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Shutterfly (SFLY)

Q4 2013 Earnings Call

February 05, 2014 5:00 pm ET

Executives

Michael Look - Vice President of Investor Relations

Jeffrey T. Housenbold - Chief Executive Officer, President and Director

Brian M. Regan - Chief Financial Officer and Senior Vice President

Analysts

Rohit Kulkarni - Robert W. Baird & Co. Incorporated, Research Division

Paul Judd Bieber - BofA Merrill Lynch, Research Division

Kerry K. Rice - Needham & Company, LLC, Research Division

Kevin Kopelman - Cowen and Company, LLC, Research Division

Naved Khan - Cantor Fitzgerald & Co., Research Division

Shawn C. Milne - Janney Montgomery Scott LLC, Research Division

Trisha Dill - Wells Fargo Securities, LLC, Research Division

Heath P. Terry - Goldman Sachs Group Inc., Research Division

Brian Patrick Fitzgerald - Jefferies LLC, Research Division

Mitchell O. Bartlett - Craig-Hallum Capital Group LLC, Research Division

Presentation

Operator

Good day, ladies and gentlemen, and thank you for standing by, and welcome to the Shutterfly Incorporated's Fourth Quarter 2013 Financial Results Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. It's now my pleasure to turn the floor over to Michael Look, Vice President of Investor Relations. Sir, the floor is yours.

Michael Look

Thank you, operator. Good afternoon, everyone. Welcome to Shutterfly's Fourth Quarter Fiscal 2013 Financial Results Conference Call. With us today are Jeff Housenbold, Chief Executive Officer of Shutterfly; and Brian Regan, Chief Financial Officer. By now, you should have received a copy of our earnings press release, which crossed the wire approximately 1 hour ago. If you need a copy of the press release, you can go to shutterfly.com under the Investor Relations link to find an electronic copy. We have also released a presentation that we will use as we go through this call. Call participants are advised that the audio of this conference call is being recorded for playback purposes and that a recording of this call will be made available on our website within a few hours. You can access these recordings through the Investor Relations section of our website at shutterfly.com.

Before we begin, I'd like to note that our discussion today will include forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. These forward-looking statements include statements about our business outlook and strategy, and the assumptions underlying those statements, and statements about historical results that may suggest trends for our business. 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 sections of our most recent Form 10-K and Form 10-Q and our other filings with the SEC.

I would also like to note that any forward-looking statements made on this call reflect information and analysis as of today and we assume no obligation to update this information. This presentation contains certain financial performance measures that are different from financial measures calculated in accordance with GAAP, and may be different from calculations or measures made by other companies. A quantitative reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures is available in our fourth quarter and fiscal 2013 financial results press release, which is posted on the Investor Relations section of our website at shutterfly.com. Now I'd like to turn the call over to Shutterfly's CEO, Jeff Housenbold. Jeff?

Jeffrey T. Housenbold

Thanks, Mike. Good afternoon, everyone, and welcome to our fourth quarter 2013 earnings call. I'll start with an overview of our Q4 and full year 2013 results, followed by some thoughts on our strategy for the coming year. I will then turn the call over to Brian for a detailed review about financial results, as well as our initial financial guidance for 2014.

Q4 was a strong finish to another outstanding year at Shutterfly. We continued to drive profitable revenue growth and healthy customer behavior across our entire family of premium lifestyle brands and our Enterprise business. We executed well against our 2013 strategic plan while simultaneously focusing on the long-term through smart investments in consumer-facing programs and back-end infrastructure projects that will provide future scale and scope efficiencies. We delivered these strong results while successfully navigating a challenged, shortened holiday shopping season and the unfavorable comp against our Q3 2012 migration of the Kodak's Gallery's customer base. Despite these headwinds, net revenues for the fourth quarter grew 17% year-over-year to $410.8 million and resulted in a 12% year-over-year increase in adjusted EBITDA.

Customer acquisition and behavior remained healthy throughout the quarter despite the challenges we faced from the termination of TinyPrints Costco relationship and the difficult comps from last year's Kodak Gallery acquisition. Unique transacting customers and orders increased year-over-year by 10% and 12%, respectively, translating into 4.7 million customers who generated 7.7 million orders during the quarter. Average order value for the fourth quarter was a record $51.80, 4% higher than the same period a year ago as we continue to drive improvements in our overall pricing and promotional strategies.

Looking at our full year 2013 performance, we set historical highs for revenue, adjusted EBITDA and free cash flows. Specifically, net revenues grew 22% to $783.6 million. Adjusted EBITDA was a record $150.4 million, up 17% from the prior year, and we generated more than $75 million in free cash flow. Furthermore, total unique transacting customers during the year totaled 8.1 million, representing a 15% year-over-year increase or the addition of more than 1 million customers. Customer orders for the year totaled 18.6 million, up 14% increase over year and average order value for the year increased by 7% year-over-year to a record $40.19, reflecting our continued focus on profitable customer acquisition driven by our integrated marketing campaigns along with efforts to optimize customer behavior.

In the beginning of the year, I outlined 5 key areas of focus that capitalized on our market-leading position and strong balance sheet. To refresh, they were: one, grow Shutterfly and Tiny Prints, our 2 core brands, through innovative products and services; two, invest in our early-stage growth initiatives, including Wedding Paper Divas, Treat, Mobile, ThisLife and Enterprise; three, broaden and enhance our overall brand awareness utilizing our integrated marketing platform; four, increase our manufacturing and operations capabilities; and five, expand our portfolio of premium lifestyle brands through disciplined strategic acquisitions. I'm proud to say we executed well against these 5 key areas, which resulted in profitable growth, increased market leadership and further progress towards transforming the multibillion dollar memories, social expression and personalized products markets from off-line to online.

Read the rest of this transcript for free on seekingalpha.com