Shutterfly Q1 2015 Earnings Review: Next Generation Shutterfly And GrooveBook In Focus

Leading internet based image publishing service, Shutterfly (NASDAQ:SFLY) reported its Q1 2015 earnings on April 29th. Shutterfly’s net revenues of $160 million (17% year-on-year growth) marked the 57th consecutive quarter of year-on-year increases. The top-line performance was a consequence of customer order growth for the consumer brands, complemented by a boost from the enterprise business. Shutterfly is on a major upgradation path, wherein it plans to integrate all its brands on a common technological platform. ^[1] The next generation Shutterfly or Shutterfly 3.0, will be available towards the end of 2016. Shutterfly 3.0 will enhance user engagement and improve monetization. The company has also undertaken some internal restructurings and movements which are expected to enhance future performance and efficiency.

In Q1 2015, Shutterfly’s unique customers increased by 25% on a year-on-year basis to reach 3.2 million. The average order value (AOV) per order decreased by 14.5% to $28.86. This was mainly on account of GrooveBook, which offers services at a lower price point than the other Shutterfly brands. The number of customer and orders, however, received a boost of 10% and 16% respectively. ^[2]

Other than the flagship Shutterfly brand, the popular brands in Shutterfly’s portfolio are: ThisLife (photos and videos organizer), Tiny Prints (premium cards and stationery for all occasions), Treat (personalized greeting cards), Wedding Paper Divas (wedding related stationery), BorrowLenses (online photo and video equipment rental service), GrooveBook (mobile photo-book service), and others. From March 18th, Shutterfly has discontinued its Treat brand, due to a lack of a strong dedicated user base. However, the current Treat users will be redirected to Shutterfly.com and will be served through the flagship brand.

We are in the process of updating our $49 price estimate for Shutterfly.

GrooveBook’s Strategic Importance In Shutterfly’s Future Vision: User Expansion Across Income And Age Segments

Shutterfly’s acquisition of the mobile photo book application, GrooveBook, has been instrumental in expanding Shutterfly’s capabilities and consequently, in gaining customers across newer demographics. GrooveBook prints up to 100 photos stored in the mobile phone, in a 4.5″ x 6.5″ GrooveBook format. It then emails the keepsake book to customers, for a monthly charge of $2.99. ^[3] At the time of its acquisition in November 2014, GrooveBook had more than 1 million downloads, 200 million photo uploads and a subscriber base of around 7 million. ^[4]

Shutterfly decided to keep GrooveBook as a stand-alone application, as well as, integrate GrooveBook’s functionality across its multiple brands. The acquisition also enhanced vertical integration. Grove book prints photo books from photos saved in mobile phones, which was the next logical step for Shutterfly, after offering customers photo-printed cards, mementos, and accessories..

GrooveBook provides the bang for the buck. This helped Shutterfly in gaining a hitherto unexplored user base. For example, Shutterfly’s normal services offered 100 prints for a month at a total cost of $22 to $23. Groovebook, on the other hand, provides the whole package for $2.99. Though the cost reduction comes with lower quality, it is still attractive to the younger population with lower disposable income. Hence, Shutterfly is gaining markets from an erstwhile unexplored younger demography. In the long run, the brand loyalty would influence these new consumers to purchase other Shutterfly offerings as they grow older and gain more purchasing power. ^[2]

The Next Generation Shutterfly 3.0 Would Lead To Enhanced Operational Efficiencies, Better Brand Recognition, And Higher Adoption Rates

Shutterfly plans to launch the next generation Shutterfly by the end of 2016. Shutterfly 3.0 will integrate the services of its brands such as This Life, Tiny Prints, and Wedding Paper Divas with the Shutterfly flagship brand, into a common platform. The services of Shutterfly and This Life can be accessed through the same mobile application, as well.

This consolidation will prevent investments across different technology platforms and hence, will be more cost efficient for the company. In addition, it will be less cumbersome for Shutterfly’s users to manage. The company will continue its investments on the individual brands, but all the brands will be supported through a common technology platform, including cart, checkout, creation paths, login, address book, and media storage platforms.

The management expects Shutterfly 3.0 to enhance the rate of adoption of its lesser known brands. Through a common platform, the Shutterfly brand name will add value to those brands. This in turn will drive up the monetization. ^[2]

Post The Failed Snapfish Deal, Is Another Alliance On The Cards?

On October 2014, private equity firm, Silver Lake Partners had put their plan of acquiring and combining Shutterfly and Hewlett-Packard’s Snapfish on hold.  ((Shutterfly share losses continue after report of failed acquisition deal, Silicon Valley Business Journal, Oct 13, 2014)). The merger of Shutterfly and Snapfish—both companies operating in the photo storage and printing space—would have created a bigger entity, expanded the customer base, and posed substantial threat in this market space witnessing continuous influx of players. According to recent news, Hewlett-Packard has agreed to sell Snapfish to District Photo, a U.S. digital imaging company. ^[5]

Under its previously announced $300 million stock repurchase plan, Shutterfly repurchased 1 million shares in Q1 2015, at an average price of $45.16. The company has $264 million of repurchase capacity remaining. Hence, according to its management, along with its organic growth, the company is on the look-out for strategically relevant acquisitions. With the fall-out of the Snapfish deal, we can expect Shutterfly to buy companies that would aid in its user base expansion (similar to GrooveBook) and at the same time help in solidifying its dominant position in the industry. ^[2]

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1. Shutterfly Announces Q1 2015 Financial Results, Shutterfly Investor Relations, April 29, 2015 [↩]
2. Shutterfly Q1 2015 Earnings Call Transcript, Seeking Alpha, April 29, 2015 [↩] [↩] [↩] [↩]
3. Shutterfly Inc. Acquires GrooveBook, Shutterfly, Nov 2014 [↩]
4. Shark Tank-Backed GrooveBook Acquired By Shutterfly For $14.5 Million, Tech Crunch, Nov 2013 [↩]
5. H-P to Sell Snapfish Photo-Storage Business to District Photo, WSJ, April 21, 2015 [↩]