Shutterfly Q3 Loss Narrower than Expected, Revenues Miss - Analyst Blog

Personalized products and service provider, Shutterfly Inc.'s (SFLY) third-quarter 2014 loss per share of $1.12 per share was narrower than the Zacks Consensus Estimate of a loss of $1.17 per share. Also, the company's third-quarter loss was within management's expectation of a loss of $1.14–$1.11 per share. However, the loss was much wider than the prior-year quarter loss of 24 cents per share due to higher operating expenses.

In the quarter under review, net revenue increased 15.4% year over year to $142.0 million. Revenues were also within management's guidance range of $140.5–$143.0 million. Revenues benefited from the strong performance of both the Consumer and Enterprise segments. However, it missed the Zacks Consensus Estimate of $144.0 million by approximately 1.4%.

Behind the Headline Numbers

Revenues from the Consumers category were $127.3 million in the quarter, up 13% year over year. The upside reflects strong customer orders and average order value growth.

Enterprise segment revenues increased 47% to $14.7 million in the quarter. The company is confident of the potential of the segment as it utilizes the available capacity of market-leading digital printing capabilities. Given the potential, the company believes that the promising enterprise sales pipeline will continue to produce significant growth opportunities in 2015 as well.

In the quarter, the total number of customers was 2.5 million, reflecting an increase of 6% from the prior-year quarter. Total orders generated were 4.2 million, up 7% year over year. Average order value was $30.63, up 5% year over year driven by promotional strategies and integrated marketing campaigns adopted by the company.

Gross margin contracted 510 basis points to 36.8% and was below management's expectation of 40.6% to 41.6%. The downside reflects an increase in manufacturing and customer service labor and training costs.

Excluding stock-based compensation, operating expenses totaled $88.3 million, up 21.5% year over year owing to increased headcount and facilities costs. Excluding stock-based compensation and amortization, sales and marketing expense was $31.6 million, up 20% year over year owing to increases in headcount, advertising agency fees, direct response media, search fees and online media.

Adjusted EBITDA loss was $9.7 million that compared unfavorably with the year-ago loss of $1.1 million owing to lower gross margins.

Fourth-Quarter Guidance

Shutterfly's business is highly seasonal and the company posts losses in the first three quarters of the year. The company stated that it is well positioned to manage expected record order volumes for the upcoming holiday season.

The company expects earnings per share in the range of $2.42 to $2.67 in the upcoming quarter compared with earnings of $1.20 in the fourth quarter of 2013. The Zacks Consensus Estimate is currently pegged at $2.62. For the fourth quarter of 2014, Shutterfly expects net revenue in the range of $466.7 –$481.7 million, up 13.6% to 17.3% year over year.

2014 Outlook

The company revised the lower end of its guidance. The company expects results in the range of a loss of 7 cents to earnings of 20 cents compared to the prior expectation of a loss of 11 cents to earnings of 20 cents. The Zacks Consensus Estimate is currently pegged at a loss of 11 cents. The company continues to expect revenues in the range of $905.0 to $920.0 million, up 15.5% to 17.4% year over year.

Our Take

Shutterfly has been in the news for some time for its sale plans as the company incurred back-to-back losses in the first two quarters of 2014. Though it managed to post a narrower-than- expected loss this quarter, we believe that the termination of the partnership with Costco Wholesale Corporation in 2013 and depreciation, labor and equipment costs for expansion and acquisition of manufacturing facilities are denting the profitability of the company.

However, the company's opportunistic acquisitions, improved offerings in the growing mobile e-commerce segment, aggressive promotions, affordable prices and simplicity of usage of its products would offset the impact of these negatives. Shutterfly currently sports a Zacks Rank #1 (Strong Buy).

Other Stocks to Consider

Investors interested in the industry may consider stocks like Brightcove, Inc. (BCOV), Shanda Games Limited (GAME) and Spark Networks, Inc. (LOV). While Spark Networks sports a Zacks Rank #1, Brightcove and Shanda Games carry a Zacks Rank #2 (Buy).