Shutterfly Earnings Preview: Rising Expenses A Concern But Stock Is Cheap

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Shutterfly

Shutterfly (NASDAQ:SFLY) will announce its Q2 2012 earnings on July 25. It reported revenues of $91.3 million in Q1 2012, a 60% year-on-year increase. Despite the increase in revenue, it still posted a net loss of $10 million, primarily due to a significant jump in its marketing expenses. Since then there have been some developments which are likely to have bearing on Shutterfly’s earnings going forward.

Shutterfly competes primarily with services like HP’s (NYSE:HPQ) Snapfish, American Greetings’ Photoworks and Webshots brands, and even Apple (NASDAQ:AAPL) that ventured into this business lately, with its new Cards app on iOS.

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Check out our complete analysis of Shutterfly

Customer growth expected to continue

Shutterfly has continued to add new customers organically, as well as through acquisitions. After its acquisition of Kodak Gallery in the previous quarter, the latter went dark in June and the process of transitioning of photos to Shutterfly has begun. Kodak Gallery had 75 million user accounts and unless a user specifically wants to opt out, he will have to create a Shutterfly account in order to access their photos. With most people expected to opt-in in order to access their photos, Shutterfly’s user base is set to soar multi-fold from a mere 5.9 million at the end of 2011. Shutterfly also expects Kodak Gallery to contribute $21 million to its revenues in 2012.

We expect some updated numbers or guidance in this earnings release, following which we will update our forecasts and estimates.

Until then, you can see how any increase in its customer base over the years impacts its stock value by dragging the trend-line in the chart below.

Average order value could decline

In our pre-earnings article for the last quarter we had expressed reservations that increasing competition could force the company to lower prices which in turn would lead to a decline in average order value. The company admitted to a discount intensive environment in Q1 2012 which led to lower average order values and cautioned that the situation could persist. We believe it has and thus expect lower average order values this quarter year-over-year.

Also, we expect much lower average revenue numbers due to the addition of new users from Kodak Gallery. We should see more light on this during the earnings call.

You can tweak this chart to see how the average order value impacts the Trefis price estimate for Shutterfly.

Sales & marketing expenses need to be cut down to size

Shutterfly’s sales and marketing expenses increased from $14.27 million in Q1 2011 to $27.03 million in Q1 2012, which bumped up SG&A expenses substantially, causing loss from operations in the quarter to widen year-over-year. With Shutterfly expected to go after the new customers acquired from Kodak Gallery, especially the 1 million or so users who show heavy activity, we expect no let down in marketing costs for the remaining duration of the financial year.

We have a $43.80 Trefis price estimate for Shutterfly, which stands nearly 38% above its market price. Personalized photos, cards and albums account for most of its value.

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