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Shutterfly's Q3 Loss Narrows; Beats on Rev

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Leading manufacturer and digital retailer of personalized products and services, Shutterfly Inc.’s (SFLY - Free Report) third-quarter 2013 loss of 24 cents per share was substantially narrower than the Zacks Consensus Estimate of 62 cents loss per share as well as the year-ago loss of 29 cents a share. Also, the company’s loss per share was much narrower than management’s guidance range of a loss of 58–62 cents.

In the quarter under review, net revenue increased 25.0% year over year to $122.7 million, which was ahead of the Zacks Consensus Estimate of $118.0 million by about 4.0%. Revenues in the quarter benefited from the strong performance of the Consumer and Enterprise segments. Revenues also beat management’s guidance range of $115.5–$117.5 million.

Shutterfly’s business is highly seasonal and the company posts losses in the first three quarters of the year.

Behind the Headline Numbers

Revenues from the Consumers category were $112.7 million in the quarter, up 25.0% over the prior-year quarter. The category received a boost from increased selling across all of its brands as well as core products like photo books and cards.

Net Enterprise revenues grew 22% to $10.0 million in the quarter thanks to organic growth from existing clients as well as decent contribution from R&R images.

In the quarter, the total number of customers was 2.4 million, reflecting an increase of 6.0% from the prior-year quarter. Total orders generated were 3.9 million, up 8% year over year. Average order value was $29.07, up 16% year over year.

Adjusted gross profit margin contracted 100 basis points (bps) from the prior-year quarter to 45.0%, mainly due to the rise in depreciation and customer service costs from the company’s latest Fort Mill facility and adverse product mix.

Fourth-Quarter Guidance

For the fourth quarter of 2013, Shutterfly expects net revenue in the range of $392.1–$405.1 million. The company expects earnings in the range of 95 cents–$1.11 per share in the upcoming quarter. Prior to the release, the Zacks Consensus Estimate for fourth quarter was much higher at $1.42 per share.

2013 Guidance

For fiscal 2013, Shutterfly lowered its expectation for net revenue to the range of $765.0–$778.0 million, from the prior expectation of $776.0–$781.0 million. Notably, in the preceding quarter the company had raised its expectation for revenue from earlier expectations of $766.0–$771.0 million.

Adjusted earnings guidance range was widened to 20 to 35 cents from the prior projection of 23 to 33 cents per share.

Our Take

Despite posting a loss owing to the seasonal nature of its business, Shutterfly managed to beat the Zacks Consensus Estimate and maintain the momentum of 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. However, just one spot in its otherwise clean performance is the trimmed revenue guidance for the full year. Shutterfly currently carries a Zacks Rank #3 (Hold).  

Internet content companies that warrant a look at the current level include Shanda Games Limited , Yandex N.V. (YNDX - Free Report) and WebMD Health Corp. , all carrying a Zacks Rank #1 (Strong Buy).

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