Shutterfly Beats, Loss Widens

Shutterfly Inc. (SFLY - Analyst Report) has reported adjusted third-quarter 2011 loss of 15 cents per share, handily beating the Zacks Consensus Estimate of a loss of 37 cents but deteriorating from the year-earlier loss of 8 cents.

On a GAAP basis, the loss came in at 29 cents versus 17 cents in comparable quarter prior year and was far better than the company’s guidance range of a loss of 44 cents to 32 cents per share. The better-than-expected earnings were 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 a whopping 56% year over year to $76.5 million. The rise was primarily backed by increased revenues from personalized products.

Behind the Headline Numbers

Revenues from personalized products and services were $56.5 million in the quarter, up a massive 73% over the prior-year quarter, while print revenues saw a 3% uptick to reach $16.1 million.

The total number of customers excluding Tiny Prints was 1.4 million in the quarter, reflecting an increase of 16% from the prior-year quarter. These customers generated about 2.4 million orders, up 17% year over year. Average order value was flat at $23.71. Existing customers generated 77% of the net revenue, with new customers contributing the rest.

Gross profit margin declined 350 basis points to 45.6% from the prior-year quarter. The decline was due to the higher Tiny Prints outsourced cost structure and increased contribution from lower margin commercial revenues. Adjusted EBITDA was ($3.3) million compared with $2.2 million in the prior-year quarter.

Financials

At quarter end, Shutterfly’s cash and cash equivalents were $68.7 million, compared with $252.2 million at the end of December 2010.

Outlook

For the fourth quarter of 2011, Shutterfly expects net revenue in the range of $270.5 million to $275.5 million. The company expects GAAP earnings of 98 cents to $1.03 per share.

For fiscal 2011, Shutterfly expects net revenue to range between $480 million and $485 million. On a GAAP basis, earnings are estimated between 42 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 WMSG and Tiny Prints continue to strengthen the company’s portfolio. We are also enthusiastic about the upcoming quarter as it is seasonally the strongest owing to the holiday season.

However, the above-said acquisitions still have a long way to go before they 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.