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): February 5, 2019

 
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 February 5, 2019, Shutterfly, Inc. (“Shutterfly”) issued a press release announcing its financial results for the fourth quarter and full year ended December 31, 2018.

This press release is being furnished as Exhibit 99.1 to this Current Report on Form 8-K and is incorporated herein by 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:  February 5, 2019

 
 



 

EXHIBIT INDEX


Number
 
Description
 
99.1 Press release, dated February 5, 2019. 

 


Document

http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12677294&doc=3 
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.

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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:


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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
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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.
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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.
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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
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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
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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


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


December 31, 2018December 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 
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 


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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 







11


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

Three Months Ended Twelve Month Ended 
December 31, December 31,  
2018201720182017
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 %%

[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,
2017201720172017201820182018201820172018
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.
12


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, 
2018201720182017
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.



13


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, 
2018201720182017
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.
14


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

Three Months Ended Three Months Ended 
December 31, 2018December 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 %

15


Twelve Months Ended Twelve Months Ended 
December 31, 2018December 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.

16


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,
2017201720172017201820182018201820172018
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,
2017201720172017201820182018201820172018
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 





17


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,
20172017201720172018
2018 [1]
2018 201820172018
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.

18


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 
Wei