Shutterfly’s 2017 In Review

Shutterfly (NASDAQ:SFLY) performed decently in 2017, with revenue of over $596 million in the first three quarters, an increase of over 4% 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. The decline in the consumer business due to the shutdown of non-Shutterfly brands was reflected in the decline in gross margins. However, a notable decline in operating expenses (nearly 8%) in Q3 also indicates the success of the restructuring and platform consolidation strategy. The company will continue to make investments in improving the mobile and consumer platforms and infrastructure upgrades. We expect its margins to further improve in the near term, as the business consolidation is likely to boost sales and reduce overhead costs.

Our price estimate for Shutterfly’s stock stands at $52, which is above the market price.

As a part of its restructuring exercise, the company shut down the MyPublishers and Wedding Paper Divas legacy site, opened the Shutterfly Wedding Shop and migrated its second largest consumer brand, Tiny Prints to Shutterfly.com. 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 should drive some growth over the long run with the optimization of technology initiatives and a better focus on brands.

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 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 every quarter, with mobile sales accounting for over 25% of the brand’s revenue, 500 basis points above the previous year’s comparable period. 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 25% 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.

For the fourth quarter of 2017, the expected total net revenue ranges between $538 million and $568 million, gross margins in the range of 58% to 60% and operating income ranging from $151.5 million to $171.5 million. 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.

Strong Competition From Large Players

Competition for Shutterfly is intensifying. In September last year, Amazon launched a photo printing service called “Amazon Prints” aimed toward its Prime customers who already get free photo storage on its site. The photo printing feature was added to Google Photos wherein users can create a photo book at competitive prices, using their photos uploaded on the app. While Shutterfly has had a decent performance, we believe the competition from Google Photos can impact its user growth. Shutterfly is betting big on its restructuring initiatives to improve the customer experience. However, the convenience offered by Google Photos might be a huge incentive for users to use the same platform for their printing requirements and not use any other service at all. Shutterfly might become the go-to option for users who prefer interesting designs and exquisite stationery for their photo books, thus restricting its user growth. Competition in this space is intensifying, and Shutterfly’s ability to simplify its services will be critical for its long term growth.