Growing Digital Camera Use Boosts Shutterfly

| About: Shutterfly, Inc. (SFLY)

Shutterfly Inc.’s (NASDAQ:SFLY) fourth quarter earnings of $24.1 million or 88 cents per share were well ahead of the Zacks Consensus Estimate of 70 cents per share. The company had reported earnings of $14.4 million or 56 cents in the year-ago quarter. The results were driven by better-than-expected growth in revenue.

For full year 2009, Shutterfly earned $5.9 million or 22 cents per share, up from $3.7 million or 14 cents per share a year ago. Revenues were up 15% to $246.4 million.

For the quarter, net revenues were up 22% from the prior-year quarter to $131.1 million, primarily attributable to increases in personalized products and services revenues. Personalized products and services revenues were $93.2 million, up 29% over the prior-year quarter, while print revenues increased 4% year-over-year to $36.6 million. However, referral fee revenues of $2.5 million were down 8% year-over-year.

The total number of customers was 1.9 million, an increase of 18% from the prior-year quarter. These customers generated about 3.1 million orders, a figure which is up 12% year-over-year. Average order value was $42.40, up 8% from the prior-year quarter. Existing customers generated 73% of net revenues while the rest was generated by new customers.

Gross profit margin was 61%, essentially flat compared to the prior-year quarter. The strong margin performance resulted from several factors, including an improved product mix, labor efficiencies from both its Charlotte and Phoenix plants and improvements in materials costs, but partially offset by promotional discounts, lower shipping margins and lower margin commercial print revenues.

Operating expenses, excluding $4.4 million of stock-based compensation, totaled $39.6 million. Adjusted EBITDA was $47.9 million compared to $38.6 million in the prior-year quarter. At December 31, 2009, the company had $132.8 million of cash and cash equivalents, compared to $88.2 million at the end of the prior year.


For the first quarter, Shutterfly expects net revenues in the range of $40.0 million to $42.0 million, an 11% to 17% increase from the prior-year quarter. The company expects to post a loss of 12 cents to 15 cents per share, excluding one-time items.

On a GAAP basis, the loss would range from 23 cents per share to 27 cents per share. Shutterfly’s business is highly seasonal, with a large proportion of net revenues, net income and operating cash flows being generated during the fourth quarter.

For the full fiscal 2010, the company expects net revenues to range from $267 million to $277 million, representing a year-over-year increase of 9% to 13%. Excluding one-time items, the company expects to report earnings of 61 cents to 74 cents per share. On a GAAP basis, earnings would range between 18 cents to 33 cents per share.

Increased usage of digital cameras combined with the accessibility of high-speed Internet provides significant expansion potential for Shutterfly. Product innovation, strategic partnerships with retailers and opportunistic acquisitions also augur well. We believe Shutterfly’s focus on developing a successful commercial printing business aided by strategic partnerships will significantly contribute to its earnings.

On the downside, we see a continuation of pricing pressure in its printing business. Also, a weak economy and rising unemployment will negatively impact the company’s profitability as consumers’ discretionary spending is expected to be restricted in the near term.