Shutterfly, Inc. is the leading retailer and manufacturing platform for
personalized products and communications and was incorporated in the state of
Delaware in 1999. In September 2006, we completed our initial public offering
and our common stock is listed on The Nasdaq Global Select Market under the
symbol "SFLY." Our principal corporate offices are in Redwood City, California.
On April 2, 2018, we completed our acquisition of Lifetouch Inc. ("Lifetouch")
for an all-cash purchase price of $825.0 million. Lifetouch is the national
leader in school photography.
We announced in June 2019 that we have entered into a definitive agreement with
the affiliates of certain funds (the "Apollo Funds"), managed by affiliates of
Apollo Global Management, LLC (together with its consolidated subsidiaries,
"Apollo"), a leading global alternative investment manager, pursuant to which
affiliates of Apollo Funds will acquire all the outstanding shares of Shutterfly
for $51.00 per share in cash (the "Transaction"). The Transaction is expected to
close by early fourth quarter 2019, pending approval by Shutterfly stockholders
and satisfaction of certain other closing conditions. Early termination of the
applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976 was granted on July 17, 2019, effective immediately.
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 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.
We also offer Shutterfly Photos, our cloud photo management service, to our
customers. During fall picture day season in 2018, Lifetouch school customers
who purchased digital images from mylifetouch.com were able to access these
pictures directly within Shutterfly Photos; we also deployed this integrated
experience for Lifetouch preschool customers during the second quarter of 2019.
These customers benefit from free storage for any personal photos they uploaded
as well as their Lifetouch photos, and are able to create and purchase
personalized products using these photos. Our experience shows that integrating
customers' photos onto Shutterfly Photos is the best way to drive customer
engagement and purchases of our products.
Our high-quality products and services and the compelling experience we create
for our customers, combined with our focus on continuous innovation, have
allowed us to establish premium brands. We realize the benefits of premium
brands through high customer loyalty, low customer acquisition costs and premium
pricing. Our trusted premium brands are:
Shutterfly Consumer leads the industry in personalized photo products and
services. Shutterfly Consumer helps our customers turn their precious memories
into lasting keepsakes with cards and stationery, award-winning
professionally-bound photo books, personalized gifts and home décor as well as
calendars and prints.
The Tiny Prints boutique offers premium cards and stationery, stylish
announcements, invitations and personal stationery. The Tiny Prints boutique
provides customers exclusive luxe designs curated from top stationery designers.
Customers seek us out for our industry-leading designs and exceptional service.
BorrowLenses is a premier online marketplace for high-quality photographic and
video equipment rentals.
Groovebook is an iPhone and Android app and subscription service that prints up
to 100 mobile phone photos in a Groovebook and mails it to customers every
Lifetouch is the national leader in school photography, built on the enduring
tradition of "Picture Day." School Photography captures K-12 portraits and helps
high school and college seniors celebrate those graduation milestones and
yearbooks. Our Portrait Studios provide professional photographic services for
infants, toddlers, families and business professionals throughout the United
States under the JCPenney portrait brand at over 400 select retail studios.
Lifetouch also captures pictures of infants to toddlers for Preschools and
daycares nationwide and provides Churches and other groups with pictorial
directories and images for purchase.
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In addition to these consumer brands, Shutterfly Business Solutions ("SBS")
provides personalized direct marketing, other end-consumer communications and
just-in-time, inventory-free printing for our business customers.
We generate most of our revenue by marketing and manufacturing a variety of
products such as portraits, cards and stationery, professionally-bound photo
books and yearbooks, personalized gifts and home décor, calendars and
high-quality prints. We manufacture many of these items in our production
facilities located throughout the United States and one in Canada. By operating
our own production facilities, we can produce high-quality products, innovate
rapidly, maintain a favorable cost structure and ensure timely shipment to
customers, even during peak periods of demand. We also operate a network of
partners, across which we can seamlessly manage demand. Some of the products
that are currently manufactured for us by third-parties include calendars, mugs,
ornaments, candles, pillows and blankets.
While Lifetouch is a leading school photographer in Canada, substantially all
our revenue is generated from sales originating in the United States. Shutterfly
Consumer and Lifetouch sales have historically been highly seasonal. For
example, we generated approximately 50% of our net revenue in the fourth quarter
during each of the last three years in our Shutterfly consumer business and
Lifetouch generated approximately 35% of its net revenue in the fourth calendar
quarter during each of the last three years. We have also seen an increase in
Lifetouch net revenue during the second quarter in connection with the spring
portrait season and yearbooks. Our operations and financial performance depend
on general economic conditions in the United States, consumer sentiment, and the
levels of consumer discretionary spending. We closely monitor these economic
measures as their trends are indicators of the health of the overall economy and
are some of the key external factors that impact our business.
Our Lifetouch business is based on securing opportunities at schools,
preschools, retailers and other organizations to capture unique images of
infants, toddlers, children, teenagers, high school and college seniors, adults
and families. Through Lifetouch's arrangements with these "hosts," Lifetouch
captures the images of more than 25 million individuals each year and serves
over 10 million households. Through our acquisition of Lifetouch, we potentially
gain access to these Lifetouch customers for our Shutterfly Consumer business.
Lifetouch has over 11 million non-overlapping three-year active customers
(defined as customers who have made at least one purchase from Lifetouch in the
last three years). Over time, Lifetouch's customers will benefit from
Shutterfly's leading cloud-photo management service ("Shutterfly Photos"),
product creation capabilities, mobile apps, and broad product range. We expect
to realize more revenue from Lifetouch customers within Lifetouch by
accelerating the development of Lifetouch's online ordering platforms as well as
potentially offering some of Shutterfly's broader product range to customers. We
also expect to realize supply chain, manufacturing, and fulfillment synergies
Our plans for cost synergies center on establishing a common manufacturing
platform, achieving greater utilization given our adjacent peak periods (the
third quarter for Lifetouch and the fourth quarter for Shutterfly Consumer), and
leveraging our combined purchasing power and scale. As part of our strategic
planning process for 2019, we further developed our long-term plans to establish
a single, next-generation manufacturing platform serving Shutterfly Consumer,
Lifetouch and SBS. We refer to this initiative as Project Aspen.
In conjunction with Project Aspen, we plan to open a new 237,000 square foot
facility in Plano, Texas in the first quarter of 2020, which will serve all of
our segments. We will also close four legacy Lifetouch facilities in 2019: Loves
Park, Illinois; Bloomington, Minnesota; Chico, California; and Chattanooga,
Tennessee, and will consolidate this volume into other Shutterfly facilities and
the new facility in Texas. The consolidation involves a mix of moving existing
Lifetouch equipment to Shutterfly facilities and migrating Lifetouch volumes to
Shutterfly's digital presses. Given the adjacent peak periods of the Shutterfly
Consumer and the Lifetouch businesses, this consolidation of facilities will
provide an opportunity to reduce our reliance on temporary labor while improving
the utilization of existing assets. We plan to retain a portion of the impacted
employees in this transition, who will move to other existing Shutterfly or
Lifetouch facilities, and we will offer appropriate severance and/or retention
packages to other employees. We expect Project Aspen will result in future
benefits to operating expenses; however, the expected benefits to operating
expenses are not measurable at this point.
In addition to the customer acquisition opportunities made possible through our
acquisition of Lifetouch, we will continue to acquire customers through multiple
marketing channels including search engine marketing ("SEM") (e.g. Google),
social media marketing (e.g. Facebook) and display marketing. Close, frequent
customer interactions, coupled with significant investments in sophisticated
integrated marketing programs, enable us to obtain user input on new features,
functionalities and products. We continue to fine-tune and tailor our promotions
and website presentation to specific customer segments. Consequently, our
Shutterfly customers are presented with a highly personalized shopping
experience, which helps foster a unique and deep relationship with our
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To successfully execute our strategies, we require a talented leadership team.
This is even more critical as we integrate our acquisition of Lifetouch. As a
result, we intend to continue our focus to attract, retain, and grow our team;
and to build continuity and pursue executional excellence in our daily
operations everywhere. Lifetouch is also highly dependent on field sales and
photo operations teams, which have a core year-round employee base, supplemented
by a large number of seasonal employees. By providing our employees with a great
place to work, we believe that we continue to strengthen our high-performance
On February 5, 2019, we announced that Christopher North, President and CEO,
will be stepping down at the end of August 2019. On June 10, 2019, we announced
the appointment of Ryan O'Hara as our next President and Chief Executive Officer
and a member of the Board of Directors effective June 24, 2019. Mr. O'Hara has
served as Chief Executive Officer of Move, Inc., a real estate portal company,
since January 2015. Prior to joining Move, from 2013 to 2014, Mr. O'Hara served
as President of Content, Distribution & Sales at The Madison Square Garden
Company, the sports and entertainment firm for which he led media assets MSG and
Fuse network, as well as technology and marketing partnerships.
On March 8, 2019, we announced the appointment of James Hilt as President,
Shutterfly Consumer. On April 4, 2019, we announced that Michael Meek, President
and CEO of Lifetouch, will be stepping down in October 2019. On July 30, 2019,
we announced the appointment of Greg Hintz as our next President, Lifetouch,
effective immediately. Prior to this role, Greg has served as head of Corporate
Development, a leader of integration efforts, and Chief of Staff for the
We adopted the new accounting standard for leases effective January 1, 2019.
This new lease standard had a material impact on our consolidated balance sheet
related to the recording of right-of-use assets and corresponding lease
liabilities for operating leases. Further, the change in accounting for our
build-to-suit arrangements impacted the classification of associated expenses in
the statement of operations. However, the standard did not materially impact our
consolidated net loss and had no impact on the consolidated statement of cash
flows. Refer to Note 1 - The Company and Summary of Significant Accounting
Policies of the financial statements for further details regarding the adoption
of the new lease standard.
Basis of Presentation
Net Revenue. Our net revenue is comprised of sales generated from our
Shutterfly Consumer, Lifetouch and SBS segments.
Shutterfly Consumer. Our Shutterfly Consumer net revenue includes sales from
our brands and are derived from the sale of a variety of products such as, cards
and stationery, professionally-bound photo books, personalized gifts and home
décor, calendars and prints, and the related shipping revenue as well as rental
revenue from our BorrowLenses brand. Revenue from advertising displayed on our
websites is also included in Shutterfly Consumer net revenue.
Lifetouch. Our Lifetouch net revenue is primarily from professional photography
services for schools, preschools and retail studios operated by Lifetouch under
the JCPenney Portrait brand as well as Churches and other groups.
SBS. Our SBS net revenue is primarily from personalized direct marketing, other
end-consumer communications and just-in-time, inventory-free printing for our
business customers. We continue to focus our efforts in expanding our presence
in this industry.
Our Shutterfly Consumer segment is subject to seasonal fluctuations. In
particular, we generate a substantial portion of our Shutterfly Consumer segment
net revenue during the holiday season in the fourth quarter. We also typically
experience an increase of volume in the Shutterfly Consumer segment during
shopping-related seasonal events, such as Easter, Mother's Day, Father's Day and
Halloween. We generally experience lower Shutterfly Consumer segment net revenue
during the first, second and third calendar quarters and have incurred and may
continue to incur losses in these quarters. Due to the relatively short lead
time required to fulfill product orders, usually one to three business days,
Shutterfly Consumer segment order backlog is not material to our business.
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To further understand net revenue trends in our Shutterfly Consumer segment, we
monitor several key metrics including, total customers, total number of orders,
and average order value.
Total Customers. We closely monitor total customers as a key indicator of
demand. Total customers represent the number of transacting customers in a given
period. An active customer is defined as one that has transacted in the last
trailing twelve months. We seek to expand our customer base by empowering our
existing customers with sharing and collaboration services, and by conducting
integrated marketing and advertising programs. We also acquire new customers
through customer list acquisitions.
Total Number of Orders. We closely monitor total number of orders as a leading
indicator of net revenue trends. We recognize net revenue associated with an
order when the products have been shipped and all other revenue recognition
criteria have been met. Orders are typically processed and shipped in
approximately three business days after a customer places an order.
Average Order Value. Average order value ("AOV") is Shutterfly Consumer net
revenue for a given period divided by the total number of customer orders
recorded during that same period. AOV is impacted by product sales mix and
pricing and promotional strategies, including our promotions and competitor
promotional activity. As a result, our AOV may fluctuate on a quarterly and
Our Lifetouch segment is also subject to seasonal fluctuations. In particular,
we generate a substantial portion of our Lifetouch segment revenue in the fourth
quarter during the traditional fall school and holiday portraits season. The
Lifetouch segment also typically experiences increases in net revenue during the
second quarter due to the spring school portrait and yearbook seasons.
Our SBS segment net revenue is generated from personalized direct marketing,
other end-consumer communications and just-in-time, inventory-free printing for
our business customers.
We believe the analysis of these metrics and others described under "Non-GAAP
Financial Measures" provides us with important information on our overall net
revenue trends and operating results. Fluctuations in these metrics are not
unusual and no single factor is determinative of our net revenue and operating
Cost of Net Revenue. Our cost of net revenue is split between our Shutterfly
Consumer, Lifetouch and SBS segments.
Shutterfly Consumer. Cost of net revenue for the Shutterfly Consumer segment
consists of costs incurred to produce personalized products for all our brands.
These costs include direct materials (the majority of which consists of paper,
ink, and photo book covers), shipping charges, packing supplies, distribution
and fulfillment activities, third-party costs for photo-based merchandise,
payroll and related expenses for direct labor and customer service, rent for
production facilities, and depreciation of production equipment (primarily
digital printing presses and binders) and manufacturing facilities. Cost of net
revenue also includes amortization of capitalized website and software
development costs, primarily related to adding features and functionality to our
website and apps to facilitate product purchases and improve the customer
shopping experience. These costs include amortization of third-party software
and acquired developed technology as well as patent royalties.
Lifetouch. Cost of net revenue for the Lifetouch segment consists of costs
incurred to capture and produce photography products. These costs include direct
materials (the majority of which consists of paper, ink, and yearbook covers),
shipping charges, packing supplies, distribution and fulfillment activities,
payroll and related expenses for direct labor (including photographers) and
customer service, and depreciation of production and photography equipment and
manufacturing facilities. Cost of net revenue also includes amortization of
capitalized website and software development costs, primarily related to adding
features and functionality to the Lifetouch website to facilitate product
purchases and improve the customer shopping experience. These costs include
amortization of third-party software and acquired developed technology.
SBS. Cost of net revenue for the SBS segment consists of costs which are direct
and incremental to the SBS business. These include production costs of SBS
products, such as materials, labor and printing costs, shipping costs, indirect
overhead and depreciation as well as costs associated with third-party
production of goods.
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Operating Expenses. Operating expenses consist of technology and development,
sales and marketing, general and administrative and restructuring expenses.
Technology and development expense consists primarily of salaries and benefits
for employees and professional fees for contractors engaged in the maintenance
and support of our website, developing features and functionality for our free
photo storage service, and developing and maintaining internal infrastructure,
internal reporting tools and network security and data encryption systems. These
expenses include depreciation of computer and network hardware used to run our
websites, store user photos and related data, and support our infrastructure, as
well as amortization of software used to operate such hardware. Technology and
development expense also includes co-location, power and bandwidth costs.
Sales and marketing expense consists of costs incurred for marketing programs,
and personnel and related expenses for our customer acquisition, product
marketing, business development, and public relations activities. As it relates
to the Lifetouch segment, sales and marketing expenses also consist of costs
incurred to acquire host accounts (e.g., schools or churches) as well as the
costs for marketing programs directed at the end-consumer. These costs include
labor costs for sales professionals and account managers who maintain host
relationships as well as the personnel and related expenses for product
marketing activities. Our marketing efforts consist of various online and
offline media programs, such as e-mail and direct mail promotions, flyers
distributed by our hosts, social media and online display advertising, radio
advertising, television advertising, the purchase of keyword search terms and
various strategic alliances. We utilize these efforts to attract customers to
General and administrative expense includes general corporate costs, including
rent for our corporate offices, insurance, depreciation on information
technology equipment, and legal and accounting fees. Transaction costs are also
included in general and administrative expense. In addition, general and
administrative expense includes personnel expenses of employees involved in
executive, finance, accounting, human resources, information technology and
legal roles. Third-party payment processor and credit card fees are also
included in general and administrative expense and have historically fluctuated
based on revenue during the period. All the payments we have received from our
intellectual property license agreements have been included as an offset to
general and administrative expense.
Interest Expense. Interest expense primarily consists of interest on our term
loans issued in October 2017 and April 2018, interest on our convertible senior
notes settled in May 2018 (primarily related to amortization of debt discount),
amortization of debt issuance costs, and costs associated with our finance
leases and build-to-suit financing obligations.
Interest and Other Income, Net. Interest and other income, net primarily
consists of the interest earned on our cash and investment accounts and realized
gains and losses on the sale of our investments.
Income Taxes. We account for income taxes under the liability method. Under
this method, deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax basis of assets and
liabilities. We are subject to taxation in the United States, Canada and Israel.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations
are based upon our unaudited condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenue and expenses. On an on-going basis, we evaluate our
critical accounting policies and estimates. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
There have been no changes to our critical accounting policies and estimates
described in our Annual Report on Form 10-K for the year ended December 31, 2018
that have had a material impact on our condensed consolidated financial
statements and related notes.
Recent Accounting Pronouncements
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Refer to Note 1 - The Company and Summary of Significant Accounting Policies of
the financial statements for a discussion of the recent accounting
Results of Operations
The following table presents the components of our statement of operations as a
percentage of net revenue:
Three Months Ended Six Months Ended
June 30, June 30,
2019 2018 2019 2018
Net revenue 100 % 100 % 100 % 100 %
Cost of net revenue 51 % 53 % 56 % 56 %
Gross profit 49 % 47 % 44 % 44 %
Technology and development 10 % 10 % 12 % 13 %
Sales and marketing 29 % 29 % 32 % 26 %
General and administrative 11 % 12 % 13 % 14 %
Restructuring 1 % 1 % 1 % - %
Total operating expenses 51 % 52 % 58 % 53 %
Loss from operations (2) % (5) % (14) % (9) %
Interest expense (3) % (4) % (4) % (4) %
Interest and other income, net - % - % - % - %
Loss before income taxes (5) % (9) % (18) % (12) %
Benefit from income taxes 2 % 3 % 6 % 4 %
Net loss (3) % (6) % (12) % (8) %
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