Breaking Down Shutterfly’s Key Revenue Drivers

Shutterfly (NASDAQ: SFLY) delivered a strong financial performance in fiscal 2018. The company’s revenue surged by 63.8% year-over-year to reach approximately $2 billion, primarily driven by the acquisition of Lifetouch. Trefis’ model for the company breaks its key value drivers down to three key components:

• Consumer Segment
• Shutterfly Business Solutions Segment (SBS)
• Lifetouch Segment (created in 2018)

As we summarize below, we expect the company’s total revenues to grow at 10.6% and cross $2.1 billion in 2019. We currently have a price estimate of $51 per share for SFLY, which is almost 20% ahead of the current market price. We have summarized our revenue expectations for Shutterfly, based on the company’s guidance and our own estimates, on our interactive dashboard Summarizing Shutterfly’s Revenue Breakdown. You can modify any of our key drivers to gauge the impact changes would have on its valuation, and see all Trefis Internet & Software Services Data here.

Total Revenue:

• Shutterfly saw a total revenue increase of more than $800 million from 2016 to 2018 (CAGR of 31%) while recording $1.9 billion in revenue in FY 2018.
• Revenue growth was driven by the better-than-expected performance from the Lifetouch acquisition and strong performance of its Business Solutions segment, partially offset by a lower-than-expected performance from its Customer segment.
• Lifetouch and SBS are expected to continue their robust growth in FY 2019, while the consumer segment is also expected to improve from its sub-par performance in 2018.

Consumer Segment

• Consumer segment revenue decreased by $25 million year over year to $972 million in fiscal 2018, primarily due to weak performance of the Tiny Prints boutique, a premium cards and stationery brand.
• This segment contributed more than 80% of total revenues over 2015-2017. However, this contribution shrunk to less than 50% in 2018 due to the Lifetouch acquisition and growth of the Business Solutions Segment.
• We expect the segment’s revenue to decline by 0.5% to $967 million in FY 2019, with average price per order increasing to $44 due to a favorable product mix and larger basket sizes.
• Total number of orders for Shutterfly declined by 11.4% (y-o-y) in 2018, and we expect the number of orders to further decline by 6% to approximately 22 million in 2019.

Shutterfly Business Solutions Segment (SBS)

• This segment has seen robust growth in recent years, with revenues increasing from under $100 million in 2015 to $231 million in 2018 (CAGR of 33%)
• SBS grew revenues by 19% in 2018 to $231 million, driven by higher than expected volumes from existing customers.
• We expect similar trends going forward, with 2019 revenues of $277 million, growing at an average rate of 12% in next 3 years.
• Despite the acquisition of Lifetouch in 2018, the segment’s contribution to total revenues has increased from less 10% in 2015 to approximately 12% in 2018. We expect this figure to further increase to 13% in FY 2019.

Lifetouch Segment

• Shutterfly acquired Lifetouch, a national leader in school photography, in April 2018 for $825 million.
• The company reported the financials for Lifetouch under the newly created Lifetouch segment.
• Lifetouch generated $799 million of non-GAAP revenue for the nine months ended December 31, 2018 with strong performance in schools, preschool, offset by a modest decline in Studios and a continued decline in Church.
• Shutterfly expects Lifetouch revenue growth to be relatively flat in FY 2019 with net revenue ranging from $915 million to $935 million. However, this excludes $25 million of Lifetouch acquisition revenue synergies expected to be achieved in 2019.

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