Shutterfly Inc. ( SFLY - Analyst Report ) has reported adjusted second-quarter 2011 loss of 12 cents per share, handily beating the Zacks Consensus Estimate of a loss of 39 cents but remaining in line with the year-earlier loss.

On a GAAP basis, the loss came in at 11 cents versus 22 cents in comparable quarter prior year and was far better than the company’s guidance range of a loss of 46 cents to 35 cents per share. The improvement was driven by strong demand for photo-book along with considerable contribution from the cards and stationery collection as well as the synergy realized from the Tiny Prints acquisition.

In the quarter under review, net revenue increased 62% year over year to $75.8 million. The quarter’s revenue surpassed the Zacks Consensus Estimate of $70.0 million and topped the $68 million to $72 million guidance range provided by the company. The rise was primarily backed by increased revenues from personalized products.

Behind the Headline Numbers

Revenues from personalized products and services were $58.5 million in the quarter, up a whopping 85% over the prior-year quarter, while print revenues saw a 1% uptick to reach $14.5 million.

The total number of customers was 1.4 million in the quarter, reflecting an increase of 26% from the prior-year quarter. These customers generated about 2.2 million orders, up 24% year over year. Average order value was $26.10, up 2% from the prior-year quarter. Existing customers generated 72% of the net revenue, with new customers contributing the rest.

Gross profit margin declined 310 basis points to 47.4% from the prior-year quarter. The decline in margin was due to the higher Tiny Prints outsourced cost structure, increased contribution from lower margin commercial revenues and slightly higher shipping costs, which were partially offset by a favorable product mix. Adjusted EBITDA was ($0.3) million compared with $1.2 million in the prior-year quarter.

Financials

At quarter end, Shutterfly’s cash and cash equivalents were $75.9 million, compared with $252.2 million at the end of December 2010.

Outlook

For the third quarter of 2011, Shutterfly expects net revenue in the range of $73.0 million to $75.0 million. The company expects GAAP loss of 44 cents to 32 cents per share.

For fiscal 2011, Shutterfly expects net revenue to range between $475 million and $485 million. On a GAAP basis, earnings are estimated between 38 cents and 46 cents per share.

Our Take

We believe product innovation, ongoing strategic partnerships with retailers and opportunistic acquisitions augur well for the company. Acquisitions of Dallas-based WMSG and Tiny prints strengthened the company’s portfolio in the second quarter.

However, we currently refrain from being too enthusiastic on the upcoming quarter as it is seasonally weak for Tiny Prints. Moreover, the acquisitions are still in the early phase of operation and are likely to take some time to reap significant profits.

The company also faces stiff competition from the likes of LookSmart Ltd. ( LOOK ) , Snapfish owned by Hewlett-Packard Company ( HPQ - Analyst Report ) , and Photoworks and Webshots brands of American Greetings Corp. ( AM ) .

Shutterfly currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.