We maintain our Neutral recommendation on California-based Shutterfly Inc. (SFLY), a leading provider of social expression and personal publishing services through the Internet.
Second Quarter Flashback
Shutterfly reported adjusted second quarter 2010 loss of 12 cents per share compared with the Zacks Consensus Estimate of 30 cents loss. Results reflected higher-than-expected demand for Photo Books. Contribution from the cards and stationery collection was also solid. Shutterfly’s net revenue was $46.8 million, up 20% year over year.
Outlook
For the third quarter, Shutterfly expects adjusted loss of 18 cents to 16 cents per share on revenues of $45.5 million to $47.5 million. The current Zacks Consensus Estimate for the third quarter is loss of 26 cents.
For full-year 2010, the company anticipates adjusted earnings to range within 66 to 75 cents per share and revenues between $277 million and $287 million. The Zacks Consensus Estimate for fiscal 2010 earnings is 32 cents.
Neutral Recommendation Reaffirmed
Shutterfly has the potential to grow its business significantly. The increasing use of digital cameras, largely driven by price decreases, has led to a pick up demand for online photo printing services. The company is poised to benefit from the increase in personalized print products stemming from a steady demand in Photo Books.
Shutterfly is focused on growing its business through strategic partnerships with retailers and through acquisitions. Its recent tie-up with Sony and integration with Facebook will continue to support user growth.
However, considering the sluggish recovery in the economy, we expect top-line improvement to be slow. In fact, the company witnessed some moderation in site traffic and order volume in the last few months probably due to seasonality, faltering consumer confidence and a high rate of unemployment. Although management raised its forward guidance slightly, it maintained a conservative outlook for fiscal 2010.
Shutterfly’s net revenue and performance depend on vacation and other travel trends, as these are the major occasions requiring greater use of digital cameras. Hence, downturns or weaknesses in the travel industry can hurt the company’s business.
Additionally, Shutterfly’s business is highly seasonal. The company generates a large proportion of its earnings during the fourth quarter of every year, which is the holiday season. Thus, in the absence of any near-term catalyst, the third quarter results are expected to be suppressed. Consequently, we have a Zacks Rank of #3 (short-term Hold recommendation) on the shares and reiterate our long-term Neutral rating.
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