Shutterfly (SFLY 79.38, -4.18, -5.00%) opened sharply higher today after
reporting Q2 earnings and forward-looking guidance last night. Originally incorporated
in 1999, today, Shutterfly is a digital retailer and manufacturer that helps
consumers create personal products with digital photos. Shutterfly is now
comprised of three divisions: Shutterfly Consumer, Lifetouch, and Shutterfly
Shutterfly Consumer includes a variety of brands housing a variety of products. Segment product offerings and services enable customers to upload photos and create professionally-bound photo books; cards and stationery; custom home décor products, from wall art to glass prints to ceramic tiles; and other unique photo gifts, calendars, and prints. This segment also encompasses rental revenue from the BorrowLenses brand, an online marketplace for photographic and video equipment rentals. Revenue derived from advertising displayed on the website is also tallied in the Consumer segment.
Lifetouch was acquired by SFLY in April 2018. It's the national leader in school photography, offering services including professional fall yearbook portraits, sports team photos, commencement pictures, retail studio sessions, and more. SFLY sees Lifetouch as a transformational acquisition, adding $935 mln in annual revenue.
Finally, the Shutterfly Business Solutions segment provides personalized direct marketing and inventory-free printing for business customers, with a focus on the financial, retail, technology, and health care verticals.
As you can imagine, given the usual stimuli for photo and card printing, SFLY's business is highly seasonal, with about half of its revenue generated during the Q4 holiday season; its Tiny Prints boutique, included in the Shutterfly Consumer segment, generates 70% of its revenue in Q4. SFLY manufactures many of its offered items at its own facilities in SC, MN, and AZ but it does also farm out some orders to third party suppliers. Substantially all of the company’s revenue comes from the U.S.
It's worth noting that SFLY went through a restructuring in 2017. SFLY decided to focus the company and narrow its brand portfolio, focusing its efforts on the Shutterfly brand. A big problem for the company had been that SFLY had too many websites; some of these failed to get the attention they needed, and they would get all this web traffic but be unable to cross-sell them other products. To address this issue, SFLY combined many of its sites onto its flagship Shutterfly portal. Tiny Prints, Wedding Paper Divas, and MyPublisher customers were migrated to Shutterfly.com, and some legacy websites were shut down. The company has also notably moved to place a much bigger focus on mobile. During its big 4Q17 holiday period, mobile accounted for 21% of revenue. Mobile app revenue doubled year/year.
Turning to the Q2 results, SFLY reported a surprise non-GAAP profit of $0.38 when a loss was expected. Non-GAAP revenue more than doubled to $476.7 mln, which was also much better than expected. Keep in mind that the Lifetouch acquisition is a big part of that growth number.
Growth in Q2 was driven by strong performances in both the Lifetouch and SBS segments. However, the Shutterfly Consumer segment growth was below expectations, driven by a mix shift away from free promotions and towards paid higher value purchases. While free promotions can play a useful role in engaging customers and in driving strategically valuable actions such as customer acquisition to the app, they come with trade-offs against quality of revenue, brand positioning, and customer behavior. Over the last three quarters, SFLY has begun to reduce the mix of revenue from free promotions and expects to limit their use over time.
SFLY launched its Kids and Pets categories on July 9. Shutterfly Kids offers a variety of products for children, including school gear, kids’ room furnishings and decor, travel products, toys and games, and tableware. The collection is designed for children aged 4 to 14 and includes products such as personalized bean bags, duvets and shams, fleece blankets, custom lunch boxes, school notebooks, and beach towels -- even personalized capes. Shutterfly Pets offers products for both pets and their owners ranging from personalized pet beds, bowls, and blankets to pet tags and bandanas.
Mobile continues to grow strongly; this quarter, mobile purchases increased 410 basis points year/year to comprise 29% of Shutterfly brand revenue. SFLY continues to expand the range of products available in the app, adding 13 products in Q2, which helps drive higher mobile average order value.
Investors initially seemed to be quite pleased with the Q2 results. It seems investors may have been underestimating the strong impact Lifetouch would have on results. This was the first quarter to includle the segment. From a broader perspective, we are supportive of SFLY's transition to a more streamlined platform. The early results seem to be quite good.
- OUR VIEW
- LEARNING CENTER