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Shutterfly Announces Fourth Quarter and Full Year 2014 Financial Results

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Shutterfly, Inc. (NASDAQ:SFLY) , the leading manufacturer and digital retailer of high-quality personalized products and services offered through a family of lifestyle brands, today announced financial results for the fourth quarter and full year-ended December 31, 2014.

“2014 was another outstanding year for Shutterfly,” said Jeffrey Housenbold, President and CEO of Shutterfly. “We delivered record results for revenue, adjusted EBITDA, and free cash flow, and we also returned nearly $90 million of capital back to our shareholders through our share repurchase plan. We continue to thoughtfully balance our strategic investments across our multiple objectives of gaining market share, widening our competitive moat, and driving continuous innovation to deliver increased shareholder value over both the short and long term.”

Fourth Quarter 2014 Financial Highlights

  • Net revenues totaled $483.3 million, an 18% year-over-year increase.
  • Fourth quarter 2014 represents the 56th consecutive quarter of year-over-year net revenue growth.
  • Consumer net revenues totaled $462.9 million, a 16% year-over-year increase.
  • Enterprise net revenues totaled $20.4 million, a 67% year-over-year increase.
  • Gross profit margin was 58% of net revenues, compared to 60% in the fourth quarter of 2013.
  • Consumer gross profit margin was 60.7% of net revenues. (1)
  • Enterprise gross profit margin was 12.9% of net revenues. (1)
  • Operating expenses, excluding $16.4 million of stock-based compensation, totaled $143.1 million.
  • GAAP net income was $99.7 million, compared to $43.6 million in the fourth quarter of 2013.
  • GAAP net income per diluted share was $2.51, compared to $1.10 in the fourth quarter of 2013.
  • Non-GAAP net income per diluted share was $2.57, compared to $1.20 in the fourth quarter of 2013.
  • Adjusted EBITDA was $164.6 million, compared to $141.9 million in the fourth quarter of 2013.
  • At December 31, 2014, cash and investments totaled $475.3 million.

Full Year 2014 Financial Highlights

  • Net revenues totaled $921.6 million, an 18% year-over-year increase.
  • Consumer net revenues totaled $871.0 million, a 17% year-over-year increase.
  • Enterprise net revenues totaled $50.6 million, a 34% year-over-year increase.
  • Gross profit margin was 50.9% of net revenues, compared to 52.8% in 2013.
  • Consumer gross profit margin was 54.7% of net revenues. (1)
  • Enterprise gross profit margin was 14.2% of net revenues. (1)
  • Operating expenses, excluding $58.1 million of stock-based compensation, totaled $404.5 million.
  • GAAP net loss was ($7.9) million, compared to GAAP net income of $9.3 million in 2013.
  • GAAP net loss per diluted share was ($0.20), compared to GAAP net income per diluted share of $0.24 in 2013.
  • Non-GAAP net income per diluted share was $0.07, compared to $0.38 in 2013.
  • Adjusted EBITDA was $166.8 million, compared to $150.4 million in 2013.
  • During 2014, the Company repurchased approximately 2.0 million shares for a total repurchase amount of $88.8 million.

(1) Effective in the fourth quarter of 2014, the Company defined two reportable segments based on factors such as how management manages the operations and how the chief operating decision maker views results. The Company’s two reportable segments are Consumer and Enterprise. Refer to the Segment Disclosure table at the back of the release for segment level disclosures.

Fourth Quarter 2014 Consumer Operating Metrics

  • Transacting customers totaled 5.7 million, a 22% year-over-year increase.
  • Orders totaled 9.6 million, a 25% year-over-year increase.
  • Average order value was $48.26, a decrease of 7% year-over-year.
  • Average order value without the impact of the Groovebook acquisition was $51.55, in line with the same period in 2013.

Full Year 2014 Consumer Operating Metrics

  • Transacting customers totaled 9.2 million, a 14% year-over-year increase.
  • Orders totaled 21.8 million, a 17% year-over-year increase.
  • Average order value was $40.00, in line with the same period in 2013.
  • Average order value without the impact of the Groovebook acquisition was $41.14, an increase of 2% year-over-year.

Jeffrey Housenbold continued: “Today, we are also announcing a series of strategic initiatives to drive increased scale efficiencies and operating margins from the consolidation of several of our technology platforms, the closure of our sub-scale Elmsford manufacturing facility, and the shutdown of our Treat brand.”

2015 Strategic Initiatives and Business Outlook

Shutterfly announces the following 2015 strategic initiatives:

  • Shutterfly will begin a 15 to 18 month process to build the next generation of Shutterfly: a world-class memory management service connected to our personalized e-commerce solutions.
  • The next generation of Shutterfly will incorporate our ThisLife service directly into Shutterfly.com and consolidate our ThisLife and Shutterfly mobile apps, which is intended to accelerate the rate of adoption of ThisLife’s features and functionality, and drive greater usage and monetization of the service.
  • This effort will also include the migration of the Tiny Prints and Wedding Paper Divas brand technology platforms onto the Shutterfly brand platform, creating a single e-commerce system. We will continue to invest in the Tiny Prints and Wedding Paper Divas brands, but through a common set of shared technology services.
  • Shutterfly will discontinue the Treat brand and migrate our one-to-one greeting offering to the Shutterfly brand by the end of the first quarter of 2015.
  • Beginning on March 18, customers will no longer be able to place an order on Treat.com or access the Treat mobile app. However, they will be redirected to Shutterfly.com where we will enhance the one-to-one card experience under our flagship brand identity.
  • Shutterfly will close its MyPublisher brand manufacturing facility located in Elmsford, NY and redirect all production and customer service operations throughout the Shutterfly manufacturing network by the end of third quarter of 2015.
  • In all, these strategic restructurings will reduce long term operating costs, consolidate our development efforts against a single technology platform, and further leverage our primary manufacturing centers.

The full year 2015 Adjusted EBITDA Guidance below incorporates one-time pretax non-recurring restructuring charges related to these strategic initiatives of between $10 million to $12 million.

First Quarter 2015:

  • Net revenues to range from $153.0 million to $157.0 million, a year-over-year increase of 11.6% to 14.5%.
  • GAAP gross profit margin to range from 39.1% to 40.0% of net revenues.
  • Non-GAAP gross profit margin to range from 41.7% to 42.6% of net revenues.
  • GAAP operating loss to range from ($53.3) million to ($53.5) million.
  • Non-GAAP operating loss to be approximately ($27.4) million.
  • GAAP effective tax rate to range from 5.0% to 16.0%.
  • GAAP net loss per diluted share to range from ($1.27) to ($1.45).
  • Non-GAAP net loss per diluted share to range from ($1.20) to ($1.36).
  • Weighted average diluted shares of approximately 38.2 million.
  • Adjusted EBITDA loss to range from ($5.2) million to ($7.2) million.

Full Year 2015:

  • Net revenues to range from $1,040.0 million to $1,060.0 million, a year-over-year increase of 12.8% to 15.0%.
  • GAAP gross profit margin to range from 49.0% to 50.5% of net revenues.
  • Non-GAAP gross profit margin to range from 50.1% to 51.6% of net revenues.
  • GAAP operating income to range from $0.5 million to $7.5 million.
  • Non-GAAP operating income to range from $96.0 million to $104.0 million.
  • GAAP effective tax rate to range from 5% to 16%.
  • GAAP net loss per diluted share to range from ($0.31) to ($0.43).
  • Non-GAAP net income / (loss) per diluted share to range from ($0.12) to $0.04.
  • Weighted average diluted shares of approximately 38.9 million.
  • Adjusted EBITDA to range from $182.0 million to $192.0 million, or 17.5% to 18.1% of net revenues.
  • Adjusted EBITDA, excluding the effects of pre-tax non-recurring restructuring charges to range from $192.0 million to $204.0 million, or 18.5% to 19.2% of net revenues.
  • Capital expenditures to range from 8.6% to 9.2% of net revenues a reduction from 9.8% of net revenues in 2014.

The foregoing financial guidance replaces any of the Company’s previously issued financial guidance which should no longer be relied upon.

Share Repurchase Program

The Company also announced that its Board of Directors has authorized and its Audit Committee has approved a share repurchase program granting the Company authority to repurchase up to $300 million of outstanding Shutterfly common stock, in addition to amounts remaining under our previously announced and expanded program. The repurchase program authorizes Shutterfly to buy its common stock from time to time through open market, privately negotiated or other transactions, including pursuant to trading plans established in accordance with Rules 10b5-1 and 10b-18 of the Securities Exchange Act of 1934, as amended, or by a combination of such methods. The share repurchase program is subject to prevailing market conditions and other considerations; does not require the Company to repurchase any dollar amount or number of shares; and may be suspended or discontinued at any time.

Notes to the Fourth Quarter 2014 and Full Year 2014 Financial Results and Operating Metrics and 2015 Business Outlook

Adjusted EBITDA is a non-GAAP financial measure that the Company defines as earnings before interest, taxes, depreciation, amortization and stock-based compensation.

Free cash flow is a non-GAAP financial measure that the Company defines as adjusted EBITDA less purchases of property, plant, and equipment and capitalization of software development costs.

Non-GAAP earnings per share is defined as non-GAAP net income (loss), which excludes interest expense related to the Company’s issuance of 0.25% convertible senior notes in May 2013, divided by diluted non-GAAP shares outstanding, which is GAAP diluted weighted average shares outstanding less any shares issuable under the Company’s convertible senior notes.

Consumer segment includes net revenues from stationery and greeting cards, photo books, calendars and photo-based merchandise, photo prints, and the related shipping revenues and rental revenue. Consumer also includes net revenues from advertising and sponsorship programs.

Enterprise segment includes net revenues primarily from variable, four-color direct marketing collateral manufactured and fulfilled for business customers.

Average Order Value (AOV) is defined as total net revenues (excluding Enterprise) divided by total orders.

Fourth Quarter and Full Year 2014 Conference Call

Management will review the fourth quarter and full year 2014 financial results and its expectations for the first quarter and full year 2015 on a conference call on Thursday, February 12, 2015 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 (970) 315-0490. The webcast, as well as a podcast, will be archived and available at http://www.shutterflyinc.com. A replay of the conference call will be available through Thursday, February 26, 2015. To hear the replay, please dial (855) 859-2056 or (404) 537-3406, replay passcode 76983967.

Non-GAAP Financial Information

This press release contains certain non-GAAP financial measures. Tables are provided at the end of this press release that reconcile the non-GAAP financial measures to the most directly comparable financial measures prepared in accordance with Generally Accepted Accounting Principles (GAAP). These non-GAAP financial measures include non-GAAP gross profit margins, non-GAAP operating income (loss) and the related operating income (loss) margins, adjusted EBITDA, free cash flow, and non-GAAP net income (loss) per share. The method the Company uses to produce non-GAAP financial measures is not computed according to GAAP and may differ from methods used by other companies.

To supplement the Company’s consolidated financial statements presented on a GAAP basis, we believe that these non-GAAP measures provide useful information about the Company’s core operating results and thus are appropriate to enhance the overall understanding of the Company’s past financial performance and its prospects for the future. These adjustments to the Company’s GAAP results are made with the intent of providing both management and investors a more complete understanding of the Company’s underlying operational results and trends and performance. Management uses these non-GAAP measures to evaluate the Company’s financial results, develop budgets, manage expenditures, and determine employee compensation. The presentation of additional information is not meant to be considered in isolation or as a substitute for or superior to gross margins, operating income (loss), net income (loss) or net income (loss) per share determined in accordance with GAAP. For more information, please see Shutterfly’s SEC Filings, including the most recent Form 10-K and Form 10-Q, which are available on the Securities and Exchange Commission’s Web site 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, which involve risks and uncertainties. These forward-looking statements include statements regarding the Company’s business objectives, 2015 strategic initiatives and financial expectations for the first quarter and full year 2015 set forth under the caption “2015 Strategic Initiatives and Business Outlook” and its share repurchase program. The Company’s actual results may differ materially from those anticipated in these forward-looking statements. Factors that might contribute to such differences include, among others, economic downturns and the general state of the economy; decreased consumer discretionary spending as a result of the macroeconomic environment; our ability to expand our customer base and increase sales to existing customers; our ability to meet production requirements; unanticipated delays in our ability to build our next generation Shutterfly platform; unforeseen difficulties executing on our strategic restructuring activities, our ability to successfully integrate acquired businesses and assets; our ability to retain and hire necessary employees, including seasonal personnel, and appropriately staff our operations; the impact of seasonality on our business; our ability to develop innovative, new products and services on a timely and cost-effective basis; consumer acceptance of our products and services; our ability to develop additional adjacent lines of business; unforeseen changes in expense levels; and competition and the pricing strategies of our competitors, which could lead to pricing pressure. 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 our business in general, we refer you to the “Risk Factors” section of the Company’s most recent Form 10-K and Form 10-Q, and the Company’s other filings, which are available on the Securities and Exchange Commission’s Web site 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 manufacturer and digital retailer of high-quality personalized products and services offered through a family of lifestyle brands. Founded in 1999, the Shutterfly, Inc. family of brands includes Shutterfly, where your photos come to life in photo books, cards and gifts; Tiny Prints, premium cards and stationery for all life’s occasions; Wedding Paper Divas, wedding invitations and stationery for every step of the planning process; Treat, personalized greeting cards that really stand out; MyPublisher, one of the pioneers in the photo book industry and creator of easy-to-use photo book-making software; ThisLife, a private, cloud-based solution that makes it easy for consumers to find, share and enjoy their photos and videos, all in one place; and BorrowLenses, the premier online marketplace for photographic and video equipment rentals. For more information about Shutterfly, Inc. (NASDAQ:SFLY) , visit www.shutterflyinc.com.

Shutterfly, Inc.

Consolidated Statements of Operations

(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Twelve Months Ended
December 31, December 31,
2014 2013 2014 2013
Net revenues $ 483,325 $ 410,788 $ 921,580 $ 783,642
Cost of net revenues 203,316 164,716 452,720 369,593
Gross profit 280,009 246,072 468,860 414,049
Operating expenses:
Technology and development 36,521 30,963 133,623 108,995
Sales and marketing 87,340 80,039 216,035 189,985
General and administrative 35,668 30,493 112,957 93,011
Total operating expenses 159,529 141,495 462,615 391,991
Income from operations 120,480 104,577 6,245 22,058
Interest expense (4,548 ) (3,762 ) (16,732 ) (9,446 )
Interest and other income, net 125 127 508 308
Income/(loss) before income taxes 116,057 100,942 (9,979 ) 12,920
Benefit from/(provision for) income taxes (16,407 ) (57,293 ) 2,119 (3,635 )
Net income/(loss) $ 99,650 $ 43,649 $ (7,860 ) $ 9,285
Net income/(loss) per share
Basic $ 2.59 $ 1.15 $ (0.20 ) $ 0.25
Diluted $ 2.51 $ 1.10 $ (0.20 ) $ 0.24
Weighted-average shares outstanding
Basic 38,412 38,097 38,452 37,680
Diluted 39,631 39,713 38,452 39,493
Stock-based compensation is allocated as follows:
Cost of net revenues $ 875 $ 683 $ 3,657 $ 2,485
Technology and development 3,040 2,634 9,236 9,477
Sales and marketing 5,833 5,744 22,670 19,774
General and administrative 7,520 6,298 26,199 21,792
$ 17,268 $ 15,359 $ 61,762 $ 53,528

Shutterfly, Inc.

Consolidated Balance Sheets

(In thousands, except par value amounts)
(Unaudited)
December 31, December 31,
2014 2013

ASSETS

Current assets:

Cash and cash equivalents

$ 380,543 $ 499,084
Short-term investments 64,866
Accounts receivable, net 31,105 21,641
Inventories 13,016 9,629
Deferred tax asset, current portion 34,645 26,942
Prepaid expenses and other current assets 24,983 21,260
Total current assets 549,158 578,556
Long-term investments 29,928
Property and equipment, net 241,742 155,727
Intangible assets, net 87,950 118,621
Goodwill 408,975 397,306
Deferred tax asset, net of current portion 549 520
Other assets 13,976 15,412
Total assets $ 1,332,278 $ 1,266,142
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 30,086 $ 33,656
Accrued liabilities 135,485 107,448
Deferred revenue 31,415 24,114
Total current liabilities 196,986 165,218
Convertible senior notes, net 255,218 243,493
Deferred tax liability 48,090 42,995
Other liabilities 74,178 26,341
Total liabilities 574,472 478,047
Stockholders’ equity:

Common stock, $0.0001 par value; 100,000 shares authorized; 37,906 and 38,196 shares

issued and outstanding at December 31, 2014 and December 31, 2013, respectively

4 4
Additional paid-in-capital 838,313 771,875
Accumulated other comprehensive loss (53 )
Accumulated earnings/(deficit) (80,458 ) 16,216
Total stockholders’ equity 757,806 788,095
Total liabilities and stockholders’ equity $ 1,332,278 $ 1,266,142
Shutterfly, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Twelve Months Ended
December 31,
2014 2013

Cash flows from operating activities:

Net income/(loss) $ (7,860 ) $ 9,285

Adjustments to reconcile net income/(loss) to net cash provided by operating activities:

Depreciation and amortization 64,885 43,887
Amortization of intangible assets 33,867 30,969
Amortization of debt discount and transaction costs 12,905 7,707
Stock-based compensation, net of forfeitures 61,762 53,528
Loss on disposal of property and equipment and rental assets 361 13
Deferred income taxes (2,604 ) 331
Tax benefit/(shortfall) from stock-based compensation (163 ) 2,957
Excess tax benefits from stock-based compensation (1,025 ) (3,635 )
Changes in operating assets and liabilities:
Accounts receivable, net (9,464 ) (7,174 )
Inventories (3,388 ) (3,681 )
Prepaid expenses and other current assets (3,958 ) (4,347 )
Other assets (1,442 ) (7,669 )
Accounts payable (1,275 ) 3,583
Accrued and other liabilities 18,273 16,089
Deferred revenue 7,301 5,258
Other non-current liabilities (1,687 ) 167
Net cash provided by operating activities 166,488 147,268
Cash flows from investing activities:
Acquisition of business and intangible assets, net of cash acquired (12,000 ) (76,893 )
Purchases of property and equipment (71,169 ) (62,582 )
Capitalization of software and website development costs (21,032 ) (15,760 )
Purchases of investments (124,111 )
Maturities and sales of investments 29,980
Proceeds from sale of equipment and rental assets 904 388
Net cash used in investing activities (197,428 ) (154,847 )
Cash flows from financing activities:
Proceeds from borrowings of convertible senior notes, net of issuance costs 291,897
Proceeds from issuance of warrants 43,560
Purchase of convertible note hedge (63,510 )
Proceeds from issuance of common stock upon exercise of stock options 3,243 19,112
Repurchases of common stock (88,815 ) (32,241 )
Excess tax benefits from stock-based compensation 1,025 3,635
Principal payments of capital lease and financing obligations (3,054 ) (878 )
Net cash provided by/(used in) financing activities (87,601 ) 261,575

Net increase/(decrease) in cash and cash equivalents

(118,541 ) 253,996
Cash and cash equivalents, beginning of period 499,084 245,088
Cash and cash equivalents, end of period $ 380,543 $ 499,084
Supplemental schedule of non-cash activities

Net decrease in accrued purchases of property and equipment

$ (2,674 ) $ (3,372 )
Net increase in accrued capitalized software and website development costs 716
Increase in estimated fair market value of building under build-to-suit leases 22,855 10,080
Property and equipment acquired under capital leases 37,823
Amount due from adjustment of net working capital from acquired business 253

10

Amount due for acquisition of business 1,673
Shutterfly, Inc.
Consumer Metrics Disclosure
Three Months Ended Twelve Months Ended
December 31, December 31,
2014 2013 2014 2013

Consumer Metrics
Customers 5,673,174 4,652,682 9,206,162 8,094,038
year-over-year growth 22% 14%
Orders 9,592,330 7,693,863 21,772,719 18,561,022
year-over-year growth 25% 17%
Average order value* $48.26 $51.80 $40.00 $40.19
year-over-year growth -7%

* Average order value excludes Enterprise revenue.

Shutterfly, Inc.

Segment Disclosure

(In thousands)

(Unaudited)
Three Months Ended Year Ended Year Ended Year Ended
Mar. 31, 2014 Jun. 30, 2014 Sep. 30, 2014 Dec. 31, 2014 Dec. 31, 2014 Dec. 31, 2013 Dec. 31, 2012
Consumer
Revenues

$

130,621

$

150,152

$

127,299

$

462,887

$

870,959

$

745,970

$

613,445

Cost of revenues

66,408 72,250 73,845 181,762 394,265 327,145 263,962
Gross Margin 64,213 77,902 53,454 281,125 476,694 418,825 349,483
49.2% 51.9% 42.0% 60.7% 54.7% 56.1% 57.0%
Enterprise

Revenues

6,478 8,996 14,709 20,438 50,621 37,672 27,179

Cost of revenues

6,110 7,368 12,173

17,805

43,456 29,480 22,803
Gross Margin 368 1,628

2,536

2,633 7,165 8,192 4,376
5.7% 18.1% 17.2% 12.9% 14.2% 21.7% 16.1%
Corporate (1)
Revenues

Cost of revenues

3,825 3,717 3,708 3,749 14,999 12,968 8,092
Gross Margin (3,825) (3,717) (3,708) (3,749) (14,999) (12,968) (8,092)
Consolidated
Revenues 137,099 159,148 142,008 483,325 921,580 783,642 640,624

Cost of revenues

76,343 83,335 89,726 203,316 452,720 369,593 294,857
Gross Margin

$

60,756

$

75,813

$

52,282

$

280,009

$

468,860

$

414,049

$

345,767

44.3% 47.6% 36.8% 57.9% 50.9% 52.8% 54.0%
Non-GAAP Gross Margin 47.1% 50.0% 39.4% 58.7% 52.5% 54.5% 55.2%

(1) Corporate category includes activities that are not directly attributable or allocable to a specific segment. This category consists of stock-based compensation and amortization of intangible assets.

Shutterfly, Inc.

Reconciliation of Forward-Looking Guidance for Non-GAAP Financial Measures to GAAP Measures

(In millions, except per share amounts)

Forward-Looking Guidance
GAAP Non-GAAP
Range of Estimate Adjustments Range of Estimate
From To From To From To

Three Months Ending March 31, 2015

Net revenues $153.0 $157.0 $153.0 $157.0
Gross profit margin 39.1% 40.0% 2.6% 2.6% [a] 41.7% 42.6%
Operating loss ($53.5) ($53.3) $26.1 $25.9 [b] ($27.4) ($27.4)
Operating margin (35%) (34%) 17% 17% [b] (18%) (17%)
Stock-based compensation $18.2 $18.4 $18.2 $18.4
Amortization of intangible assets $7.7 $7.7 $7.7 $7.7
Adjusted EBITDA* ($7.2) ($5.2)
Diluted loss per share ($1.45) ($1.27) $0.09

$0.07

[e] ($1.36)

($1.20)

Weighted average diluted shares 38.2 38.2
Effective tax rate 16.0% 5.0%
Twelve Months Ending December 31, 2015

Net revenues

$1,040.0

$1,060.0 $1,040.0 $1,060.0
Gross profit margin 49.0% 50.5% 1.1% 1.1% [c] 50.1% 51.6%
Operating income $0.5 $7.5 $95.5 $96.5 [d] $96.0 $104.0
Operating margin 0% 1% 9% 9% [d] 9% 10%
Operating income excluding restructuring $0.5 $7.5 $11.3 $13.3 [g] $11.8 $20.8
Stock-based compensation $68.5 $69.5 $68.5 $69.5
Amortization of intangible assets $27.0 $27.0 $27.0 $27.0
Adjusted EBITDA* $182.0 $192.0
Adjusted EBITDA* margin 17.5% 18.1%
Adjusted EBITDA* excluding restructuring $192.0 $204.0 [h]
Adjusted EBITDA* margin excluding restructuring 18.5% 19.2% [h]
Diluted earnings/(loss) per share ($0.43) ($0.31) $0.31 $0.35 [f] ($0.12) $0.04

Weighted average diluted shares

38.9 38.9
Effective tax rate 16.0% 5.0%
Capital expenditures – % of net revenues 8.6% 9.2%
*

Adjusted EBITDA is a non-GAAP financial measure defined as earnings before interest, taxes, depreciation, amortization and stock-based compensation.

[a]

Reflects estimated adjustments for stock-based compensation expense of approximately $1.2 million and amortization of purchased intangible assets of approximately $2.8 million.

[b]

Reflects estimated adjustment for stock-based compensation expense of approximately $18.2 million to $18.4 million, and amortization of purchased intangible assets of approximately $7.7 million.

[c]

Reflects estimated adjustments for stock-based compensation expense of approximately $3.8 million and amortization of purchased intangible assets of approximately $8.1 million.

[d]

Reflects estimated adjustments for stock-based compensation expense of approximately $68.5 million to $69.5 million and amortization of purchased intangible assets of approximately $27.0 million.

[e] Reflects estimated adjustments for interest expense of approximately $3.0 million to $3.3 million, net of tax.
[f] Reflects estimated adjustments for interest expense of approximately $12.1 million to $13.7 million, net of tax.
[g] Reflects a range of estimated adjustments for the following restructuring events:
From To
Platform consolidation

$ 5.0

$ 6.0

Elmsford facility and Treat closure 5.0 6.0
Depreciation and amortization [1]

1.3

1.3

$ 11.3

$ 13.3

[1] Includes accelerated depreciation of capitalized website costs and amortization of intangible assets.
[h]

Reflects estimated adjustments for platform consolidation, Elmsford facility closure, and Treat shutdown (excluding depreciation and amortization) of approximately $10.0 million to $12.0 million.

Shutterfly, Inc.
Reconciliation of GAAP Gross Profit Margin to Non-GAAP Gross Profit Margin
(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,
2013 2013 2013 2013 2014 2014 2014 2014 2013 2014
GAAP gross profit $ 54,855 $ 61,745 $ 51,377 $ 246,072 $ 60,756 $ 75,813 $ 52,282 $ 280,009 $ 414,049 $ 468,860
Stock-based compensation 564 592 646 683 1,002 894 886 875 2,485 3,657
Amortization of intangible assets 2,390 2,608 2,685 2,800 2,823 2,823 2,822 2,874 10,483 11,342
Non-GAAP gross profit $ 57,809 $ 64,945 $ 54,708 $ 249,555 $ 64,581 $ 79,530 $ 55,990 $ 283,758 $ 427,017 $ 483,859
Non-GAAP gross profit margin 50 % 49 % 45 % 61 % 47 % 50 % 39 % 59 % 54 % 53 %
Shutterfly, Inc.
Reconciliation of GAAP Operating Margin to Non-GAAP Operating Margin
(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,
2013 2013 2013 2013 2014 2014 2014 2014 2013 2014
GAAP operating income (loss) $ (23,964 ) $ (23,933 ) $ (34,622 ) $ 104,577 $ (38,611 ) $ (26,697 ) $ (48,927 ) $ 120,480 $ 22,058 $ 6,245
Stock-based compensation 11,538 12,649 13,982 15,359 15,992 14,714 13,788 17,268 53,528 61,762
Amortization of intangible assets 6,511 7,539 8,189 8,730 8,583 8,740 8,530 8,014 30,969 33,867
Non-GAAP operating income (loss) $ (5,915 ) $ (3,745 ) $ (12,451 ) $ 128,666 $ (14,036 ) $ (3,243 ) $ (26,609 ) $ 145,762 $ 106,555 $ 101,874
Non-GAAP operating margin (5 %) (3 %) (10 %) 31 % (10 %) (2 %) (19 %) 30 % 14 % 11 %

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,
2013 2013 2013 2013 2014 2014 2014 2014 2013 2014
GAAP net income (loss) $ (12,405 ) $ (11,811 ) $ (10,148 ) $ 43,649 $ (34,214 ) $ (27,052 ) $ (46,244 ) $ 99,650 $ 9,285 $ (7,860 )
Interest expense 139 1,936 3,609 3,762 3,947 3,856 4,381 4,548 9,446 16,732
Interest and other income, net (7 ) (35 ) (139 ) (127 ) (227 ) (54 ) (102 ) (125 ) (308 ) (508 )
Tax (benefit) provision (11,691 ) (14,023 ) (27,944 ) 57,293 (8,117 ) (3,447 ) (6,962 ) 16,407 3,635 (2,119 )
Depreciation and amortization 15,738 17,580 19,573 21,965 22,805 23,712 25,415 26,820 74,856 98,752
Stock-based compensation 11,538 12,649 13,982 15,359 15,992 14,714 13,788 17,268 53,528 61,762
Non-GAAP Adjusted EBITDA $ 3,312 $ 6,296 $ (1,067 ) $ 141,901 $ 186 $ 11,729 $ (9,724 ) $ 164,568 $ 150,442 $ 166,759
Shutterfly, Inc.
Reconciliation of Cash Flow from Operating Activities to Non-GAAP Adjusted EBITDA and Free Cash Flow
(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,
2013 2013 2013 2013 2014 2014 2014 2014 2013 2014
Net cash provided by (used in) operating activities $ (83,504 ) $ 11,923 $ 309 $ 218,540 $ (97,473 ) $ 12,282 $ (7,850 ) $ 259,529 $ 147,268 $ 166,488
Interest expense 139 1,936 3,609 3,762 3,947 3,856 4,381 4,548 9,446 16,732
Interest and other income, net (7 ) (35 ) (139 ) (127 ) (227 ) (54 ) (102 ) (125 ) (308 ) (508 )
Tax (benefit) provision (11,691 ) (14,023 ) (27,944 ) 57,293 (8,117 ) (3,447 ) (6,962 ) 16,407 3,635 (2,119 )
Changes in operating assets and liabilities 101,426 2,555 19,961 (126,168 ) 106,531 (7,633 ) (2,521 ) (100,737 ) (2,226 ) (4,360 )
Other adjustments (3,051 ) 3,940 3,137 (11,399 ) (4,475 ) 6,725 3,330 (15,054 ) (7,373 ) (9,474 )
Non-GAAP Adjusted EBITDA 3,312 6,296 (1,067 ) 141,901 186 11,729 (9,724 ) 164,568 150,442 166,759
Less: Purchases of property and equipment (10,832 ) (15,869 ) (20,343 ) (12,166 ) (16,419 ) (22,734 ) (18,769 ) (10,573 ) (59,210 ) (68,495 )
Less: Capitalized technology & development costs (3,495 ) (4,255 ) (4,307 ) (3,703 ) (5,112 ) (5,324 ) (6,084 ) (5,228 ) (15,760 ) (21,748 )
Free cash flow $ (11,015 ) $ (13,828 ) $ (25,717 ) $ 126,032 $ (21,345 ) $ (16,329 ) $ (34,577 ) $ 148,767 $ 75,472 $ 76,516
Shutterfly, Inc.
Reconciliation of Net Income/(Loss) per Share to Non-GAAP Net Income/(Loss) per Share
(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,
2013 2013 2013 2013 2014 2014 2014 2014 2013 2014
GAAP net income (loss) $ (12,405 ) $ (11,811 ) $ (10,148 ) $ 43,649 $ (34,214 ) $ (27,052 ) $ (46,244 ) $ 99,650 $ 9,285 $ (7,860 )
Add back interest expense related to:
Amortization of debt discount 1,401 2,771 2,830 2,870 2,911 2,951 2,994 7,002 11,726
Amortization of debt issuance costs 160 260 285 288 293 297 301 705 1,179
0.25% coupon 93 188 188 188 187 187 188 469 750
Tax effect (770 ) (2,046 ) 516 (637 ) (438 ) (395 ) (1,430 ) (2,300 ) (2,900 )
Non-GAAP net income (loss) $ (12,405 ) $ (10,927 ) $ (8,975 ) $ 47,468 $ (31,505 ) $ (24,099 ) $ (43,204 ) $ 101,703 $ 15,161 $ 2,895
GAAP basic shares outstanding 37,034 37,775 37,814 38,097 38,503 38,438 38,453 38,412 37,680 38,452
Add back:

Dilutive effect of stock options and restricted awards

1,616 1,219 1,813
GAAP diluted shares outstanding 37,034 37,775 37,814 39,713 38,503 38,438 38,453 39,631 39,493 38,452
Add back:

Dilutive effect of stock options and restricted awards

1,442
Dilutive effect of convertible notes
Non-GAAP diluted shares outstanding 37,034 37,775 37,814 39,713 38,503 38,438 38,453 39,631 39,493 39,894
GAAP net income (loss) per share $ (0.33 ) $ (0.31 ) $ (0.27 ) $ 1.10 $ (0.89 ) $ (0.70 ) $ (1.20 ) $ 2.51 $ 0.24 $ (0.20 )
Non-GAAP net income (loss) per share $ (0.33 ) $ (0.29 ) $ (0.24 ) $ 1.20 $ (0.82 ) $ (0.63 ) $ (1.12 ) $ 2.57 $ 0.38 $ 0.07

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