Document
FALSE000112592000011259202019-08-072019-08-07

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, 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 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  

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, 2019, Shutterfly, Inc. (“Shutterfly”) issued a press release announcing its financial results for the second quarter ended June 30, 2019.

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 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, 2019

 
 



 

EXHIBIT INDEX


Number
 
Description
 
99.1 Press release, dated August 7, 2019. 


Document

http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=13048478&doc=8 
Shutterfly Announces Second Quarter 2019 Financial Results


REDWOOD CITY, California, August 7, 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 second quarter ended June 30, 2019.

Second Quarter 2019 Financial Highlights

Net revenue was $473 million. Shutterfly Consumer segment net revenue totaled $170 million, a 3% year-over-year increase. Lifetouch segment GAAP net revenue was $254 million, an 11% year-over-year increase. Shutterfly Business Solutions segment net revenue remained relatively flat at $50 million. Operating loss totaled $7.9 million. Net loss was $13 million or a loss of $0.37 per share.

Lifetouch segment non-GAAP net revenue was $254 million, a 3% year-over-year decrease.

Normalized operating income, excluding restructuring and executive transition and strategic review charges was $3.5 million. Normalized net loss was $8.0 million. Adjusted EBITDA was $57 million.

A reconciliation of GAAP to non-GAAP financial measures has been provided in the financial statement tables included in this press release. An explanation of these measures is also included below under the heading “Non-GAAP Financial Information.”


Shutterfly Acquisition by Apollo

Shutterfly announced in June 2019 that it has entered into a definitive agreement (the "Merger Agreement") with the affiliates of certain funds (the “Apollo Funds”), managed by affiliates of Apollo Global Management, LLC (together with its consolidated subsidiaries, “Apollo”) (NYSE: APO), a leading global alternative investment manager, pursuant to which affiliates of Apollo Funds will acquire all the outstanding shares of Shutterfly for $51.00 per share in cash. The transaction is expected to close by early fourth quarter 2019, pending approval by Shutterfly stockholders and satisfaction of certain other closing conditions. Early termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 was granted on July 17, 2019, effective immediately.

Due to the pending acquisition by affiliates of the Apollo Funds, Shutterfly does not plan to host an earnings conference call nor provide forward-looking guidance.
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Notes to the Second Quarter 2019 Financial Results and Operating Metrics
Adjusted EBITDA is a non-GAAP financial measure that the Company defines as earnings before interest, taxes, depreciation, amortization, stock-based compensation, restructuring, acquisition-related costs, and executive transition and strategic review 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. Shutterfly 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 (Shutterfly Consumer revenue only) divided by total orders.

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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, non-GAAP gross margin, normalized operating income (loss), non-GAAP operating margin, normalized net income (loss), non-GAAP diluted 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), operating margin, 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.


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 the timing of the expected closing of our pending acquisition by the Apollo Funds. 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, the parties' inability to consummate the acquisition due to failure to satisfy conditions to the completion of the transaction, including the receipt of stockholder approval, which may not be obtained on the anticipated schedule or at all, and the outcome of lawsuits that may be brought by certain purported stockholders seeking to rescind the Merger Agreement or enjoin the consummation of the acquisition. 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.



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Additional Information and Where to Find It
In connection with the proposed acquisition of Shutterfly by certain affiliates of the Apollo Funds, Shutterfly has filed and will continue to file relevant materials with the SEC, including a preliminary and definitive proxy statement. Promptly after filing the definitive proxy statement, Shutterfly will mail the definitive proxy statement and a proxy card to the stockholders of Shutterfly. SHUTTERFLY STOCKHOLDERS ARE URGED TO READ THE DEFINITIVE PROXY STATEMENT (INCLUDING ANY AMENDMENTS OR SUPPLEMENTS THERETO) CAREFULLY WHEN IT BECOMES AVAILABLE BEFORE MAKING ANY VOTING OR INVESTMENT DECISION WITH RESPECT TO THE PROPOSED TRANSACTION BECAUSE IT WILL CONTAIN IMPORTANT INFORMATION ABOUT THE PROPOSED TRANSACTION AND THE PARTIES TO THE PROPOSED TRANSACTION. Stockholders of Shutterfly will be able to obtain a free copy of these documents, when they become available, at the website maintained by the SEC at www.sec.gov or free of charge at www.shutterflyinc.com.

Additionally, Shutterfly will file other relevant materials in connection with the proposed acquisition of Shutterfly by certain affiliates of the Apollo Funds pursuant to the terms of the Merger Agreement by and such affiliates of the Apollo Funds and Shutterfly. Shutterfly and its directors, executive officers and other members of its management and employees, under SEC rules, may be deemed to be participants in the solicitation of proxies of Shutterfly stockholders in connection with the proposed transaction. Information concerning the interests of Shutterfly’s participants in the solicitation, which may, in some cases, be different than those of Shutterfly’s stockholders generally, are available in Shutterfly’s proxy statement for its 2019 annual meeting of stockholders, which was filed with the SEC on April 8, 2019. To the extent holdings of securities by Shutterfly’s directors or executive officers have changed since the amounts disclosed in its proxy statement, such changes have been or will be reflected on Statements of Change in Ownership on Form 4 filed with the SEC. Additional information regarding these persons and their interests in the proposed transaction will be set forth in the definitive proxy statement relating to the proposed transaction when it becomes available. These documents are available free of charge at the SEC’s web site at www.sec.gov or by going to Shutterfly’s website at www.shutterflyinc.com.


# # #

About Shutterfly, Inc.
Shutterfly, Inc. is the leading retailer and manufacturing platform for personalized products and communications. Founded in 1999, Shutterfly, Inc. has three divisions: Shutterfly Consumer, Lifetouch, and Shutterfly Business Solutions. Shutterfly Consumer and Lifetouch help consumers capture, preserve, and share life’s important moments through professional and personal photography, and personalized products. The Shutterfly brand brings photos to life in photo books, gifts, home décor, and cards and stationery. Lifetouch is the national leader in school photography, built on the enduring tradition of “Picture Day”, and also serves families through portrait studios and other partnerships. Shutterfly Business Solutions delivers digital printing services that enable efficient and effective customer engagement through personalized communications. For more information about Shutterfly, Inc. (NASDAQ: SFLY), visit www.shutterflyinc.com.

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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 Six Months Ended 
June 30, June 30, 
2019 2018 2019 2018 
Net revenue $473,416 $443,372 $798,097 $643,097 
Cost of net revenue 240,513 233,228 450,912 359,275 
Gross profit
232,903 210,144 347,185 283,822 
Operating expenses: 
Technology and development
49,606 44,420 97,939 82,924 
Sales and marketing135,468 130,643 254,837 168,363 
General and administrative[1]
52,491 55,040 100,878 86,604 
Restructuring[2]
3,274 2,952 7,247 2,952 
Total operating expenses 240,839 233,055 460,901 340,843 
Loss from operations (7,936)(22,911)(113,716)(57,021)
Interest expense (13,312)(17,769)(31,566)(27,402)
Interest and other income, net 1,088 1,561 2,266 3,310 
Loss before income taxes (20,160)(39,119)(143,016)(81,113)
Benefit from income taxes 7,428 12,607 46,665 27,436 
Net loss $(12,732)$(26,512)$(96,351)$(53,677)
Net loss per share - basic and diluted $(0.37)$(0.80)$(2.83)$(1.63)
Weighted-average shares outstanding - basic and diluted 34,254 33,234 34,089 32,970 
Stock-based compensation is allocated as follows: 
Cost of net revenue
$844 $943 $1,736 $1,942 
Technology and development 2,268 2,571 4,566 5,001 
Sales and marketing 3,574 2,941 7,039 6,445 
General and administrative 4,821 5,242 10,204 10,001 
$11,507 $11,697 $23,545 $23,389 
Depreciation and amortization is allocated as follows: 
Cost of net revenue
$24,566 $21,944 $48,853 $37,386 
Technology and development 6,344 7,418 12,814 13,715 
Sales and marketing 9,893 9,530 19,759 11,571 
General and administrative 1,625 1,485 3,161 2,603 
Restructuring 937 — 2,232 — 
$43,365 $40,377 $86,819 $65,275 
[1] The General and administrative expenses of $52.5 million and $100.9 million for the three and six months ended June 30, 2019, respectively, include $7.5 million and $9.7 million, respectively, of costs related to executive transition and the strategic review. The General and administrative expenses of $55.0 million and $86.6 million for the three and six months ended June 30, 2018, respectively, include $8.0 million and $12.6 million, respectively, of acquisition-related charges.
[2] The restructuring plan approved in the fourth quarter of 2018 to close four Lifetouch facilities resulted in restructuring charges of $3.3 million and $7.2 million for the three and six months ended June 30, 2019, respectively. The exit of iMemories business in the second quarter of 2018 resulted in restructuring charges of $3.0 million for the three and six months ended June 30, 2018.
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Appendix 1.2
Shutterfly, Inc.
Consolidated Balance Sheets - GAAP
(In thousands, except par value amounts)
(Unaudited)
June 30, 2019December 31, 2018
ASSETS 
Current assets: 
Cash and cash equivalents $105,338 $521,567 
Short-term investments 19,013 34,011 
Accounts receivable, net 60,433 87,023 
Inventories 20,916 18,015 
Assets held for sale9,142 1,000 
Prepaid expenses and other current assets 114,776 65,961 
Total current assets 329,618 727,577 
Long-term investments 4,872 10,808 
Property and equipment, net 336,655 381,018 
Intangible assets, net 291,459 316,154 
Goodwill 843,698 843,607 
Other assets 84,872 23,045 
Total assets $1,891,174 $2,302,209 
LIABILITIES AND STOCKHOLDERS’ EQUITY 
Current liabilities: 
Current portion of long-term debt $5,234 $14,203 
Accounts payable 45,129 105,407 
Accrued liabilities 142,836 226,445 
Operating lease liabilities, current portion 21,045 — 
Deferred revenue, current portion 38,350 57,319 
Total current liabilities 252,594 403,374 
Long-term debt 897,985 1,090,442 
Operating lease liabilities 59,301 — 
Other liabilities 84,707 134,027 
Total liabilities 1,294,587 1,627,843 
Stockholders’ equity: 
Common stock, $0.0001 par value; 100,000 shares authorized; 34,382 and 33,673 shares issued and outstanding on June 30, 2019 and December 31, 2018, respectively 
Additional paid-in capital 1,090,694 1,065,531 
Accumulated other comprehensive (loss) income (1,027)1,592 
Accumulated deficit (493,083)(392,760)
Total stockholders' equity 596,587 674,366 
Total liabilities and stockholders' equity $1,891,174 $2,302,209 


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Appendix 1.3
Shutterfly, Inc.
Consolidated Statements of Cash Flows - GAAP
(In thousands)
(Unaudited)
Six Months Ended 
June 30, 
2019 2018 
Cash flows from operating activities: 
Net loss $(96,351)$(53,677)
Adjustments to reconcile net loss to net cash used in operating activities: 
Depreciation and amortization 58,967 50,111 
Amortization of intangible assets 25,620 15,164 
Amortization of debt discount and issuance costs 5,533 7,009 
Amortization of operating lease assets 11,150 — 
Repayment of convertible senior notes attributable to debt discount[1]
— (63,510)
Stock-based compensation 23,545 23,389 
(Gain) loss on disposal of property and equipment (426)154 
Deferred income taxes 3,808 17,571 
Restructuring 2,301 752 
Other (57)(272)
Changes in operating assets and liabilities, net of acquisition: 
Accounts receivable 26,605 30,767 
Inventories (2,959)15,607 
Prepaid expenses and other assets (48,994)(42,795)
Accounts payable (60,267)(69,708)
Accrued and other liabilities (114,092)(130,127)
Net cash used in operating activities (165,617)(199,565)
Cash flows from investing activities: 
Acquisition of business, net of cash acquired — (890,052)
Purchases of property and equipment (27,129)(17,692)
Capitalization of software and website development costs (30,642)(21,392)
Purchases of investments — (9,523)
Proceeds from maturities of investments 21,184 174,329 
Proceeds from sales of investments — 45,106 
Proceeds from sales of property and equipment 1,136 1,132 
Net cash used in investing activities (35,451)(718,092)
Cash flows from financing activities: 
Proceeds from issuance of common stock upon exercise of stock options 1,007 16,577 
Principal payments of borrowings[1]
(207,292)(239,098)
Principal payments of finance lease liabilities and financing obligations (9,587)(9,396)
Proceeds from borrowings, net of issuance costs — 806,652 
Net cash (used in) provided by financing activities (215,872)574,735 
Effect of exchange rate changes on cash and cash equivalents 711 (271)
Net decrease in cash and cash equivalents (416,229)(343,193)
Cash and cash equivalents, beginning of period 521,567 489,894 
Cash and cash equivalents, end of period $105,338 $146,701 
Supplemental schedule of non-cash investing / financing activities: 
Net decrease in accrued purchases of property and equipment$(1,915)$(1,200)
Net increase in accrued capitalized software and website development costs2,532 1,119 
Stock-based compensation capitalized with software and website development costs 612 697 
Leased assets obtained in exchange for finance lease liabilities 2,973 2,969 
[1] During the third quarter of 2018, the Company identified certain amounts attributable to the repayment of accreted interest on its convertible senior notes that should have been classified as cash used in operating activities instead of cash used in financing activities. Such error resulted in a $63.5 million understatement of net cash used in operating activities with a corresponding understatement of cash provided by financing
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activities in the statement of cash flows for the six months ended June 30, 2018. The statement of cash flows for the six months ended June 30, 2018 above has been revised to reflect the appropriate classification of such repayment between financing and operating activities.

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

Three Months Ended 
June 30, 
20192018
Shutterfly Consumer Metrics
Customers [1]
3,034,584 3,140,246 
   year-over-year change(3)%
Orders4,410,299 4,788,564 
   year-over-year change(8)%
Average order value [2]
$38.45 $34.46 
   year-over-year change12 %

[1] An active customer is defined as one that has transacted in the last trailing-twelve months. 
[2] Average order value is calculated using solely Shutterfly Consumer revenue.


Appendix 1.5
Shutterfly, Inc.
Shutterfly Consumer Net Revenue by Brand
(In thousands)
(Unaudited)

Three Months Ended
Mar. 31,
Jun. 30,
Sep. 30,
Dec. 31,
Mar. 31,
Jun. 30,Dec. 31,
2018201820182018201920192018
Shutterfly Consumer net revenue[1]
Shutterfly Brand Core $111,668 $116,041 $85,502 $369,016 $105,076 $115,583 $682,228 
Shutterfly Brand Personalized Gifts and Home Décor 30,965 38,163 30,006 110,173 34,585 44,171 209,307 
Tiny Prints Boutique 2,134 1,374 1,446 39,910 1,695 1,067 44,864 
Other 7,292 9,425 9,934 8,779 7,491 8,763 35,430 
Total$152,059 $165,003 $126,888 $527,878 $148,847 $169,584 $971,829 

[1] 2018 quarterly net revenue by brand has been updated to allocate order-to-billed adjustments to each brand of Shutterfly Consumer net revenue.
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Appendix 2.1
Shutterfly, Inc.
Segment Disclosure
(In thousands)
(Unaudited)

The margin of the Company's three segments compares to non-GAAP operating loss by adding corporate expenses, amortization of intangible assets, stock-based compensation, restructuring, acquisition-related charges, executive transition and strategic review charges, and purchase accounting adjustments.
Three Months Ended Six Months Ended 
June 30, June 30, 
2019201820192018
Shutterfly Consumer: 
Net revenue $169,584 $165,003 $318,432 $317,062 
Cost of net revenue[1]
95,261 86,065 185,667 170,909 
Technology and development 34,373 29,830 67,896 61,959 
Sales and marketing 31,739 29,956 60,863 60,681 
Credit card fees 4,346 4,349 8,501 8,548 
Margin[1][2]
$3,865 $14,803 $(4,495)$14,965 
Margin % 2.3 %9.0 %(1.4)%4.7 %
Lifetouch[3]:
Net revenue[4]
$254,174 $261,911 $384,126 $261,911 
Cost of net revenue[5]
98,844 91,148 177,172 91,148 
Technology and development 8,021 7,109 15,994 7,109 
Sales and marketing89,847 86,960 166,141 86,960 
Credit card fees 2,693 1,165 4,920 1,165 
Margin[2]
$54,769 $75,529 $19,899 $75,529 
Margin % 21.5 %28.8 %5.2 %28.8 %
Shutterfly Business Solutions: 
Net revenue $49,658 $49,809 $96,184 $97,475 
Cost of net revenue 42,941 41,610 81,092 81,519 
Technology and development 3,700 3,049 6,992 6,994 
Sales and marketing 1,107 1,619 2,515 3,069 
Margin[2]
$1,910 $3,531 $5,585 $5,893 
Margin % 3.8 %7.1 %5.8 %6.0 %
Consolidated Segments: 
Net revenue[4]
$473,416 $476,723 $798,742 $676,448 
Cost of net revenue[1][5]
237,046 218,823 443,931 343,576 
Technology and development 46,094 39,988 90,882 76,062 
Sales and marketing 122,693 118,535 229,519 150,710 
Credit card fees 7,039 5,514 13,421 9,713 
Margin[1][2]
$60,544 $93,863 $20,989 $96,387 
Margin % 12.8 %19.7 %2.6 %14.2 %
[1] The six months ended June 30, 2019 includes an immaterial out-of-period adjustment for shipping services provided in the fourth quarter of 2018 of $2.8 million, which increased cost of net revenue and lowered segment margin.
[2] The margins reported reflect only costs that are directly attributable or allocable to a specific segment and exclude purchase accounting adjustments, corporate expenses, amortization of intangible assets, stock-based compensation, restructuring, acquisition-related, and executive transition and strategic review charges.
[3] The Company acquired Lifetouch on April 2, 2018.
[4] Lifetouch net revenue presented in management reporting related to certain obligations that would have otherwise been recorded by Lifetouch as an independent entity but were not recognized in our condensed consolidated financial statements for the six months ended June 30, 2019 and the three and six months ended June 30, 2018 due to business combination accounting requirements.
[5] Business combination accounting principles require the Company to measure acquired inventory at fair value. The fair value of inventory reflects Lifetouch's cost of manufacturing plus a portion of the expected profit margin. Segment reporting excludes this purchase accounting adjustment from cost of net revenue for the Lifetouch segment for the three and six months ended June 30, 2018.



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The following table reconciles Total segment margin to operating loss, Total segment net revenue to Net revenue, and Total segment cost of net revenue to Cost of net revenue:

Three Months Ended Six Months Ended 
June 30, June 30, 
2019201820192018
Total segment margin $60,544 $93,863 $20,989 $96,387 
Purchase accounting deferred revenue adjustment[1]
— (33,351)(645)(33,351)
Purchase accounting inventory adjustment[2]
— (10,931)— (10,931)
Corporate expenses[3]
(32,459)(37,012)(67,549)(55,036)
Amortization of intangible assets (12,795)(12,831)(25,620)(15,164)
Stock-based compensation expense (11,507)(11,697)(23,545)(23,389)
Restructuring (3,274)(2,952)(7,247)(2,952)
Executive transition and strategic review charges (8,445)— (10,099)— 
Acquisition-related charges — (8,000)— (12,585)
Operating loss $(7,936)$(22,911)$(113,716)$(57,021)
Operating margin (1.7)%(5.2)%(14.2)%(8.9)%
Total segment net revenue $473,416 $476,723 $798,742 $676,448 
Purchase accounting deferred revenue adjustment[1]
— (33,351)(645)(33,351)
Net revenue $473,416 $443,372 $798,097 $643,097 
Total segment cost of net revenue $237,046 $218,823 $443,931 $343,576 
Purchase accounting inventory adjustment[2]
— 10,931 — 10,931 
Stock-based compensation for cost of net revenue 844 943 1,736 1,942 
Amortization of intangible assets for cost of net revenue 2,623 2,531 5,245 2,826 
Cost of net revenue $240,513 $233,228 $450,912 $359,275 

[1] Lifetouch net revenue presented in management reporting related to certain obligations that would have otherwise been recorded by Lifetouch as an independent entity but were not recognized in our condensed consolidated financial statements due to business combination accounting requirements.
[2] Business combination accounting principles require the Company to measure acquired inventory at fair value. The fair value of inventory reflects the acquired company’s cost of manufacturing plus a portion of the expected profit margin. Management reporting excludes this purchase accounting adjustment from cost of net revenue for the Lifetouch segment.
[3] Corporate expenses include activities that are not directly attributable or allocable to a specific segment. This category consists primarily of expenses related to certain functions performed at the corporate level such as non-manufacturing facilities, human resources, finance and accounting, legal, information technology, integration, etc.
11


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


Three Months Ended Three Months Ended 
June 30, 2019June 30, 2019
GAAP Income Normalized 
Statement Adjustments  Non-GAAP 
Net revenue: 
Shutterfly Consumer $169,584 $169,584 
Lifetouch 254,174 254,174 
Shutterfly Business Solutions 49,658 49,658 
Total net revenue 473,416 473,416 
Cost of net revenue 240,513 240,513 
Gross profit 232,903 232,903 
Gross profit margin 49.2 %49.2 %
Operating expenses: 
Technology and development 49,606 49,606 
Sales and marketing 135,468 (651)[1]134,817 
General and administrative 52,491 (7,518)[1]44,973 
Restructuring 3,274 (3,274)[2]— 
Total operating expenses 240,839 (11,443)229,396 
Operating (loss) income (7,936)11,443 3,507 
Operating margin (1.7)%0.7 %
Interest expense (13,312)(13,312)
Interest and other income, net 1,088 1,088 
Loss before income taxes (20,160)11,443 (8,717)
Benefit from income taxes 7,428 766 
Net loss $(12,732)$(7,951)
Net loss per share - basic and diluted $(0.37)$(0.23)
Weighted-average shares outstanding - basic and diluted 34,254 34,254 
Operating loss $(7,936)$3,507 
Stock-based compensation 11,507 11,507 
Amortization of intangible assets 12,795 12,795 
Depreciation 30,570 (937)[2]29,633 
Adjusted EBITDA $57,442 
Adjusted EBITDA margin 12.1 %

12


The GAAP and Non-GAAP amounts presented below for the six months ended June 30, 2019 are impacted by an immaterial out-of-period adjustment for shipping services provided in the fourth quarter of 2018 of $2.8 million, which increased cost of net revenue and burdened gross margin, operating loss, net loss, and Adjusted EBITDA loss.
Six Months Ended Six Months Ended 
June 30, 2019June 30, 2019
GAAP Income Normalized 
Statement Adjustments  Non-GAAP 
Net revenue: 
Shutterfly Consumer $318,432 $318,432 
Lifetouch 383,481 645 [4] 384,126 
Shutterfly Business Solutions 96,184 96,184 
Total net revenue 798,097 645 798,742 
Cost of net revenue 450,912 [3]450,912 
Gross profit 347,185 [3]645 347,830 
Gross profit margin 43.5 %[3]43.5 %
Operating expenses: 
Technology and development 97,939 97,939 
Sales and marketing 254,837 (1,030)[1]253,807 
General and administrative 100,878 (9,704)[1] 91,174 
Restructuring 7,247 (7,247)[2]— 
Total operating expenses 460,901 (17,981)442,920 
Operating loss (113,716)[3]18,626 (95,090)
Operating margin (14.2)%[3](11.9)%
Interest expense (31,566)3,886 [5](27,680)
Interest and other income, net 2,266 2,266 
Loss before income taxes (143,016)[3]22,512 (120,504)
Benefit from income taxes 46,665 [3]29,835 
Net loss $(96,351)[3]$(90,669)
Net loss per share - basic and diluted $(2.83)[3]$(2.66)
Weighted-average shares outstanding - basic and diluted 34,089 34,089 
Operating loss $(113,716)$(95,090)
Stock-based compensation 23,545 (911)[1]22,634 
Amortization of intangible assets 25,620 25,620 
Depreciation 61,199 (2,232)[2]58,967 
Adjusted EBITDA $12,131 
Adjusted EBITDA margin 1.5 %

[1] Charges related to executive transition and strategic review. $0.9 million of the charges was related to stock-based compensation expense for the six months ended June 30, 2019.
[2] Restructuring charges related to the planned closure of four Lifetouch facilities of which $0.9 million and $2.2 million was related to depreciation expense for the three and six months ended June 30, 2019, respectively.
[3] The six months ended June 30, 2019, includes an immaterial out-of-period adjustment for shipping services provided in the fourth quarter of 2018 of $2.8 million, which increased cost of net revenue, and burdened gross margin, operating loss, net loss, and Adjusted EBITDA loss.
[4] Lifetouch net revenue presented in management reporting related to certain obligations that would have otherwise been recorded by Lifetouch as an independent entity but were not recognized in our condensed consolidated financial statements for the six months ended June 30, 2019 due to business combination accounting requirements.
[5] Non-cash charges related to the $200 million debt repayment made in January 2019 that is considered a partial early debt extinguishment.
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Appendix 4.1
Shutterfly, Inc.
Reconciliation of Net Income (Loss) to Non-GAAP Net Income (Loss) and Non-GAAP Net Income (Loss) per Share
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended
Year Ended
Mar. 31,
Jun. 30,
Sep. 30,
Dec. 31,
Mar. 31,
Jun. 30,
Dec. 31,
2018201820182018201920192018
Net income (loss)$(27,165)$(26,512)$(73,543)$177,616 $(83,619)$(12,732)$50,396 
Restructuring — 2,952 — 1,667 3,973 3,274 4,618 
Acquisition-related charges 4,585 8,000 2,392 572 — — 15,549 
Purchase accounting adjustments — 44,282 3,958 2,298 645 — 50,538 
Executive transition and strategic review charges — — — — 2,565 8,169 — 
Debt repayment impact — — — — 3,886 — — 
Tax benefit impact of adjustments (1,185)(15,171)(3,603)5,050 (10,168)(6,662)(14,910)
Non-GAAP net income (loss)$(23,765)$13,551 $(70,796)$187,203 $(82,718)$(7,951)$106,191 
Diluted shares outstanding
32,702 33,234 33,470 34,218 33,918 34,254 34,832 
Non-GAAP diluted shares outstanding
32,702 35,775 33,470 34,218 33,918 34,254 34,832 
Net income (loss) per share
$(0.83)$(0.80)$(2.20)$5.19 $(2.47)$(0.37)$1.45 
Non-GAAP net income (loss) per share
$(0.73)$0.38 $(2.12)$5.47 $(2.44)$(0.23)$3.05 

Appendix 4.2
Shutterfly, Inc.
Reconciliation of Net Income (Loss) to Adjusted EBITDA
(In thousands)
(Unaudited)
Three Months EndedYear Ended
Mar. 31,
Jun. 30,
Sep. 30,
Dec. 31,
Mar. 31,
Jun. 30,
Dec. 31,
2018201820182018201920192018
Net income (loss)$(27,165)$(26,512)$(73,543)$177,616 $(83,619)$(12,732)$50,396 
Interest expense 9,633 17,769 16,660 17,176 18,253 13,312 61,239 
Interest and other income, net (1,749)(1,561)(856)(1,278)(1,178)(1,088)(5,444)
Tax (benefit) provision (14,829)(12,607)(28,797)65,496 (39,237)(7,428)9,262 
Depreciation and amortization 24,898 40,377 41,970 43,883 42,158 42,428 151,127 
Stock-based compensation 11,692 11,697 11,931 12,400 11,128 11,507 47,721 
Restructuring — 2,952 — 1,667 3,973 3,274 4,618 
Executive transition and strategic review charges — — — — 2,565 8,169 — 
Acquisition-related charges 4,585 8,000 2,392 572 — — 15,549 
Purchase accounting adjustments — 44,282 3,958 2,298 645 — 50,538 
Adjusted EBITDA$7,065 $84,397 $(26,285)$319,830 $(45,312)$57,442 $385,006 

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Appendix 4.3
Shutterfly, Inc.
Reconciliation of Cash Flow from Operating Activities to Adjusted EBITDA
(In thousands)
(Unaudited)
Three Months Ended
Year Ended
Mar. 31,
Jun. 30,
Sep. 30,
Dec. 31,
Mar. 31,
Jun. 30,
Dec. 31,
2018
2018[1]
20182018201920192018
Net cash (used in) provided by operating activities
$(124,332)$(75,233)$27,041 $374,450 $(144,115)(21,502)$201,926 
Interest expense
9,633 17,769 16,660 17,176 18,253 13,312 61,239 
Interest and other income, net
(1,749)(1,561)(856)(1,278)(1,178)(1,088)(5,444)
Tax (benefit) provision
(14,829)(12,607)(28,797)65,496 (39,237)(7,428)9,262 
Changes in operating assets and liabilities
142,368 53,888 (45,554)(150,834)128,121 71,586 (132)
Other adjustments
(8,611)47,659 (1,129)11,950 (12,081)(7,927)49,868 
Cash restructuring
— 2,200 — — 2,626 2,320 2,200 
Cash executive transition and strategic review charges— — — — 1,654 8,169 — 
Acquisition-related charges
4,585 8,000 2,392 572 — — 15,549 
Purchase accounting adjustments
— 44,282 3,958 2,298 645 — 50,538 
Adjusted EBITDA $7,065 $84,397 $(26,285)$319,830 $(45,312)$57,442 $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 $63.5 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.

15