Shutterfly Announces Fourth Quarter and Full Year 2018 Financial Results
REDWOOD CITY, California, February 5, 2019 -- 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.
“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.
Fourth Quarter Conference Call
Management will review the fourth quarter and full year 2018 financial results and its expectations for the first quarter and full year 2019 on a conference call on Tuesday, February 5, 2019 at 2:00 p.m. Pacific Time (5:00 p.m. Eastern Time). To listen to the call and view the accompanying slides, please visit http://www.shutterflyinc.com. In the Investor Relations area, click on the link provided for the webcast, or dial (844) 763-8274 or (412) 717-9224, and ask to be to be joined into the Shutterfly call. The webcast will be archived and available at http://www.shutterflyinc.com in the Investor Relations section. A replay of the conference call will be available through Tuesday, February, 19, 2019. To hear the replay, please dial (877) 344-7529 or (412) 317-0088 and enter access code 10127959.
Non-GAAP Financial Information
To supplement the Company’s consolidated financial statements, which are prepared and presented in accordance with U.S. generally accepted accounting principles (GAAP), the Company uses certain non-GAAP financial measures. Tables are provided at the end of this press release that reconcile the non-GAAP financial measures that the Company uses to the most directly comparable financial measures prepared in accordance with GAAP. These non-GAAP financial measures include non-GAAP net revenue, non-GAAP Lifetouch segment net revenue, normalized operating income (loss), net income (loss), net income (loss) per share and adjusted EBITDA. The method the Company uses to produce non-GAAP financial measures is not computed according to GAAP and may differ from methods used by other companies.
The Company believes that these non-GAAP measures provide useful information about the Company's core operating results and thus are appropriate to enhance the overall understanding of the Company's past financial performance and its prospects for the future. These adjustments to the Company's GAAP results are made with the intent of providing both management and investors a more complete understanding of the Company's underlying operational results and trends and performance. Management uses these non-GAAP measures to evaluate the Company's financial results, develop budgets, manage expenditures, and determine employee compensation. The presentation of additional information is not meant to be considered in isolation or as a substitute for or superior to gross margins, net revenue, operating income (loss), net income (loss), or net income (loss) per share determined in accordance with GAAP. For more information, please see Shutterfly's Securities and Exchange Commission (“SEC”) filings, including the most recent Form 10-K and Form 10-Q, which are available on the SEC's website at www.sec.gov.
The Company has provided a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure, where possible, except that the Company has not reconciled its first quarter and full year 2019 guidance, and its updated 2021 non-GAAP Adjusted EBITDA bridge to comparable GAAP measures at this stage of the process because it is unreasonably difficult to provide guidance for stock-based compensation expense; capitalization and amortization of internal-use software; costs related to executive transition, the strategic review, the facility closures in 2019, any non-recurring charges related to the $200 million debt repayment made in January 2019; and proceeds from the sale of existing facilities, which are reconciling items between GAAP measures and non-GAAP measures. The factors that may impact future stock-based compensation expense; capitalization and amortization of internal-use software; costs related to executive transition; the strategic review; the facility closures in 2019; and the proceeds from the sale of existing facilities are out of the Company's control and/or cannot be reasonably predicted, and therefore the Company is unable to provide such guidance without unreasonable effort. These factors include the Company's market capitalization and related volatility of its stock price; its inability to project the cost or scope of internally produced software; its inability to estimate the charges related to the facility closures in 2019 and the proceeds from the sale of existing facilities; its ability to attract new management personnel; and the lack of assurance that the review of strategic alternatives will result in a transaction or other outcome.
Notice Regarding Forward-Looking Statements
This media release contains "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties. These forward-looking statements include statements regarding expected cash flow generation in each of the Company's three
segments; the Company’s belief it can offer a complete memory solution; the Company's expectations of opportunities to broaden its value proposition to customers; the Company's expectations to create shareholder value; the Company’s expectations of growing all three divisions and returning capital to shareholders; the Company's expectations of maintaining a certain gross leverage ratio; the Company’s expectations as to the timing of meeting its Adjusted EBITDA target; the Company’s expectations as to the revenues and cost synergies from the Lifetouch acquisition; expectations around the consolidation of production facilities including run-rate savings; expectations around the impact of ASC 842; and the Company's business outlook for the first quarter of 2019 and full year 2019. You can identify these statements by the use of terminology such as “guidance”, “believe”, “expect”, “will”, “should”, “could”, “estimate”, “anticipate” or similar forward-looking terms. You should not rely on these forward-looking statements as they involve risks and uncertainties that may cause actual results to vary materially from the forward-looking statements. Factors that might contribute to such differences include, among others, decreased consumer discretionary spending as a result of general economic conditions; the Company's ability to expand its customer base and increase sales to existing customers; the Company's ability to meet production requirements; the Company’s ability to attract and retain management and other personnel; the Company's ability to retain and hire necessary employees, including seasonal personnel, and appropriately staff its operations; the impact of seasonality on the Company's business; the Company's ability to develop innovative, new products and services on a timely and cost-effective basis; failure to realize the anticipated benefits of the Company's 2017 restructuring activities or of the Lifetouch acquisition; recent and ongoing restructuring activities (including but not limited to those relating to manufacturing consolidation, Lifetouch field operations and the Company's single platform migration); any indications of interest received by Shutterfly; consumer acceptance of the Company's products and services; the Company's ability to develop additional adjacent lines of business; unforeseen changes in expense levels; refining our promotional strategies; competition and the pricing strategies of the Company's competitors, which could lead to pricing pressure; the retention of Lifetouch employees and the Company's ability to successfully integrate the Lifetouch businesses; risks inherent in the achievement of anticipated synergies and the timing thereof; and general economic conditions and changes in laws and regulations. For more information regarding the risks and uncertainties that could cause actual results to differ materially from those expressed or implied in these forward-looking statements, as well as risks relating to the Company's business in general, the Company refers you to the “Risk Factors” section of its SEC filings, including the Company's most recent Form 10-K and 10-Q, which are available on the SEC’s website at www.sec.gov. These forward-looking statements are based on current expectations and the Company assumes no obligation to update this information.
# # #
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.
| | | | | |
Contacts Investor Relations: Shawn Tabak, 650-610-6026 stabak@shutterfly.com |
Media Relations: Sondra Harding, 650-610-5129 sharding@shutterfly.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
March 31, 2019 | | | | Twelve Months Ending 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.
