Shutterfly Q3 Earnings: The Enterprise Segment Soars, While The Consumer Business And AOV Lag

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Shutterfly (NASDAQ:SFLY) released its earnings for Q3 on October 27 and, as expected, the company delivered yet another solid quarter with $167 million in revenues (18% growth year-over-year). This quarter is the 59th consecutive quarter in which the company has posted year-over-year net revenue growth. Shutterfly’s consumer business grew by 8% year-over-year, while its enterprise business year-over-year had an impressive growth of about 100%. The primary reason for growth in the consumer business was the company’s flagship Shutterfly brand which continued to show double digit organic growth. The huge growth in the enterprise segment can be attributed to the business generated from the deal concluded with a large Fortune 50 company. The management expects this deal to add $350 million to revenues over the next seven years. This quarter also saw a healthy 40% increase in the number of Millennial customers. As one may recall, it was part of the company’s strategy to try and tap into this demographic, which now accounts for about 75 million Americans (largest demographic).

Q4 is one of the most important quarters for the company and the management is confident that the Shutterfly team is well prepared for the 2015 holiday season. The company expects net revenues to lie between $528.7 million to $548.7 million, while they estimate operating income to lie between $128.8 million to $139.5 million.

See our complete analysis for Shutterfly

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Consumer Business Grew Sluggishly While AOV Dropped Again:

The company’s consumer business revenues suffered this quarter due to “nonrecurring facility charges” (costs involved in the overlapping opening of new and closing of their old manufacturing facilities), as well as costs from a larger product base of photo gifts and home decor products, which earlier had been manufactured at partner hubs at reduced margins. However, the management feels this is a one off occurrence and that things will correct themselves next quarter.

Average order value (AOV) dropped again for a consecutive quarter at a rate of 6%. This is primarily due to the company’s focus on increasing its customer base. Towards the end of the quarter, Shutterfly began distributing some free products to rope in new customers, while temping existing customers to return. Apart from giving free products to increase the customer base, Shutterfly also offered free shipping as a promotional activity. Apart from this, the lack of gift giving holidays in Q3, has had an impact on AOV. The company feels that in the coming quarters AOV will continue to lag marginally while customers and sales increase. The management expects this trend to continue until the launch of Shutterfly 3.0.

Update on Shutterfly 3.0:

The management was keen to announce that Shutterfly 3.0 is on track for its release in mid-2016. The new platform hopes to enable quicker innovation and enable further mobile penetration by adding new products and services. The company has highlighted five major components to Shutterfly 3.0:

  1. It aims to provide a “next generation photo service” to its customers by bringing their ThisLife product to work under the shutterfly.com umbrella. By bringing together the “photo curation capabilities” of ThisLife and the “product creation capabilities” of Shutterfly, the company aims to create a better experience for its customers. A better experience will ensure higher conversion rates and revenues.
  2. This new platform will enable better partnerships with other photo sharing sites so as to increase flexibility for its consumers. With Shutterfly 3.0, customers would be able to create unique gifts from wherever their photos are stored.
  3. The company hopes that by consolidating all the features in one place, it can increase “mobile footprint and capabilities.”  Mobile revenues were up by almost 40% in Q3 and the company hopes to push this number further, seeing great potential here. A unified app complete with all the features and designs of Shutterfly’s products will allow greater flexibility for its customers.
  4. The consolidation of all its products into one platform also reduces the number of platforms that the company needs to manage, thereby lowering marketing and operating costs. This should have a favorable impact on revenues.
  5. The company hopes that Shutterfly 3.0 will enable them to sell their product internationally “through a modernized, efficient, multi-currency, multi-language technology platform.” If this is successful, the company could see great additions to their customer base and increased revenues.

As mentioned previously, this move to Shutterfly 3.0 seems like a very good idea, especially after considering the benefits highlighted above. Should things go according to plan, the company could definitely see improvements in revenues, through the addition of more customers and increasing conversions.

Preparations For The Holiday Season:

Historically, Q4 is when the company generates a bulk of its revenues. Given the importance of the coming quarter, the management has taken all the necessary precautions across all divisions of the company. Shutterfly is extremely confident that it is prepared this holiday season and that it will come out with flying colors. The company has added many more products and services to ensure that its customers are able to find perfect gifts for their loved ones this quarter.

The company has recently launched the Make My Photo Book service. Customers can now use professional stock photography in their photo books or make other “unique gifts” with such photos and designs. The company has also added a host of new products and designs, which are more holiday themed. At Tiny Prints, which is the company’s premium stationary brand, Shutterfly has introduced a host of new greeting cards which are innovative and meaningful. The management feels that these cards stand out among competitors and will, hence, garner greater sales.

Shutterfly has also upped their marketing to stand out in a crowded and saturated gift-market for the coming quarter. The company is in a constant effort to redefine their email marketing to improve “personalization and relevance.” The company will also continue their efforts in TV and radio ads this quarter. It will also be releasing its largest holiday catalogue to date, for its Shutterfly and Tiny Prints products.

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