Shutterfly Demonstrated A Healthy Second Quarter With Broad-based Growth, Though Average Order Value Declined

Shutterfly (NASDAQ:SFLY), released its Q2 2015 earnings on July 29th. The company delivered a solid second quarter. While the revenues were within management guidance, the adjusted EBITDA exceeded the guidance range. The flagship Shutterfly brand and the enterprise segment were the prime drivers of the solid growth, and overshadowed the slow demand for brands such as Tiny Prints and Wedding Paper Divas. The company has intentionally reduced investments in the aforementioned brands and directed the resources to its upcoming Shutterfly 3.0 platform. Shutterfly 3.0 will integrate the services of all its brands such as This Life, Tiny Prints, and Wedding Paper Divas, with the Shutterfly flagship brand, into a common platform. This consolidation will be cost effective for the company and also more user-friendly. The company’s second quarter earnings also reaped the benefit of deferred revenue recognition from one of its unredeemed flash sales. The second quarter also got the advantage of growth because of some expenses shifting to the third quarter. The management believes that the profitability improvement will continue right up to 2016 as the company is effectively managing both its COGS and operating expenses. ^[1]

For Q2 2015, the revenues reflected 16% year-on-year growth to amount to $184 million. There was a 14% growth in the consumer business ($171 million) and 40% growth in enterprise revenues ($12.6 million). Growth in the enterprise segment was primarily because of a new multi-year project with a Fortune 50 client. The flagship Shutterfly brand witnessed double digit organic growth. Shutterfly’s customers and orders grew by around 20% across all segments to reach around 3 million and 5 million, respectively. However, after excluding the impacts from the flash sale deferred revenue, closure of the Treat brand, and the GrooveBook acquisition, customers grew by 5%, orders grew by 9%. ^[2]

For the full year 2015, the company expects revenues to the tune of $1.04 billion to $1.06 billion (an year-on-year growth of 13% to 15%) and adjusted EBITDA to lie between $186 to $194 million (reflecting around 18% year-on-year growth).

We are in the process of updating our $49 price estimate for Shutterfly.

See our complete analysis for Shutterfly

GrooveBook Brings About Customer Expansion At The Cost Of Reduced Average Order Values

In the second quarter, Shutterfly’s average order value (AOV) declined by 10% year-on-year to reach $32.50. As projected in our Q2 pre-earnings report, Shutterfly’s AOV continued to be dampened at the cost of its customer base expansion.

Shutterfly’s 2014 acquisition, GrooveBook – a mobile photo book application subscription service, is mainly responsible for the lower AOVs. In Q1 2015, Shutterfly’s AOVs declined by 14.5% to $28.86. This is because GrooveBook provides services at a lower price point than most of Shutterfly’s other brands. On the flip side, Shutterfly’s unique customers increased by 25% on a year-on-year basis, in the first quarter, to reach 3.2 million.

Shutterfly has strategically positioned GrooveBook’s services as a stand-alone application, as well as an integrated functionality across its multiple brands. This helped the company in preserving Groovebook’s earlier user base and by offering a new service to Shutterfly’s existing users, the company is expected to gain a hitherto unexplored user base. GrooveBook services provide value for money. Prior to the acquisition, Shutterfly’s normal services offered 100 prints for a month at a total cost of $22 to $23. Groovebook, on the other hand, provides the whole package for $2.99. ^[3] Though the cost reduction comes with lower quality, it is still attractive to the younger population with lower disposable income. Hence, Shutterfly is gaining a segment of revenues from a younger demography (while earlier, most of its customers were mostly from affluent backgrounds, such as, couples about to get married or mothers with young children). Hence, at the cost of a lesser average order per customer, Shutterfly is gaining a wider user base. As these young people mature and get married or have children, they’d be the company’s prospective clients for the other (more expensive) brands, as well.

Marathon’s Representation On Shutterfly’s Board Might Help The Company’s Long-Term Prospects

Marathon Partners Equity Management recently won two seats out of three on Shutterfly’s board of directors. Marathon intends to influence Shutterfly in implementing shareholder-friendly reforms. Over the past, Marathon had been critical of Shutterfly’s policies, including lack of incentives for long-term investors and lack of prudent decisions regarding investments and acquisitions.

Shutterfly’s management had implemented more favorable changes with Marathon representatives on its board. The executive compensation had been tied to earnings and long-term financial goals. Also, shareholders will be given back the excess capital in a tax efficient way after having sufficient capital for acquisition considerations. Marathon’s intention was to bring about strategic changes to improve the long-term health of the company. This includes strategic decisions including looking for suitable acquisitions. ^{[4] [2]}

Shutterfly 3.0 Will Focus On Higher Mobile Penetration

In Q2 2015, 14% of Shutterfly’s orders came through the mobile devices. The company wants to increase this percentage and believes Shutterfly 3.0 will help it towards this end. Like other digital marketing companies, Shutterfly wants to take advantage of the secular trends of rising demands that emerge from the mobile platform. Also, Shutterfly 3.0 might come up with smart phone applications that will enable users to create a card or a photo book on the phone itself. The company feels that its competitive advantage lies on being platform agnostic, and being available through iPhones, Androids, or Kindle devices. These unique propositions help it in standing on its own with a  15-year-old brand equity,  in a marketplace flooded with photo applications.

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1. Shutterfly’s Q2 2015 Earnings Calls Transcript, Seeking Alpha, July 29, 2015 [↩]
2. Shutterfly Announces Second Quarter 2015 Financial Results, Shutterfly, July 19, 2015 [↩] [↩]
3. Shutterfly’s Q1 2015 Earnings Calls Transcript, Seeking Alpha, April 29, 2015 [↩]
4. What does Shutterfly, Inc. (SFLY) Look Like After Board Shakeup?, Invest Correctly, June 19, 2015 [↩]