Here Are A Few Factors That Support Shutterfly’s Future Revenue Growth

Shutterfly Inc. (NASDAQ:SFLY) is an online retailer and manufacturer of personalized photo products and services, with brands such as Shutterfly, Tiny Prints, Treat and Wedding Paper Divas in its brand portfolio. Market capitalization for the company stands at about $1.75 billion. Business for the company is highly seasonal, with Shutterfly generating more than 50% of annual revenues  in the fourth quarter, when demand is elevated by the holiday season. Within this seasonality, the company has seen consistent growth in its top line for 51 quarters, fueled by inorganic as well as organic growth.

For the nine months in 2013, Shutterfly reported revenues of $373 million, a 29% increase over the prior year $289 million. For the forthcoming fourth quarter, Shutterfly expects revenues between $392 – $405 million. ^[1] However, this growth in revenues for the company comes at the cost of negative operating and net income margins. Operating and net income margins for the January – September period stand at (-22%) and (-9%) respectively. A year ago, these margins were (-21%) and (-10%) during a comparable period.

In this article, we take a look at various factors impacting Shutterfly’s business for the fourth quarter. We have a $49 Trefis price estimate for Shutterfly, which is nearly 7% above the current market price.

Check out our complete analysis of Shutterfly

Improved Discretionary Spending Levels, Acquisitions To Support Impressive Top Line Growth Trajectory

As stated earlier, Shutterfly’s business is highly seasonal and bulk of the revenues are generated during the holiday season. Additionally, the company’s revenues are dependent on the state of the U.S. economy. During the recessionary period of 2008 – 09, Shutterfly’s revenue growth rate declined to 14% and 15% in fiscal 2008 and 2009. Post recession, top line growth for fiscal years 2010, 2011 and 2012 climbed to 25%, 54% and 35% respectively. Shutterfly’s revenues are highly correlated with consumer spending levels within the U.S., and given the positive outlook on holiday season e-commerce sales showcased by logistics operators FedEx Corp. (NYSE:FDX) and United Parcel Service (NYSE:UPS) this year, we believe Shutterfly’s Q4 guidance is on the conservative side. We note too that analysts’ revenue consensus estimates are at the high end of guidance..

We expect factors such as a stronger U.S. economy, increased discretionary spending, and strategic partnerships with traditional brick-and-mortar retailers such as Costco (NASDAQ:COST) to contribute to an expansion in total customers purchasing Shutterfly’s products going forward. This is despite Shutterfly’s termination of a part of the partnership with Costco relating to an reduction in price of its Tiny Prints cards could offset revenues by more than the expected $8 million and decrease total customers for the company. ^[1]

In organic growth will contribute as well.  Shutterfly acquired R and R Images and BorrowLenses in Q3 and Q4 which should support top line growth going forward. ^[1] These acquisitions are an addition to Shutterfly prior acquisitions of MyPublisher, Photoccino, Penguin Digital, ThisLife.com and Kodak Gallery’s online photo service. R and R Images is a digital marketing solutions provider while BorrowLenses is a premier online marketplace for photographic and video equipment rentals. These acquisitions could spur growth in Shutterfly’s Enterprise Customer base going forward. Revenues from enterprise customers also tend to be contract-based and recurring in nature, lasting across a time period as opposed to individual product sales which are immediate, which could be beneficial to the company’s long term success. Currently, Shutterfly’s revenue split between individual and enterprise clients stands at 93%:07% for the nine months in 2013.

Shutterfly’s average price per order could see some uptick following an expansion in the company’s premium line of products across brands such as the flagship Shutterfly brand, Tiny Prints and Photo Books. ^[1] Moreover, services such as expedited shipping and next day delivery could support an increase in Shutterfly’s average price per order in Q4 primarily due to the shortened holiday season this year. ^[1]

Margins Could See More Downward Pressure

Shutterfly operates in a highly competitive industry. While the company provides a complete suite of services from sharing to designing to printing, it faces stiff competition from providers such as Snapfish and VistaPrint. Shutterfly has been spending heavily on sales and marketing activities to promote its own products. As a percentage of revenue, marketing expenditure for the company has grown from 18% in 2007 to 23% in 2012. For the nine months in 2013, marketing spend stands at approximately 29.5%. However, much of this spend is an upfront investment to support holiday season sales for the company.

Going forward, we anticipate operating and net income margins to continue to see downward pressure due to intense competition within the industry. On the flipside, a migration to premium products could offset this to a degree. Moreover, net income margin for Shutterfly is expected to be pressurized in the near term by an increase in tax burden from the acquisitions made in 2013 as revenue generation lags expenses incurred.

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1. Shutterfly Management Discusses Q3 2013 Results – Earnings Call Transcript, Seeking Alpha, October 2013 [↩] [↩] [↩] [↩] [↩]