Key Takeaways From Shutterfly’s Q2 Earnings

After a decent start to the year, Shutterfly (NASDAQ:SFLY) sustained its growth trend in Q2, with $209 million in quarterly revenue, an increase of 3% year-on-year. In line with our expectations, the growth in the company’s Shutterfly brand was partially offset by declining revenues in non-Shutterfly brands. In the second quarter, the company managed to migrate its second largest consumer brand, Tiny Prints, to Shutterfly.com as a part of its restructuring initiatives. The company is expecting its restructuring initiatives to close by the end of the fiscal year. This should 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 run 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, and infrastructure upgrades. 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 and Personalized Gifts lines. The company expects to further its product offerings throughout the year.
• The company’s mobile app saw significant improvement, with added products and styles to improve product creation and purchases. The app saw over a million downloads for the second consecutive quarter, with mobile sales accounting for over 25% of the brand’s revenue, 600 basis points above the previous year’s quarter.   Increased mobile penetration and strategic investments are bound to help this channel grow in the coming quarters.
• SBS showcased very strong results this time around. Revenues grew over 10% 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 further. 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 third quarter of 2017, the expected total net revenue ranges between $187 million and $193 million and gross margins of 35.0% to 35.5%. For the full year 2017, the expected total net revenue ranges between $1.135 billion and $1.165 billion and we forecast revenue of $1.15 billion. The company expects gross margins of 49.0% to 50.0%.