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Shutterfly Looks Dirt Cheap

Posted on Monday, Mar 31st 2008

As a follow up to my recently concluded interview with Shutterfly’s CEO, Jeff Housenbold, here is an analysis of their Q4 results announced earlier last month.

With revenues at $97.5 million for Q4, Shutterfly (SFLY) recorded an impressive 49% year on year growth, and beat market expectations of $93.7 million.

Segment wise, Personalized products and services contributed 64% of Q4 revenue, representing a year on year growth of 55%. Revenue from Print increased by 39% compared to the previous year.

Their EPS of $0.63 was 29% higher than the previous year Q4 EPS of $0.49. However, it fell marginally short of market expectations of $0.65.

Thier annual revenue grew by 52% to $187 million over the 2006 revenue of $123 million. For the year, their EPS grew by 35% to $0.38 but was short of market expectations of $0.40.

Segment wise, contribution of Personalized products and services grew to 56% of revenue for the year from 51% in 2006. Revenue from Print increased by 34% compared to the previous year.

For the year 2008, they expect revenues to be in the range of $245-$255 million, with 16-18% margins. Q1 revenues are projected to be in the range of $34 – $36 million, with a net loss of $1.8 – $2.3 million.

As part of my analysis of the online photo sharing vertical on the Web 3.0 series, I had pointed out that I did not like having to use Shutterfly for private photos and Flickr for public. In the conversation with Jeff Housenbold, he clarifies that it is part of their core strategy to stay focused on “personal memories.” As for innovation around their Content and Commerce strategy, there is much going on in the company that is very interesting.

Their recent acquisition of Nexo will help them improve their Community angle, with users now being able to make collaborative photo books.

Jeff explains, “We are going after the $31B digital photo industry, the $7.5B greeting card industry, the $7 to $8B stationery market where you do wedding invitations and baby announcements. We are going after the $6-$7B calendar business as there are 500 million calendars sold in America each year. We are going after the photo based merchandise business which includes mugs and mouse pads, which is $.5 to $1B this year.” I recommend you read the interview for the full overview of how they are approaching the market.

In 2007 they announced their tie-up with Target, which is helping them expand their visibility from the online world to the brick and mortar world. They still, however, remain US centric and are not looking at the international market right now.

With 7.1 million customers for the year and 72% repeat customers in a quarter, Shutterfly definitely knows how to keep its users happy. The stock, however, has not been so upbeat recently. It saw its new 52 week low of $14.61 in March this year, and is now been trading in a 50 day average of $15.83. I own the stock, and am holding onto it, since I believe in the company’s long term potential.

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Correction to the last paragraph:
“2.4M transacting customers who did 7.1M transactions”

On a separate note: one thing that bothers me is that they don’t seem aggressive enough compared to the competition – slow in rolling out internationally, essentially writing off new features/ideas – at least that was my impression from the interview

Denis Tuesday, April 1, 2008 at 9:39 AM PT

It’s a logistics-heavy business, something they don’t have years of experience in. It takes time to figure these things out, and International is yet another layer of complexity.

I don’t have a problem with the pace. As long as they stay at it, and keep growing at a 50% clip, keep penetrating the market,

Sramana Mitra Tuesday, April 1, 2008 at 11:31 AM PT

Exactly. Growth is the key attraction this company has at the moment for investors. And based on their 1Q guidance, year-on-year growth will be down from 50% to just 31%… And what if they miss the guidance, and/or 2Q will be even lower? How much confidence we have in the future growth?

Denis Tuesday, April 1, 2008 at 1:05 PM PT

Growth generally slows a bit as the revenue basis increases. At $250 M revenue range, 30% is good growth.

What if … that’s for you to judge. I just said above, that I like their market, their story and their strategy, and will watch how they execute. I don’t see any major problems with the company at the moment. I think they have huge biz dev opportunities. We’ll just have to see how they reap the benefits of those.

What else do you want to hear?

Sramana Mitra Tuesday, April 1, 2008 at 1:22 PM PT

Well, I like your blog and hate to be critical, but you made very strong statement in the header so I thought you may want to have a stronger supporting facts/thoughts for the future growth, because right now we see it cooling off at a fast pace. Overstock was also going at 100%+ for three years in a row all the way up to $1bn and then…

Denis Tuesday, April 1, 2008 at 3:01 PM PT

Well, I can tell you how I look at investments, Denis, if that helps you.

In the venture capital industry, there are 3 primary parameters based upon which we evaluate deals:
– Market Size
– Team
– Technology

I think, in Shutterfly’s case, the market size is enormous. I think the team is also pretty good right now. I like Jeff Housenbold. This is less a technology play, more a brand and logistics play
at this point, and especially, in my view, a biz dev play.

Jeff and I agreed on the fact that biz dev is their big opportunity for leverage.

My discussion with Jeff has given me enough comfort to continue believing in the company and its market opportunity.

The rest is going to be execution, so we need to let them run with the strategy and show us what they can do, no?

How can you or I predict that they will “miss” or they will “surpass” or “slow down” sitting here, now?

For all you know, a couple of really good biz dev deals could move them back to a 100% growth rate … the question that is worth thinking about for Jeff and team is what could those one or two key levers be?

Sramana Mitra Tuesday, April 1, 2008 at 9:41 PM PT

Re: market size argument
It seems that paper prints will die eventually. We still love them primarily because we were raised with photo albums, there is a nostalgic value in it. Even then, most of my prints go to grandmas. New generation raised with computers don’t see much value in holding physical albums, so it seems over the longer term this biz will peter out just like paper media. How’s that for a contrarian argument?

Denis Thursday, April 3, 2008 at 3:54 AM PT

Denis, True, but whole new genres of products for preserving memories are coming out now that did not exist before, photo books being the primary example.

I gave my grandma a photo book, something unconceivable a decade ago.

That’s also expanding the market.

Sramana Mitra Thursday, April 3, 2008 at 9:46 AM PT