Shutterfly Announces Fourth Quarter and Full Year 2018 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 fourth quarter and full year ended December 31, 2018.

“2018 was a transformational year for Shutterfly, with the Lifetouch acquisition almost doubling the size of the company, and ending 2018 with $2 billion of Non-GAAP net revenue,” said Christopher North, President and Chief Executive Officer. “We articulated a unique value proposition for our customers going forward: together, Shutterfly and Lifetouch will help customers capture, preserve, and share the most important memories in their lives, bringing Shutterfly’s strengths as the leader in personalized photo-based products coupled with photo storage, together with Lifetouch’s strengths as the leader in school and family photography, to create the only end-to-end memory solution for families. In doing so, we’ve significantly increased our potential to create shareholder value. Looking forward, value creation will come from continuing to drive growth in all three of our divisions, from delivering substantial cost and revenue synergies from the Lifetouch integration, and from returning capital to shareholders.”

“Our results in the fourth quarter were mixed, with strong performance in Shutterfly Business Solutions and solid performance in Lifetouch offset by disappointing performance in Shutterfly Consumer, which had lower than expected growth of 1%.”

Please see the Company’s other two press releases issued today. The first announces that the Board of Directors has formed a Strategic Review Committee and retained a financial advisor, as it continues an ongoing review of strategic and financial alternatives. The second announces that Christopher North, President and CEO, will be stepping down at the end of August 2019, and that the Board of Directors has engaged an executive search firm to identify candidates to succeed him.

Fourth Quarter 2018 Financial Highlights

GAAP net revenue was $950 million. Shutterfly Consumer segment net revenue totaled $528 million, a 1% year-over-year increase. Lifetouch segment net revenue was $348 million. Shutterfly Business Solutions segment net revenue totaled $74 million, a 3% year-over-year increase. GAAP operating income totaled $259 million. Net income was $178 million or $5.19 per share.

Non-GAAP net revenue, excluding purchase accounting adjustments related to the deferred revenue write-down, was $952 million, a 60% year-over-year increase driven by the Lifetouch acquisition. Non-GAAP Lifetouch segment net revenue was $350 million. Normalized operating income, excluding restructuring, acquisition-related charges and purchase accounting adjustments related to the deferred rent and deferred revenue write-down, was $264 million. Normalized net income was $187 million. Adjusted EBITDA was $320 million.

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

Full Year 2018 Financial Highlights

GAAP net revenue was $1,962 million. Shutterfly Consumer segment net revenue totaled $972 million, a 3% year-over-year decrease, as 3% organic Shutterfly Brand growth was offset by lost revenue from the brands and websites the Company shuttered in the 2017 platform consolidation, and a year-over-year decline in the TinyPrints Boutique. Lifetouch segment net revenue was $759 million. Shutterfly Business Solutions segment net revenue totaled $231 million, a 19% year-over-year increase. GAAP operating income totaled $115 million. Net income was $50 million or $1.45 per share.

Non-GAAP net revenue, excluding purchase accounting adjustments related to the deferred revenue write-down, was $2,001 million, a 68% year-over-year increase driven by the Lifetouch acquisition. Non-GAAP Lifetouch segment net revenue was $799 million. Normalized operating income, excluding restructuring, acquisition-related charges and purchase accounting adjustments related to inventory, deferred rent and the deferred revenue write-down, was $186 million. Normalized net income was $106 million. Adjusted EBITDA was $385 million.

Project Aspen

In the fourth quarter of 2018, the Company further developed its long-term plans to establish a single, next-generation manufacturing platform serving Shutterfly Consumer, Lifetouch and SBS, an initiative the Company refers to as Project Aspen. Project Aspen will yield a total of approximately $130 million in cash savings over the next five years, with annual run-rate savings from manufacturing operations of approximately $35 million from 2022 onward. In addition, while Project Aspen requires net investment in 2019, it will deliver net cash savings in every year beginning in 2020. In the first phase of Project Aspen, the Company will close four legacy Lifetouch facilities, including the two sites previously announced, and two additional facility closures announced today: Chico, California and Chattanooga, Tennessee, both of which will close in the second half of 2019. The Company will also open a new 237,000 square foot facility in Texas, in the first half of 2020, which will serve both Lifetouch and Shutterfly. Further details about Project Aspen will be shared as it progresses.

Adjusted EBITDA Target Update

The revenue and cost synergies from the Lifetouch acquisition are expected to generate between $67 million and $75 million of incremental annual Adjusted EBITDA in the next three years. The Company is updating the previously communicated 2020 Adjusted EBITDA target of $450 million for two reasons. First, the Company had lower-than-expected Shutterfly Consumer growth in the fourth quarter of 2018 and has moderated Shutterfly Consumer growth expectations in the near term. Second, while Project Aspen is expected to generate greater run-rate savings, it will also delay some of our 2020 cost synergies by one year. The Company now expects to achieve between $400 million and $450 million of Adjusted EBITDA in 2021 as follows:

		2021 Adjusted EBITDA Range[1]
		Low-end			High-end
FY19 Guidance range		$	315		$	340
Incremental manufacturing cost synergies (between 2019 and 2021)		24			24
Reduced integration costs (between 2019 and 2021)		18			18
		357			382
Baseline revenue growth (2020 and 2021)[2]		19			35
Revenue synergies (2020 and 2021)[3]		25			33
2021 Adjusted EBITDA range		$	400		$	450

[1] The Company's 2021 Adjusted EBITDA outlook is composed entirely of non-GAAP measures. The Company considers it unreasonably difficult to reconcile its outlook to comparable GAAP measures.

[2] Baseline revenue growth rate 3%-5% per year.

[3] Assumes $50 million - $65 million of revenue synergies at a 50% contribution margin.

Capital Update

Cash, cash equivalents, and investments as of December 31, 2018 totaled $566 million. In January 2019, as anticipated, the Company repaid $200 million of Term Loan B debt that was used to finance the acquisition of Lifetouch. The Company ended January with cash, cash equivalents, and investments of approximately $225 million, down from December 31, 2018, driven by the debt repayment, and working capital used to pay vendors and suppliers used in the fourth quarter.

The Board and management have also reviewed Shutterfly’s capital structure, including appropriate leverage levels and potential share buybacks. In the first quarter of 2019, the Company paid down $200 million of debt, consistent with its previous commitment to retain a BB debt rating, while remaining compliant with its debt covenants. As part of this review, the Company affirmed its objective of maintaining gross leverage of 2.5-3.0x Adjusted EBITDA on an annual basis, and to return cash in excess of our operating and financing needs to shareholders in the form of share repurchases, within the parameters of appropriate cash management that meets the needs of Shutterfly’s highly seasonal business, where substantially all of the Company’s cash flow is generated in the last four months of the year. Currently, management believes it will be in position to begin executing on a capital return plan during the fourth quarter of 2019.

Impact of New Lease Accounting Standard

The new lease accounting standard, ASC 842 (Leases) is effective for the Company on January 1, 2019. The Company is finalizing the evaluation of the effects to the Company’s Consolidated Financial Statements and disclosure. The Company expects the most significant impact relates to the leases designated as operating leases that will be recognized as right-of-use assets and corresponding lease liabilities on its Consolidated Balance Sheets upon adoption. Additionally, the Company derecognized its build-to-suit leases upon adoption of ASC 842. Post adoption of ASC 842, the Company's build-to-suit leases will be accounted for as operating leases and will be recorded as right-of-use assets and lease liabilities, with lease expense recorded in the income statement. Prior to adoption of ASC 842, the Company’s build-to-suit leases were recorded as assets and financing obligations, with depreciation expense and interest expense recorded in the income statement, respectively. As a result, the Company expects that its Adjusted EBITDA in 2019 will be negatively impacted by approximately $5.0 million from the change in accounting treatment related to the Company’s build-to-suit leases.

Business Outlook^[1][2]

Full Year 2019:

• Net revenue to range from $2,130 million to $2,210 million
• Shutterfly Consumer net revenue to range from $975 million to $1,025 million
• Lifetouch net revenue to range from $915 million to $935 million
• SBS net revenue to range from $240 million to $250 million
• Gross profit margin to range from 51.4% to 51.7% of net revenue
• Operating income to range from $76 million to $101 million
• Effective tax rate of 28.0%
• Net income per share to range from $0.55 to $1.06
• Weighted average shares of approximately 34.8 million
• Adjusted EBITDA to range from $315 million to $340 million
• Capital expenditures to range from $125 million to $130 million

First Quarter 2019:

• Net revenue to range from $317 million to $328 million
• Shutterfly Consumer net revenue to range from $146 million to $150 million
• Lifetouch net revenue to range from $126 million to $130 million
• SBS net revenue to range from $45 million to $48 million
• Gross profit margin to range from 35.8% to 36.7% of net revenue
• Operating loss to range from $102 million to $107 million
• Effective tax rate of 27.0%
• Net loss per share to range from $2.49 to $2.59
• Weighted average shares of approximately 33.9 million
• Adjusted EBITDA loss to range from $43 million to $48 million

^[1] Excludes any costs related to executive transition, the strategic review, the facility closures in 2019, and any non-recurring charges related to the $200 million debt repayment made in January 2019. It also excludes any proceeds from the sale of existing facilities.
^[2] The Company's business outlook is composed entirely of non-GAAP measures. The Company considers it unreasonably difficult to reconcile its outlook to comparable GAAP measures.

Notes to the Fourth Quarter and Full Year 2018 Financial Results and Operating Metrics and 2019 Business Outlook

Adjusted EBITDA is a non-GAAP financial measure that the Company defines as earnings before interest, taxes, depreciation, amortization, stock-based compensation, capital lease termination, restructuring and acquisition-related costs.

The Company expanded segment reporting in the second quarter of 2018, which now includes segment margin. Segment reporting continues to report net revenue and cost of net revenue, consistent with previous reporting, but now it also includes technology and development, sales and marketing, and credit card fees, arriving at a margin for the segment. The margin of the Company's three segments compares to non-GAAP operating income by adding corporate expenses, amortization of intangible assets, stock-based compensation, and other non-recurring items including restructuring and acquisition-related charges.

Shutterfly Consumer segment includes sales from the Shutterfly brand, the Tiny Prints boutique and BorrowLenses, and are derived from the sale of a variety of products such as, professionally-bound photo books, cards and stationery, custom home décor products and unique photo gifts, calendars and prints, and the related shipping revenue, as well as rental revenue from the BorrowLenses brand. Consumer also includes revenue from advertising displayed on the Company’s website.

Lifetouch segment includes net revenue from professional photography services for schools, preschools and churches, as well as retail studios operated by Lifetouch under the JCPenney Portrait brand.

Shutterfly Business Solutions ("SBS") segment includes net revenue from personalized direct marketing and other end-consumer communications as well as just-in-time, inventory-free printing for the Company's business customers.

Average Order Value ("AOV") is defined as total net revenue (excluding Lifetouch and SBS) divided by total orders.

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

Fourth Quarter Conference Call

Management will review the fourth quarter and full year 2018 financial results and its expectations for the first quarter and full year 2019 on a conference call on Tuesday, February 5, 2019 at 2:00 p.m. Pacific Time (5:00 p.m. Eastern Time). To listen to the call and view the accompanying slides, please visit http://www.shutterflyinc.com. In the Investor Relations area, click on the link provided for the webcast, or dial [phone] or [phone], and ask to be to be joined into the Shutterfly call. The webcast will be archived and available at http://www.shutterflyinc.com in the Investor Relations section. A replay of the conference call will be available through Tuesday, February, 19, 2019. To hear the replay, please dial [phone] or [phone] and enter access code 10127959.

Non-GAAP Financial Information

To supplement the Company’s consolidated financial statements, which are prepared and presented in accordance with U.S. generally accepted accounting principles (GAAP), the Company uses certain non-GAAP financial measures. Tables are provided at the end of this press release that reconcile the non-GAAP financial measures that the Company uses to the most directly comparable financial measures prepared in accordance with GAAP. These non-GAAP financial measures include non-GAAP net revenue, non-GAAP Lifetouch segment net revenue, normalized operating income (loss), net income (loss), net income (loss) per share and adjusted EBITDA. The method the Company uses to produce non-GAAP financial measures is not computed according to GAAP and may differ from methods used by other companies.

The Company believes that these non-GAAP measures provide useful information about the Company's core operating results and thus are appropriate to enhance the overall understanding of the Company's past financial performance and its prospects for the future. These adjustments to the Company's GAAP results are made with the intent of providing both management and investors a more complete understanding of the Company's underlying operational results and trends and performance. Management uses these non-GAAP measures to evaluate the Company's financial results, develop budgets, manage expenditures, and determine employee compensation. The presentation of additional information is not meant to be considered in isolation or as a substitute for or superior to gross margins, net revenue, operating income (loss), net income (loss), or net income (loss) per share determined in accordance with GAAP. For more information, please see Shutterfly's Securities and Exchange Commission (“SEC”) filings, including the most recent Form 10-K and Form 10-Q, which are available on the SEC's website at www.sec.gov.

The Company has provided a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure, where possible, except that the Company has not reconciled its first quarter and full year 2019 guidance, and its updated 2021 non-GAAP Adjusted EBITDA bridge to comparable GAAP measures at this stage of the process because it is unreasonably difficult to provide guidance for stock-based compensation expense; capitalization and amortization of internal-use software; costs related to executive transition, the strategic review, the facility closures in 2019, any non-recurring charges related to the $200 million debt repayment made in January 2019; and proceeds from the sale of existing facilities, which are reconciling items between GAAP measures and non-GAAP measures. The factors that may impact future stock-based compensation expense; capitalization and amortization of internal-use software; costs related to executive transition; the strategic review; the facility closures in 2019; and the proceeds from the sale of existing facilities are out of the Company's control and/or cannot be reasonably predicted, and therefore the Company is unable to provide such guidance without unreasonable effort. These factors include the Company's market capitalization and related volatility of its stock price; its inability to project the cost or scope of internally produced software; its inability to estimate the charges related to the facility closures in 2019 and the proceeds from the sale of existing facilities; its ability to attract new management personnel; and the lack of assurance that the review of strategic alternatives will result in a transaction or other outcome.

Notice Regarding Forward-Looking Statements

This media release contains "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties. These forward-looking statements include statements regarding expected cash flow generation in each of the Company's three segments; the Company’s belief it can offer a complete memory solution; the Company's expectations of opportunities to broaden its value proposition to customers; the Company's expectations to create shareholder value; the Company’s expectations of growing all three divisions and returning capital to shareholders; the Company's expectations of maintaining a certain gross leverage ratio; the Company’s expectations as to the timing of meeting its Adjusted EBITDA target; the Company’s expectations as to the revenues and cost synergies from the Lifetouch acquisition; expectations around the consolidation of production facilities including run-rate savings; expectations around the impact of ASC 842; and the Company's business outlook for the first quarter of 2019 and full year 2019. You can identify these statements by the use of terminology such as “guidance”, “believe”, “expect”, “will”, “should”, “could”, “estimate”, “anticipate” or similar forward-looking terms. You should not rely on these forward-looking statements as they involve risks and uncertainties that may cause actual results to vary materially from the forward-looking statements. Factors that might contribute to such differences include, among others, decreased consumer discretionary spending as a result of general economic conditions; the Company's ability to expand its customer base and increase sales to existing customers; the Company's ability to meet production requirements; the Company’s ability to attract and retain management and other personnel; the Company's ability to retain and hire necessary employees, including seasonal personnel, and appropriately staff its operations; the impact of seasonality on the Company's business; the Company's ability to develop innovative, new products and services on a timely and cost-effective basis; failure to realize the anticipated benefits of the Company's 2017 restructuring activities or of the Lifetouch acquisition; recent and ongoing restructuring activities (including but not limited to those relating to manufacturing consolidation, Lifetouch field operations and the Company's single platform migration); any indications of interest received by Shutterfly; consumer acceptance of the Company's products and services; the Company's ability to develop additional adjacent lines of business; unforeseen changes in expense levels; refining our promotional strategies; competition and the pricing strategies of the Company's competitors, which could lead to pricing pressure; the retention of Lifetouch employees and the Company's ability to successfully integrate the Lifetouch businesses; risks inherent in the achievement of anticipated synergies and the timing thereof; and general economic conditions and changes in laws and regulations. For more information regarding the risks and uncertainties that could cause actual results to differ materially from those expressed or implied in these forward-looking statements, as well as risks relating to the Company's business in general, the Company refers you to the “Risk Factors” section of its SEC filings, including the Company's most recent Form 10-K and 10-Q, which are available on the SEC’s website at www.sec.gov. These forward-looking statements are based on current expectations and the Company assumes no obligation to update this information.

About Shutterfly, Inc.

Shutterfly, Inc. is the leading retailer and manufacturing platform for personalized products and communications. Founded in 1999, Shutterfly, Inc. has three divisions: Shutterfly Consumer, Lifetouch, and Shutterfly Business Solutions. Shutterfly Consumer and Lifetouch help consumers capture, preserve, and share life’s important moments through professional and personal photography, and personalized products. The Shutterfly brand brings photos to life in photo books, gifts, home décor, and cards and stationery. Lifetouch is the national leader in school photography, built on the enduring tradition of “Picture Day”, and also serves families through portrait studios and other partnerships. Shutterfly Business Solutions delivers digital 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						Twelve Months Ended
		December 31,						December 31,
		2018			2017			2018			2017
Net revenue		$	949,966		$	593,755		$	1,961,820		$	1,190,202
Cost of net revenue		377,562			254,218			961,575			619,650
Restructuring		—			—			—			1,475
Gross profit		572,404			339,537			1,000,245			569,077
Operating expenses:
Technology and development		49,342			43,415			177,001			168,383
Sales and marketing		202,095			78,503			505,833			197,708
General and administrative[1]		60,290			38,597			197,340			117,797
Capital lease termination		—			—			—			8,098
Restructuring[2]		1,667			—			4,618			15,491
Total operating expenses		313,394			160,515			884,792			507,477
Income from operations		259,010			179,022			115,453			61,600
Interest expense		(17,176)			(9,219)			(61,239)			(27,836)
Interest and other income, net		1,278			794			5,444			1,481
Income before income taxes		243,112			170,597			59,658			35,245
Provision for income taxes		(65,496)			(58,873)			(9,262)			(5,160)
Net income		$	177,616		$	111,724		$	50,396		$	30,085
Net income per share:
Basic		$	5.28		$	3.45		$	1.52		$	0.91
Diluted		$	5.19		$	3.37		$	1.45		$	0.88
Weighted average shares outstanding:
Basic		33,614			32,372			33,258			33,113
Diluted		34,218			33,114			34,832			34,106
Stock-based compensation is allocated as follows:
Cost of net revenue		$	973		$	1,055		$	3,824		$	4,339
Technology and development		2,445			2,391			9,990			9,778
Sales and marketing		3,287			3,211			12,790			12,229
General and administrative		5,695			4,206			21,117			17,227
Restructuring		—			—			—			814
		$	12,400		$	10,863		$	47,721		$	44,387
Depreciation and amortization is allocated as follows:
Cost of net revenue		$	25,645		$	15,682		$	87,563		$	60,415
Technology and development		6,881			6,935			26,721			28,457
Sales and marketing		9,786			2,122			31,002			10,393
General and administrative		1,571			985			5,841			4,597
Restructuring		805			—			805			5,999
		$	44,688		$	25,724		$	151,932		$	109,861

[1] The General and administrative expenses of $60 million and $197 million for the three and twelve months ended December 31, 2018, respectively, include $0.6 million and $16 million, respectively, of acquisition-related charges.

[2] The exit of iMemories business in the second quarter of 2018 and the planned closure of two Lifetouch facilities in the fourth quarter of 2018 resulted in restructuring charges of $1.7 million and $4.6 million in the three and twelve months ended December 31, 2018, respectively.

Appendix 1.2
Shutterfly, Inc.
Consolidated Balance Sheets - GAAP
(In thousands, except par value amounts)
(Unaudited)
		December 31, 2018			December 31, 2017
ASSETS
Current assets:
Cash and cash equivalents		$	521,567		$	489,894
Short-term investments		34,011			178,021
Accounts receivable, net		87,023			82,317
Inventories		18,015			11,019
Prepaid expenses and other current assets		66,961			41,383
Total current assets		727,577			802,634
Long-term investments		10,808			9,242
Property and equipment, net		381,018			266,860
Intangible assets, net		316,154			29,671
Goodwill		843,607			408,975
Other assets		23,045			17,418
Total assets		$	2,302,209		$	1,534,800
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt		$	14,203		$	297,054
Accounts payable		105,407			91,473
Accrued liabilities		226,445			159,248
Deferred revenue, current portion		57,319			24,649
Total current liabilities		403,374			572,424
Long-term debt		1,090,442			292,457
Other liabilities		134,027			119,195
Total liabilities		1,627,843			984,076
Stockholders’ equity:
Common stock, $0.0001 par value; 100,000 shares authorized; 33,673 and 32,297 shares issued and outstanding on December 31, 2018 and 2017, respectively		3			3
Additional paid-in capital		1,065,531			996,301
Accumulated other comprehensive income		1,592			1,778
Accumulated deficit		(392,760)			(447,358)
Total stockholders' equity		674,366			550,724
Total liabilities and stockholders' equity		$	2,302,209		$	1,534,800

Appendix 1.3
Shutterfly, Inc.
Consolidated Statements of Cash Flows - GAAP
(In thousands)
(Unaudited)
		Year Ended December 31,
		2018			2017
Cash flows from operating activities:
Net income		$	50,396		$	30,085
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		110,703			88,946
Amortization of intangible assets		40,424			14,916
Amortization of debt discount and issuance costs		8,792			15,508
Repayment of convertible senior notes attributable to debt discount		(63,510)			—
Stock-based compensation		47,721			43,573
(Gain) loss on disposal of property and equipment		(252)			1,141
Deferred income taxes		5,630			(161)
Restructuring		2,418			10,882
Other		(528)			—
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable		2,937			(24,952)
Inventories		12,766			(743)
Prepaid expenses and other assets		5,680			5,603
Accounts payable		4,223			32,189
Accrued and other liabilities		(25,474)			22,537
Net cash provided by operating activities		201,926			239,524
Cash flows from investing activities:
Acquisition of business, net of cash acquired		(890,204)			—
Purchases of property and equipment		(41,396)			(36,745)
Capitalization of software and website development costs		(45,878)			(34,006)
Purchases of investments		(9,523)			(205,466)
Proceeds from the maturities of investments		206,231			45,257
Proceeds from the sales of investments		46,879			13,874
Proceeds from sale of property and equipment		2,976			21,724
Net cash used in investing activities		(730,915)			(195,362)
Cash flows from financing activities:
Proceeds from issuance of common stock upon exercise of stock options		20,166			677
Repurchases of common stock		—			(110,000)
Principal payments of borrowings		(246,052)			—
Principal payments of capital lease and financing obligations		(19,032)			(29,380)
Proceeds from borrowings, net of issuance costs		806,652			295,211
Net cash provided by financing activities		561,734			156,508
Effect of exchange rate changes on cash and cash equivalents		(1,072)			—
Net increase in cash and cash equivalents		31,673			200,670
Cash and cash equivalents, beginning of period		489,894			289,224
Cash and cash equivalents, end of period		$	521,567		$	489,894
Supplemental schedule of non-cash investing / financing activities:
Net increase in accrued purchases of property and equipment		$	1,607		$	2,693
Net increase (decrease) in accrued capitalized software and website development costs		69			(396)
Stock-based compensation capitalized with software and website development costs		1,345			1,373
Property and equipment acquired under capital leases		5,611			19,145

Appendix 1.4
Shutterfly, Inc.
Shutterfly Consumer Metrics Disclosure
(Unaudited)
		Three Months Ended					Twelve Month Ended
		December 31,					December 31,
		2018			2017		2018			2017
Shutterfly Consumer Metrics
Customers [1]		6,066,885			6,110,833		9,766,578			10,048,431
year-over-year change		(1)	%				(3)	%
Orders		9,769,375			10,463,752		23,625,789			26,328,121
year-over-year change		(7)	%				(10)	%
Average order value [2]		$54.03			$49.87		$41.13			$37.87
year-over-year change		8	%				9	%

[1] An active customer is defined as one that has transacted in the last trailing twelve months.

[2] Average order value excludes Lifetouch and SBS revenue.

Appendix 1.5
Shutterfly, Inc.
Shutterfly Consumer Net Revenue by Brand
(In thousands)
(Unaudited)
		Three Months Ended																								Year Ended
		Mar. 31,			Jun. 30,			Sep. 30,			Dec. 31,			Mar. 31,			Jun. 30,			Sep. 30,			Dec. 31,			Dec. 31,			Dec. 31,
		2017			2017			2017			2017			2018			2018			2018			2018			2017			2018
Shutterfly Consumer net revenue
Shutterfly Brand Core		$	97,368		$	104,779		$	87,398		$	372,136		$	114,087		$	116,808		$	86,237		$	372,567		$	661,682		$	689,700
Shutterfly Brand PGHD		26,535			35,129			28,485			92,411			28,577			37,373			29,227			$	105,966		182,560			201,143
Tiny Prints Boutique		—			—			1,942			48,932			2,103			1,397			1,490			40,566			50,874			45,556
Tiny Prints [1]		10,465			12,917			—			—			—			—			—			—			23,382			—
Wedding Paper Divas [2]		14,290			11,365			8,523			—			—			—			—			—			34,178			—
MyPublisher [3]		4,936			6,056			—			—			—			—			—			—			10,992			—
Other		7,051			8,844			9,070			8,330			7,292			9,425			9,934			8,779			33,295			35,430
Total		$	160,645		$	179,090		$	135,418		$	521,809		$	152,059		$	165,003		$	126,888		$	527,878		$	996,963		$	971,829

[1] Tiny Prints website shut down on June 28, 2017.

[2] Wedding Paper Divas website shut down on September 13, 2017.

[3] MyPublisher website shut down on May 15, 2017.

Appendix 2.1

Shutterfly, Inc.

Segment Disclosure

(In thousands)

(Unaudited)

The Company expanded segment reporting, which now includes segment margin. Segment reporting continues to report net revenue and cost of net revenue, consistent with previous reporting, but now it also includes technology and development, sales and marketing, and credit card fees, arriving at a margin for the segment. The margin of the Company's three segments compares to non-GAAP operating income by adding corporate expenses, amortization of intangible assets, stock-based compensation, and other non-recurring items including restructuring and acquisition-related charges.

		Three Months Ended						Twelve Months Ended
		December 31,						December 31,
		2018			2017			2018			2017
Shutterfly Consumer:
Net revenue		$	527,878		$	521,809		$	971,829		$	996,963
Cost of net revenue		200,285			193,320			452,226			456,665
Technology and development		32,740			36,019			124,670			140,698
Sales and marketing		78,943			71,732			168,442			170,687
Credit card fees		12,997			12,936			25,072			25,645
Margin[1]		$	202,913		$	207,802		$	201,419		$	203,268
Margin %		38.4 %			39.8 %			20.7 %			20.4 %
Lifetouch[2]:
Net revenue[3]		$	349,736		$	—		$	798,718		$	—
Cost of net revenue[4]		114,131			—			299,467			—
Technology and development		7,461			—			21,711			—
Sales and marketing		108,925			—			288,578			—
Credit card fees		4,470			—			8,951			—
Margin[1]		$	114,749		$	—		$	180,011		$	—
Margin %		32.8 %			— %			22.5 %			— %
Shutterfly Business Solutions:
Net revenue		$	74,358		$	71,946		$	230,588		$	193,239
Cost of net revenue		59,899			58,812			187,392			154,068
Technology and development		3,430			5,006			13,614			17,907
Sales and marketing		1,525			1,444			6,067			4,476
Margin[1]		$	9,504		$	6,684		$	23,515		$	16,788
Margin %		12.8 %			9.3 %			10.2 %			8.7 %
Consolidated Segments:
Net revenue[3]		$	951,972		$	593,755		$	2,001,135		$	1,190,202
Cost of net revenue[4]		374,315			252,132			939,085			610,733
Technology and development		43,631			41,025			159,995			158,605
Sales and marketing		189,393			73,176			463,087			175,163
Credit card fees		17,467			12,936			34,023			25,645
Margin[1]		$	327,166		$	214,486		$	404,945		$	220,056
Margin %		34.4 %			36.1 %			20.2 %			18.5 %

[1] The margins reported reflect only costs that are directly attributable or allocable to a specific segment and exclude corporate expenses, amortization of intangible assets, stock-based compensation and other non-recurring charges.

[2] The Company acquired Lifetouch on April 2, 2018.

[3] Yearbook sales and collections for the Lifetouch segment are made throughout the school year, whereas yearbooks are typically delivered toward the end of the school year in the second quarter of the fiscal year. Business combination accounting principles require the Company to record the assumed deferred revenue at fair value on the acquisition date measured based on the cost to manufacture and deliver the yearbooks, plus a profit margin. Segment reporting includes this purchase accounting adjustment which primarily relates to yearbook sales in net revenue for the Lifetouch segment.

[4] Business combination accounting principles require the Company to measure acquired inventory at fair value. The fair value of inventory reflects the acquired company’s cost of manufacturing plus a portion of the expected profit margin. Segment reporting excludes this purchase accounting adjustment from cost of net revenue for the Lifetouch segment.

The following table reconciles operating segment margin to total operating income, operating segment net revenue to total net revenue, and operating segment cost of net revenue to total cost of net revenue:

		Three Months Ended						Twelve Months Ended
		December 31,						December 31,
		2018			2017			2018			2017
Total margin for operating segments		$	327,166		$	214,486		$	404,945		$	220,056
Purchase accounting deferred revenue adjustment[1]		(2,006)			—			(39,315)			—
Purchase accounting inventory adjustment[2]		—			—			(10,931)			—
Purchase accounting deferred rent adjustment[3]		(292)			—			(292)			—
Corporate expenses[4]		(38,519)			(21,454)			(130,642)			(74,903)
Amortization of intangible assets		(12,700)			(3,147)			(40,424)			(14,916)
Stock-based compensation for operating segments		(12,400)			(10,863)			(47,721)			(43,573)
Restructuring		(1,667)			—			(4,618)			(16,966)
Acquisition-related charges		(572)			—			(15,549)			—
Capital lease termination		—			—			—			(8,098)
Operating income		$	259,010		$	179,022		$	115,453		$	61,600
Operating margin		27.3 %			30.2 %			5.9 %			5.2 %
Total net revenue for all operating segments		$	951,972		$	593,755		$	2,001,135		$	1,190,202
Purchase accounting deferred revenue adjustment[1]		(2,006)			—			(39,315)			—
Total net revenue		$	949,966		$	593,755		$	1,961,820		$	1,190,202
Total cost of net revenue for all operating segments		$	374,315		$	252,132		$	939,085		$	610,733
Purchase accounting inventory adjustment[2]		—			—			10,931			—
Stock-based compensation for cost of net revenue		973			1,055			3,824			4,339
Amortization of intangible assets for cost of net revenue		2,274			1,031			7,735			4,578
Total cost of net revenue		$	377,562		$	254,218		$	961,575		$	619,650

[1] Yearbook sales and collections for the Lifetouch segment are made throughout the school year, whereas yearbooks are typically delivered toward the end of the school year in the second quarter of the fiscal year. Business combination accounting principles require the Company to record the assumed deferred revenue at fair value on the acquisition date measured based on the cost to manufacture and deliver the yearbooks, plus a profit margin. Segment reporting includes this purchase accounting adjustment which primarily relates to yearbook sales in net revenue for the Lifetouch segment.

[2] Business combination accounting principles require the Company to measure acquired inventory at fair value. The fair value of inventory reflects the acquired company’s cost of manufacturing plus a portion of the expected profit margin. Segment reporting excludes this purchase accounting adjustment from cost of net revenue for the Lifetouch segment.

[3] Segment reporting excludes this purchase accounting adjustment for deferred rent.

[4] Corporate expenses include activities that are not directly attributable or allocable to a specific segment. This category consists primarily of expenses related to certain functions performed at the corporate level such as non-manufacturing facilities, human resources, finance and accounting, legal, information technology, integration, etc.

Appendix 3.1
Shutterfly, Inc.
Reconciliation of Non-GAAP Financial Measures
(In thousands)
(Unaudited)
		Three Months Ended											Three Months Ended
		December 31, 2018											December 31, 2018
		GAAP Income			Non-GAAP				Non-recurring				Normalized
		Statement			Adjustments				Adjustments				Non-GAAP
Net revenue:
Shutterfly Consumer		$	527,878										$	527,878
Lifetouch		347,730			2,006		[1]						349,736
Shutterfly Business Solutions		74,358											74,358
Total net revenue		949,966			2,006								951,972
Cost of net revenue		377,562											377,562
Gross profit		572,404			2,006								574,410
Gross profit margin		60.3 %											60.3 %
Operating expenses:
Technology and development		49,342											49,342
Sales and marketing		202,095			(217)		[5]						201,878
General and administrative		60,290			(75)		[5]		(572)		[3]		59,643
Restructuring		1,667							(1,667)				—
Total operating expenses		313,394			(292)				(2,239)				310,863
Operating income		259,010			2,298				2,239				263,547
Operating margin		27.3 %											27.7 %
Interest expense		(17,176)											(17,176)
Interest and other income, net		1,278											1,278
Income before income taxes		243,112			2,298				2,239				247,649
Provision for income taxes		(65,496)											(60,446)
Net income		$	177,616										$	187,203
Net income per share:
Basic		$	5.28										$	5.57
Diluted		$	5.19										$	5.47
Weighted-average shares outstanding:
Basic		33,614											33,614
Diluted		34,218											34,218
Operating income		$	259,010										$	263,547
Stock-based compensation		12,400											12,400
Amortization of intangible assets		12,700											12,700
Depreciation		31,988							(805)				31,183
Adjusted EBITDA													$	319,830
Adjusted EBITDA margin													33.6 %

		Twelve Months Ended											Twelve Months Ended
		December 31, 2018											December 31, 2018
		GAAP Income			Non-GAAP				Non-recurring				Normalized
		Statement			Adjustments				Adjustments				Non-GAAP
Net revenue:
Shutterfly Consumer		$	971,829										$	971,829
Lifetouch		759,403			39,315		[1]						798,718
Shutterfly Business Solutions		230,588											230,588
Total net revenue		1,961,820			39,315								2,001,135
Cost of net revenue		961,575			(10,931)		[2]						950,644
Gross profit		1,000,245			50,246								1,050,491
Gross profit margin		51.0 %											52.5 %
Operating expenses:
Technology and development		177,001											177,001
Sales and marketing		505,833			(217)		[5]						505,616
General and administrative		197,340			(75)		[5]		(15,549)		[3]		181,716
Restructuring		4,618							(4,618)		[4]		—
Total operating expenses		884,792			(292)				(20,167)				864,333
Operating income		115,453			50,538				20,167				186,158
Operating margin		5.9 %											9.3 %
Interest expense		(61,239)											(61,239)
Interest and other income, net		5,444											5,444
Income before income taxes		59,658			50,538				20,167				130,363
Provision for income taxes		(9,262)											(24,172)
Net income		$	50,396										$	106,191
Net income per share - basic
Basic		$	1.52										$	3.19
Diluted		$	1.45										$	3.05
Weighted-average shares outstanding:
Basic		33,258											33,258
Diluted		34,832											34,832
Operating income		115,453											186,158
Stock-based compensation		47,721											47,721
Amortization of intangible assets		40,424											40,424
Depreciation		111,508							(805)				110,703
Adjusted EBITDA													$	385,006
Adjusted EBITDA margin													19.2 %

[1] Yearbook sales and collections for the Lifetouch segment are made throughout the school year, whereas yearbooks are typically delivered toward the end of the school year in the second quarter of the fiscal year. Business combination accounting principles require the Company to record the assumed deferred revenue at fair value on the acquisition date measured based on the cost to manufacture and deliver the yearbooks, plus a profit margin. Segment reporting includes this purchase accounting adjustment which primarily relates to yearbook sales in net revenue for the Lifetouch segment.

[2] Business combination accounting principles require the Company to measure acquired inventory at fair value. The fair value of inventory reflects the acquired company’s cost of manufacturing plus a portion of the expected profit margin. Segment reporting excludes this purchase accounting adjustment from cost of net revenue for the Lifetouch segment.

[3] Acquisition-related charges for Lifetouch acquisition.

[4] Restructuring charge related to the exit of iMemories and the planned closure of two Lifetouch facilities.

[5] Purchase accounting adjustment of deferred rent related to Lifetouch acquisition.

Appendix 4.1
Shutterfly, Inc.
Reconciliation of Net Income (Loss) to Non-GAAP Net Income (Loss) and Non-GAAP Net Income (Loss) per Share
(In thousands, except per share amounts)
(Unaudited)
		Three Months Ended																								Year Ended
		Mar. 31,			Jun. 30,			Sep. 30,			Dec. 31,			Mar. 31,			Jun. 30,			Sep. 30,			Dec. 31,			Dec. 31,			Dec. 31,
		2017			2017			2017			2017			2018			2018			2018			2018			2017			2018
GAAP net income (loss)		$	(33,194)		$	(22,838)		$	(25,607)		$	111,724		$	(27,165)		$	(26,512)		$	(73,543)		$	177,616		$	30,085		$	50,396
Capital lease termination		—			8,098			—			—			—			—			—			—			8,098			—
Restructuring		8,976			4,673			3,317			—			—			2,952			—			1,667			16,966			4,618
Acquisition-related charges		—			—			—			—			4,585			8,000			2,392			572			—			15,549
Purchase accounting adjustments		—			—			—			—			—			44,282			3,958			2,298			—			50,538
Tax benefit impact of non-recurring items		(3,948)			(4,829)			(1,669)			—			(1,185)			(15,171)			(3,603)			5,050			(10,446)			(14,910)
Benefit from 2017 tax reform legislation		—			—			—			(8,875)			—			—			—			—			(8,875)			—
Non-GAAP net income (loss)		$	(28,166)		$	(14,896)		$	(23,959)		$	102,849		$	(23,765)		$	13,551		$	(70,796)		$	187,203		$	35,828		$	106,191
GAAP diluted shares outstanding		33,712			33,579			32,878			33,114			32,702			33,234			33,470			34,218			34,106			34,832
Non-GAAP diluted shares outstanding		33,712			33,579			32,878			33,114			32,702			35,775			33,470			34,218			34,106			34,832
GAAP net income (loss) per share		$	(0.98)		$	(0.68)		$	(0.78)		$	3.37		$	(0.83)		$	(0.80)		$	(2.20)		$	5.19		$	0.88		$	1.45
Non-GAAP net income (loss) per share		$	(0.84)		$	(0.44)		$	(0.73)		$	3.11		$	(0.73)		$	0.38		$	(2.12)		$	5.47		$	1.05		$	3.05

Appendix 4.2
Shutterfly, Inc.
Reconciliation of Net Income (Loss) to Non-GAAP Adjusted EBITDA
(In thousands)
(Unaudited)
		Three Months Ended																								Year Ended
		Mar. 31,			Jun. 30,			Sep. 30,			Dec. 31,			Mar. 31,			Jun. 30,			Sep. 30,			Dec 31,			Dec. 31,			Dec. 31,
		2017			2017			2017			2017			2018			2018			2018			2018			2017			2018
GAAP net income (loss)		$	(33,194)		$	(22,838)		$	(25,607)		$	111,724		$	(27,165)		$	(26,512)		$	(73,543)		$	177,616		$	30,085		$	50,396
Interest expense		5,964			5,955			6,699			9,219			9,633			17,769			16,660			17,176			27,836			61,239
Interest and other income, net		(189)			(244)			(253)			(794)			(1,749)			(1,561)			(856)			(1,278)			(1,481)			(5,444)
Tax (benefit) provision		(22,341)			(14,713)			(16,660)			58,873			(14,829)			(12,607)			(28,797)			65,496			5,160			9,262
Depreciation and amortization		27,364			25,957			24,815			25,724			24,898			40,377			41,970			43,883			103,862			151,127
Stock-based compensation		11,505			10,469			10,736			10,863			11,692			11,697			11,931			12,400			43,573			47,721
Capital lease termination		—			8,098			—			—			—			—			—			—			8,098			—
Restructuring		8,976			4,673			3,317			—			—			2,952			—			1,667			16,966			4,618
Acquisition-related charges		—			—			—			—			4,585			8,000			2,392			572			—			15,549
Purchase accounting adjustments		—			—			—			—			—			44,282			3,958			2,298			—			50,538
Non-GAAP Adjusted EBITDA		$	(1,915)		$	17,357		$	3,047		$	215,609		$	7,065		$	84,397		$	(26,285)		$	319,830		$	234,099		$	385,006

Appendix 4.3
Shutterfly, Inc.
Reconciliation of Cash Flow from Operating Activities to Non-GAAP Adjusted EBITDA
(In thousands)
(Unaudited)
		Three Months Ended																								Year Ended
		Mar. 31,			Jun. 30,			Sep. 30,			Dec. 31,			Mar. 31,			Jun. 30,			Sep. 30,			Dec. 31,			Dec. 31,			Dec. 31,
		2017			2017			2017			2017			2018			2018 [1]			2018			2018			2017			2018
Net cash provided by (used in) operating activities		$	(72,386)		$	13,672		$	(21,945)		$	320,183		$	(124,332)		$	(75,233)		$	27,041		$	374,450		$	239,524		$	201,926
Interest expense		5,964			5,955			6,699			9,219			9,633			17,769			16,660			17,176			27,836			61,239
Interest and other income, net		(189)			(244)			(253)			(794)			(1,749)			(1,561)			(856)			(1,278)			(1,481)			(5,444)
Tax (benefit) provision		(22,341)			(14,713)			(16,660)			58,873			(14,829)			(12,607)			(28,797)			65,496			5,160			9,262
Changes in operating assets and liabilities		92,194			(2,565)			35,336			(159,600)			142,368			53,888			(45,554)			(150,834)			(34,634)			(132)
Other adjustments		(6,265)			5,377			(2,575)			(13,026)			(8,611)			47,659			(1,129)			11,950			(16,488)			49,868
Cash restructuring		1,108			1,777			2,445			754			—			2,200			—			—			6,084			2,200
Capital lease termination		—			8,098			—			—			—			—			—			—			8,098			—
Acquisition-related charges		—			—			—			—			4,585			8,000			2,392			572			—			15,549
Purchase accounting adjustments		—			—			—			—			—			44,282			3,958			2,298			—			50,538
Non-GAAP Adjusted EBITDA		$	(1,915)		$	17,357		$	3,047		$	215,609		$	7,065		$	84,397		$	(26,285)		$	319,830		$	234,099		$	385,006

[1] During the third quarter of 2018, the Company identified certain amounts attributable to the repayment of accreted interest on its convertible senior notes that were misclassified within the statement of cash flows. This misclassification resulted in a $64 million understatement of net cash used in operating activities with a corresponding understatement of cash provided by financing activities for the second quarter of 2018. The quarterly amounts in the above table have been revised to appropriately reflect such repayment of accreted interest in cash used in operating activities during the second quarter of 2018.

Appendix 5.1
Shutterfly, Inc.
Forward-Looking Guidance for Non-GAAP Financial Measures
(In millions, except per share amounts)
(Unaudited)
		Forward-Looking Guidance[1][2]
		Three Months Ending						Twelve Months Ending
		March 31, 2019						December 31, 2019
		Low			High			Low			High
Net revenue		$317			$328			$2,130			$2,210
Shutterfly Consumer net revenue		$146			$150			$975			$1,025
Lifetouch net revenue		$126			$130			$915			$935
SBS net revenue		$45			$48			$240			$250
Gross profit		$114			$120			$1,095			$1,143
Gross profit margin		35.8	%		36.7	%		51.4	%		51.7	%
Operating income (loss)		($107)			($102)			$76			$101
Operating margin		(33.7)	%		(31.1)	%		3.6	%		4.6	%
Operating income (loss)		($107)			($102)			$76			$101
Stock-based compensation		$13			$13			$54			$54
Amortization of intangible assets		$13			$13			$51			$51
Depreciation		$33			$33			$133			$133
Adjusted EBITDA		($48)			($43)			$315			$340
Adjusted EBITDA margin		(15.1)	%		(13.1)	%		14.8	%		15.4	%
Capital Expenditures		—			—			$125			$130
Capital expenditures as % of net revenue		—			—			5.9	%		5.9	%
Tax rate		27.0	%		27.0	%		28.0	%		28.0	%
Net income (loss) per share
Basic		($2.59)			($2.49)			—			—
Diluted		—			—			$0.55			$1.06
Weighted average shares
Basic		33.9			33.9			—			—
Diluted		—			—			34.8			34.8

[1] Excludes any costs related to executive transition, the strategic review, the facility closures in 2019, and any non-recurring charges related to the $200 million debt repayment made in January 2019. It also excludes any proceeds from the sale of existing facilities.

[2] The Company's business outlook is composed entirely of non-GAAP measures. The Company considers it unreasonably difficult to reconcile its outlook to comparable GAAP measures.

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