Shutterfly Inc. (NASDAQ:SFLY) is an online retailer of personalized photo products such as photo books, greeting cards, photo prints, calendars and other customized gift products. The retailer derives more than 50% of its revenues in its fourth quarter, with elevated demand arising from the holiday season. In 2012, Shutterfly generated revenues of approximately $641 million, with completed orders standing at about 16 million. In addition to growing its order pipeline organically, Shutterfly’s acquisitions of Kodak Gallery, Photoccino, Penguin Digital and ThisLife contributed to the 32% growth in its orders.
In this article, we shed light on various factors that have contributed to growth in the online photo printing industry and study trends that influence the industry’s future performance. In the post-photo products and services market, Shutterfly enjoys a domestic market share exceeding 50%, and hence, we believe the industry’s future performance is a benchmark to the company’s success.
Digitalization, Social Media Drove Industry Growth Historically
Before the commercial launch of digital photographic tools and equipment, the photography market globally was dominated by film-based cameras. These film-based cameras created avenues for offline photo printing businesses, with photographic films needing to be developed and printed manually. However, digital imaging, a technology pioneered by Kodak in the late ’70s, meant film camera manufacturers had to realign their business models. While players such as Canon and Nikon have adapted their businesses according to changing consumer perception, other players such as Kodak and Fujifilm continued to remain positive on the return of film-based photography. Between 2000-2008, digital camera sales grew at double-digit pace as film-based cameras witnessed spiraling sales. Early in 2012, Kodak had to file for bankruptcy, signaling the end of the film photography era. 
However, digital camera sales slumped following the crash of the economy in 2008-09 and has not recovered since. Unit sales for digital cameras peaked to 127 million units in 2008 before declining 13% in 2009 to reach 110 million units.  Volumes continued to remain lower than the peak seen in 2008, with unit sales expected to be about 86 million units in 2013, 24% lower compared to 2012.  This decline in digital camera volumes is attributable to two broad factors:
- Smartphones rivaled entry-level digital cameras with their cheaper price points and began replacing digital cameras in most regions globally.
- Customer spending potential has remained weak on mid and high-end digital cameras and other high-performance photography equipment since 2008-09.
- Shutterfly Q4 Earnings: Holiday Sales Boost Earnings As The Company Crosses $1 Billion In Full-Year Revenues
- Shutterfly Earnings Preview: Holiday Demand Could Drive Revenues This Quarter
- Shutterfly Q3 Earnings: The Enterprise Segment Soars, While The Consumer Business And AOV Lag
- Shutterfly Earnings Preview: Enterprise Segment And New Products Could Drive Growth
- Shutterfly’s Growth Momentum Could Continue In The Coming Quarters
- Shutterfly Demonstrated A Healthy Second Quarter With Broad-based Growth, Though Average Order Value Declined
Going forward, we expect to see a steady decline in digital camera sales with customers choosing smartphones over entry-level digital cameras. However, the mid to high-end cameras catering to professionals in the industry continue to be lucrative for manufacturers such as Nikon and Canon. Recently, Sony launched two innovative clip-on cameras that can be attached to any Android smartphone or iPhone, serving as a replacement to their built-in cameras and costing much less than a traditional digital camera.  We could very well see more innovative products such as these from manufacturers that could help mitigate the declines from their digital camera sales in the future.
Growing Smartphone Base Should Drive Future Top Line
Although digital camera volumes have seen a steady decline in the past few years, rapid growth in smartphone sales offset this decline and boosted total growth in digital photography. According to our calculations from smartphone sales data sourced from Gartner, smartphone units sold in 2012 were close to 675 million, 85% higher than in 2011, and are expected to grow 19% annually through 2016.  This growth in the smartphone base should drive Shutterfly’s revenues in the future. In Q3FY13, Shutterfly generated about 7% revenues from its mobile platform.  Going forward, we expect Shutterfly to gain a higher percentage of revenues from mobile devices due to the steady increase in smartphone devices, and consequently, pictures taken.
Additionally, expanding Internet penetration globally and the rise of social media has resulted in explosive growth of capturing and sharing pictures. Facebook, the world’s largest social media platform, reports that it uploads more than 350 million photos daily and has uploaded more than 250 billion photos so far.  By November 2013, Snapchat revealed that its users shared close to 400 million snaps each day.  This expansion in social media and Internet penetration is driving the growth in sharing of pictures. Yahoo estimates the number of pictures taken in 2014 to reach 880 billion, which presents a huge opportunity for online photo printing companies. 
We believe a combination of factors such as the expansion of smartphone base within the U.S. and globally, and the rise of various distinctive social media platforms that enable picture sharing, could continue to drive growth for market leader Shutterfly in the future. Furthermore, its foray into enterprise printing solutions to generate revenue during off-seasons should support strong growth in the future. Enterprise revenues for the company expanded from 2% in 2010 to 4% in 2012 as Shutterfly leverages its installed printing base during low volume seasons. However, various challenges arising from the advent of new media accompany these opportunities. For example, with Snapchat, users share photos that by their intent are ephemeral, disappearing within a brief, pre-set interval from the recipient’s screen. There are no prints for posterity in this medium, likewise with Facebook’s albums. In a similar vein, Shutterfly counts on its users to convert their images from digital copies to prints. Inducing customers to share prints as well as images remains one of the crucial factors that determines the success of these personalized photo printing players.Notes:
- Kodak Files for Bankruptcy as Digital Era Spells End to Film, Bloomberg, January 2012 [↩]
- Digital Still Cameras Market to Grow in 2010, But Decline Soon to Follow, IHS iSuppli, January 2011 [↩]
- Digital cameras in decline, though interchangeable lens segment sees growth, Futuresource Consulting, November 2013 [↩]
- Sony News Release, September 2013 [↩]
- Worldwide Smartphone 2012–2016 Forecast and Analysis, Market Research, March 2012 [↩]
- Shutterfly Management Discusses Q3 2013 Results – Earnings Call Transcript, Seeking Alpha, October 2013 [↩]
- Facebook reveals we upload a whopping 350 million photos to the network daily, Digital Trends, September 2013 [↩]
- Snapchat Sees More Daily Photos Than Facebook, TechCrunch, November 2013 [↩]
- Number of photos taken in 2014 will approach 1 trillion thanks to selfie explosion, Yahoo News, December 2013 [↩]