Shutterfly (NASDAQ:SFLY) reported its earnings this week with a 60% increase in its revenues, which jumped to $91.3 million. However, most of its revenue growth can be attributed to its Tiny Prints acquisition. Despite the increase in revenue, it still posted a net loss of $10 million, primarily due to a significant jump in its marketing expenses, which nearly doubled year-over-year.
Shutterfly competes primarily with services like HP’s (NYSE:HPQ) Snapfish, American Greetings’ Photoworks and Webshots brands, and even Apple (NASDAQ:AAPL) that ventured into this business lately, with its new Cards app on iOS.
Customer growth expected to continue
Shutterfly has continued to add new customers organically, as well as through acquisitions. After the Tiny Prints acquisition which drove growth in 2011, we expect Shutterfly’s recent acquisition of Kodak Gallery to help it add a significant number of new customers to its service. Shutterfly also launched a series of new offerings recently, like Videograms, Treat and additional features and card designs.
Its total customer base was around 5.9 million in 2011. We expect it to increase to around 6.8 million in 2012 organically. However, the Kodak acquisition could lead to much higher growth in its customer base. We will update our model accordingly, after the Kodak business is merged with Shutterfly’s.
Marketing expenses on the rise
Shutterfly’s sales and marketing expenses increased by more than 90% in 2011, which has bumped up SG&A expenses as a % of gross profit to 68% – an all-time high. This was primarily due to increasing competition in the space and aggressive marketing by its competitors like Snapfish. Shutterfly reported high marketing expenses in the last quarter too, but we expect SG&A expenses to decline going forward. If it is unable to clamp down its SG&A expenses in the coming years, there could be a significant negative impact on its stock price.
We have a $37 Trefis price estimate for Shutterfly, which stands nearly 20% above its market price. Personalized photos, cards and albums account for most of its value.