Shutterfly reports first quarter results; will exit iMemories

GaryPageau , ,

Editor’s note: Post updated to reflect iMemories will not be closed – as previously written – but “exited.” Industry reports is a new buyer will take over the business.

A few highlights from the Shutterfly earnings report, reproduced below.

  • Shutterfly closed the Lifetouch acquisition April 2
  • Shutterfly will exit Lifetouch’s iMemories business in the second quarter, earlier than expected. This was expected, as iMemories is similar in function to Shutterfly’s own cloud photo storage service.
  • Consumer net revenues were up 5% to $152 million.
  • Consumer orders were down 8 percent but average order value was up 3% to $29.96.
  • Shutterfly’s commercial business continues to grow sales, but margins are much tighter than consumer business. 

Shutterfly announces first quarter 2018 financial results

REDWOOD CITY, Calif.–(BUSINESS WIRE)–Shutterfly, Inc. (NASDAQ:SFLY), the leading online retailer and manufacturer of high-quality personalized products and services, today announced financial results for the first quarter ended March 31, 2018.

Christopher North, CEO, Shutterfly

“The first quarter of 2018 was a good start to the year for Shutterfly, led by healthy Shutterfly organic growth and overperformance in Shutterfly Business Solutions,” said Christopher North, President and Chief Executive Officer. “We showed a significant improvement in profitability over the first quarter of 2017, thanks to organic Shutterfly brand growth of 10% and the benefits of last year’s platform consolidation. We continue to execute against our strategic plan, with notable progress in mobile as well as pricing and promotion optimization. Finally, we closed the transformational acquisition of Lifetouch, and are now fully focused on achieving the cost and revenue synergies that will contribute to our target of a minimum of $450 million in combined company Adjusted EBITDA by 2020.”

First Quarter 2018 Financial Highlights

Net revenues were $199.7 million, a 4% year-over-year increase. Shutterfly Consumer net revenues totaled $152.1 million, a 5% year-over-year decrease which was consistent with the Company’s expectations of a mid-single digit decline in the first quarter of 2018 as indicated on prior earnings calls. Shutterfly brand growth was supported by strong performance in Photo Books as well as the Wedding Shop, which was launched in the third quarter of 2017, and was offset by anticipated revenue declines in the non-Shutterfly brands due to the platform consolidation and the brand shutdowns over the course of 2017. Shutterfly Business Solutions net revenues totaled $47.7 million, a 52% year-over-year increase.

GAAP operating loss totaled $34.1 million and net loss was $27.2 million or a $0.83 loss per share.

On a normalized basis, which excludes acquisition-related charges in the first quarter of 2018 and restructuring charges in the first quarter of 2017, operating loss improved $11.3 million year-over-year to a loss of $29.5 million, net loss improved $4.4 million year-over-year to a loss of $23.8 million, and net loss per share improved $0.11 to a net loss of $0.73 per share.

Adjusted EBITDA was $7.1 million, a $9.0 million year-over-year increase primarily due to growth in the Shutterfly brand and the benefits of the platform consolidation and restructuring.

Business Outlook

The acquisition of Lifetouch will significantly increase the Company’s overall profitability. Since the acquisition closed on April 2, 2018, management has updated its guidance to include Lifetouch. The Lifetouch annual guidance is consistent with the guidance provided in January when the deal was announced, except for the impact of exiting the iMemories business which is expected to occur in the second quarter, and reduces full-year 2018 revenue guidance by $22 million but has no impact on Adjusted EBITDA. Please see page 16 for more detail.

Lifetouch purchased iMemories in 2016 to provide a cloud photo storage and organization service coupled with a broader range of photo-based products to its customers. When the Company agreed to purchase Lifetouch, it anticipated that it would ultimately exit the iMemories business as over time Shutterfly’s Photos service and its broader range of products would be offered to Lifetouch customers. Since closing the Lifetouch acquisition, the Company has decided to accelerate the process of exiting iMemories, and now expects to exit it by the end of the second quarter.

Today, the Company is providing updated annual guidance for the combined company. Lifetouch previously operated as a private company. As such, GAAP quarterly historical financials have not been prepared. In an effort to help investors better understand the seasonality and profitability of the combined companies, the Company is providing quarterly targets for each quarter of 2018 that sum to the midpoint of annual guidance. Please see page 16 for more detail.

The Company is providing annual guidance on a GAAP and non-GAAP basis. Non-GAAP guidance, which adjusts for certain purchase accounting items, is intended to allow investors to more clearly understand the trends in the business on an ongoing basis. There are a number of items to note as it relates to the Company’s updated 2018 GAAP and Non-GAAP guidance:

1) Since the acquisition closed on April 2, 2018, first quarter revenue and Adjusted EBITDA for Lifetouch are not reflected in the guidance. Lifetouch typically has revenue of approximately $128 million with an Adjusted EBITDA loss of approximately $30 million in the first quarter, as it is a seasonally smaller quarter for the Lifetouch business. Please see page 16 for more detail.

2) The Company expects to complete purchase accounting in the second quarter of 2018. Guidance and targets reflect our best estimates as of this moment in time as it relates to normal purchase accounting adjustments for the following items that will be fair valued on the opening balance sheet:

a) Deferred revenue will be written down to fair value. This will have the effect of lowering GAAP reported revenue by approximately $40 million in 2018, most of which we expect to occur in the second quarter of 2018. Non-GAAP guidance adjusts for this Deferred Revenue write-down.

b) Inventory will be written up to fair value and have the effect of increasing cost of revenues by approximately $15 million in 2018, most of which we expect to occur in the second quarter of 2018. Non-GAAP guidance adjusts for this cost of revenues increase.

c) Depreciable property, plant and equipment are expected to be valued at approximately $145 million with a weighted average life of 11 years resulting in annual depreciation expense of approximately $13 million.

d) Intangible assets are expected to be approximately $300 million with a weighted average life of seven years resulting in annual amortization of approximately $43 million.

None of these estimated purchase accounting adjustments will impact cash flow or Adjusted EBITDA. This supplemental information for both GAAP and non-GAAP guidance is intended to allow investors to more clearly understand the trends in the business on an ongoing basis. Please see page 15 for more detail.

3) This guidance excludes remaining acquisition-related charges of $7 million, expected to be incurred in the second quarter of 2018, as well as approximately $4 million of charges related to exiting the iMemories business.

4) The Company is also in the process of assessing and aligning Lifetouch accounting policies with Shutterfly’s and will provide any updates on the second quarter of 2018 earnings call.

 

Shutterfly, Inc.

Shutterfly Consumer Metrics Disclosure

(Unaudited)
Three Months Ended
March 31,
2018 2017
Shutterfly Consumer Metrics
Customers [1] 3,220,881 3,364,799
year-over-year change (4 )%
Orders 5,076,150 5,535,344
year-over-year change (8 )%
Average order value [2] $29.96 $29.02
year-over-year change 3 %
[1] An active customer is defined as one that has transacted in the last trailing twelve months.
[2] Average order value excludes Shutterfly Business Solutions revenue.

Shutterfly, Inc.

Segment Disclosure

(In thousands)

(Unaudited)
Three Months Ended
March 31,
2018 2017
Shutterfly Consumer
Net revenues $ 152,059 $ 160,645
Cost of net revenues 84,845 89,854
Restructuring — 1,240
Gross profit $ 67,214 $ 69,551
Consumer gross profit margin 44.2 % 43.3 %
Shutterfly Business Solutions (SBS)
Net revenues $ 47,666 $ 31,327
Cost of net revenues 39,910 23,838
Gross profit $ 7,756 $ 7,489
SBS gross profit margin 16.3 % 23.9 %
Corporate [1]
Net revenues $ — $ —
Cost of net revenues 1,291 2,427
Gross profit $ (1,291 ) $ (2,427 )
Consolidated
Net revenues $ 199,725 $ 191,972
Cost of net revenues 126,046 116,119
Restructuring — 1,240
Gross profit $ 73,679 $ 74,613
Gross profit margin 36.9 % 38.9 %
Gross profit margin excluding restructuring 36.9 % 39.5 %
[1] Corporate category includes activities that are not directly attributable or allocable to a specific segment. This category consists of stock-based compensation and amortization of intangible assets.

Shutterfly, Inc.

Shutterfly Consumer Revenues by Brand

(In thousands)

(Unaudited)
Three Months Ended Year Ended
Mar. 31, Jun. 30, Sep. 30, Dec. 31, Mar. 31, Dec. 31,
2017 2017 2017 2017 2018 2017
Consumer net revenues
Shutterfly brand $ 123,903 $ 139,908 $ 115,883 $ 464,547 $ 142,664 $ 844,242
Tiny Prints Boutique — — 1,942 48,932 2,103 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 33,295
Total $ 160,645 $ 179,090 $ 135,418 $ 521,809 $ 152,059 $ 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.

About Shutterfly, Inc.

Shutterfly, Inc. is the leading digital retailer and manufacturer of high-quality personalized products and services. Founded in 1999, Shutterfly brings your photos to life in photo books, gifts, and cards and stationery – through its flagship Shutterfly products, premium offerings in its Tiny Prints boutique, as well as wedding invitations and stationery for every step of the planning process; and through BorrowLenses, the premier online marketplace for photographic and video equipment rentals. Shutterfly, Inc. also operates Shutterfly Business Solutions, delivering high-quality digital printing services to the enterprise market, and Lifetouch, the leader in school photography. For more information about Shutterfly, Inc. (SFLY), visit www.shutterflyinc.com.