Zacks_Analysts' Blog : Shutterfly Tops, Loss Widens - Analyst Blog

Shutterfly Inc. (SFLY) reported adjusted first-quarter 2011 loss of 15 cents per share, handily beating the Zacks Consensus Estimate of a loss of 26 cents but deteriorating from the year-earlier loss of 7 cents. The results came in line with its own guidance range of a loss of 17 cents to 14 cents per share.

On a GAAP basis, loss came in at 27 cents versus 18 cents in comparable quarter prior year and was within the company’s guidance range of loss of 30 cents to 26 cents per share. The results were driven by strong demand for photo-book along with considerable contribution from the cards and stationery collection.

In the quarter under review, net revenue increased 25% year over year to $57.2 million. The quarter’s revenue surpassed the Zacks Consensus Estimate of $54.0 million and topped the $52 million to $53 million guidance range provided by the company. The rise was primarily driven by increased revenues from personalized products. 

Behind the Headline Numbers

Revenues from personalized products and services were $40.8 million in the quarter, up 34% over the prior-year quarter, while print revenues were $14.4 million, up 3% year over year. 

The total number of customers was 1.3 million in the quarter, reflecting an increase of 25% from the prior-year quarter. These customers generated about 2.1 million orders, up 23% year over year. Average order value was $26.64, up 1% from the prior-year quarter. Existing customers generated 72% of the net revenue with the remaining came from new customers.

Gross profit margin declined 220 basis points to 48.4% from the prior-year quarter. The decline in margin was due to increased promotional activity, lower margin commercial revenues and WMSG integration costs partially offset by scale efficiencies from higher volumes and improved product mix. Adjusted EBITDA was ($1.9) million compared with $3.4 million in the prior-year quarter.

Financials

At quarter end, Shutterfly’s cash and cash equivalents were $216.3 million, compared with $252.2 million at the end of December 2010.

Outlook

For the second quarter of 2011, Shutterfly expects net revenue in the range of $68.0 million to $72.0 million. The company expects GAAP loss of 46 cents to 35 cents per share.

For fiscal 2011, Shutterfly expects net revenue to range between $468 million and $478 million. On a GAAP basis, earnings are estimated between 39 cents and 44 cents per share.

Our Take

We believe product innovation, ongoing strategic partnerships with retailers and opportunistic acquisitions will augur well for the company. Two of company’s recent acquisitions include Dallas-based WMSG Inc., a privately held, digital direct marketing company and California-based Tiny Prints Inc., yet another privately held company that operates tinyprints.com and weddingpaperdivas.com, two fast growing e-commerce brands.

We believe WMSG's digital marketing and print-on-demand solutions will help Shutterfly to strengthen its struggling commercial print business. Additionally, with the acquisition of Tiny Prints, Shutterfly can accelerate its pace of innovation, deliver cost-effective personalized products and strengthen its core business.

However, we currently refrain from being too enthusiastic on the upcoming quarter as it is seasonally weak. Moreover, the acquisitions are still in the early phase of operation and are likely to take some time to materialize. The company also faces stiff competition from the likes of LookSmart Ltd. (LOOK), Snapfish owned by Hewlett-Packard Company (HPQ), and Photoworks and Webshots brands of American Greetings Corp. (AM).

Shutterfly currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.