Shutterfly Might Demonstrate A Strong First Quarter On The Back Of Its Strategic Investments And Cost Cutting Initiatives

Leading internet based image publishing service, Shutterfly (NASDAQ:SFLY) is set to release its first quarter earnings on April 29th. It was likely a  healthy first quarter, given both the company’s initiatives around growing the scope of its products and services, along with the integration of its strategic acquisition, Groovebook. However, some of its restructuring  efforts may well have boosted expenses on an unadjusted basis.

In 2014, Shutterfly posted $926 million in revenues, witnessing an 18% year on year growth. The growth was boosted by a 14% increase in user base, a 17% increase in orders from its Consumer segment, and increased revenues from its Enterprise segment. The growth received a further lift due to the company’s acquisition of  Groovebook in 2014 and full year results from 2013 acquisitions of MyPublisher and BorrowLenses. ^[1]

Shutterfly’s gross margin for 2014 stood at 51% reflecting a year on year decline of ~ 200 basis points. The start-up costs of the Shakopee, Minnesota production facility (which went live in Q3 2014), the acquisition of Groovebook, the relocation of the data center to Nevada, were some of the reasons for the dampened margins. Shutterfly’s management believes that it will observe healthier margin performance in 2015, as the expenses of opening new facilities get absorbed and with the growth of its various brands across its mobile and wedding segments. ^[2].

Other than the flagship Shutterfly brand, the popular brands in Shutterfly’s portfolio are: ThisLife (photos and videos organizer), Tiny Prints (premium cards and stationery for all occasions), Treat (allows users to create personalized greeting cards), Wedding Paper Divas (wedding related stationery), BorrowLenses (online photo and video equipment rental service), Groovebook (mobile photo-book service), and others.

We will update our $49 price estimate for Shutterfly post the Q1 2015 earnings release.

See our complete analysis for Shutterfly

Initiatives To Streamline Production Costs And Expand User Base Might Boost First Quarter Results

On its fourth quarter earnings call, Shutterfly discussed the foundation for its growth path in the recent years. In 2015, the company expects to incur between $10 to $12 million in its restructuring efforts. Here are some key points:

• Launch of Shutterfly 3.0 By The End Of 2016: By the end of next year, Shutterfly is planning on launching the next generation of Shutterfly — a memory management service, connected to the personalized e-commerce solutions. The next generation of Shutterfly (Shutterfly 3.0) will incorporate the services of This Life directly into Shutterfly.com and consolidate both the services in a single mobile application. The Tiny Prints and Wedding Paper Divas platforms will also be migrated to the Shutterfly 3.0 platform, creating an integrated e-commerce solution. This consolidation will prevent investments across two technology platforms and hence will be more cost efficient and less cumbersome.

• Groovebook’s Dual Role: Shutterfly plans on both keeping its 2014 acquisition, GrooveBook, as a stand-alone application, that is as a mobile photo book application.  In additin, management intends to expand  Groovebook’s functionality across its multiple brands, such as the Shutterfly flagship brand and the Tiny Prints brands. Hence, though Groovebook will be separate, its features will also be available across the other brands and sold at different price points and  to different sets of customers. ^[3]

• Discontinued Treat Brand: From March 18th, Shutterfly has discontinued its Treat brand, due to a lack of a strong dedicated user base for this brand. However, the current Treat users will be redirected to Shutterfly.com and will be served through the flagship brand.

• Share Repurchase Program: Shutterfly’s Board of Directors has authorized the repurchase of up to $300 million of Shutterfly common stock. The repurchase program is in tandem with the long term capital allocation strategy that aims to maximize shareholder value while maintaining enough flexibility to continue with strategic investments and deals. ^[3]
• Elmsford Manufacturing Facility To Shut Down: In 2015, Shutterfly decided to close down its manufacturing operations at Elmsford, NY. Over the next few months, the manufacturing operations will be transitioned to its Fort Mill, Phoenix and Shakopee facilities.

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1. Shutterfly’s Form 10-K For The Period Ending December 31, 2014, Shutterfly Investor Relations, February 18, 2015 [↩]
2. Shutterfly’s (SFLY) CEO Jeffrey Housenbold on Q3 2014 Results – Earnings Call Transcript, Seeking Alpha, October 2014 [↩]
3. Shutterfly Q4 2014 Earnings Call Transcript, Seeking Alpha, February 12, 2015 [↩] [↩]