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Shutterfly Inc.’s (SFLY - Analyst Report) fourth-quarter 2012 earnings of $1.40 per share breezed past the Zacks Consensus Estimate by 38.6% and the year-ago result by 44.3%. Increased revenues along with efficient cost containment led to the beat.

In the quarter under review, net revenues surged 33% year over year to $351.8 million which was significantly ahead of the Zacks Consensus Estimate of $309.0 million, induced by sturdy sales from both Consumer and Enterprise categories.
    
Healthy customer and transaction growth, sustained growth in enterprise revenues and better-than-expected contribution from recently acquired Kodak customers drove revenues in the quarter.

Behind the Headline Numbers

Revenues from the Consumers’ category were $343.5 million in the quarter, up 33.0% over the prior-year quarter. Net Enterprise revenues jumped 79.0% to $8.3 million in the quarter.
    
In the quarter, the total number of customers was 4.2 million, reflecting an increase of 30.0% from the prior-year quarter. Total orders generated were 6.9 million, up 33% year over year. Average order value was $49.80, flat year over year. Several promotional and pricing strategies implemented in the fourth quarter helped sustain average order value.

Gross profit margin expanded 162 basis points from the prior-year quarter to 60.5%, mainly due to stable order value, several efficiency initiatives and higher scale economics partially offset by higher-than-expected low-margin Enterprise revenues and increased indirect labor cost associated with customer service.

Full-Year Highlights

In full-year 2012, earnings per share were 61 cents per share, which significantly beat the Zacks Consensus Estimate by 154.2% and the year-ago earnings by 52.5%. Higher revenues boosted earnings in 2012.

Net revenues also witnessed an increase of 35% to $640.6 million in the quarter, surpassing the Zacks Consensus Estimate by 11.2%. Revenues went up in 2012 buoyed by solid transaction growth as well as increased number of orders, partially offset by slightly lower average order value.

Liquidity

Shutterfly exited the quarter with cash and cash equivalents of $245.1 million, up 172.6% sequentially. Free cash flow also increased 35.7% year over year in the quarter under review.

Outlook

For the first quarter of 2013, Shutterfly expects net revenue in the range of $107.2—$110.0 million. The company expects to incur a loss of 42—39 cents per share in the upcoming quarter.

For fiscal 2013, Shutterfly expects net revenues to range between $739.7—$746.0 million. On reported basis, earnings are estimated to be in between 38—51 cents per share.

Our Take

Shutterfly wrapped up the year 2012 on a strong note, beating estimates in all four quarters by significant margins. For the past few quarters, Shutterfly remains a solid growth vehicle. Apart from focusing on its core business, the company has been very active on the acquisition front.

Shutterfly recently clinched deals to takeover Eastman Kodak, FujiFilm, Penguin Digital, Photoccino and ThisLife, which will likely prove beneficial for the company over the long term. The company will triple its East Coast manufacturing operations by opening a new unit in South Carolina. This move also affirms the company’s strong growth trajectory.

However, challenging economic conditions as well as competitive pressures remain concerns. With the holiday season over, which is seasonally the strongest for the company, Shutterfly will likely face adverse seasonality in the forthcoming quarters.

Additionally, management’s guidance for the first quarter of 2013 remains below the Zacks Consensus Estimate of 31 cents loss per share. Shutterfly currently holds a Zacks Rank #3 (Hold).

Some Internet content companies that warrant a look include Changyou.com Limited (CYOU - Snapshot Report), TripAdvisor Inc.  (TRIP - Snapshot Report) and Sina Corp. (SINA - Analyst Report) all carrying a Zacks Rank #2 (Buy).
 

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