Progress On Buyout Talks Should Lend Volatility To Shutterfly’s Stock

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Shutterfly

Shutterfly Inc. (NASDAQ:SFLY) is the largest online provider of personalized photo books, cards and other stationary products in the U.S, with a market capitalization of about $1.95 billion and revenues of nearly $296 million in the first half of FY14. Second quarter revenues continued to display a slowdown in year-on-year growth, registering a 19% growth this quarter to reach $159 million against 35% in Q2FY13. Revenues from its consumer printing business increased 20% to reach $150 million while enterprise revenues increased at a slower pace of 5% to reach $9 million.

The company has seven brands in its portfolio, with six of them acquired over the years. Last quarter, Shutterfly reported an average order rate of 1.61 orders per customer compared to 1.56 orders per customers in Q2FY13 and 1.5 orders per customer in Q1FY14. The increase in orders completed per customer highlights greater cross-selling of products across its brand portfolio. However, Shutterfly’s bottom line was eroded severely in FY14, resulting from higher R&D and depreciation expenses.

In this note, we provide a brief update on Shutterfly’s business. We have a $49 Trefis price estimate for Shutterfly, marginally lower than its current market price.

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Mobile Monetization Could Gain Momentum with New App Launch

Last quarter, revenues from Shutterfly’s mobile and tablet apps amounted for nearly 11% of Shutterfly brand revenues. Comparatively, revenue share from these channels was 5% of Shutterfly brand revenues in Q2FY13. This strong surge in mobile monetization was facilitated by increased penetration of smartphones and tablets among consumers. The company has developed mobile applications for new devices and supports the iPhone, iPad and Android devices. To further enhance its position in the mobile space, Shutterfly recently launched its tinyprints brand for the iPad. [1]

According to Gartner, nearly 40% of U.S. households owned a tablet in 2013. The Apple iPad had a market leading position, with a 51% share in 2013. [2] Assuming about 75 million households in the U.S., we estimate an installed base of nearly 15 million iPads at the end of 2013. This represents a huge addressable market for Shutterfly. Last fiscal year, the company reported nearly 8.1 million customers with an average revenue per customer of about $92. By expanding its customer base through new channels, Shutterfly can increase its orders processed and accelerate revenue growth.

On the flipside, expanding memory reserves on smartphones, increased storage of pictures on digital albums from Google and Facebook and the advent of ephemeral picture messaging apps like Snapchat are depressing potential growth for photoretailers like Shutterfly.

Final Bids for PE Buyout Expected This Month

In early July, Bloomberg reported that Shutterfly was working with Qatalyst Partners LLC, a boutique investment bank, to find potential buyers for itself. [3] Recently, Reuters reported that Bain Capital and Silver Lake Partners are among the buyout firms looking to acquire the online photoretailer. [4] Both these companies have progressed into the second round of the auction and are reportedly considering to submit binding offers for the buyout.

The buyout of Shutterfly is expected to priced at more than seven times earnings before interest, taxes, depreciation and amortization (EBITDA). We have a forward 12-month EV/EBITDA multiple of 9.5x for Shutterfly, indicating about a 26% premium on its possible buyout price. Any progress on these buyout talks in September should lend volatility to Shutterfly’s stock. Year to date, Shutterfly’s stock is down 2% compared to a 11% increase in the NASDAQ Composite.

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Notes:
  1. Shutterfly Brings Its Online Boutique Tiny Prints To The iPad, Techcrunch, September 2014 []
  2. Apple’s iPad Sales Boom Ends, U.S. News, April 2014 []
  3. Shutterfly Said to Hire Qatalyst to Seek Buyers for Site, Bloomberg, July 03, 2014 []
  4. Silver Lake, Bain vie for photobook maker Shutterfly: sources, Reuters, August 2014 []