Shutterfly Show Strong Growth But Needs To Tighten Up Expenses

by Trefis Team
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Shutterfly (NASDAQ:SFLY) reported earnings this week, showing a 31% year-on-year increase in revenues. Despite the increase in revenues, the company still posted a net loss of $9.5 million. The loss can primarily be attributed to a significant jump in marketing expenses as well as technology & development spending. After excluding stock-based compensation and amortization, the above expenses increased $8 million year-over-year.

Shutterfly competes primarily with services such as HP’s (NYSE:HPQ) Snapfish, American Greetings’ Photoworks and Webshots brands, and Apple‘s (NASDAQ:AAPL) Cards app on iOS.

Check out our complete analysis of Shutterfly

Shutterfly changed the structure of its disclosure in the beginning of this quarter and will henceforth report revenues segmented by the types of customers it serves (i.e. Consumers and Enterprises). Financial results from its Tiny Prints, Wedding Paper Divas and brands along with Shutterfly prints and personalized products and services will be consolidated and presented under the Consumer segment. Commercial printing results will now be reported under the Enterprise segment. Customer metrics such as number of orders, average order value and transacting customers will now be presented only for the Consumer segment as a whole.

Accordingly, Shutterfly reported net revenues of $94.4 million from the Consumer segment and $4.6 million from the Enterprise segment. As you can see the Consumer segment makes up most of the company’s revenues.

Customer growth expected to continue

Shutterfly has continued to add new customers organically as well as through acquisitions. For this quarter, Shutterfly’s transacting customer base stood at 1.9 million, a 14% year-over-year increase. We expect that the overall customer base will increase to 6.8 million in 2012.  The acquisition of Kodak Gallery was completed in May and the transition of photos to Shutterfly began 20 days ago. A majority of Kodak Gallery’s 75 million customers is expected to migrate to Shutterfly by the time the transition is complete.

We will update our model accordingly after Kodak is fully merged with Shutterfly.

Expenses on the rise

Shutterfly reported a year-over-year increase in sales and marketing expense of $5 million largely due to the addition of the Tiny Prints marketing team. The $3 million increase in technology and development spending was due to the incremental costs associated with the company’s acquisition of Kodak Gallery’s accounts and photos. The added costs include facilities cost, increased storage, power, bandwidth and technical support costs as well as costs related to increasing engineering headcount. Given that these are one-time costs, we expect operating expenses to decline going forward.

We have updated our model and have a $47 Trefis price estimate for Shutterfly, which is nearly 55% above its market price. Personalized photos, cards and albums account for most of the company’s value.

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