Shutterfly yesterday reported earnings showing the photography company’s EBITDA for 3Q19 went deeper into negative territory in its first quarter of earnings following an LBO by Apollo Global Management, according to two sources familiar with the situation.

The borrower’s EBITDA declined to negative USD 46m compared with negative USD 26m in 3Q18, the sources noted. But investors expected a seasonal trough and viewed the quarter as far less consequential than 4Q19, the period when the company generates most of its EBITDA due to the holiday season, they added.

Meanwhile, revenue for the quarter totaled USD 346m, the sources said. Adding back a purchase account impact of USD 25m, revenue comes to USD 371m, roughly flat year-over-year, they said.

Shutterfly also disclosed it bought back USD 35m of secured bonds in October, the sources noted.

As such, the USD 750m 8.5% senior secured bonds due 2026 – placed in October at an OID of 94.371 as part of the LBO – have trended higher for the past month, trading up to 92.5 to yield 10.048% today post-earnings, from trades at 90.75 to yield 10.432% before earnings and trades as low as 83.75 to yield 12.057% at the beginning of December, according to MarketAxess.

The company faced a difficult syndication process, including several rounds of revisions and a postponement, before Apollo bought USD 300m of the bonds and the underwriters carved out a separate pro-rata tranche to hold on to for six months.

Zooming in on the earnings release, Shutterfly reports earnings in three segments – consumer, business solutions, and Lifetouch, its photography division. Overall, core consumer grew 5% year-over-year, while management expects growth to continue in 4Q, the sources said. For reference, the company generated roughly USD 320m of EBITDA in 4Q18, according to SEC filings.

The consumer segment’s revenues rose 4% in the quarter, in line with expectations, and the business solutions segment’s growth is also accelerating, driven by a new customer win, they added.

Revenues in Lifetouch, on the other hand, declined 7% due to a USD 12m headwind from revenue recognition caused by production/shipping delays, the sources said. Excluding the delay, Lifetouch revenues declined 1%. Sources expect a recovery in 4Q.

As of 30 September, liquidity stands at USD 355m, based on USD 55m of cash on hand and an undrawn USD 300m revolver.

The company executed on USD 11m of cost savings through the end of the year and maintains a USD 85m long-term target. Management also said it foresees a greater cost savings opportunity than initially underwritten, the sources noted.

Shutterfly also refiled the HSR for its expected merger with Snapfish on 10 December, for which the 30-day waiting period will expire 9 January. The transaction is expected to close next month.

Based on USD 2.115bn of total debt and USD 413m of pro forma LTM adjusted EBITDA including Snapfish, leverage stands at 5.12x.

Shutterfly and Apollo did not respond to requests for comment.

2019 Debtwire