Shutterfly (SFLY) Beats On Q4 Earnings, Acquires Lifetouch

Shutterfly, Inc. (NASDAQ:SFLY) reported better-than-expected fourth-quarter 2017 results.

This personalized products and service provider usually incurs losses in the first three quarters followed by earnings in the last quarter of the year. This is due to the seasonal nature of its business.

In sync with this, Shutterfly reported adjusted earnings of $3.11 that beat the Zacks Consensus Estimate of $2.91 by 6.9% and increased 18% year over year. The figure came ahead of the guided range of $2.60 to $3.00. Evidently, the improvement came on the back of a higher top line and expense control.

Net revenues of $593.8 million increased 6% year over year and surpassed the consensus mark of $557 million by 6.6%. The top line came well ahead of the guided range of $538 million to $568 million. In fact, the fourth-quarter earnings season marked the 68th consecutive quarter of year-over-year net revenue growth. The solid growth was driven by strong performance across both consumer and Shutterfly Business Solutions (SBS) segments.

Shutterfly, Inc. Revenue (TTM)

Concurrent with the earnings announcement, Shutterfly said that it has reached a deal to acquire Lifetouch, a privately held online photography company for $825 million cash. The deal is expected to close in the second quarter of 2018.

The acquisition is expected to add approximately $935 million to Shutterfly’s net revenues and $100 million to its adjusted EBITDA over the 12 months following the closure of the deal. By 2020, the company targets a minimum $450 million of adjusted EBITDA.

The top and bottom line beat along with the acquisition announcement sent shares up a massive 19.9% in afterhours trading on Jan 30. Shares, however, have gained just 3% in the past year, significantly underperforming the industry’s massive 61.6% rally.

Let’s delve deeper into the numbers.

Revenues in Detail

Revenues from the Consumers category were $521.8 million, flat year over year. Loss of revenues from the non-Shutterfly brand as a result of brand shutdowns was significantly offset by growth of the Shutterfly brand.

Shutterfly Business Solutions (SBS) segment revenues surged 81% year over year to $71.9 million driven by faster ramp up of a multiyear deal signed with an existing client in the third quarter.

Unique customers declined 2% year over year to 6.1 million and total orders decreased 14% year over year to 10.5 million, primarily due to platform consolidation. On the contrary, average order value increased 4% to $49.9 on the back of product mix.

Operating Performance

Gross margin (excluding restructuring charges) increased 180 basis points (bps) to 57.2%, chiefly due to higher consumer gross margins.

Adjusted EBITDA (Earnings before interest, tax, depreciation and amortization) of $215.6 million grew 11% year over year. The reported figure was above the high end of the guided range of $191.5 million to $211.5 million backed by careful expense control.

Operating expenses totaled $160.5 million, down 10% year over year. As a percentage of net revenues, operating expenses declined 460 bps year over year to 27%. The decline was owing to platform consolidation as well as strong expense control. Consequently, operating income in the quarter improved 16% year over year to $179 million.

Balance Sheet

Shutterfly exited the fourth quarter with cash and cash equivalents of $489.9 million, compared with $56 million in the prior quarter. Accounts receivables were $82.3 million, up from $61.5 million in the previous quarter. Long-term debt was approximately $292.5 million.

Cash from operations was around $320.2 million. Shutterfly spent $36.7 million on capital expenditures and $30 million on share repurchases during the fourth quarter.

First Quarter Guidance

For the first quarter of 2018, the company expects to report net loss per share in the range of 92 cents to 96 cents, higher than the current Zacks Consensus Estimate of a loss of 84 cents.

Net revenues are expected in the range of $190 million to $194 million. Gross profit margin is projected between 38% and 38.5% of net revenues. Adjusted EBITDA is expected in the $3 million to $5 million band. Operating loss is anticipated to range from $32.0 million to $34.0 million.

The company expects effective tax rate to be 26% in the quarter.

2018 Guidance

For the full year, the company expects earnings in the range of $1.94 to $2.38 per share, higher than the current Zacks Consensus Estimate of $1.52.

Net revenues are expected in the range of $1.22 billion to $1.26 billion. Gross profit margin is estimated in the range of 48.5% to 49.5% of net revenues. Adjusted EBITDA is anticipated to be in the band of $260 to $280 million. Operating income is anticipated in the band of $115.0 million to $135.0 million.

The company expects effective tax rate to be 26% in 2018.

Zacks Rank and Stocks to Consider

Shutterfly carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Better-ranked stocks in the broader technology sector include Micron Technology Inc. (NASDAQ:MU) , Lam Research Corporation (NASDAQ:LRCX) and The Trade Desk Inc. (NASDAQ:TTD) , all sporting a Zacks Rank #1.

Long-term earnings growth rate for Micron, Lam Research and The Trade Desk is projected to be 10%, 14.85% and 25%, respectively.

The Hottest Tech Mega-Trend of All

Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.

See Zacks' 3 Best Stocks to Play This Trend >>