Shutterfly’s Earnings: All About User Base Growth

by Trefis Team
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Shutterfly (NASDAQ:SFLY) will announce its Q1 2013 earnings on May 1, following a strong 35% performance in $641 million in 2012. The acquisition of technology companies, Photoccino and Penguin Digital in 2012, helped the company improve its services, resulting in the number of unique transacting customers growing to 7.1 million users, a 30% growth over last year. The company also improved its net margins from ~3% in 2011, to ~3.5% in 2012. The disparity between the growth in margins and that of revenues was on account of a 30% jump in the costs associated with sales and marketing.

The company has set its focus on developing its mobile platform in 2013, which we expect will drive further growth over the forecast period. The first step in the direction was taken through the launch of a revamped Shutterfly iOS app for photo prints and gifts in December. We will look for any significant impact of the new app on the number unique transacting customers in Q1. We will also look for any new client additions in the enterprise business, which has grown revenues from $500,000 in 2008 to $27 million in 2012.

Shutterfly competes primarily with services like HP’s (NYSE:HPQ) Snapfish, American Greetings’ Photoworks and Webshots brands, and Apple‘s (NASDAQ:AAPL) Cards app on iOS.

Check out our complete analysis of Shutterfly

Customer Growth Expected To Continue

Shutterfly continues to add new customers organically as well as through acquisitions. At the end of 2012, its transacting customer base stood at 7.1 million, a 30% year-over-year increase. The strong growth largely organic, was the result of a successful marketing campaign. The growth was also helped by the acquisition of customers from the now defunct Kodak Gallery. The growth in transacting customers and introduction of new products also resulted in a 30% growth in the number of orders processed. In 2013, we expect the growth to be mostly organic. We expect several mobile initiatives to roll out this year, which will make it easier for customers to access and use Shutterfly’s services on the move. The acquisition of Photoccino and Penguin Digital should prove helpful in this regard.

Besides the new mobile app launched earlier in Q1, the tie-up with Hallmark Gold Crown stores is expected to support a growth in transacting customers. The company also completed the acquisition of ThisLife, the cloud-based photo and video organization platform in Q1. Integration of ThisLife’s technology into Shutterfly’s services will help users to seamlessly organize, store, share and create physical and digital products, using both web and mobile devices. We expect the acquisition to help Shutterfly corner a larger share of the photo and personal publishing market in 2013.

Enterprise Segment Expected To Continue Strong Growth

Shutterfly’s continued focus on the commercial printing business helped revenues from the segment grow almost 100% to $27 million. A developed enterprise publishing business will help the company mellow the effects of the seasonality in the personal publishing business. In 2012, the strong growth of the segment was a combined result of new customer additions and robust organic orders from existing clients. We expect the company to continue to focus on the segment, as increased utilization of existing facilities during the off-season for personal publishing will help improve its gross margins.

We have a $38 Trefis price estimate for Shutterfly, which stands nearly 15% below its market price. Personalized photos, cards and albums account for most of its value.

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