Shutterfly Announces Second Quarter 2019 Financial Results

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.

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.

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.

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.

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,

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 marketing

135,468

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.

Appendix 1.2

Shutterfly, Inc.

Consolidated Balance Sheets - GAAP

(In thousands, except par value amounts)

(Unaudited)

June 30, 2019

December 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 sale

9,142

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

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 costs

2,532

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 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,

2019

2018

Shutterfly Consumer Metrics

Customers [1]

3,034,584

3,140,246

year-over-year change

(3)

Orders

4,410,299

4,788,564

year-over-year change

(8)

Average order value [2]

$38.45

$34.46

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 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,

2018

2019

2018

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.

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,

2019

2018

2019

2018

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 marketing

89,847

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.

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,

2019

2018

2019

2018

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.

Appendix 3.1

Shutterfly, Inc.

Reconciliation of Non-GAAP Financial Measures

(In thousands)

(Unaudited)

Three Months Ended

June 30, 2019

GAAP Income

Normalized

Statement

Adjustments

Non-GAAP

Net revenue:

Shutterfly Consumer

169,584

Lifetouch

254,174

Shutterfly Business Solutions

49,658

Total net revenue

473,416

Cost of net revenue

240,513

Gross profit

232,903

Gross profit margin

49.2

Operating expenses:

Technology and development

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)

Interest and other income, net

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

Operating loss

(7,936)

3,507

Stock-based compensation

11,507

Amortization of intangible assets

12,795

Depreciation

30,570

(937)

[2]

29,633

Adjusted EBITDA

57,442

Adjusted EBITDA margin

12.1

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

June 30, 2019

GAAP Income

Normalized

Statement

Adjustments

Non-GAAP

Net revenue:

Shutterfly Consumer

318,432

Lifetouch

383,481

645

[4]

384,126

Shutterfly Business Solutions

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

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

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

Operating loss

(113,716)

(95,090)

Stock-based compensation

23,545

(911)

[1]

22,634

Amortization of intangible assets

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.

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,

2018

2019

2018

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 Ended

Year Ended

Mar. 31,

Jun. 30,

Sep. 30,

Dec. 31,

Mar. 31,

Jun. 30,

Dec. 31,

2018

2019

2018

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

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]

2018

2019

2018

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.

View source version on businesswire.com: https://www.businesswire.com/news/home/20190807005706/en/

Investor Relations: Shawn Tabak, 650-610-6026 stabak@shutterfly.com

Media Relations: Sondra Harding, 650-610-5129 sharding@shutterfly.com

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