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Shutterfly Continues to Gain Market Share

Posted on Tuesday, Feb 25th 2014

According to a BCC research report, the digital photography market is expected to be worth $68 billion. Within the market, photo products and accessories amounted to $5.7 billion in 2011.This segment is projected to grow to $7.9 billion by 2016. The online photo printing industry is dominated by Shutterfly (NASDAQ: SFLY) which accounts for more than 50% of the market in the country and is showing no sign of slowing down.

Shutterfly’s Financials

Shutterfly’s fourth quarter revenues grew 17% over the year to $410.0 million, ahead of market expectations of $408 million. EPS of $1.20 grew 14% over the year and surpassed the Street’s expectations of $1.09.

By segment, revenues from the Consumers division grew 16% over the year to $398.6 million. Enterprise segment revenues grew 48% to $12.2 million. During the quarter, the total number of customers grew 10% to 4.7 million. The number of orders grew 12% to 7.7 million with average order value rising 4% to $51.80.

They ended the year with revenues of $783.6 million with EPS of $0.38.

For the current quarter, Shutterfly projected revenues of $132 million-$135 million with a net loss of $0.86-$0.92 per share. The Street was estimating a net loss of $0.41 per share for the quarter. Shutterfly projected to end the year with revenues of $900 million–$920 million and a net loss of $0.02-$0.28 per share. The Street was projecting earnings of $0.36 per share for the year.

Shutterfly’s Growth Plan

Shutterfly is focused on five key areas of growth to strengthen their market leading position. First, grow their two core brands of Shutterfly and Tiny Prints through innovation; second, invest in high growth market segments such as Mobile, Cloud, and Enterprise; third, improve brand awareness; fourth, expand manufacturing capabilities; and finally grow through strategic acquisitions.

As part of this effort, they have improved their product creation apps such as Photo Books and Magic Shop, which now use proprietary algorithms. The innovations include features such as enhanced auto fill capabilities and a photo service where recently uploaded pictures are instantly analyzed and automatically made into popular photo products. They have also re-engineered their flow process to reduce product creation friction and improve overall customer satisfaction rates. To cater to the growing mobile segment, they have upgraded their iPhone, iPad and Android apps by adding new features. Users can now use Shutterfly Photo Story, a photo book creation app for the iPad, that lets them create digital and physical photo books, which include multimedia features like audio notes. During the last year, Mobile device revenues increased to 6.5% of their annual revenues compared with a comparatively meager 1% a year ago.

Additionally, Shutterfly continued to build their stationery by introducing more color, layout and back-of-the-card choices. Shutterfly is also improving their average order revenue by placing premium products for sale. They recently introduced certain premium features such as pearlescent paper, clear cards, additional edge treatments, and foil stamping.

To streamline manufacturing operations, they opened a new facility in Fort Mill, South Carolina last summer and are now building a new facility in Shakopee, Minnesota to primarily cater to the Midwest region.

They did not close on any acquisition during the last quarter, but maintain that they are scouting for companies that can give them additional product and market edge. As I mentioned earlier, adding someone like the high-end photo book maker Blurb may be a good addition to their portfolio.

Their stock is trading at $49.03 with a market capitalization of $1.87 billion. It touched a 52-week high of $59.93 in August last year.

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