June 18, 2015
Chairman Shutterfly, Inc.
2800 Bridge Parkway
Redwood City, CA 94065
Dear Mr. Marineau:
Ancora Advisors LLC (“Ancora”) is a shareholder of Shutterfly (“Company”). Ancora is a Cleveland, Ohio-based registered investment advisor with approximately $2.2 billion of discretionary assets under management. On May 29th, we publicly announced our support of the proposed Marathon slate of directors and highlighted the need for material change to the strategic direction and executive compensation plan at Shutterfly to bring an end to the lengthy period of inferior shareholder returns
We believe the results of Shutterfly’s 2015 meeting of shareholders strongly indicate that shareholders desire transformation, particularly relating to the executive compensation structure and capital allocation practices. As you contemplate how to best direct the Company under a revised mandate from shareholders, we urge that you pursue the following:
• Dramatically overhaul the executive compensation incentive structure to align management with long-term shareholders (with Cimpress 2012 as a template)
• Appoint at least one of the newly elected Marathon representatives to the Compensation Committee
• Develop and implement a stated capital return policy
Compensation must be restructured to incentivize long-term shareholder value creation
We believe Shutterfly’s executive compensation plan is an element of the long-term underperformance of the stock price, given the lack of alignment between management and shareholder interests. As addressed in our May 29th letter to Shutterfly shareholders, we assert:
Given the inclusion of time-based grants and the exclusion of vesting triggers based on share price performance, the current incentive compensation structure is ineffective and fails to require that management think like an owner of the business
2. Cimpress N.V. offers a template of how long-term executive compensation could be restructured
3. Current performance metrics exclude the real cost of stock-compensation to shareholders
While we think the shareholder vote was a referendum on much more than just executive compensation, it is abundantly clear that the majority of shareholders are demanding significant change to the current incentive compensation program. To instill an owners mentality in Company management, executive compensation should incorporate elements that reward management only when shareholders prosper, such as triggers based on TSR or relative TSR, out of the money stock options, and long-dated vesting schedules. The board should also completely eliminate all non-performance related RSU/option grants (such as the time-based RSU component of the plan).
In our May 29th letter, we outlined a comparison of Shutterfly’s current situation to that of Cimpress in 2012, and we believe it would make tremendous sense for you and the Shutterfly board to consider a similar construct. Further supporting our belief is the share price performance of CMPR vs. SFLY since the new plan was incorporated at Cimpress. Since September 2012, Cimpress’ stock price returns have been 2.5x that of Shutterfly’s.
We believe total shareholder return should be the primary trigger event for vesting of RSU/options. However, if other operating metrics are considered for performance-based compensation awards, then these metrics must accurately reflect the inherent goal of maximizing shareholder value. The current plan’s free cash flow definition fails to account for both stock based compensation and cash paid for acquisitions, real costs to the Company’s shareholders.
With the overwhelming vote against the “Say on Pay” proposal, we also believe there needs to be an overhaul of the Compensation Committee. Given a key proponent of the proxy contest run by Marathon was reforming shareholder compensation and two of their representatives received significantly more votes than the rest of the nominees, we believe at least one, if not both, of the Marathon directors should be added to the Compensation Committee
Implement a capital return policy
To reiterate a few points from our previous letter, we believe the Company continues to have a sub-optimal capital structure. We suggest the board implements a stated capital return policy that would improve the capital structure by incorporating a leverage target (we believe ~1.5x is very reasonable and conservative), and maintaining that leverage by returning excess cash to shareholders via dividends or buybacks. With shareholder representation on the board, we would hope that management is held accountable to its promise to return EBITDA margins to the 20%+ range and capex to 7-8% of revenue. A levered buyback ahead of this operational improvement would be extremely accretive to FCF/share over the next few years. We believe an ongoing commitment to shareholder return would help reestablish the credibility of this board with shareholders, and coupled with holding management accountable for delivering return on investments, can dramatically improve investor sentiment toward Shutterfly’s stock.
Ancora intends to remain an engaged shareholder and as such we are more than happy to discuss this letter and our thoughts with you or other members of the board/management.
Chief Executive Officer and Executive Chairman
Ancora Advisors LLC