Shutterfly reported negative EBITDA for the third quarter – historically its trough quarter – but the loss contracted versus the third quarter of last year, said two sources familiar with the matter.  The company is still facing a drag from the Lifetouch segment because of school closures, but the segment improved sequentially, the sources added. 

Adjusted EBITDA totaled negative USD 20m for the quarter, compared to negative USD 47m last year, the sources said. However, revenue fell 20% year-over-year to USD 337m, driven by weakness in the Lifetouch segment, which provides student and staff photo services to schools. 

Revenues for the consumer segment rose 10% YoY to USD 141m. Lifetouch revenue fell 43% to USD 98m, after an even larger 65% YoY decline in 2Q20. 

On an LTM basis, Shutterfly generated USD 432m of adjusted EBITDA, including USD 18m of planned cost synergies and USD 13m of COVID adjustments. 

The company is 4.5x levered through USD 1.95bn in first lien debt, and 5.2x levered through USD 2.25bn in total debt, given USD 432m of LTM adjusted EBITDA.

As of 30 September, the company had USD 184m of liquidity through USD 154m of cash and USD 30m of revolver availability. Shutterfly drew USD 115m on its revolver during the third quarter. 

Performance in the fourth quarter, the company’s peak quarter historically, is expected to offset some of the losses from 3Q, the sources said. For Lifetouch, two-thirds of the 43,000 schools the company services will still partake in picture days – but of those, 20% are expected to be carried over to 1Q21.

One source estimates that the company will generate more than USD 300m of free cash flow in 4Q, which will help with repaying revolver borrowings. 

When Shutterfly came to the market for its LBO by Apollo Management in September 2019, the company set the synergy target to USD 90m. The target was later revised in 2Q20 to USD 120m. 

As of 3Q, the company has realized USD 54m of run-rate synergies. That number is expected to increase to USD 85m by the end of 2020, with the remainder to be achieved in 2021. 

Shutterfly’s USD 750m 8.5% senior secured notes due 2026 traded yesterday at 101.25 to yield 8.108% from trades at 100.125 to yield 8.455% on 24 November, prior to yesterday’s earnings report, according to MarketAxess.

The Libor+ 600bps institutional tranche – USD 775m at issuance – traded up today after the earnings report to the 97.75/99.083 context, from the 96.063/97.813 context on 30 November, according to Markit. 

The capital structure was placed to back the Apollo LBO. 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.

Shutterfly did not respond to a request for comment.

2020 Debtwire