A Snapshot of Shutterfly’s Business

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SFLY: Shutterfly logo
SFLY
Shutterfly

    Quick Take 

  • Shutterfly operates in the digital photography space and its consumer business accounts for over 80% of our valuation for the company’s stock.
  • Its revenue grew at a healthy rate in 2012 and Q1 2013. Growth strategies such as acquisitions to enhance customer base and technology, continued innovation in product portfolio, and mobile platform development bode favorably for its future outlook.
  • Shutterfly’s operating margin came in higher in 2012 as compared to 2011. However, incremental costs associated with acquisitions, its mobile strategy and cloud based services are expected to weigh on margins in the future.
  • Shutterfly operates in a highly competitive environment with the presence of several competitors across the industry value chain.

Shutterfly (NASDAQ:SFLY) is a manufacturer and online retailer of photo-based personalized products and services in the U.S. While the company operates in both the consumer and enterprise segment – the consumer segment represents the dominant part of its business accounting for more than 95% of its overall revenues. The company’s business is seasonal as more than 50% of the overall revenues are recorded in the fourth quarter.

Revenue grew by 35% annually and 28% annually in 2012 and Q1 2013 respectively for the company. The growth in the number of customers and orders have been the key drivers for revenue growth in these periods. We expect continued strong growth in Shutterfly’s top line fueled by its inorganic growth strategy, innovation in its product portfolio and partnerships to boost brand awareness. Its operating margin grew to 6.4% in 2012 as compared to 3.3% in the prior year, mainly on account of decrease in sales and marketing costs, and general and administrative expenses as a percentage of revenues. The competitive landscape in Shutterfly’s industry is challenging with multiple competitors across the digital photography industry value chain.

Check out our complete analysis of Shutterfly

What are the different businesses for Shutterfly?

Shutterfly’s business can be divided into two segments: consumer business and enterprise segment:

  • The consumer business, which enables users to buy personalized photo books, greeting and stationery cards, calendars and other merchandise, represents the focal point of the company accounting for around 96% of the overall revenues. The presence of four distinct brands Shutterfly, Tiny Prints,Wedding Paper Divas and Treat augments the appeal to customers. We estimate this segment to account for 83% of our valuation for the company.
  • The enterprise segment, which involves commercial printing for business customers is mainly used to mellow down the effects of seasonality in the business. This division contributed 4% to the overall revenues in 2012 and is responsible for 5% our valuation for Shutterfly. 
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How are the revenues and key business metrics trending for Shutterfly?

2011

2012 Annual growth rate in 2012

Annual growth rate in Q1 2013

Net Revenue (in $ thousands)

473,270

640,624 35%

28%

Number Customers (in thousands)

5,388

7,062 31%

20%

Number of Orders (in thousands)

12,340

16,322 32%

20%

Average Order Value ($)

37.25

37.58 1%

7%

Shutterfly’s 35% y-o-y revenue growth in 2012 was primarily on account of increase in transacting customers and orders as the average order value was flat compared to the prior year. In comparison, the company saw 7% rise in average order value in Q1 2013, which also contributed to the revenue growth during the quarter.

What are the key costs for Shutterfly?

2011

2012 Q1 2012

Q1 2013

Cost of net revenue as a % of revenue

46.4%

46% 54.8%

53.0%

Technology and development as a % of revenue

13.9%

13.4% 20.3%

20.6%

Sales and marketing as a % of revenue

24.1%

23.2% 29.6%

29.9%

General and administrative as a % revenue

12.4%

11% 16.2%

17.0%

Operating margin

3.3%

6.4% -20.9%

-20.5%

The company’s operating margin in Q1 2013 came in line with the previous year as the benefit from higher gross margin was offset by rise in technology and development costs, sales and marketing costs, and general and administrative costs. Incremental costs associated with acquisitions also played a part in driving these operating expenses higher. Shutterfly’s operating margins are typically negative in the first quarter due to the seasonality for this business.

The key growth strategies for Shutterfly

  • Acquisitions to drive revenue growth and enhance technology: Shutterfly has made various acquisitions in the past to expand its customer base and enhance its technology. In Q1 2013 it acquired MyPublisher (a photo-book making platform), and in 2012 it had acquired Photoccino (a company that provides technology for efficiently organizing photos), Penguin Digital (a mobile app development company), ThisLife.com (a cloud based player engaged in organizing and storing photos), as well as the customer accounts of Kodak Gallery’s online photo service. Acquisitions of these players will help Shutterfly in differentiating its products and services to its customers. We expect Shutterfly to continue its inorganic growth strategy in the future as well.
  • Innovation to enhance its product base: Shutterfly continues to add innovative product offerings to its portfolio to enhance its customer appeal and drive its revenue growth. In Q1 2013, it added matte finish photo covers to its photo book options and stainless steel travel mugs, pillows and new magnet sizes to its Photo Gift and Home Decor category. Enhancements to Wedding Paper Divas and Treat were also made with new designs and more personalization capabilities. [1]
  • Partnerships with other companies to enhance customer awareness: Shutterfly is also leveraging partnerships with other companies to enhance its brand awareness. Recently, the company collaborated with Hallmark to launch a specialized collection of personalized gifts. We expect these partnerships to drive customer growth for Shutterfly. [1]
  • Enhancing the mobile platform: As the Internet market is seeing a trend towards growing number of mobile Internet users, Shutterfly is actively investing in the mobile platform to leverage this trend. It has launched various new mobile applications in the recent past and also enabled its websites for better mobile experience. Shutterfly has over 1.6 million active quarterly mobile users, and we believe that this figure will grow in the future.

The competitive landscape

Shutterfly operates in a highly competitive environment. While it provides products and services across the value chain from sharing to designing to printing, it faces stiff competition in each vertical.

Some of its key competitors include:

  • Snapfish (HP) is among its primary competitors in the online photo delivery and printing space.
  • Certain large retailers such Wal-Mart, Costco and Sam’s Club compete with Shutterfly by providing low cost digital photography products and services.
  • Dedicated players in the photo book and stationery business including Hallmark, Cardstore, Picaboo, Blurb, etc.
  • Companies involved in mobile digital photography such as Instagram, Woven, and iPhoto and cloud based storage services including Dropbox, SugarSync and Amazon Cloud Drive also pose a risk to Shutterfly.
  • Social media companies, such as Facebook, Twitter and Myspace compete with Shutterfly in the photo sharing space.

Our $38 Trefis price estimate for Shutterfly, is nearly 30% below the current market price.

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Notes:
  1. Shutterfly Management Discusses Q1 2013 Results – Earnings Call Transcript, Seeking Alpha, May 1, 2013 [] []