Personalized products and service provider, Shutterfly Inc.'s (SFLY) second-quarter 2014 loss per share of 63 cents was narrower than the Zacks Consensus Estimate of a loss of 74 cents owing to a better-than-expected top line. Also, the company's second-quarter loss was narrower than management's expectation of a loss of 65–68 cents per share. However, the loss was much wider than the prior-year quarter loss of 29 cents per share, due to higher total operating expenses.
In the quarter under review, net revenue increased 19.2% year over year to $159.1 million and was ahead of the Zacks Consensus Estimate of $157.0 million by approximately 1.3%. Revenues benefited from the strong performance of both the Consumer and Enterprise segments. Revenues also beat management's guidance range of $154.0–$158.0 million.
Behind the Headline Numbers
Revenues from the Consumers category were $150.1 million in the quarter, up 20.1% year over year. The upside reflects 21% increase in brand revenues, owing to growth in cards, stationery and photo gifts during the Easter, Mother’s Day, Father’s Day, and graduation gift giving periods.
Enterprise segment revenues increased 5% to $9.0 million in the quarter. The company is confident of the potential of the segment as it utilizes the available capacity of market-leading digital printing capabilities. Given the potential, the company expects the enterprise sales pipeline to grow year over year in the second half of 2014.
In the quarter, the total number of customers was 2.6 million, reflecting an increase of 13% from the prior-year quarter. Total orders generated were 4.2 million, up 16% year over year. Average order value was $36.14, up 3% year over year driven by promotional strategies and integrated marketing campaigns adopted by the company.
Gross margin expanded 137 basis points to 47.6% and was higher than management’s guidance of 47%. The upside reflects operational efficiency gains in materials, labor and shipping costs, partially offset by higher depreciation and equipment expenses.
Excluding stock-based compensation and amortization, sales and marketing expense increased 15.8% year over year to $34.0 million due to investments in integrated marketing campaigns and a modest increase in headcount.
Adjusted EBITDA was $11.7 million, up 85.7% year over year, driven by operational efficiencies and timing shifts of expenditures, marketing and hiring.
Third-Quarter Guidance
Shutterfly's business is highly seasonal and the company posts losses in the first three quarters of the year.
For the third quarter of 2014, Shutterfly expects net revenue in the range of $140.5–$143.5 million, up 14.5% to 17% year over year. The company expects loss per share in the range of $1.14 to $1.11 in the upcoming quarter compared to a loss of 24 cents in the third quarter 2013.
2014 Outlook
The company narrowed its revenue guidance range for 2014 and expects it in the range of $905.0 million to $920.0 million, up 15.5% to 17.4% year over year, compared to the previous expectation of $903.0 to $920.0 million.
The company also revised its bottom line guidance for 2014 and anticipates it to range from a loss of 11 cents to earnings of 20 cents compared to the prior expectation of a loss of 8 cents to earnings of 13 cents. Depreciation, labor and equipment costs incurred for expansion and acquisition of manufacturing facilities are expected to adversely impact profitability in 2014.
Other Stocks to Consider
Shutterfly currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the sector include WebMD Health Corp. (WBMD), Yelp, Inc. (YELP), and Jiayuan.com International Ltd. (DATE). While WebMD Health and Yelp, Inc. sport a Zacks Rank #1 (Strong Buy), Jiayuan.com International carries a Zacks Rank #2 (Buy).
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