Lifetouch Acquisition Drives Shutterfly’s 3Q Earnings; New Initiatives To Augment Its Results In The Near Term

In line with market expectations, Shutterfly (NASDAQ:SFLY) reported a solid financial performance for its September quarter earlier this week driven by the better-than-expected performance from the Lifetouch acquisition. This, coupled with the efficiencies from the consolidation and restructuring program drove the company’s operating margin. We expect the integration of Lifetouch, along with the launch of new products and other strategic initiatives to optimize its technology, to drive its value in the coming quarters.

We have a price estimate of $80 per share for the company, which is higher than its current market price. View our interactive dashboard – Shutterfly’s Price Estimate and modify the key drivers to visualize their impact on its valuation.

Key Highlights of 3Q’18 Results

• Driven by the Lifetouch acquisition earlier this year, Shutterfly’s non-GAAP revenues for the third quarter increased to $373 million, 91% higher on a year-on-year basis. While this is a significant improvement, it was below the market as well as company expectations. This was largely due to the disappointing performance from its Shutterfly Consumer segment.
• The management acknowledged that it struggled with customer growth as its promotional strategy didn’t deliver much due to the lack of holidays in the quarter. Also, the seasonality factor in the cards and stationery business further weighed down on the company’s top-line growth.
• Further, Shutterfly highlighted that the need to develop additional cost effective mechanisms to acquire new customers and engage existing customers in order to mitigate the negative impact of increasing costs of paid online channels.

• Despite the lower-than-expected revenue, the company reported an adjusted EBITDA loss of $26 million, which was better than its expectations.
• The company launched a new Kids and Pets category earlier this year which delivered strong demand during the third quarter. Also, the company launched 16 new products during the quarter, the most notable one being a new line of personalized children storybooks with licensed content from Nickelodeon.
• Also, the company launched seven new personalized gifts and home décor products in the third quarter, taking the total to 47 new products this year, more than double the number launched last year. With this, the company has reduced the cost to launch a new product by 20% and the time to launch by 32%.
• Shutterfly launched a new app exclusive program called Free Photo Book A Month, which presents pre-created photo books meant to be purchased as an impulse buy with the goal of acquiring new customers and driving more frequent purchases. These initiatives are likely to contribute to its top-line growth in the coming quarters.

• Shutterfly foresees Lifetouch to be the single greatest opportunity to re-accelerate its customer growth in the near term. The integration of Lifetouch has provided access to more than 10 million purchasing households, that are its ideal target customers. The larger customer base is likely to boost its revenue growth in the coming quarters.
• Going forward, Shutterfly plans to expand its product and category range, drive mobile innovation, simplify the process of creating and purchasing products, and optimize its pricing and promotions. These initiatives are expected to contribute to its customer growth and drive its value in the near term.
• Further, the company will focus on delivering strong results in the fourth quarter, which includes the holiday season. More than 80% of the revenue in 4Q is expected to come from existing customers, roughly half of which were acquired four or more years ago.

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