 $63.5 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 six months ended June 30, 2018 above has been revised to reflect the appropriate classification of such repayment between financing and operating activities.


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

	Three Months Ended
	June 30,
	2019		2018
Shutterfly Consumer Metrics
Customers ^[1]	3,034,584		3,140,246
year-over-year change	(3)	%

Orders	4,410,299		4,788,564
year-over-year change	(8)	%

Average order value^[2]	$38.45		$34.46
year-over-year change	12	%

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

^[2]Average order value is calculated using solely Shutterfly Consumer revenue.


Appendix 1.5
Shutterfly, Inc.
Shutterfly Consumer Net Revenue by Brand
(In thousands)
(Unaudited)

	Three Months Ended
	Mar. 31,		Jun. 30,		Sep. 30,		Dec. 31,		Mar. 31,		Jun. 30,		Dec. 31,
	2018		2018		2018		2018		2019		2019		2018

Shutterfly Consumer net revenue^[1]
Shutterfly Brand Core	$	111,668	$	116,041	$	85,502	$	369,016	$	105,076	$	115,583	$	682,228
Shutterfly Brand Personalized Gifts and Home Décor	30,965		38,163		30,006		110,173		34,585		44,171		209,307
Tiny Prints Boutique	2,134		1,374		1,446		39,910		1,695		1,067		44,864
Other	7,292		9,425		9,934		8,779		7,491		8,763		35,430
Total	$	152,059	$	165,003	$	126,888	$	527,878	$	148,847	$	169,584	$	971,829

^[1] 2018 quarterly net revenue by brand has been updated to allocate order-to-billed adjustments to each brand of Shutterfly Consumer net revenue.


Appendix 2.1
Shutterfly, Inc.
Segment Disclosure
(In thousands)
(Unaudited)

The margin of the Company’s three segments compares to non-GAAP operating loss by adding corporate expenses, amortization of intangible assets, stock-based compensation, restructuring, acquisition-related charges, executive transition and strategic review charges, and purchase accounting adjustments.

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2019			2018			2019			2018
Shutterfly Consumer:
Net revenue	$	169,584		$	165,003		$	318,432		$	317,062
Cost of net revenue^[1]	95,261			86,065			185,667			170,909
Technology and development	34,373			29,830			67,896			61,959
Sales and marketing	31,739			29,956			60,863			60,681
Credit card fees	4,346			4,349			8,501			8,548
Margin^[1][2]	$	3,865		$	14,803		$	(4,495)		$	14,965
Margin %	2.3		%	9.0		%	(1.4)		%	4.7		%

Lifetouch^[3]:
Net revenue^[4]	$	254,174		$	261,911		$	384,126		$	261,911
Cost of net revenue^[5]	98,844			91,148			177,172			91,148
Technology and development	8,021			7,109			15,994			7,109
Sales and marketing	89,847			86,960			166,141			86,960
Credit card fees	2,693			1,165			4,920			1,165
Margin^[2]	$	54,769		$	75,529		$	19,899		$	75,529
Margin %	21.5		%	28.8		%	5.2		%	28.8		%

Shutterfly Business Solutions:
Net revenue	$	49,658		$	49,809		$	96,184		$	97,475
Cost of net revenue	42,941			41,610			81,092			81,519
Technology and development	3,700			3,049			6,992			6,994
Sales and marketing	1,107			1,619			2,515			3,069
Margin^[2]	$	1,910		$	3,531		$	5,585		$	5,893
Margin %	3.8		%	7.1		%	5.8		%	6.0		%

Consolidated Segments:
Net revenue^[4]	$	473,416		$	476,723		$	798,742		$	676,448
Cost of net revenue^[1][5]	237,046			218,823			443,931			343,576
Technology and development	46,094			39,988			90,882			76,062
Sales and marketing	122,693			118,535			229,519			150,710
Credit card fees	7,039			5,514			13,421			9,713
Margin^[1][2]	$	60,544		$	93,863		$	20,989		$	96,387
Margin %	12.8		%	19.7		%	2.6		%	14.2		%

^[1]The six months ended June 30, 2019 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 lowered segment margin.

^[2]The margins reported reflect only costs that are directly attributable or allocable to a specific segment and exclude purchase accounting adjustments, corporate expenses, amortization of intangible assets, stock-based compensation, restructuring, acquisition-related, and executive transition and strategic review charges.

^[3] The Company acquired Lifetouch on April 2, 2018.

^[4] 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 six months ended June 30, 2019 and the three and six months ended June 30, 2018 due to business combination accounting requirements.

^[5]Business combination accounting principles require the Company to measure acquired inventory at fair value. The fair value of inventory reflects Lifetouch’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 for the three and six months ended June 30, 2018.

The following table reconciles Total segment margin to operating loss, Total segment net revenue to Net revenue, and Total segment cost of net revenue to Cost of net revenue:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2019			2018			2019			2018

Total segment margin	$	60,544		$	93,863		$	20,989		$	96,387
Purchase accounting deferred revenue adjustment^[1]	—			(33,351)			(645)			(33,351)
Purchase accounting inventory adjustment^[2]	—			(10,931)			—			(10,931)
Corporate expenses^[3]	(32,459)			(37,012)			(67,549)			(55,036)
Amortization of intangible assets	(12,795)			(12,831)			(25,620)			(15,164)
Stock-based compensation expense	(11,507)			(11,697)			(23,545)			(23,389)
Restructuring	(3,274)			(2,952)			(7,247)			(2,952)
Executive transition and strategic review charges	(8,445)			—			(10,099)			—
Acquisition-related charges	—			(8,000)			—			(12,585)
Operating loss	$	(7,936)		$	(22,911)		$	(113,716)		$	(57,021)
Operating margin	(1.7)		%	(5.2)		%	(14.2)		%	(8.9)		%


Total segment net revenue	$	473,416		$	476,723		$	798,742		$	676,448
Purchase accounting deferred revenue adjustment^[1]	—			(33,351)			(645)			(33,351)
Net revenue	$	473,416		$	443,372		$	798,097		$	643,097

Total segment cost of net revenue	$	237,046		$	218,823		$	443,931		$	343,576
Purchase accounting inventory adjustment^[2]	—			10,931			—			10,931
Stock-based compensation for cost of net revenue	844			943			1,736			1,942
Amortization of intangible assets for cost of net revenue	2,623			2,531			5,245			2,826
Cost of net revenue	$	240,513		$	233,228		$	450,912		$	359,275

^[1] 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 due to business combination accounting requirements.

^[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. Management 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.