Key Takeaways From Shutterfly’s Q1 Earnings

Shutterfly (NASDAQ:SFLY) reported a decent start to the year, with almost $192 million in quarterly revenue, implying a 3% year-on-year growth. In line with our expectations, the growth in the company’s Shutterfly brand was partially offset by declining revenues in non-Shutterfly brands. The company is betting big on its restructuring initiatives to improve its customer experience by consolidating its platform and creating an integrated offering. While this might create issues in the short term, we believe this strategy can drive growth over the long term with the optimization of technology initiatives and a better focus on brands. The company’s restructuring reflected in the decline in margins. Operating expenses grew partly due to investments in improving the mobile and consumer platforms. We expect the margins to recover later in the year as the business consolidation is likely to boost sales and reduce overhead costs.

What Went Well For Shutterfly

• Since constant innovation is critical for Shutterfly to keep consumer interest and maintain a competitive edge, the company added new products in the Home Decor, Personalized gifts and Wedding categories. The company expects to further its product offerings, all through the year.
• The mobile app saw significant improvement with added products and styles to improve product creation and purchases. The app saw over a million downloads in the quarter, with mobile sales accounting for over 23% of the brand revenue, 300 basis points above the previous year’s quarter.   Increased mobile penetration and strategic investments are bound to help this business channel grow in the coming quarters.
• SBS showcased very strong results this time around. Revenues grew over 19% on the back of new client adds and increased orders from existing clients. With the help of the SBS technology platform, the company expects to scale the business. Shutterfly is establishing itself as a major contender in the corporate stationery solutions business, and we expect the segment to show promising results throughout the year.

Outlook for the Year

For the second quarter of 2017, the expected total net revenue ranges between $205 million and $212 million and gross margins of 43.0% to 43.5%. For the full year of 2017, the expected total net revenue ranges between $1.135 billion and $1.165 billion and we forecast revenue of $1.153 billion. The company expects gross margins of 49.0% to 50.0%, slightly below our forecast of 50.5%.