Shutterfly (NASDAQ:SFLY) will announce its Q3 2012 earnings on October 30. During Q2, its net revenues increased 31% year-over-year to $99 million. Despite the increase, it posted a net loss of $9.5 million, primarily due to a significant jump in marketing and R&D expenses. Notably, capital expenditure as a percentage of total revenues increased from the long-term average of 7% to 15% for the quarter. The jump was driven by additional spend on technology equipment and software which accounted for 75% of total expenditure.
In the Q3 earnings call, we will be closely watching how Shutterfly’s plans to consolidate its position in the personal expressions market. We will also look for any announcements regarding the final customer migration figures from Kodak gallery and details of a similar migration happening from Fujifilm’s SeeHere.com. Shutterfly competes primarily with services like HP’s (NYSE:HPQ) Snapfish, American Greetings’ Photoworks and Webshots brands, and even Apple (NASDAQ:AAPL) with its Cards app on iOS.
Shutterfly continues to add new customers organically as well as through acquisitions. In Q2, its transacting customer base stood at 1.9 million, a 14% year-over-year increase. The share of new customers among total customers stood at a healthy 25% for the Shutterfly brand and at 67% for Tiny Prints brand.
The acquisition of Kodak Gallery was completed in May and the transition of photos to Shutterfly began in early July. We will be looking for any hints about the percentage of the 75 million Kodak Gallery customers who might have migrated to Shuttefly, as well as the number of customers the company expects to acquire from Fujifilm’s SeeHere.com.
Capital expenditure could be a concern
The company’s expenses have been increasing as it sets up infrastructure to support expansion. The company reported capital expenditure of about $15 million in Q2, $11 million of which was for technology equipment and software. The technology spending was attributed to the large number of photos/customers acquired from the Kodak gallery. Some of these costs are expected to be incurred in Q3.
Besides the customer acquisition costs, the company also has to bear costs of a new manufacturing facility it is setting up in Fort Mill, SC. The new facility is expected to cost about $60 million, of which $700,000 will be provided by the state government in the form of an infrastructure improvement grant. We will be looking for the company’s guidance on how the costs would be spread out over the coming quarters.
We have a $47 Trefis price estimate for Shutterfly, which we will review after the earnings release.