Shutterfly Q2FY14 Preview: Focus on Order Growth and Take-Out Rumors

+0.25%
Upside
50.97
Market
51.10
Trefis
SFLY: Shutterfly logo
SFLY
Shutterfly

Shutterfly (NASDAQ:SFLY) is scheduled to report its second quarter results on July 30. In the first quarter of 2014, the company reported a 17.5% jump in Q1FY14 revenues on a year-on-year basis, from $117 million in Q1FY13 to $137 million this quarter. Although revenues grew at double digit pace, the year-on-year growth in revenues has been rapidly decelerating for the company. Comparatively, Q1FY13 sales expanded 28% from Q1FY12.

In addition to slowing sales, Shutterfly’s bottom line has been strained by depreciation expenses related to its old manufacturing facilities. Quarterly depreciation expenses in Q1FY12, Q1FY13 and Q1FY14 stood at $6 million, $9 million and $14 million respectively. As a percentage of gross profit, depreciation expenses for these three quarterly periods stood at 14%, 16% and 24% respectively. Moreover, Shutterfly’s interest coverage ratio, which is an indication of the number of times the company can service its interest expense obligations through its operating income, has also declined more than 10 fold between Q1FY13 and Q1FY14. The company reported approximately $34 million as a net loss, against a loss of $12 million in Q1FY13, primarily due to a higher interest expense and depreciation expenses.

Shutterfly expects second quarter revenues of approximately $154-$158 million, indicating a year-on-year revenue increase ranging between 15.4%-18.4%. We have a second quarter revenue estimate of $154.87 million against the consensus estimate of $156.95 million. The company expects a GAAP net loss of 72-75 cents per share for Q2FY14 against a net loss of 27 cents per share in Q2FY13.

Relevant Articles
  1. Why Is Apollo Global Management Acquiring Shutterfly?
  2. Lifetouch Powers Shutterfly’s Q1 Results, And Will Continue To Drive Growth Going Forward
  3. Lifetouch Acquisition To Continue To Drive Top-Line Growth For Shutterfly In Q1
  4. Breaking Down Shutterfly’s Key Revenue Drivers
  5. Lifetouch Acquisition Should Continue To Drive Growth For Shutterfly
  6. Can Lifetouch Acquisition Drive Shutterfly’s Q4?

See our complete analysis of Shutterfly

Weak Order Expansion to Drag Revenue Growth

One of the reasons for Shutterfly’s decelerating top line growth is the slowdown in total orders processed. In the first two quarters of fiscal 2013, Shutterfly reported a 20% jump in total orders processed, partly boosted by prior acquisitions. However, the company’s total orders processed expanded 13% on a year-on-year basis in Q1FY14. The slowdown in incremental orders processed might be a result of weak adoption of its product offerings from existing customers. Historically, Shutterfly has been able to expand its portfolio and add new customers through acquisitions, thereby increasing orders processed.

However, the inorganic growth strategy might be a hard option to boost growth, particularly in a niche industry vertical such as photo retailing. Recently, Bloomberg reported that Shutterfly might be looking to sell itself and has hired Qatalyst Partners LLC as its investment bank. [1] Although the credibility of this rumor has not been confirmed by Shutterfly, the stock rallied as much as 17% on this news.

Given the photo retailing nature of its business, potential synergies for an acquirer could be limited. Shutterfly has a market capitalization of approximately $1.82 billion and a customer base of  8 million. Photo retailing is both a challenged and fragmented industry and obvious acquirers do not readily come to mind. From the Q2FY14 earnings, we intend to understand more about Shutterfly’s future growth in orders and the management’s view on Shutterfly selling itself.

Weakness in Bottom Line in Focus

Shutterfly expects a net loss of 72-75 cents/share for the quarter. This is nearly three times the loss it registered in the second quarter of fiscal 2013. This huge pressure on the company’s bottom line stems from the increasing interest payments and expanding depreciation expenses relating to new manufacturing facilities and relocated data center operations. The company plans to open its new manufacturing facility in Shakopee, Minnesota by 2014 and relocate its data center to Las Vegas by 2015. Additionally, one time expenses relating to duplicative operating costs during the relocation of the data center are expected to negatively impact its bottom line in FY14.

We expect the management to guide on the higher depreciation charges and interest expenses for fiscal 2014 and intend to focus on the company’s bottom line trend going ahead.

See More at Trefis | View Interactive Institutional Research (Powered by Trefis)
Get Trefis Technology

Notes:
  1. Shutterfly Said to Hire Qatalyst to Seek Buyers for Site, Bloomberg, July 03, 2014 []