Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 8-K
 
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 

Date of Report (Date of Earliest Event Reported): August 7, 2018

 
Shutterfly, Inc.
(Exact Name of the Registrant as Specified in Its Charter)

 
Delaware
(State or Other Jurisdiction of Incorporation)

001-33031
 
94-3330068
(Commission File Number)
 
(IRS Employer Identification No.)
 

 
2800 Bridge Parkway
Redwood City, California
 
94065
(Address of Principal Executive Offices)
 
(Zip Code)


(650) 610-5200
(Registrant’s Telephone Number, Including Area Code)
 

(Former Name or Former Address, If Changed Since Last Report)


Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

[   ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

[   ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

[   ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2)

[   ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Indicate by check mark whether the registrant is an emerging growth company as defined in as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth company o 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o 





Item 2.02.  Results of Operations and Financial Condition.

On August 7, 2018, Shutterfly, Inc. (“Shutterfly”) issued a press release announcing its financial results for the second quarter ended June 30, 2018.

This press release is being furnished as Exhibit 99.1 to this Current Report on Form 8-K and is incorporated herein by this reference.

The information furnished under Item 2.02 of Form 8-K, “Results of Operations and Financial Condition,” including Exhibit 99.1, is furnished and is not deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”) or otherwise subject to the liabilities of that section.  The information contained in Item 2.02 and in the accompanying exhibit is not incorporated by reference in any filing of Shutterfly under the Securities Act of 1933 or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.

Use of Non-GAAP Financial Information
 
Shutterfly has supplemented the financial measures contained in the attached press release that are provided in accordance with generally accepted accounting principles (“GAAP”) with non-GAAP financial measures. Shutterfly believes that these non-GAAP financial measures provide useful information about its core operating results and thus are appropriate to enhance the overall understanding of its past financial performance and its prospects for the future. These adjustments to Shutterfly’s GAAP results are made with the intent of providing both management and investors a more complete understanding of Shutterfly’s underlying operational results and trends and performance. Management uses these non-GAAP measures to evaluate Shutterfly’s financial results, develop budgets, manage expenditures and determine employee compensation. The methods used by Shutterfly to produce non-GAAP financial results may differ from the methods used by other companies.  Shutterfly’s reference to these non-GAAP financial results should be considered in addition to results that are prepared under current accounting standards but should not be considered as a substitute for, or superior to, the financial results that are presented as consistent with GAAP.  Reconciliation to the nearest GAAP financial measures of the non-GAAP financial measures is included in the press release attached hereto as Exhibit 99.1.

Item 9.01.  Financial Statements and Exhibits.

(d)   Exhibits.

Number
 
 
Description
 
99.1
 


 
 







SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
SHUTTERFLY, INC.
 
 
By:
 
/s/ Michael Pope
Michael Pope
Senior Vice President & Chief Financial Officer

Date:  August 7, 2018

 
 





 

EXHIBIT INDEX


Number
 
 
Description
 
99.1
 
Press release, dated August 7, 2018.

 



Exhibit


http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12394921&doc=3 
Shutterfly Announces Second Quarter 2018 Financial Results


REDWOOD CITY, Calif. August 7, 2018 -- Shutterfly, Inc. (NASDAQ:SFLY), the leading online retailer and manufacturer of high-quality personalized products and services, today announced financial results for the second quarter ended June 30, 2018.

“With the closing of the Lifetouch acquisition, the second quarter of 2018 marks the beginning of a new stage of Shutterfly's growth,” said Christopher North, President and Chief Executive Officer of Shutterfly. “Shutterfly now comprises three divisions: Shutterfly Consumer, Lifetouch, and Shutterfly Business Solutions. All three are large, profitable businesses that are the leaders in their respective industries, and all three have significant opportunities ahead of them. As we continue to integrate Lifetouch, all three divisions will both contribute to and benefit from the combined scale and capabilities of the overall company, most significantly via our world-class manufacturing platform. This sets Shutterfly on a long-term path for sustained, profitable growth.”

"After three full months of Lifetouch ownership, we're pleased with the business results, the Lifetouch leadership, and the close alignment of mission and culture between the two companies. While the full integration of Lifetouch will take several years, the early integration work is off to a strong start and confirms our excitement about the potential for the combined company.”

Second Quarter 2018 Financial Highlights

GAAP net revenue was $443.4 million, which includes Lifetouch from the acquisition date of April 2, 2018. Shutterfly Consumer segment net revenue totaled $165.0 million, an 8% year-over-year decrease. GAAP Lifetouch segment net revenue was $228.6 million. Shutterfly Business Solutions segment net revenue totaled $49.8 million, a 66% year-over-year increase. GAAP operating loss totaled $22.9 million. Net loss was $26.5 million, or a loss of $0.80 per share.

Non-GAAP net revenue, excluding purchase accounting adjustments related to the deferred revenue write-down, was $476.7 million. Shutterfly Consumer brand like-for-like revenue growth was 4%, compared to the second quarter of 2017. Non-GAAP Lifetouch segment net revenue was $261.9 million. Normalized operating income, excluding restructuring, acquisition-related charges and purchase accounting adjustments related to the deferred revenue write-down and inventory write-up, was $32.3 million. Normalized net income was $13.6 million. Adjusted EBITDA was $84.4 million.

The Company expanded its segment reporting which will help investors better understand the trends in the business (see Appendix 2.1, page 10 and 11).

Capital Structure Update

In the second quarter of 2018, the Company settled its $300.0 million of convertible notes in cash, as planned and communicated previously. As expected, the conversion option settled in the money. Therefore, the Company transferred 1,108,176 shares to the noteholders, and pursuant to the

1



Company's bond hedge, received shares from the bond hedge counterparties offsetting any dilution from the conversion option. The warrants initially sold with the convertible notes settle in the third quarter of 2018. There are 4,675,408 warrants that will settle ratably over an 80-day period commencing on August 15. The Company intends to net share settle the warrants.

As a reminder, in the near term the Company anticipates using cash to pay down its acquisition debt, and maintaining a BB rating profile. Longer term, the Company will continue to focus on optimizing capital allocation across organic re-investment in the business, further M&A, and returning excess capital to shareholders.

iMemories Update

At the time the Company purchased Lifetouch, the Company anticipated that it would exit the iMemories business, as Shutterfly Photos was a more complete and advanced solution.  As communicated on the Q1 earnings call, the Company decided to accelerate the process of exiting iMemories. The Company completed the divestiture in the second quarter, resulting in restructuring charges of $3.0 million.

Business Outlook[1] 

On a full-year 2018 basis the Company is raising its guidance on net revenue and adjusted EBITDA, and is updating non-GAAP guidance to the following (in millions, except per share amounts):

 
Prior Non-GAAP Guidance Midpoint
as of May 2, 2018
 
 
 
Updated Non-GAAP Guidance Midpoint
 
Twelve Months Ending
December 31, 2018
 
Change
 
Twelve Months Ending
December 31, 2018
 
 
 
 
 
 
Net revenue

$2,035

 

$3

 

$2,038

Shutterfly Consumer net revenue

$1,035

 

($22
)
 

$1,013

Lifetouch net revenue

$785

 

$15

 

$800

SBS net revenue

$215

 

$10

 

$225

 
 
 
 
 
 
Gross profit margin[2]
62.4
%
 
 
 
53.7
%
 
 
 
 
 
 
Operating income

$196

 

$9

 

$205

Adjusted EBITDA

$400

 

$10

 

$410

 
 
 
 
 
 
Earnings per share

$3.06

 

$0.21

 

$3.27

 
 
 
 
 
 
Capital expenditures

$100

 

 

$100

 
 
 
 
 
 
[1] Excludes restructuring, acquisition-related charges and purchase accounting adjustments related to the deferred revenue write-down and inventory write-up.
[2] The Company substantially completed its assessment of Lifetouch accounting policies during the second quarter of 2018, which resulted in the presentation of photography expenses as cost of net revenue, whereas it had previously been reflected in sales and marketing. Please note, this only impacts income statement presentation and does not impact operating income or adjusted EBITDA. Q2 results and updated guidance reflect this presentation.

2



Notes to the Second Quarter 2018 Financial Results and Operating Metrics and 2018 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 will continue to report net revenue and cost of net revenue, consistent with previous reporting, but now will also include 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 Company substantially completed its assessment of Lifetouch accounting policies during the second quarter of 2018, which resulted in the presentation of photography expenses as cost of net revenue, whereas it had previously been reflected in sales and marketing. Please note this only impacts income statement presentation, and does not impact operating income or adjusted EBITDA. Q2 results and updated guidance reflect this presentation.
The financial guidance herein replaces any of the Company’s previously issued financial guidance which should no longer be relied upon.

Second Quarter Conference Call
Management will review the second quarter 2018 financial results and its expectations for the third quarter and full year 2018 on a conference call on Tuesday, August 7, 2018 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 (888) 243-4451 or (412) 542-4135, 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, August 21, 2018. To hear the replay, please dial (877) 344-7529 or (412) 317-0088 and enter access code 10121786.

3



Non-GAAP Financial Information
This press release contains 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 Generally Accepted Accounting Principles (GAAP). These non-GAAP financial measures include non-GAAP net revenue, 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.
 
To supplement the Company's consolidated financial statements presented on a GAAP basis, 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, operating income (loss), net income (loss), or net income (loss) per share determined in accordance with GAAP. For more information, please see Shutterfly's SEC Filings, including the most recent Form 10-K and Form 10-Q, which are available on the Securities and Exchange Commission's website at www.sec.gov.

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 opportunities in each of the Company's three segments; the Company's expectation that all three segments will contribute to and benefit from the combined scale and capabilities of the overall Company; the Company's expectation of being on a long-term path for sustained, profitable growth; the Company's excitement about the potential for the combined Company; the Company's intention to net share settle its outstanding warrants; the Company's intention to use cash to pay down acquisition debt and maintain a BB rating profile; the Company's expected continued focus on methods for optimizing capital allocation; the Company's business outlooks for the third and fourth quarters of 2018, and the full year 2018; and the Company's intention to provide additional disclosure about the Company's non-Lifetouch businesses through the second quarter of 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 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; consumer acceptance of the Company's products and services; the Company's ability to develop additional adjacent lines of

4



business; unforeseen changes in expense levels; 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 Securities and Exchange Commission (“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 high-quality personalized products. Founded in 1999, Shutterfly, Inc. helps customers capture, preserve and share life’s joy through its Shutterfly and Lifetouch brands. Shutterfly brings photos to life in photo books, gifts, home décor, and cards and stationery, through its flagship Shutterfly.com website, including premium offerings in its Tiny Prints boutique. Lifetouch is the national leader in school photography, built on the enduring tradition of “Picture Day”, as well as serving families through portrait studios and partnerships with churches. Additionally, Shutterfly, Inc. operates Shutterfly Business Solutions, delivering digital printing services to businesses, and BorrowLenses, the premier online marketplace for photographic and video equipment rentals. 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



5



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,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
Net revenue
$
443,372

 
$
209,032

 
$
643,097

 
$
401,004

Cost of net revenue
233,228

 
118,205

 
359,275

 
234,324

Restructuring

 
196

 

 
1,436

Gross profit
210,144

 
90,631

 
283,822

 
165,244

Operating expenses:
 
 
 

 
 
 
 

Technology and development
44,420

 
39,398

 
82,924

 
85,353

Sales and marketing
130,643

 
42,987

 
168,363

 
85,874

General and administrative[1]
55,040

 
27,511

 
86,604

 
55,306

Capital lease termination

 
8,098

 

 
8,098

Restructuring[2]
2,952

 
4,477

 
2,952

 
12,213

Total operating expenses
233,055

 
122,471

 
340,843

 
246,844

Loss from operations
(22,911
)
 
(31,840
)
 
(57,021
)
 
(81,600
)
Interest expense
(17,769
)
 
(5,955
)
 
(27,402
)
 
(11,919
)
Interest and other income, net
1,561

 
244

 
3,310

 
433

Loss before income taxes
(39,119
)
 
(37,551
)
 
(81,113
)
 
(93,086
)
Benefit from income taxes
12,607

 
14,713

 
27,436

 
37,054

Net loss
$
(26,512
)
 
$
(22,838
)
 
$
(53,677
)
 
$
(56,032
)
 
 
 
 
 
 
 
 
Net loss per share - basic and diluted
$
(0.80
)
 
$
(0.68
)
 
$
(1.63
)
 
$
(1.67
)
 
 
 
 
 
 
 
 
Weighted-average shares outstanding - basic and diluted
33,234

 
33,579

 
32,970

 
33,646

 
 
 
 
 
 
 
 
Stock-based compensation is allocated as follows:
 
 
 
 
 
 
 
Cost of net revenue
$
943

 
$
1,074

 
$
1,942

 
$
2,243

Technology and development
2,571

 
2,179

 
5,001

 
4,875

Sales and marketing
2,941

 
2,980

 
6,445

 
6,153

General and administrative
5,242

 
4,236

 
10,001

 
8,703

Restructuring

 

 

 
814

 
$
11,697

 
$
10,469

 
$
23,389

 
$
22,788

 
 
 
 
 
 
 
 
Depreciation and amortization is allocated as follows:
 
 
 
 
 
 
 
Cost of net revenue
$
21,944

 
$
15,069

 
$
37,386

 
$
30,052

Technology and development
7,418

 
7,099

 
13,715

 
14,888

Sales and marketing
9,530

 
2,693

 
11,571

 
5,787

General and administrative
1,485

 
1,096

 
2,603

 
2,594

Restructuring

 
2,493

 

 
5,335

 
$
40,377

 
$
28,450

 
$
65,275

 
$
58,656


[1] 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 divestiture of iMemories resulted in restructuring charges of $3.0 million for the three and six months ended June 30, 2018.

6



Appendix 1.2
Shutterfly, Inc.
Consolidated Balance Sheets - GAAP
(In thousands, except par value amounts)
(Unaudited)


 
June 30, 2018
 
December 31, 2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
146,701

 
$
489,894

Short-term investments
53,890

 
178,021

Accounts receivable, net
58,578

 
82,317

Inventories
15,269

 
11,019

Prepaid expenses and other current assets
112,196

 
41,383

Total current assets
386,634

 
802,634

Long-term investments
24,974

 
9,242

Property and equipment, net
392,662

 
266,860

Intangible assets, net
341,769

 
29,671

Goodwill
841,374

 
408,975

Other assets
23,623

 
17,418

Total assets
$
2,011,036

 
$
1,534,800

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
15,249

 
$
297,054

Accounts payable
33,178

 
91,473

Accrued liabilities
146,372

 
159,248

Deferred revenue
29,448

 
24,649

Total current liabilities
224,247

 
572,424

Long-term debt
1,094,347

 
292,457

Other liabilities
148,146

 
119,195

Total liabilities
1,466,740

 
984,076

Stockholders’ equity:
 
 
 
Common stock, $0.0001 par value; 100,000 shares authorized; 33,381 and 32,297 shares issued and outstanding on June 30, 2018 and December 31, 2017, respectively
3

 
3

Additional paid-in capital
1,036,962

 
996,301

Accumulated other comprehensive income
4,164

 
1,778

Accumulated deficit
(496,833
)
 
(447,358
)
Total stockholders' equity
544,296

 
550,724

Total liabilities and stockholders' equity
$
2,011,036

 
$
1,534,800



7



Appendix 1.3
Shutterfly, Inc.
Consolidated Statements of Cash Flows - GAAP
(In thousands)
(Unaudited)
 
Six Months Ended
 
June 30,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net loss
$
(53,677
)
 
$
(56,032
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
50,111

 
45,121

Amortization of intangible assets
15,164

 
8,200

Amortization of debt discount and issuance costs
7,009

 
7,524

Stock-based compensation, net of forfeitures
23,389

 
21,974

Loss on disposal of property and equipment
154

 
467

Deferred income taxes
17,571

 
(7,103
)
Restructuring
752

 
10,764

Other
(272
)
 

Changes in operating assets and liabilities, net of acquisition:
 
 
 
Accounts receivable
30,767

 
27,286

Inventories
15,607

 
1,415

Prepaid expenses and other assets
(42,795
)
 
(19,776
)
Accounts payable
(69,708
)
 
(39,949
)
Accrued and other liabilities
(130,127
)
 
(58,605
)
Net cash used in operating activities
(136,055
)
 
(58,714
)
Cash flows from investing activities:
 
 
 
Acquisition of business, net of cash acquired
(890,052
)
 

Purchases of property and equipment
(17,692
)
 
(8,176
)
Capitalization of software and website development costs
(21,392
)
 
(17,058
)
Purchases of investments
(9,523
)
 
(39,805
)
Proceeds from the maturities of investments
174,329

 
19,033

Proceeds from the sales of investments
45,106

 

Proceeds from sale of property and equipment
1,132

 
11,678

Net cash used in investing activities
(718,092
)
 
(34,328
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of common stock upon exercise of stock options
16,577

 
520

Repurchases of common stock

 
(50,000
)
Principal payments of borrowings
(302,608
)
 

Principal payments of capital lease and financing obligations
(9,396
)
 
(20,621
)
Proceeds from borrowings, net of issuance costs
806,652

 

Net cash provided by (used in) financing activities
511,225

 
(70,101
)
Effect of exchange rate changes on cash and cash equivalents
(271
)
 

Net decrease in cash and cash equivalents
(343,193
)
 
(163,143
)
Cash and cash equivalents, beginning of period
489,894

 
289,224

Cash and cash equivalents, end of period
$
146,701

 
$
126,081

 
 
 
 
Supplemental schedule of non-cash investing / financing activities:
 
 
 
Net (decrease) increase in accrued purchases of property and equipment
$
(1,200
)
 
$
745

Net increase in accrued capitalized software and website development costs
1,119

 
270

Stock-based compensation capitalized with software and website development costs
697

 
758

Property and equipment acquired under capital leases
2,969

 
6,228

Net increase in receivable proceeds from the sale of property and equipment

 
9,250


8



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

 
Three Months Ended
 
June 30,
 
2018
 
2017
Shutterfly Consumer Metrics
 
 
 
Customers [1]
3,140,246

 
3,350,434

   year-over-year change
(6
)%
 
 
 
 
 
 
Orders
4,788,564

 
5,467,763

   year-over-year change
(12
)%
 
 
 
 
 
 
Average order value [2]

$34.46

 

$32.75

   year-over-year change
5
 %
 
 

[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,
 
Dec. 31,
 
2017
 
2017
 
2017
 
2017
 
2018
 
2018
 
2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shutterfly Consumer net revenue
 
 
 
 
 
 
 
 
 
 
 
 
 
Shutterfly brand
$
123,903

 
$
139,908

 
$
115,883

 
$
464,547

 
$
142,664

 
$
154,181

 
$
844,242

Tiny Prints Boutique

 

 
1,942

 
48,932

 
2,103

 
1,397

 
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

 
9,425

 
33,295

Total
$
160,645

 
$
179,090

 
$
135,418

 
$
521,809

 
$
152,059

 
$
165,003

 
$
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.



9



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

The Company expanded segment reporting, which now includes segment margin. Segment reporting will continue to report net revenue and cost of net revenue, consistent with previous reporting, but now will also include 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
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Shutterfly Consumer:
 
 
 
 
 
 
 
Net revenue
$
165,003

 
$
179,090

 
$
317,062

 
$
339,735

Cost of net revenue
86,065

 
92,049

 
170,909

 
181,903

Technology and development
29,830

 
33,037

 
61,959

 
71,966

Sales and marketing
29,956

 
36,406

 
60,681

 
72,144

Credit card fees
4,349

 
4,654

 
8,548

 
8,943

Margin[1]
$
14,803

 
$
12,944

 
$
14,965

 
$
4,779

Margin %
9
%
 
7
%
 
5
%
 
1
%
 
 
 
 
 
 
 
 
Lifetouch[2]:
 
 
 
 
 
 
 
Net revenue[3]
$
261,911

 
$

 
$
261,911

 
$

Cost of net revenue[4]
91,148

 

 
91,148

 

Technology and development
7,109

 

 
7,109

 

Sales and marketing
86,960

 

 
86,960

 

Credit card fees
1,165

 

 
1,165

 

Margin[1]
$
75,529

 
$

 
$
75,529

 
$

Margin %
29
%
 
%
 
29
%
 
%
 
 
 
 
 
 
 
 
Shutterfly Business Solutions:
 
 
 
 
 
 
 
Net revenue
$
49,809

 
$
29,942

 
$
97,475

 
$
61,269

Cost of net revenue
41,610

 
23,900

 
81,519

 
47,738

Technology and development
3,049

 
4,182

 
6,994

 
8,511

Sales and marketing
1,619

 
931

 
3,069

 
1,839

Margin[1]
$
3,531

 
$
929

 
$
5,893

 
$
3,181

Margin %
7
%
 
3
%
 
6
%
 
5
%
 
 
 
 
 
 
 
 
Consolidated Segments:
 
 
 
 
 
 
 
Net revenue[3]
$
476,723

 
$
209,032

 
$
676,448

 
$
401,004

Cost of net revenue[4]
218,823

 
115,949

 
343,576

 
229,641

Technology and development
39,988

 
37,219

 
76,062

 
80,477

Sales and marketing
118,535

 
37,337

 
150,710

 
73,983

Credit card fees
5,514

 
4,654

 
9,713

 
8,943

Margin[1]
$
93,863

 
$
13,873

 
$
96,387

 
$
7,960

Margin %
20
%
 
7
%
 
14
%
 
2
%
 
 
 
 
 
 
 
 
[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 one-time charges.
[2] The Company acquired Lifetouch on April 2, 2018.
[3] Yearbook sales and collections are made throughout the school year, whereas yearbooks are typically delivered toward the end of the school year in the second quarter. Business combination accounting principles require the Company to write down to fair value the deferred revenue assumed in acquisitions based on the cost to manufacture and deliver the yearbooks, plus a profit margin. Therefore, GAAP revenue after an acquisition does not reflect the full amount that would have been reported if the acquired deferred revenue was not written down to fair value. The non-GAAP adjustments eliminate the effect of the deferred revenue write-down. The Company believes these adjustments are useful to investors as an additional means to reflect revenue and gross margin trends of the Company's business.
[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. The non-GAAP adjustment to the Company's cost of net revenue excludes the expected profit margin component that is recorded under business combination accounting principles. The Company believes the adjustment is useful to investors as an additional means to reflect cost of net revenue and gross profit trends of the Company's business.

10



The following table reconciles operating segment margin to total operating income (loss), operating segment net revenue to total net revenue and operating segment cost of net revenue to total cost of net revenue:

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
Total margin for operating segments
$
93,863

 
$
13,873

 
$
96,387

 
$
7,960

Purchase accounting deferred revenue adjustment[1]
(33,351
)
 

 
(33,351
)
 

Purchase accounting inventory adjustment[2]
(10,931
)
 

 
(10,931
)
 

Corporate expenses[3]
(37,012
)
 
(18,613
)
 
(55,036
)
 
(36,825
)
Amortization of intangible assets
(12,831
)
 
(3,860
)
 
(15,164
)
 
(8,200
)
Stock-based compensation for operating segments
(11,697
)
 
(10,469
)
 
(23,389
)
 
(22,788
)
Restructuring
(2,952
)
 
(4,673
)
 
(2,952
)
 
(13,649
)
Acquisition-related charges
(8,000
)
 

 
(12,585
)
 

Capital lease termination

 
(8,098
)
 

 
(8,098
)
Operating income (loss)
$
(22,911
)
 
$
(31,840
)
 
$
(57,021
)
 
$
(81,600
)
Operating margin
(5
)%
 
(15
)%
 
(9
)%
 
(20
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total net revenue for all operating segments
$
476,723

 
$
209,032

 
$
676,448

 
$
401,004

Purchase accounting deferred revenue adjustment[1]
(33,351
)
 

 
(33,351
)
 

Total net revenue
$
443,372

 
$
209,032

 
$
643,097

 
$
401,004

 
 
 
 
 
 
 
 
Total cost of net revenue for all operating segments
$
218,823

 
$
115,949

 
$
343,576

 
$
229,641

Purchase accounting inventory adjustment[2]
10,931

 

 
10,931

 

Stock-based compensation for cost of net revenue
943

 
1,074

 
1,942

 
2,243

Amortization of intangible assets for cost of net revenue
2,531

 
1,182

 
2,826

 
2,440

Total cost of net revenue
$
233,228

 
$
118,205

 
$
359,275

 
$
234,324

 
 
 
 
 
 
 
 
[1] Yearbook sales and collections are made throughout the school year, whereas yearbooks are typically delivered toward the end of the school year in the second quarter. Business combination accounting principles require the Company to write down to fair value the deferred revenue assumed in acquisitions based on the cost to manufacture and deliver the yearbooks, plus a profit margin. Therefore, GAAP revenue after an acquisition does not reflect the full amount that would have been reported if the acquired deferred revenue was not written down to fair value. The non-GAAP adjustments eliminate the effect of the deferred revenue write-down. The Company believes these adjustments are useful to investors as an additional means to reflect revenue and gross margin trends of the Company's business.
[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. The non-GAAP adjustment to the Company's cost of net revenue excludes the expected profit margin component that is recorded under business combination accounting principles. The Company believes the adjustment is useful to investors as an additional means to reflect cost of net revenue and gross profit trends of the Company's business.
[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.


11



Appendix 3.1
Shutterfly, Inc.
Reconciliation of Non-GAAP Financial Measures
(In thousands)
(Unaudited)

The Company substantially completed its assessment of Lifetouch accounting policies during the second quarter of 2018, which resulted in the presentation of photography expenses as cost of net revenue, whereas it had previously been reflected in sales and marketing, which has the impact of reducing sales and marketing expense by $48 million and increasing cost of net revenue by a corresponding amount. There is no impact to operating income or adjusted EBITDA.

 
Three Months Ended
 
 
 
 
 
Three Months Ended
 
June 30, 2018
 
 
 
 
 
June 30, 2018
 
GAAP Income
 
Non-GAAP
 
Non-recurring
 
Normalized
 
Statement
 
Adjustments
 
Adjustments
 
 Non-GAAP
Net revenue
 
 
 
 
 
 
 
Shutterfly consumer
$
165,003

 
 
 
 
 
$
165,003

Lifetouch
228,560

 
33,351

[1]
 
 
261,911

Shutterfly business solutions
49,809

 
 
 
 
 
49,809

Total net revenue
443,372

 
33,351

 
 
 
476,723

Cost of net revenue
233,228

 
(10,931
)
[2]
 
 
222,297

Gross profit
210,144

 
44,282

 
 
 
254,426

Gross profit margin
47.4
 %
 
 
 
 
 
53.4
%
 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
Technology and development
44,420

 
 
 
 
 
44,420

Sales and marketing
130,643

 
 
 
 
 
130,643

General and administrative
55,040

 
 
 
(8,000
)
[3]
47,040

Restructuring
2,952

 
 
 
(2,952
)
[4]

Total operating expenses
233,055

 
 
 
(10,952
)
 
222,103

Operating (loss) income
(22,911
)
 
 
 
 
 
32,323

Operating margin
(5.2
)%
 
 
 
 
 
6.8
%
 
 
 
 
 
 
 
 
Interest expense
(17,769
)
 
 
 
 
 
(17,769
)
Interest and other income, net
1,561

 
 
 
 
 
1,561

(Loss) income before income taxes
(39,119
)
 
44,282

 
10,952

 
16,115

(Provision for) benefit from income taxes
12,607

 
 
 
 
 
(2,564
)
Net (loss) income
$
(26,512
)
 
 
 
 
 
$
13,551

 
 
 
 
 
 
 
 
Net (loss) income per share:
 
 
 
 
 
 
 
Basic
$
(0.80
)
 
 
 
 
 
$
0.41

Diluted
$
(0.80
)
 
 
 
 
 
$
0.38

 
 
 
 
 
 
 
 
Weighted-average shares outstanding
 
 
 
 
 
 
 
Basic
33,234

 
 
 
 
 
33,234

Diluted
33,234

 
 
 
 
 
35,775

 
 
 
 
 
 
 
 
Operating (loss) income


 
 
 
 
 
32,323

Stock-based compensation
 
 
 
 
 
 
11,697

Amortization of intangible assets
 
 
 
 
 
 
12,831

Depreciation
 
 
 
 
 
 
27,546

Adjusted EBITDA


 
 
 
 
 
$
84,397

Adjusted EBITDA margin


 
 
 
 
 
17.7
%

12



 
Six Months Ended
 
 
 
 
 
Six Months Ended
 
June 30, 2018
 
 
 
 
 
June 30, 2018
 
GAAP Income
 
Non-GAAP
 
Non-recurring
 
Normalized
 
Statement
 
Adjustments
 
Adjustments
 
 Non-GAAP
Net revenue
 
 
 
 
 
 
 
Shutterfly consumer
$
317,062

 
 
 
 
 
$
317,062

Lifetouch
228,560

 
33,351

[1]
 
 
261,911

Shutterfly business solutions
97,475

 
 
 
 
 
97,475

Total net revenue
643,097

 
33,351

 
 
 
676,448

Cost of net revenue
359,275

 
(10,931
)
[2]
 
 
348,344

Gross profit
283,822

 
44,282

 
 
 
328,104

Gross profit margin
44.1
 %
 
 
 
 
 
48.5
%
 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
Technology and development
82,924

 
 
 
 
 
82,924

Sales and marketing
168,363

 
 
 
 
 
168,363

General and administrative
86,604

 
 
 
(12,585
)
[3]
74,019

Restructuring
2,952

 
 
 
(2,952
)
[4]

Total operating expenses
340,843

 
 
 
(15,537
)
 
325,306

Operating (loss) income
(57,021
)
 
 
 
 
 
2,798

Operating margin
(8.9
)%
 
 
 
 
 
0.4
%
 
 
 
 
 
 
 
 
Interest expense
(27,402
)
 
 
 
 
 
(27,402
)
Interest and other income, net
3,310

 
 
 
 
 
3,310

Loss before income taxes
(81,113
)
 
44,282

 
15,537

 
(21,294
)
Benefit from income taxes
27,436

 
 
 
 
 
11,080

Net loss
$
(53,677
)
 
 
 
 
 
$
(10,214
)
 
 
 
 
 
 
 
 
Net loss per share - basic and diluted
$
(1.63
)
 
 
 
 
 
$
(0.31
)
 
 
 
 
 
 
 
 
Weighted-average shares outstanding
32,970

 
 
 
 
 
32,970

 
 
 
 
 
 
 
 
Operating (loss) income


 
 
 
 
 
2,798

Stock-based compensation
 
 
 
 
 
 
23,389

Amortization of intangible assets
 
 
 
 
 
 
15,164

Depreciation
 
 
 
 
 
 
50,111

Adjusted EBITDA


 
 
 
 
 
$
91,462

Adjusted EBITDA margin


 
 
 
 
 
13.5
%
 
 
 
 
 
 
 
 
[1] Yearbook sales and collections are made throughout the school year, whereas yearbooks are typically delivered toward the end of the school year in the second quarter. Business combination accounting principles require the Company to write down to fair value the deferred revenue assumed in acquisitions based on the cost to manufacture and deliver the yearbooks, plus a profit margin. Therefore, GAAP revenue after an acquisition does not reflect the full amount that would have been reported if the acquired deferred revenue was not written down to fair value. The non-GAAP adjustments eliminate the effect of the deferred revenue write-down. The Company believes these adjustments are useful to investors as an additional means to reflect revenue and gross margin trends of the Company's business.
[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. The non-GAAP adjustment to the Company's cost of net revenue excludes the expected profit margin component that is recorded under business combination accounting principles. The Company believes the adjustment is useful to investors as an additional means to reflect cost of net revenue and gross profit trends of the Company's business.
[3] Acquisition-related charges for Lifetouch acquisition.
[4] Restructuring charge related to divestiture of iMemories.


13



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,
 
Dec. 31,
 
2017
 
2017
 
2017
 
2017
 
2018
 
2018
 
2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GAAP net income (loss)
$
(33,194
)
 
$
(22,838
)
 
$
(25,607
)
 
$
111,724

 
$
(27,165
)
 
$
(26,512
)
 
$
30,085

Capital lease termination

 
8,098

 

 

 

 

 
8,098

Restructuring
8,976

 
4,673

 
3,317

 

 

 
2,952

 
16,966

Acquisition-related charges

 

 

 

 
4,585

 
8,000

 

Purchase accounting adjustments

 

 

 

 

 
44,282

 

Tax benefit impact of non-recurring items
(3,948
)
 
(4,829
)
 
(1,669
)
 

 
(1,185
)
 
(15,171
)
 
(10,446
)
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

 
$
35,828

 
 
 
 
 
 
 
 
 
 
 
 
 
 
GAAP diluted shares outstanding
33,712

 
33,579

 
32,878

 
33,114

 
32,702

 
33,234

 
34,106

Non-GAAP diluted shares outstanding
33,712

 
33,579

 
32,878

 
33,114

 
32,702

 
35,775

 
34,106

 
 
 
 
 
 
 
 
 
 
 
 
 
 
GAAP net income (loss) per share
$
(0.98
)
 
$
(0.68
)
 
$
(0.78
)
 
$
3.37

 
$
(0.83
)
 
$
(0.80
)
 
$
0.88

Non-GAAP net income (loss) per share
$
(0.84
)
 
$
(0.44
)
 
$
(0.73
)
 
$
3.11

 
$
(0.73
)
 
$
0.38

 
$
1.05


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,
 
Dec. 31,
 
2017
 
2017
 
2017
 
2017
 
2018
 
2018
 
2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GAAP net income (loss)
$
(33,194
)
 
$
(22,838
)
 
$
(25,607
)
 
$
111,724

 
$
(27,165
)
 
$
(26,512
)
 
$
30,085

Interest expense
5,964

 
5,955

 
6,699

 
9,219

 
9,633

 
17,769

 
27,836

Interest and other income, net
(189
)
 
(244
)
 
(253
)
 
(794
)
 
(1,749
)
 
(1,561
)
 
(1,481
)
Tax (benefit) provision
(22,341
)
 
(14,713
)
 
(16,660
)
 
58,873

 
(14,829
)
 
(12,607
)
 
5,160

Depreciation and amortization
27,364

 
25,957

 
24,815

 
25,724

 
24,898

 
40,377

 
103,862

Stock-based compensation
11,505

 
10,469

 
10,736

 
10,863

 
11,692

 
11,697

 
43,573

Capital lease termination

 
8,098

 

 

 

 

 
8,098

Restructuring
8,976

 
4,673

 
3,317

 

 

 
2,952

 
16,966

Acquisition-related charges

 

 

 

 
4,585

 
8,000

 

Purchase accounting adjustments

 

 

 

 

 
44,282

 

Non-GAAP Adjusted EBITDA
$
(1,915
)
 
$
17,357

 
$
3,047

 
$
215,609

 
$
7,065

 
$
84,397

 
$
234,099




14



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,
 
Dec. 31,
 
2017
 
2017
 
2017
 
2017
 
2018
 
2018
 
2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
$
(72,386
)
 
$
13,672

 
$
(21,945
)
 
$
320,183

 
$
(124,332
)
 
$
(11,723
)
 
$
239,524

Interest expense
5,964

 
5,955

 
6,699

 
9,219

 
9,633

 
17,769

 
27,836

Interest and other income, net
(189
)
 
(244
)
 
(253
)
 
(794
)
 
(1,749
)
 
(1,561
)
 
(1,481
)
Tax (benefit) provision
(22,341
)
 
(14,713
)
 
(16,660
)
 
58,873

 
(14,829
)
 
(12,607
)
 
5,160

Changes in operating assets and liabilities
92,194

 
(2,565
)
 
35,336

 
(159,600
)
 
142,368

 
53,888

 
(34,634
)
Other adjustments
(6,265
)
 
5,377

 
(2,575
)
 
(13,026
)
 
(8,611
)
 
(15,851
)
 
(16,488
)
Cash restructuring
1,108

 
1,777

 
2,445

 
754

 

 
2,200

 
6,084

Capital lease termination

 
8,098

 

 

 

 

 
8,098

Acquisition-related charges

 

 

 

 
4,585

 
8,000

 

Purchase accounting adjustments

 

 

 

 

 
44,282

 

Non-GAAP Adjusted EBITDA
$
(1,915
)
 
$
17,357

 
$
3,047

 
$
215,609

 
$
7,065

 
$
84,397

 
$
234,099





15



Appendix 5.1
Shutterfly, Inc.
Reconciliation of Forward-Looking Guidance for Non-GAAP Financial Measures
(In millions, except per share amounts)
(Unaudited)
 
Forward-Looking Guidance [1]
 
GAAP
 
 
 
Non-GAAP
 
Twelve Months Ending
December 31, 2018
 
Non-GAAP Adjustment
 
Twelve Months Ending
December 31, 2018
 
Low
 
High
 
 
Low
 
High
 
 
 
 
 
 
 
 
 
 
Net revenue

$1,972

 

$2,027

 

$38

[2]

$2,010

 

$2,065

Shutterfly Consumer net revenue

$1,000

 

$1,025

 
 
 

$1,000

 

$1,025

Lifetouch net revenue

$752

 

$772

 

$38

[2]

$790

 

$810

SBS net revenue

$220

 

$230

 
 
 

$220

 

$230

 
 
 
 
 
 
 
 
 
 
Cost of net revenue

$942

 

$966

 

($11
)
[3]

$931

 

$956

Gross profit

$1,030

 

$1,060

 

$49

[2][3]

$1,079

 

$1,109

Gross profit margin
52.2
%
 
52.3
%
 
 
 
53.7
%
 
53.7
%
 
 
 
 
 
 
 
 
 
 
Operating income

$146

 

$166

 

$49

[2][3]

$196

 

$215

Operating margin
7.4
%
 
8.2
%
 
 
 
9.7
%
 
10.4
%