Shutterfly Growth Jumps But It Needs To Tighten Up Expenses

Shutterfly (NASDAQ:SFLY) reported earnings this week, showing a 28% year-on-year increase in revenues to $116.7 million. The quarter represents the 49th consecutive quarter of year-over-year net revenue growth. Despite the increase in revenues, it still posted a net loss of $12.4 million, up 23.5% over the same period last year. The loss can primarily be attributed to a significant jump in marketing expenses as well as technology & development spending.

The company has been aggressively expanding its services through acquisitions and recently announced another. It acquired MyPublisher, a privately held company which pioneered the photo-book industry and a maker of software used to make photo books. The terms of the acquisition were not disclosed. Shutterfly plans to combine MyPublisher’s photo-book technology and its manufacturing capabilities enabling higher degree of customization of its products for the users.

Shutterfly competes primarily with services such as 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

Consumer Business Remains The Focal Point Of The Business

The consumer business which enables users to print personalized greeting and merchandise remains the focal point of Shutterfly’s business. The segment reported a 29% year-over-year increase in revenues to ~$110 million. Shutterfly attributed the growth to investments integrated marketing campaigns, which improved consumer awareness and engagement across its four brands. Greater awareness resulted in a 20% year-over-year increase in transacting customers during the quarter, to 2.2 million, as total orders increased to 3.4 million. Backed by the growth in customer awareness, we expect that the overall customer base will increase to 8.12 million in 2013. Mobile based apps, launched in December, and the customization capability offered by MyPublisher’s technology will support this growth.

Enterprise Segment Expected To Continue Growing

Shutterfly’s efforts towards reducing the seasonality of its revenues through the focus on its commercial printing business helped revenues from the segment grow almost 100%, to $27 million in 2012. However, the growth in user base and the number of orders in the off-season could see the company reduce its focus on the segment which contributes only 5% of its total revenues. In Q1, the segment reported revenue growth of 12% over the same period last year to$6.9 million. The slowdown was the result of reduced number of orders from few customers. We expect the segment to grow revenues by 30% in 2013.

Expenses On The Rise

Shutterfly reported a 29% year-over-year increase in sales and marketing expense to $35 million, largely due to increased marketing activities. The $5.5 million increase in technology and development spending was due to the incremental costs associated with the company’s mobile initiatives, which saw it launch several new mobile applications including Treat, Shutterfly and Share Site iPhone applications over the last nine months. The development of mobile apps was aided by the acquisition of Penguin Digital last year and has resulted in more than 1.6 million active quarterly mobile users. We expect the company to keep investing in further developing its mobile as well as cloud/web capabilities and hence expect its expenses to remain high.

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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