Shutterfly Pre-Earnings: Trends We Are Watching

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Shutterfly (NASDAQ:SFLY), a manufacturer and online retailer of photo-based personalized products and services in the U.S., will report its Q2 2013 results on July 31. We expect the company to post modest-to-strong growth during the quarter helped by its strategy to focus on mobile platform development, inorganic growth and product innovation. However, its profits might have come under pressure during the quarter due to expenses associated with the MyPublisher acquisition.

We believe the company will post an improvement in operating metrics such as transacting customers, orders and average order value during the quarter. The enterprise segment could continue to post strong revenue growth in the future, and this could help the company reduce seasonality inherent in its business model.

Check out our complete analysis of Shutterfly

Recap of Q1 2013 results

Shutterfly posted net revenue of $116.7 million in Q1 2013, which represented a y-o-y increase of 28%. While the consumer business saw 29% annual revenue growth, the enterprise segment reported slower revenue growth at 12% owing to delay in the timing of orders from existing customers.

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Operating metrics saw an improvement during the first quarter as both transacting customers and orders rose by 20% annually to 2.2 million and 3.4 million respectively. The average order value also expanded by 7% y-o-y to $32.13 in Q1 2013 despite intense promotional activity by Shutterfly’s competitors.

Shutterfly’s gross margin improved to 47% in Q1 2013 compared to 45% in Q1 2012 due to increased unit volumes, higher average selling prices, favorable sales mix, and other factors. The loss from operations was recorded at around -$24 million in Q1 2013.

Acquisition of MyPublisher could boost revenue growth but will impact short-term profit

At the end of April 2013, Shutterfly acquired MyPublisher, a photo-book making platform, and combined the latter’s photo-book technology and manufacturing capabilities. We expect this acquisition to expand Shutterfly’s user base and accelerate its revenue growth. However, this will also impact the company’s profits in the short term as certain one-time acquisition related costs and accelerated depreciation and amortization costs are expected to be incurred in the second quarter.

Mobile platform development represents a key strategy for Shutterfly

Shutterfly is actively investing in mobile platform development to leverage increasing traffic from mobile devices. Over the recent past, the company has introduced various new mobile applications, including Treat, Shutterfly and Share Site iPhone applications and also enabled its websites for better mobile experience. Since the acquisition of Penguin Digital last year, the company has stepped up its focus on mobile app development and over 1.6 million active quarterly mobile users were recorded in Q1 2013. We believe the company will continue to invest in mobile platform development and cloud/web capabilities, and hence we expect its expenses to remain high in the future.

Enterprise segment is expected to post strong growth

Shutterfly is focusing on the commercial printing business to reduce seasonality in its business. In 2012, this segment had seen over 100% revenue growth on account of an enhanced customer base and increased business from existing clients. We expect this business to show strong growth in 2013 as increased utilization of existing facilities will help drive the company’s profits.

We will update our price estimate for Shutterfly’s stock after the earnings release.

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