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Shutterfly Stays Neutral

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We remain Neutral on Calif.-based personalized photo services company Shutterfly Inc. (SFLY - Free Report) . While we view the company’s second quarter results, increase in revenue guidance twice this calendar year and frequent acquisitions favorably, its highly seasonal business structure keeps us on the sidelines at the current level.

Why the Reiteration?

On Jul 31, 2013, Shutterfly posted second-quarter 2013 loss of 29 cents per share, which was substantially narrower than the Zacks Consensus Estimate of a loss of 54 cents per share and management guided range of a loss of 55–58 cents per share. The results were driven by better-than-expected revenues in the quarter.

Revenues in the quarter got a boost from the strong performance of the Consumer and Enterprise segments and soared 34.8% to $133.5 million. Revenues also beat management’s guidance range of $118.0 million–$121.2 million.  Encouraged by the better-than-anticipated performance, Shutterfly raised its expectation for net revenue in 2013 for the second time to a range of $776.0—$781.0 million from prior expectations of $766.0—$771.0 million.

Shutterfly is focused on growing its business through strategic partnerships with retailers and through acquisitions. Some of Shutterfly’s latest acquisitions include MyPublisher, one of the pioneers in the photo book industry in May 2013; ThisLife, which offers a cloud-based solution for protecting, organizing and sharing photos and videos in Jan 2013; Fuji Film’s photo creating and sharing website in Oct 2012 and Kodak Gallery online photo services (formerly known as Ofoto) in May 2012.

Not only this, management is also striving hard to shore up its commercial printing business. The recent takeover of Phoenix, Ariz.-based R&R Images -- engaged in premium stationery printing and product design – is in line with the company’s strategy.
Despite these enthusiastic facts, some concerns prevent us from being too optimistic on the stock. Shutterfly’s business is highly seasonal. The company generates a large portion of its earnings during the fourth quarter of every year, which is the holiday season. This leads to relatively soft sales in the other three quarters.

Further, Shutterfly’s performance reflects the trend in leisure and recreational services industry. Hence, a slower macroeconomic recovery ahead of tapering, elections and Syria might pose threat to the company’s business.
Shutterfly currently carries a Zacks Rank #3 (Hold). Other players in the Internet content industry, which look attractive at current levels, include WebMD Health Corp. , Yandex N.V. (YNDX - Free Report) and Brightcove, Inc. (BCOV - Free Report) . While WebMD Health and Yandex carry a Zacks Rank #1 (Strong Buy), Brightcove retains a Zacks Rank #2 (Buy).


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