Why Shutterfly is a Prime Acquisition Target

Jim Clark launched Shutterfly (SFLY) on December 13, 1999. On the same day, Clark’s partner from Netscape, Jim Barksdale, launched Ofoto. Shutterfly is headquartered at Redwood Shores, California and offers storing, sharing, enhancing and printing of photos, as well as photo merchandise. Shutterfly has over 900 million photographs in its archive and was awarded the Field Test Winner Award for photo book by Money Magazine in 2006.

Shutterfly was recently ranked No. 93 on the list of America’s 500 largest e-retailers by the national magazine Internet Retailer. In 2006 the Company had $123 million in annual online revenues. The above ranking is an acknowledgment of the Company’s business model and growing brand awareness. Shutterfly has carved out a niche for itself in the photo sharing and processing business.

The Company’s vision is “to make the world a better place by helping people share life’s joy”. The Company has come a long way from its IPO in October 2006, when it issued 5.8 million shares for $15 per share. We have reviewed Shutterfly while discussing about the online photo sharing industry from a Web 3.0 perspective.

Shutterfly reported solid 1Q 2007 results and beat analyst estimates on the top and bottom lines. The Company’s revenues increased 58% to $26.7 million in the first quarter of 2007. The Company also narrowed its loss to $1.1 million, or 4 cents a share in the first quarter of 2007 from $1.6 million, or 41 cents a share in the year-ago period. The robust performance has resulted in brokerages recommending a buy on the stock. My own analysis is that this is an acquisition candidate and buying the stock is basically in anticipation of a transaction, which is likely to yield a good premium. I had, in fact, pegged it as an acquisition target even before it went public, questioning its ability to do strong partnerships. This has been changing in a very positive way.

In the first quarter of 2007, personalized products (non-print), which carry higher average order values, made up 49% ($13.1 million) of total revenues and were up 104% year-on-year. Average order values grew 20% year-on-year to $20.83 and orders grew 31% year-on-year. Customers increased by 32% year-on-year to 693,000 from 524,000 generating 1.3 million orders. Average daily orders totaled 14.3K in 1Q 2007, up 31% year-on-year from 10.9K in 1Q 2006.

The first quarter results showed accelerating revenue growth and demonstrated the management’s ability to take advantage of the rapidly growing personalized print market and its ability to monetize its offerings. The Company has been able to improve its product mix, which has resulted in a steady shift of customers from the lower margin print to the much higher margin non-print products such as greeting cards and photo books.

The Company experienced a 300 basis points improvement in its margins in 1Q 2007 due to change in product mix. The Company plans to focus on non-print, customized and value added products and services to grow its business. In this regard Shutterfly has entered into a number of partnerships to enhance its product offerings. The Company is also looking at ways to increase cross selling and average transaction size. All of these require a Flickr-like community function and they should at least try to become Flickr’s print backend, a business that they do not own today.

Recently the Company entered into a partnership with David’s Bridal, the nation’s leading bridal retailer. I think it’s a very good strategy as it will enable Shutterfly to offer its range of photo processing, printing, photo-book, memorabilia, storage services, etc. to the booming wedding industry.

I also like the trend towards partnerships that the Company has been entering into to expand its service and distribution channels. For example the recent tie-up with Target (TGT) will enable Shutterfly to expand its service channels and cross sell products to the millions of Target customers.

The Company is expected to earn $167 - $170 million in revenues in 2007 and around $220 million in 2008 on the back of high levels of customer satisfaction (78% of revenue derived from repeat customers), successful viral marketing including positive word of mouth and brand awareness. Partnerships, improved product mix, new innovative services, promotion through photo contests, growth of broadband and faster uploading will aid the Company in maintaining its lead over its competitors and grow its market share.

Most importantly, the M&A market for vertical online companies in Travel, Photo, Finance, Business, Real Estate, Jobs, etc. is heating up and acquisition remains a very real possibility for Shutterfly.

SFLY 1-yr chart