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Narrower-Than-Expected Loss at Shutterfly; Ups Rev View

SFLY GA ANGI Z

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The leading manufacturer and digital retailer of personalized products and services, Shutterfly Inc. (SFLY - Analyst Report) posted first-quarter 2013 loss of 33 cents per share, narrower than the Zacks Consensus Estimate of 41 cents loss per share but wider than the year-ago loss of 29 cents a share. However, the company’s loss per share bettered the management guidance of a loss of 42 cents - 39 cents per share. Shutterfly usually reports a loss in the first quarter of every year due to adverse seasonality.

Additional costs related to Shutterfly’s acquisitions of Photoccino, Penguin Digital and This Life as well as increased investments in technology and development headcount led to the wider year-over-year loss in the quarter.  

In the quarter under review, net revenue surged 28% year over year to $116.7 million, which was ahead of the Zacks Consensus Estimate of $110.0 million, induced by sturdy sales from both Consumer and Enterprise categories.  Revenues also came in better than the management guidance of $107.2 - $110.0 million.
    
Healthy customer and transaction growth, sustained growth in enterprise revenues and better-than-expected contribution from photo-print business drove revenues in the quarter.

Behind the Headline Numbers

Revenues from the Consumers’ category were $109.8 million in the quarter, up 29.0% over the prior-year quarter buoyed by solid performances of Cards & Stationery, Photo Books and Photo Gifts product lines. Net Enterprise revenues grew 12.0% to $6.9 million in the quarter. Consumer engagement was strong during the quarter as the company recorded a double-digit increase in visits, registrations and uploads.
    
In the quarter, the total number of customers was 2.2 million, reflecting an increase of 20.0% from the prior-year quarter. Total orders generated were 3.4 million, up 20% year over year. Average order value was $32.13, up 7% year over year. Several promotional and pricing strategies implemented in the fourth quarter of 2012 continued to help average order value.

Adjusted gross profit margin expanded 300 basis points from the prior-year quarter to 50.0%, mainly due to higher unit volumes, favorable product mix, higher average selling prices, several efficiency initiatives and a somewhat lower mix of lower-margin enterprise revenues.

Acquisition

Shutterfly acquired one of the major players in the photo book industry MyPublisher in the first quarter to integrate the latter’s photo book technology and highly specialized manufacturing capabilities with its business.

Second Quarter Guidance

For the second quarter of 2013, Shutterfly expects net revenue in the range of $118.0 - $121.2 million. The company expects to incur a loss of 58 cents - 55 cents per share in the upcoming quarter.

2013 Guidance

For fiscal 2013, Shutterfly raised its expectation for net revenue to a range of $766.0—$771.0 million from prior expectations of $739.7—$746.0 million. On reported basis, earnings are estimated to be between 20 cents - 30 cents per share (down from 38 cents - 51 cents per share guided earlier).

Our Take

Shutterfly continued its winning momentum even in the first quarter of 2013, beating estimates for seven consecutive quarters by significant margins. For the past few quarters, Shutterfly remains a solid growth vehicle. The increased revenue guidance reflects the company’s strong fundamentals.

Apart from focusing on its core business, the company has been very active on the acquisition front. Shutterfly recently clinched deals to takeover MyPublisher, Eastman Kodak, FujiFilm, Penguin Digital, Photoccino and ThisLife, which will likely prove beneficial for the company over the long term.  Shutterfly currently holds a Zacks Rank #1 (Strong Buy).

Internet content companies that warrant a look include Zillow Inc. (Z - Snapshot Report), Angie's List Inc. (ANGI - Snapshot Report) and Giant Interactive Group Inc. (GA - Snapshot Report). While Zillow carries a Zacks Rank #1 (Strong Buy), Angie’s and Giant carry a Zacks Rank #2 (Buy).
 

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