Tuesday, February 5th was a busy day for Shutterfly and those following the company. First a couple of surprising press releases followed by the previously scheduled investor call reporting on Q4 and 2018 financial results. Here’s a quick summary.
CEO STEPPING DOWN
Chris North, CEO will be stepping down at the end of August 2019 in order to return to the UK with his family. He remains as CEO through August 31st and will support the board in identifying and effecting a smooth transition to his replacement. The Transition Agreement was filed with the SEC on Tuesday.
On the investors call later in the day North reiterated his excitement in the company’s future and assured investors “that the team and I are laser focused on executing our strategy and 2019 plans.”
North was hired on March 14, 2016 and oversaw significant growth during his tenure; however stock prices have performed like a roller coaster the past several months essentially giving up everything gained through the announcement of the acquisition of the country’s largest photography company Lifetouch.
STRATEGIC REVIEW COMMITTEE
It was also announced that Shutterfly’s Board of Directors formed a strategic review committee and retained the services of Morgan Stanley as a financial advisor to the board. They explained that the committee is conducting an ongoing review of strategic alternatives and evaluating the company’s capital structure and capital return policy. On the investor’s call North stated, “Our board continues to be committed to evaluating all options that maximize shareholder value.”
POTENTIALLY UP FOR SALE
All of which might be the result of another announcement made by the company. It was reported, “that in recent months Shutterfly had been approached by a third party about the potential acquisition of the company. The company and board subsequently engaged with several additional third parties regarding a potential acquisition of the company, but no proposals have been received. The board had not set the time table for the conclusion of its preview of strategic alternatives, and it does not intend to comment further…”
During the Investor Q&A North stated, “We did not say that the company received an offer…the board felt that given the multiple expressions of interest over sustained period of time, it makes sense to form the strategic review committee to look at potential expressions of interest, as well as things like the capital structure, the debt leverage and other strategic things.”
North made it clear that the activity may not result in a transaction or other outcome.
2018 A TRANSFORMATIONAL YEAR
North positioned 2018 as a transformational year in which the company nearly doubled its size with the purchase of Lifetouch on April 2nd and told investors that the acquisition creates “the only end-to-end memory solution for families” by combining Shutterfly’s strength as the leader in personalized photo-based products and photo storage with Lifetouch’s strength as the leader in school and family photography.
SHUTTERFLY 2018 & Q4 PERFORMANCE
2018 Non-GAAP net revenue was $2.001 billion and GAAP net revenue was 950 million, an impressive increase year over year.
Shutterfly Consumer growth was well below expectations highlighted by softness in prints, cards and stationary. Prints declined 8% in 2018 underperforming the market, which is relatively flat to modestly declining. Photo books and calendars performed well. Shutterfly Business Solutions achieved better-than-expected performance and Lifetouch achieved solid performance.
Mobile significantly outperformed expectations. Q4 revenue generated by the Shutterfly app increased 68% year-over-year and full year app revenues grew 59% year-over-year. The app performed well in cost effectively gaining new customers, growing repeat customers, increasing revenue per customer, and driving a large increase in photo uploads. Shutterfly Photos now hosts more than 50 billion photos.
Shutterfly views Mobile as critical to its future and in 2019 intends to focus on acquiring new customers and monetizing existing customers through its app. North said the app would allow them to, “…drive deeper and more personalized engagement with our customers in 2019.”
Lifetouch’s 4th quarter performance appeared to be in line with expectations reporting GAAP revenue of $348M and Non-GAAP revenue of $350M.
It was reported that the school and preschool business units realized net account growth resulting from increased account retention of 93.5% and a growth in new accounts of 3%.
Declining participation in the industry appears to have impacted Lifetouch with North sharing that the positive net account growth was partially offset by the participation rate, which “was slightly below our expectations.” We can expect Shutterfly to make investments in, and to work with, Lifetouch to improve those participation rates.
One tactic to do so is to increase the number of customers who buy online. It was reported that initiatives to encourage Lifetouch customers to shift from paper based ordering have been working with 58% of the fall school picture day orders purchased online, a substantial increase year-over-year.
North said, “Overall, we continue to be pleased with Lifetouch’s performance in its third quarter as a part of Shutterfly.” He emphasized that the integration has made significant progress and he cited efforts to gain synergies. “We’re focused on realizing substantial cost and revenue synergies over a multiyear period. In Q4, we tested a broad range of marketing approaches and Shutterfly benefits for Lifetouch customers, including a lightweight first phase of technology integration as a step towards broader integration in 2019 and beyond.”
CFO Mike Pope shared that; “Lifetouch generated $799 million of non-GAAP revenue for the nine months ended December 31, 2018.” Shutterfly appeared pleased with Lifetouch’s nine month performance as a part of the company stating, “The schools, preschool and studios business units performed well, meeting our expectations for the year, while the church business continues to decline as expected.
So, Shutterfly produces mixed results but nonetheless demonstrates the opportunities within its Business Solutions segment and more importantly shows the investment community that the school picture business might just have potential.
Shutterfly’s initial investments in modernizing Lifetouch’s online ordering and introducing Lifetouch’s customer to Shutterfly’s mobile app appear to be paying off.
But, can Shutterfly deliver on the promise of converting the more than 10 million image active households of Lifetouch customers to Shutterfly’s photo management service and its broad product portfolio? If they do, Shutterfly will have disrupted the volume photography industry and in so doing shifted the traditional school photography paradigm as well.
WHAT CAN WE EXPECT FROM SHUTTERFLY AND LIFETOUCH IN 2019? WATCH FOR PART 2!