Shutterfly's (SFLY) Loss Narrows In Q2; 2016 View Updated

Shutterfly, Inc. (NASDAQ:SFLY) posted narrower-than-expected loss in the second quarter of 2016. Revenues beat estimates. Shares of Shutterfly fell 0.94% on Jul 27.

Quarter in Detail

The personalized products and service provider’s business is highly seasonal and generally incurs losses in the first three quarters of the year.

Shutterfly posted a loss of 48 cents per share in the second quarter, narrower than the Zacks Consensus Estimate of a loss of 66 cents per share and the company’s expectation of a loss of 62 cents to 69 cents. It was also narrower than the prior-year quarter loss of 63 cents per share. The improvement came on the back of a higher top line.

Net revenue increased 11% year over year to $204 million and exceeded the guided range of $195 million to $202 million. In fact, the quarter marked the 62nd consecutive quarter of year-over-year net revenue growth. Further, revenues beat the Zacks Consensus Estimate of $201 million by 1.5%.

Revenues benefited from the strong performance of both the Consumer and Shutterfly Business Solutions (‘SBS’) segments. Mobile related revenues for the Shutterfly brand grew in double digits year over year in the quarter. The app continues to drive a record number of customers to Shutterfly, benefiting from successful marketing campaigns. However, weaker revenues from the Tiny Prints and Wedding Paper Divas brands partially offset the strength in Shutterfly. Nevertheless, the company made substantial progress on its 2016 goals for Shutterfly 3.0 during the quarter.

Revenues from the Consumers category were $176.6 million, up 3% year over year backed by double-digit growth at the Shutterfly flagship brand. SBS segment revenues surged 117% to $27.4 million.

While the total number of customers was 3.3 million, up 4% year over year, total orders generated were 5.3 million, up 5% year over year. Average order value was $33.30, up 2% from the year-ago quarter, driven by favorable product mix.

Gross margin contracted 110 basis points (bps) to 46.3%. After normalizing for the one-time flash deferred revenue catch-up in the second quarter of 2015, gross margin increased 110 basis points, driven by lower manufacturer overhead costs.

Operating expenses totaled $115.4 million, flat with the prior year. After normalizing for the marketing expenses of $3.5 million associated with one-time flash catch-up in the second quarter of 2015, operating expenses as a percentage of net revenue decreased 700 basis points (bps) from the prior year primarily due to a decrease in stock-based compensation along with a continued focus on overall cost management. Sales and marketing expenses and general and administrative expenses also declined in the quarter.

The company continues to invest in additional customer facing enhancements with Shutterfly 3.0 and in the SBS business.

Adjusted EBITDA was $18.2 million, compared with the prior-year quarter growth of $15.6 million. Adjusted EBITDA exceeded the company’s expected range of $10 million to $13 million.

Other Financial Update

During the quarter, the company repurchased 0.66 million shares for $30.7 million under its share repurchase program. The company now has $117.1 million available for repurchase under its share repurchase program as of the end of Jun 30.

Q3 Earnings Outlook

For the third quarter of 2016, the company expects loss per share in the range of 90 cents to 97 cents, narrower than the Zacks Consensus Estimate of a loss of $1.07.

Net revenue is expected to be in a range of $179.2 million to $185.9 million, a year-over-year increase of 7% to 11.0%.

Gross profit margin is expected within 36.7% to 37.8% of net revenue. Adjusted EBITDA loss is expected in the range of $1 million to $4 million.

2016 Guidance Updated

The company has narrowed its overall guidance for 2016.

The company now expects earnings in the range of 31 to 58 cents per share compared with the previously guided range of 19 to 58 cents in 2016. The Zacks Consensus Estimate of 50 cents comes within the range.

Net revenue is now expected in the range of $1.130 billion to $1.160 billion compared with the previous guidance of $1.120 billion to $1.160 billion. The new revenue guidance marks a year-over-year increase of 6.7% to 9.5%. Adjusted EBITDA is now expected in the range of $210.0 to $222.9 million, narrower than the earlier range of $203.9 to $222.9 million.

Gross profit margin is now projected in the range of 51.3% to 51.7% of net revenue compared with the earlier range of 50.9% to 51.7% of net revenue.

Shutterfly carries a Zacks Rank #2 (Buy).

Stocks to Consider

Other stocks worth considering in the Internet content and services sector include Angie’s List, Inc. (NASDAQ:ANGI) , Brightcove, Inc. (NASDAQ:BCOV) and Shutterstock, Inc. (NYSE:SSTK) . While Angie’s List and Brightcove sport a Zacks Rank #1 (Strong Buy), Shutterstock carries a Zacks Rank #2.