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Tickers in this Article: AM, HPQ, LOOK, SFLY
Shutterfly Inc. (SFLY) has reported first-quarter 2012 loss of 29 cents per share, handily beating the Zacks Consensus Estimate of loss of 34 cents loss per share but deteriorating from the year-earlier loss of 27 cents. In the quarter under review, net revenue increased 60% year over year to $91.3 million, thanks to continued growth in personalized products and services.

Behind the Headline Numbers

Revenues from personalized products and services were $70.2 million in the quarter, up 72% over the prior-year quarter, while net print revenues were $14.9 million. Commercial Print revenue also saw a significant improvement to reach $6.2 million.

The total number of customers excluding Tiny Prints was 1.6 million in the quarter, reflecting an increase of 18% from the prior-year quarter. Total orders generated were 2.5 million, up 22% year over year. Average order value was $24.60, down 8% year over year.

Gross profit margin declined 320 basis points to 45.2% from the prior-year quarter. The decline was due to steeper discounting in core products such as photo books, calendars and cards, increased proportion of lower-margined commercial print revenues, and the addition of Tiny Prints' customer service and outsource manufacturing costs. Adjusted EBITDA was $0.6 million compared with ($1.9) million in the prior-year quarter.

Financials

At quarter end, Shutterfly's cash and cash equivalents were $143.9 million, compared with $179.9 million at the end of December 2011.

Outlook

For the second quarter of 2012, Shutterfly expects net revenue in the range of $90.0 million to $92.0 million. The company expects GAAP diluted net loss of 33 cents to 37 cents per share.

For fiscal 2012, Shutterfly expects net revenue to range between $576 million and $586 million ($550 million to $560 million predicted earlier). On a GAAP basis, earnings are estimated between 7 cents and 16 cents per share (25 cents and 28 cents estimated previously).

Our Take

Shutterfly is panning out with initiatives like product innovation, strategic partnerships with retailers and opportunistic acquisitions. While acquisitions of WMSG and Tiny Prints continue to strengthen the company's portfolio, Shutterfly recently clinched the important Kodak Gallery online photo services. Management sees several opportunities ahead as the social expression and personal publishing markets is still in a nascent stage.

However, challenging economic conditions and a fierce discounting war among the competitors are eating into the company's margins. The company faces competition from the likes of LookSmart Ltd. (LOOK), Snapfish owned by Hewlett-Packard Co. (HPQ) and Photoworks and Webshots brands of American Greetings Corp. (AM). Additionally, the upcoming quarter is seasonally weak.

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.

 
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