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Shutterfly 3Q Loss Narrows, View Up

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Shutterfly Inc. (SFLY - Analyst Report) has reported a loss of 29 cents per share for the third-quarter of 2012 which is narrower than the Zacks Consensus Estimate of a loss of 41 cents per share. The loss per share came at par with the year-ago level.

In the quarter under review, net revenue increased 29% year over year to $98.5 million which was significantly ahead of the Zacks Consensus Estimate of $91.0 million, induced by the sturdy sales from the Consumer category.

Healthy customer and transaction growth across all four of lifestyle brands, sustained growth in enterprise revenue and some contribution from new Kodak customers drove revenue in the quarter.

Behind the Headline Numbers

Revenues from the Consumers’ category were $90.4 million in the quarter, up 24% over the prior-year quarter. Net Enterprise revenues nearly doubled to $8.1 million in this quarter.

The total number of customers was 2.2 million in the quarter, reflecting an increase of 40% from the prior-year quarter. Total orders generated were 3.6 million, up 40% year over year. Average order value was $25.06, down 11% year over year.

Gross profit margin declined 150 basis points to 44.1% from the prior-year quarter mainly due to a lease termination fee related to the pending move of the East Coast production facility and higher customer service costs owing to the Kodak Gallery migration.

Liquidity

Shutterfly exited the quarter with cash and cash equivalents of $89.9 million. The total shareholders’ equity remains around $630.6 million in the reported quarter.

Outlook

For the fourth quarter of 2012, Shutterfly expects net revenue in the range of $300.0 million to $310.0 million. The company expects GAAP diluted earnings of 94 cents to $1.02 per share.

For fiscal 2012, Shutterfly expects net revenue to range between $589—$599 million ($582—$592 million predicted earlier). Management, in its preceding two quarters as well, had boosted its full-year revenue guidance.

On GAAP basis, earnings are estimated to be in between 14 cents and 24 cents per share (11 cents and 21 cents estimated previously). Prior to this quarter, it raised full-year earnings guidance from 11—21 cents.

Our Take

Shutterfly has recently been very active on inorganic expansion. Some of Shutterfly’s recently clinched deals like the takeover of the online photo services from FujiFilm and Eastman Kodak, along with the acquisition of Penguin digital and Photoccino will likely prove beneficial for the company over the long-term. The company announced that it would triple the East Coast manufacturing operations by opening a new unit at South Carolina. This move also affirms the company’s strong growth trajectory. Management sees several opportunities ahead as the social expression and personal publishing markets are still blooming. Additionally, with the holiday season on the way, the upcoming quarter is seasonally the strongest.

However, challenging economic conditions as well as competitive pressures pose a threat to the company’s margin expansion.  Shutterfly Inc. competes with companies like LookSmart Ltd. , Snapfish owned by Hewlett-Packard Co. (HPQ - Analyst Report) and Photoworks and Webshots brands of American Greetings Corp. . Shutterfly currently retains a Zacks #2 Rank, which translates into a short-term ‘Buy’ rating.

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