Shutterfly’s Holiday Quarter Results Will Make Or Break Its Year

Personalized photo expressions company, Shutterfly (NASDAQ:SFLY) will announce its FY 2012 earnings on February 5. The first nine months of 2012 saw the company register about 38% year-over-year growth in revenues to $289 million. The revenue growth was attributed to the robust performance of the enterprise segment in the lowest seasonal quarter, customer & transaction growth across all four brands and the acquisition of customers from the erstwhile Kodak gallery. However, the company posted a net loss of $30.5 million, primarily due to a significant jump in marketing and R&D expenses.

The company traditionally generates about half of its annual revenues in the fourth quarter on account of gifting during holiday season. Broader trends from the e-commerce market suggest that people indulged themselves this holiday season and lead us to expect robust growth in Shutterfly’s Q4 revenues. We will also look for the expenses incurred by the company towards new technology equipment and software. These expenses had jumped from the long term average of 7% of total revenues to 15% during the third quarter, and are one the biggest drags on its income.

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

Check out our complete analysis of Shutterfly

Customer Growth To Continue

Shutterfly continues to add new customers organically as well as through acquisitions. In Q3, its transacting customer base stood at 2.2 million, a 40% year-over-year increase. The strong growth was largely on account of the acquisition of customers from now defunct Kodak Gallery. The company completed the acquisition of customers from Fujifilm’s SeeHere.com in Q4, and we will look for the acquisition’s impact on the transacting customer base.

During Q4, the company aggressively promoted its services on television and social networks, and we believe the promotions will bring in additional customers. An expanding customer base would support a growth in the total number of orders generated. In Q3, the total number of orders generated were 3.6 million, a 40% y-o-y increase similar to the increase in the number of unique customers.

Average Price Per Order May Take A Hit

The average order value was $25.06 in Q3, down 11% from the same period last year. The decline can be attributed to marketing promotions designed to engage new Photo Book users and Kodak customers for the first time resulting in a higher product mix of print orders from new Kodak Gallery customers, as well as strong growth in Treat.com’s personalized greeting card orders. Both photo prints and greeting cards generally cost less than a personalized gift item. We expect the cards business to exhibit strong growth in the quarter, which would negatively impact the average price per order. Consequently, the sales growth may not have been at par with the growth in user base. Going forward, we expect the lower priced products to drive order volumes and the higher priced orders to maintain their growth trajectory.

We have a $40 Trefis price estimate for Shutterfly, which is 23% above the market price.

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