Shutterfly Pre-Earnings: Revenue Growth To Remain Strong

Online personalized photo retailer Shutterfly (NASDAQ:SFLY) is scheduled to announce its fiscal 2013 results on Wednesday, February 05, 2014. Fourth quarter revenues for the retailer account for more than 50% of fiscal revenues. For the nine months reported so far in 2013, Shutterfly generated sales of $373 million, with a growth rate of 29% over a similar period from 2012. For Q4, we expect revenues of approximately $407 million, with a 16% growth rate on a year-on-year basis. The company has a guidance of $392 million – $405 million in revenues for Q4FY13.

We expect an operating profit of $20 million for FY13 which is towards the higher end of the company’s guidance of $12.4 million – $22.5 million. This translates into an operating profit margin of approximately 2.6%, which is much lower than the 6.4% registered in FY12. This is partly due to the acquisition of R and R Images in Q3FY13 and BorrowLenses in Q4FY13 and partly due to the shift in its data and colocation facilities from the Bay Area to Las Vegas by Q4FY14 end. ^[1]

Below, we highlight key trends that we expect during Q4FY13 earnings from Shutterfly.

Check out our complete analysis of Shutterfly

Organic Growth And Acquisitions Should Boost Order Pipeline

Shutterfly’s latest acquisitions of R and R Images and BorrowLenses in fiscal 2013 should contribute to an expansion in number of orders for the company generated bythe acquired companies’ customer bases. R and R Images is a digital marketing solutions provider and should spur growth in its Enterprise Customer base in the future. BorrowLenses on the other hand is a premier online marketplace for photographic and video equipment rentals. This acquisition should improve Shutterfly’s opportunities to cross-sell its products and printing offerings to customers renting photographic equipment, thereby improving its average order value going forward.

In the nine months so far, Shutterfly’s average order value increased by about $3.66 compared to the same period in 2012, driven by an expansion its premium product offerings across brands such as Tiny Prints, Photo Books and Shutterfly. The company also has a new expedited shipping and next-day shipping service that should add to its existing average order value. ^[1]

The number of orders processed during the nine months in 2013 has increased by 15% to reach 10.87 million, supported by these acquisitions and Shutterfly’s cross selling initiatives. Organic as well as inorganic growth has also resulted in a 16% expansion in Shutterfly’s customer base. Consistent growth across all three operating metrics, namely customer base, number of orders and average order value, should bode well for the company’s long term future.

Mobile Platform To Remain Key Strategy For Shutterfly

Shutterfly presently operates 9 different applications across 3 mobile operating systems. Mobile revenues accounted for 7% of overall revenues during Q3FY13, up from 5% in Q2FY13. ^[1] With a rapidly expanding smartphone base globally, users find it easier to order their prints through their smartphones in comparison to a desktop platform. An increase in user adoption of Shutterfly’s smartphone applications, along with a strong conversion rate, could lead to a jump in number of orders processed in the long term. However, orders placed from smartphone devices have limited cross-sell potential and hence, the average order value should see some downward pressure in the long term.

We will update our price estimate of $49 for Shutterfly after the company files its financials with the SEC.

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