Shutterfly, Inc. (SFLY), the leading online retailer and manufacturer of high-quality personalized products and services, today announced financial results for the fourth quarter and full year ended December 31, 2017. Let us say, we think it was a great quarter with a top and bottom line beat against consensus expectations. Below we have the full numbers:
“Q4 was a strong conclusion to a year in which we made significant strides in positioning Shutterfly for long-term, profitable growth,” said Christopher North, President and Chief Executive Officer. “I’m proud of the effort from the Shutterfly team which has allowed us to bring our customers together on a single consumer platform, re-focusing on Shutterfly and Tiny Prints, our two strongest Consumer brands. We exceeded the high-end of guidance on all major metrics thanks to organic growth in the Shutterfly brand, good retention of customers and revenues from legacy websites, accelerating mobile growth, overperformance by Shutterfly Business Solutions, and continued expense control.”
North continued, “At the same time, today we announced a definitive agreement to acquire Lifetouch, the leader in school photography. Lifetouch is a strong strategic fit, bringing significant synergies while adding scale and profitability. With this acquisition, and continued growth in our existing Shutterfly business, we are targeting a minimum of $450 million of Adjusted EBITDA by 2020.” Please see our separate press release announcing Shutterfly’s definitive agreement to acquire privately-held Lifetouch.
Fourth Quarter 2017 Financial Highlights
Net revenues totaled $593.8 million, a 6% year-over-year increase. Consumer net revenues totaled $521.8 million, flat year-over-year which were better than anticipated, as growth in the Shutterfly brand was offset by loss of revenue from the three websites we shut down. Shutterfly Business Solutions net revenues totaled $71.9 million, an 81% year-over-year increase.
GAAP Operating income totaled $179.0 million, a $25.2 million or 16% year-over-year increase. Net income was $111.7 million or $3.37 per share. Adjusted EBITDA was $215.6 million, a $20.8 million or 11% year-over-year increase.
On a proforma basis, which excludes a benefit from tax reform of $8.9 million, Net income was $102.8 million, an increase of $11.9 million or 13%, and Earnings per share increased $0.48 per share to $3.11 per share.
During the fourth quarter of 2017, we repurchased a total of 660 thousand shares for $30.0 million bringing our year-to-date repurchases to over 2.3 million shares and total share repurchases for 2017 to $110.0 million.
Full Year 2017 Financial Highlights
Net revenues totaled $1,190.2 million, a 5% year-over-year increase. Consumer net revenues totaled $997.0 million, flat year-over-year as anticipated, as growth in the Shutterfly brand was offset by loss of revenue from the three websites we shut down. Shutterfly Business Solutions net revenues totaled $193.2 million, a 41% year-over-year increase.
GAAP Operating income totaled $61.6 million and Net income was $30.1 million or $0.88 per share.
On a proforma basis, our operating income was $86.7 million, a $37.6 million or a 76% year-over-year increase. Adjusted EBITDA was $234.1 million, a $25.6 million or 12% year-over-year increase and Net income was $35.8 million, a $19.9 million or 125% year-over-year increase. Earnings per share increased $0.60 per share to $1.05 per share.
 Normalized for restructuring charges of $17.0 million and capital lease termination charges of $8.1 million
 Refer to page 14 for reconciliation of GAAP net income to Non-GAAP net income and reconciliation of GAAP net income to Non-GAAP Adjusted EBITDA.
Business Outlook 
Full Year 2018:
- Net revenues to range from $1,220.0 million to $1,260.0 million
- Consumer revenue to range from $1,020.0 million to $1,050.0 million
- We anticipate mid-to-high single digit Shutterfly brand growth will be offset by lost revenue from the three websites we shut down
- We expect Consumer revenue to increase throughout the year. We expect a mid-single digit Consumer decline in the first half of 2018, a return to modest growth in the third quarter of 2018, and high-single digit growth in the fourth quarter of 2018, our first, true like-for-like comparable period
- SBS revenue to range from $200.0 million to $210.0 million
- Gross profit margin to range from 48.5% to 49.5% of net revenues
- Operating income to range from $115.0 million to $135.0 million
- Effective tax rate of 26.0%
- Net income per share to range from $1.94 to $2.38
- Weighted average shares of approximately 33.9 million
- Adjusted EBITDA to range from $260.0 million to $280.0 million
- Capital expenditures to be approximately $65.0 million
First Quarter 2018:
- Net revenues to range from $190.0 million to $194.0 million
- Consumer net revenue expected to decline mid-single digits over the first quarter of 2017
- Gross profit margin to range from 38.0% to 38.5% of net revenues
- Operating loss to range from $34.0 million to $32.0 million
- Effective tax rate of 26.0%
- Net loss per share to range from $0.96 to $0.92
- Weighted average shares of approximately 32.5 million
- Adjusted EBITDA to range from $3.0 million to $5.0 million
 Excludes Lifetouch and acquisition-related expenses.
Notes to the Fourth Quarter 2017 Financial Results and Operating Metrics and 2018 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, and restructuring.
Adjusted EBITDA minus capital expenditures is a non-GAAP financial measure that the Company defines as adjusted EBITDA less purchases of property, plant, and equipment and capitalization of software development costs.
Free cash flow is a non-GAAP financial measure that the Company defines as cash provided by operating activities less capital expenditures.
Consumer segment includes net revenues from cards and stationery, professionally-bound photo books, home décor, personalized gifts, high quality prints, and other photo-based merchandise, and the related shipping revenues as well as rental revenue from the BorrowLenses brand. Consumer also includes net revenues from advertising displayed in the Company’s website.
Shutterfly Business Solutions (SBS) includes net revenues generated from the printing and shipping of marketing and variable data print products and formats.
Average Order Value (AOV) is defined as total net revenues (excluding SBS) divided by total orders.
The foregoing financial guidance 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 2017 financial results and its expectations for the first quarter and full year 2018 on a conference call on Tuesday, January 30, 2018 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 (888) 243-4451 or (412) 542-4135, 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 13, 2018. To hear the replay, please dial (877) 344-7529 or (412) 317-0088 and enter access code 10116000.
Non-GAAP Financial Information
This press release contains 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 Generally Accepted Accounting Principles (GAAP). These non-GAAP financial measures include non-GAAP net income (loss) and net income (loss) per share, adjusted EBITDA, adjusted EBITDA minus capital expenditures, and free cash flow. The method the Company uses to produce non-GAAP financial measures is not computed according to GAAP and may differ from methods used by other companies.
To supplement the Company’s consolidated financial statements presented on a GAAP basis, we believe that these non-GAAP measures provide useful information about the Company’s core operating results and thus are appropriate to enhance the overall understanding of the Company’s past financial performance and its prospects for the future. These adjustments to the Company’s GAAP results are made with the intent of providing both management and investors a more complete understanding of the Company’s underlying operational results and trends and performance. Management uses these non-GAAP measures to evaluate the Company’s financial results, develop budgets, manage expenditures, and determine employee compensation. The presentation of additional information is not meant to be considered in isolation or as a substitute for or superior to gross margins, operating income (loss), net income (loss), or cash flows provided by (used in) operating activities determined in accordance with GAAP. For more information, please see Shutterfly’s SEC Filings, including the most recent Form 10-K and Form 10-Q, which are available on the Securities and Exchange Commission’s Web site at www.sec.gov.
We have provided a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure, where possible, except that we have not reconciled our 2020 non-GAAP Adjusted EBITDA target of $450 million to comparable GAAP operating income 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 and charges related to the proposed acquisition, which are reconciling items between GAAP operating loss and non-GAAP Adjusted EBITDA. The factors that may impact our future stock-based compensation expense and capitalization and amortization of internal-use software are out of our control and/or cannot be reasonably predicted, and therefore we are unable to provide such guidance without unreasonable effort. Factors include our market capitalization and related volatility of our stock price and our inability to project the cost or scope of internally produced software and charges related to the proposed acquisition during this time period.
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 our expected positioning for long-term, profitable growth; our minimum Adjusted EBITDA targets by 2020; our business outlook for the first quarter and full year 2018; and statements about historical results that may suggest trends for our business. 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 2017 restructuring activities; consumer acceptance of our products and services; our ability to develop additional adjacent lines of business; unforeseen changes in expense levels; competition and the pricing strategies of our competitors, which could lead to pricing pressure; the possibility that the closing conditions to the proposed Lifetouch acquisition may not be satisfied or waived, including that a governmental entity may prohibit, delay or refuse to grant a regulatory approval; delay in closing the Lifetouch acquisition or the possibility of non-consummation of the transaction; the risk of stockholder litigation in connection with contemplated Lifetouch Acquisition; 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 10-K and 10-Q, which are available on the Securities and Exchange Commission’s Web site at www.sec.gov. These forward-looking statements are based on current expectations and the company assumes no obligation to update this information.