Q Earnings Conference Call

Transcription

1 Q3 208 Earnings Conference Call October 30, 208 Christopher North, President and CEO Mike Pope, CFO

2 Safe Harbor Disclaimer This presentation contains "forward-looking" statements within the meaning of Section 27A of the Securities Act of 933, as amended, and Section 2E of the Securities Exchange Act of 934, as amended, that involve risks and uncertainties. These forward-looking statements include statements reiterating our 2020 minimum Adjusted EBITDA target; about the performance of Lifetouch fall picture day; about the Company s expected customer growth drivers; regarding expectations for broader technology and revenue synergies in 209; around closing of two Lifetouch facilities in 209; about expected margin improvements in Q4; and our quarterly and annual guidance targets for the remainder of 208. You can identify these statements by the use of terminology such as guidance, believe, expect, will, should, could, estimate, anticipate or similar forward-looking terms. You should not rely on these forward-looking statements as they involve risks and uncertainties that may cause actual results to vary materially from the forward-looking statements. Factors that might contribute to such differences include, among others, decreased consumer discretionary spending as a result of general economic conditions; our ability to expand our customer base and increase sales to existing customers; our ability to meet production requirements; 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; failure to realize the anticipated benefits of our 207 restructuring activities or of the Lifetouch acquisition; consumer acceptance of our products and services; our ability to develop additional adjacent lines of business; unforeseen changes in expense levels; refining our promotional strategies; competition and the pricing strategies of our competitors, which could lead to pricing pressure; the retention of Lifetouch employees and our ability to successfully integrate the Lifetouch businesses; risks inherent in the achievement of anticipated synergies and the timing thereof; and general economic conditions and changes in laws and regulations. For more information regarding the risks and uncertainties that could cause actual results to differ materially from those expressed or implied in these forward-looking statements, as well as risks relating to our business in general, we refer you to the Risk Factors section of our SEC filings, including our most recent Form 0-K and 0-Q, which are available on the Securities and Exchange Commission s Website at These forward-looking statements are based on current expectations and the company assumes no obligation to update this information. This presentation includes non-gaap financial measures, including revenue, Adjusted EBITDA, non-gaap profits/margins, non-gaap net loss, and non-gaap net loss per share. We define Adjusted EBITDA as earnings before interest, taxes, depreciation, amortization, stock-based compensation, restructuring, and acquisition-related costs. The method we use to produce non-gaap financial measures is not computed according to GAAP and may differ from the methods used by other companies. To supplement our consolidated financial statements presented on a GAAP basis, we believe that these non-gaap measures provide useful information about our core operating results and thus are appropriate to enhance the overall understanding of our past financial performance and our prospects for the future. These adjustments to our GAAP results are made with the intent of providing both management and investors a more complete understanding of our underlying operational results and trends and performance. Management uses these non-gaap measures to evaluate our 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 profit, net income (loss) or net income (loss) per share determined in accordance with GAAP. Management strongly encourages review of our financial statements and publicly-filed reports in their entirety and to not rely on any single financial measure. 2

3 Q3 8 Earnings Call Agenda Q3 8 business review Q3 8 financials Financial Outlook 3

4 Q3 8 Summary FINANCIALS Mixed quarterly financial results Below expectations on revenue Exceeded expectations on Adjusted EBITDA Reiterating 2020 minimum Adjusted EBITDA target BUSINESS Lifetouch Fall picture day off to a good start Solid results in SBS Shutterfly Consumer preparations for peak STRATEGIC Launched new categories and products New App features and simplified product creation Common manufacturing platform Plans to delever 4 4

5 Q3 8 Financial Summary ($ in Millions) Total Net Revenue Adj. EBITDA $373 $4.0 $95 $369 $3.0 2 GAAP Non-GAAP Adjustments ($26) 2 Non-GAAP Net Revenue below expectations due to disappointing performance in Shutterfly Consumer. Adjusted EBITDA better than expectations. Adjusted EBITDA is a Non-GAAP measure defined as earnings before interest, taxes, depreciation, amortization, stock-based compensation, restructuring, and acquisition-related costs. 2 Normalized for acquisition-related charges of $2.4 million, and purchase accounting adjustments related to the write-down of deferred revenue of $4.0 million in the third quarter of

6 Shutterfly Brand Revenue Shutterfly brand revenue below expectations. See appendix for details. 6 6

7 Shutterfly Consumer Strategic Initiatives Kids and Pets categories met expectations in the quarter Accelerated pace of new product introduction Mobile up 430 basis points to 33% of Q3 8 Shutterfly brand Enhanced user experience and expanded product range in app Good progress against strategic growth initiatives. 7 7

8 Shutterfly Consumer Strategic Initiatives, continued Free Book A Month aimed at acquiring new customers and driving more frequent purchases Progress on automated product creation New shopping cart experience Good progress against strategic growth initiatives. 8 8

9 Ready for Holiday Season New personalized foil Improved addressing service Expanded designer review service New personalized holiday ornaments New Kids and Pets gifts Enhanced functionality and product range in app All new app storefront Platform and manufacturing ready for Q4 Offering customers more reasons to shop than before. 9 9

10 Ready for Holiday Season, continued Simplified creation with automatic cropping and layout Added Tiny Prints to Shutterfly app Re-launched Tiny Prints as a standalone URL Personalized marketing: messages and promotions Welcome new CMO Mickey Mericle Offering customers more reasons to shop than before. 0 0

11 Lifetouch Lifetouch Non-GAAP revenue of $87M in Q3 8 Fall School picture day peak in September and October off to good start Integration plans leverage Shutterfly Photos Platform Broader technology integration and revenue synergies in 209 Closing two Lifetouch facilities in 209 Pleased with the Lifetouch performance.

12 SBS Q3 beginning of SBS peak Higher than expected volumes in the quarter Progress on technology platform New SBS technology leadership SBS revenue was $59 million in Q

13 Q3 8 Financial Results Review Mike Pope, CFO 3

14 Q3 8 Net Revenue ($ in Millions) +9% $373 $4.0 $95 $369 GAAP Non-GAAP Adjustments Non-GAAP net revenue of $373 million. Normalized for purchase accounting adjustments related to the write-down of deferred revenue of $4.0 million.. 4

15 Q3 8 Net Revenue by Segment ($ in Millions) Total Shutterfly Consumer Lifetouch SBS $373 $4.0 $95 $369 $35 $27 $87 $4.0 $83 $60 $59 GAAP Non-GAAP Adjustments GAAP Non-GAAP Adjustments Non-GAAP net revenue of $373 million with Shutterfly Consumer representing 34%, Lifetouch 50%, and SBS 6%. Normalized for purchase accounting adjustments related to the write-down of deferred revenue of $4.0 million. 5

16 Q3 8 Shutterfly Consumer Metrics Active Customers (000 s) Orders (000 s) Average Order Value 2,969 2,777 4,86 4,274 $27.86 $29.69 Shutterfly Consumer metrics reflect a combination of effects of the platform consolidation, weak performance of paid promotions, the changing mix away from free and towards paid revenues, and soft new customer growth. Average order value excludes Lifetouch and SBS net revenue. 6

17 Q3 8 Gross Profit by Segment ($ in Millions) Shutterfly Total Lifetouch Consumer 2 2 SBS 2 $48 $4.0 $64 $44 $54 $46 $93 $4.0 $89 $3 $3 GAAP Non-GAAP Adjustments Non-GAAP Adjustments GAAP GM% 32.9% 39.7% 39.8% 36.% 49.7% 20.8% 2.8% Non-GAAP gross margin of 39.7% below expectations due to Lifetouch photography expenses reflected as a cost of net revenue 3, and segment mix. Normalized for purchase accounting adjustments related to the write-down of deferred revenue of $4.0 million. 2 Gross profit at the segment level excludes amortization of intangible assets associated with cost of net revenue. 3 An additional $ 8.2 million of Lifetouch photography expenses was reflected as a cost of net revenue as opposed to sales and marketing, which only impacts income statement presentation and does not impact Operating Income or Adjusted EBITDA. 7

18 Q3 8 Total Operating Expenses ($ in Millions) $7.8 $7.8 $23 $2.4 $ $7 $200 $00 $3.3 $9.7 $0 $77 Acquisition Restructuring Stock Based Comp Depreciation & Amortization Cash Opex % Revenue 5.2% 6.9% Operating expenses include Lifetouch in Q3 8. 8

19 Q3 8 Operating Expenses by Category ($ in Millions) Technology & Development Sales & Marketing General & Administrative $35 $40 $45 $33 $24 $48 (adj) % Revenue 20.3% 2.0% 7.% 36.3% 2.2% 2.9% Operating Expenses increased due to Lifetouch. Normalized for acquisition-related charges of $2.4 million in the third quarter of

20 Q3 8 Segment Margin ($ in Millions) Shutterfly Consumer Lifetouch SBS $6.9 $8. ($9.3) ($0) ($6) % Revenue -6.9% -3.0% -5.5%.5% 3.8% Shutterfly Consumer decline due to decrease in revenue and gross margin; Lifetouch consistent with expectations; SBS increase due to higher gross margin and reduced technology expense. Normalized for purchase accounting adjustments related to the write-down of deferred revenue of $4.0 million 20

21 Q3 8 Profitability ($ in Millions) Operating Loss Adjusted EBITDA 3 (adj.) (adj.) $3.0 2 ($33) ($26) ($87) ($80) (adj.) 2 % Revenue -6.6% -23.5% -2.5%.6% -7.% Q3 8 Adjusted EBITDA was ($26) million. Normalized for restructuring charges of $3.3 million in the third quarter of 207, of which $2.6 million impacted Adjusted EBITDA. 2 Normalized for acquisition-related charges of $2.4 million, and purchase accounting adjustments related to the write-down of deferred revenue of $4.0 million in the third quarter of Adjusted EBITDA is a Non-GAAP measure defined as earnings before interest, taxes, depreciation, amortization, stock-based compensation, restructuring, and acquisition-related costs. 2

22 Q3 8 Profitability ($ in millions except per share amounts) Q3 FY8 GAAP Q3 FY8 Non-GAAP Net Revenue $369 $373 Gross Profit $44 $48 Gross Margin 39.% 39.7% Operating Loss ($87) ($80) Operating Margin (23.5%) (2.5%) Adjusted EBITDA 2 ($33) ($26) Adjusted EBITDA Margin (8.9%) (7.%) Loss before Taxes ($02) ($96) Benefit from Income Taxes $29 $25 Tax Rate 28.% 26.2% Net Loss ($74) ($7) Basic Shares (in millions) Net Loss per Share ($2.20) ($2.2) Normalized for acquisition-related charges of $2.4 million, and purchase accounting adjustments related to the write-down of deferred revenue of $4.0 million in the third quarter of Adjusted EBITDA is a Non-GAAP measure defined as earnings before interest, taxes, depreciation, amortization, stock-based compensation, restructuring, and acquisition-related costs. 22

23 Annual Capital Expenditures ($ in Millions) CapEx $M $20 $00 $80 $90 $8 $76 $73 $ $ $40 0 (% of Rev) $20 $0 0% 8% 7% 6% 5% F Q3 8 capital expenditures were $23 million. Includes Lifetouch. 23

24 Financial Outlook Mike Pope, CFO 24

25 Q4 8 Shutterfly Guidance [] ($ and shares in millions, except per share amounts) GAAP FY8 Non-GAAP Adj. Non-GAAP FY8 Net Revenue $943 to $993 $2 [2] $945 to $995 Shutterfly Consumer Net Revenue $540 to $560 $540 to $560 Lifetouch Net Revenue $339 to $359 $2 [2] $34 to $36 SBS Net Revenue $64 to $74 $64 to $74 Cost of Net Revenue $363 to $382 $363 to $382 Gross Profit $580 to $6 $2 [2] $582 to $63 Gross Profit Margin 6.5% 6.6% Operating Income $26 to $28 $2 [2] $263 to $283 Stock-based Compensation $6 Amortization of Intangible Assets $ Depreciation $35 Adjusted EBITDA [3] $325 to $345 Effective Tax Rate [4] 26.% to 25.7% 26.% to 25.7% Net Income per Share $5.09 to $5.54 $0.05 $5.4 to $5.59 Diluted Shares (weighted average shares in millions) Excludes restructuring, acquisition-related charges, and any severance or retention related to facilities closures. 2 This non-gaap adjustment eliminates the effect of the purchase accounting deferred revenue write-down. 3 Adjusted EBITDA is a Non-GAAP measure defined as earnings before interest, taxes, depreciation, amortization, stock-based compensation, restructuring, and acquisition-related costs. 4 Effective tax rate assumes windfall from stock-based compensation for shares expected to vest for the remainder of 208, based on the Company s average stock price over the last three months. 25

26 208 Shutterfly Guidance [] ($ and shares in millions, except per share amounts) GAAP FY8 Non-GAAP Adj. Non-GAAP FY8 Net Revenue $,954 to $2,004 $40 [2] $,994 to $2,044 Shutterfly Consumer Net Revenue $984 to $,004 $984 to $,004 Lifetouch Net Revenue $750 to $770 $40 [2] $790 to $80 SBS Net Revenue $220 to $230 $220 to $230 Cost of Net Revenue $947 to $966 ($) [3] $936 to $955 Gross Profit $,007 to $,038 $5 [2][3] $,058 to $,089 Gross Profit Margin 5.5% to 5.8% 53.% to 53.3% Operating Income $35 to $55 $5 [2][3] $85 to $205 Stock-based Compensation $5 Amortization of Intangible Assets $39 Depreciation $4 Adjusted EBITDA [4] $390 to $40 Effective Tax Rate [5] 2.5% 2.5% Net Income per Share $.66 to $2. $.4 $2.80 to $3.25 Diluted Shares (weighted average shares in millions) Capital Expenditures $00 $00 Excludes restructuring, acquisition-related charges, and any severance or retention related to facilities closures. 2 This non-gaap adjustment eliminates the effect of the purchase accounting deferred revenue write-down. 3 This non-gaap adjustment eliminates the effect of the purchase accounting inventory write-up. 4 Adjusted EBITDA is a Non-GAAP measure defined as earnings before interest, taxes, depreciation, amortization, stock-based compensation, restructuring, and acquisition-related costs. 5 Effective tax rate assumes windfall from stock-based compensation for shares expected to vest for the remainder of 208, based on the Company s average stock price over the last three months. 26

27 Q&A

28 ($ in Millions) Reconciliation of Non-GAAP Adjusted EBITDA Q3 8 Q3 7 GAAP net loss ($73.5) ($25.6) Interest expense, net Tax benefit (28.8) (6.7) Depreciation and amortization Stock-based compensation expense Restructuring charges Acquisition-related costs Purchase accounting adjustments Non-GAAP Adjusted EBITDA ($26.3) $3.0 28

29 Shutterfly Consumer Net Revenue by Brand ($ in Millions) Year Three Months Ended Ended Mar. 3, Jun. 30, Sep. 30, Dec. 3, Mar. 3, Jun. 30, Sep. 30, Dec. 3, Shutterfly Consumer net revenue: Shutterfly Brand $ 23.9 $ 39.9 $ 5.9 $ $ 42.7 $54.2 $5.5 $ Tiny Prints Boutique Tiny Prints () Wedding Paper Divas (2) My Publisher (3) Other Total $ 60.6 $ 79. $ 35.4 $ 52.7 $ 52. $65.0 $26.9 $ () Tiny Prints website shut down on June 28, 207. (2) Wedding Paper Divas website shut down on September 3, 207. (3) MyPublisher website shut down on May 5,

30 Q3 8 Shutterfly Revenue Bridge Shutterfly Brand revenue growth rate include a benefit from the platform consolidation and the shuttering of the legacy Wedding Paper Divas website. The following bridges Q3 7 Shutterfly Brand revenue to Q3 8 Shutterfly Brand revenue by estimating revenue attributable to i) baseline Shutterfly brand revenue change (our best estimate of an organic Shutterfly brand growth rate), and ii) incremental Shutterfly Brand revenue growth from the shuttering of the legacy Wedding Paper Divas website. () The Revenue bridge uses customer cohort data to estimate Q3 8 Shutterfly brand revenue from the shuttering of the legacy Wedding Paper Divas website that benefits the Shutterfly brand growth rate ( Incremental Revenue from Shuttered Websites ). Baseline Shutterfly brand revenue change ($(2.2) million or -2%) is then calculated as the difference between total Shutterfly brand change ($(0.4) million), less Incremental Revenue from Shuttered Websites ($.8 million). (2) Incremental Revenue from Shuttered Websites is Q3 8 Shutterfly brand revenue from the legacy Wedding Paper Divas registered users, less an estimate of what Shutterfly brand revenue from this cohort would have been if the legacy Wedding Paper Divas website was still open. 30

31 Non-GAAP Guidance Update ($ in Millions, except per share amounts) Prior Non-GAAP Midpoint Target as of August 7, 208 Updated Non-GAAP Midpoint Target Three Months Ending December 3, 208 () Change Three Months Ending December 3, 208 () Net revenue $982 ($3) $970 Shutterfly Consumer net revenue $563 ($3) $550 Lifetouch net revenue $348 $3 $35 SBS net revenue $72 ($3) $69 Gross profit margin 6.4% 6.6% Operating income $294 ($2) $273 Adjusted EBITDA $354 ($9) $335 Earnings per share $5.89 ($0.53) $5.36 () Excludes restructuring, acquisition-related charges and purchase accounting adjustments. 3

32 Segment Reporting Supplemental Information In the second quarter of 208, the Company expanded its segment disclosures to include margin. The following table provides a bridge for prior year financial statements to help investors understand the segment margin. ($ in Millions) Shutterfly income statement Stock-based compensation expense Three Months Ended September 30, 207 Amortization of intangible assets Corporate expenses and other Segment reporting for Shutterfly Consumer + SBS Net revenue $ 95.4 $ - $ - $ - $ - $ 95.4 Cost of net revenue (3.) (29.0) Technology and development (39.6) (37.) Sales and marketing (33.3) (28.0) General and administrative (23.9) (3.8) Restructuring (3.3) Operating loss $ (35.8) $ 0.7 $ 3.6 $ 5.8 $ 3.3 $ (2.4) Shutterfly income statement Stock-based compensation expense Nine Months Ended September 30, 207 Amortization of intangible assets Corporate expenses and other Nonrecurring charges Nonrecurring charges Segment reporting for Shutterfly Consumer + SBS Net revenue $ $ - $ - $ - $ - $ Cost of net revenue (365.4) (358.6) Technology and development (25.0) (7.6) Sales and marketing (9.2) (02.0) General and administrative (79.2) (2.7) Capital lease termination (8.) Restructuring (7.0) Operating (loss) income $ (7.4) $ 33.5 $.8 $ 52.7 $ 25. $