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Shutterfly Announces Second Quarter 2019 Financial Results

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.

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