Shutterfly (SFLY) Q3 Earnings Beat Estimates, Stock Down 10%

Shutterfly, Inc. (NASDAQ:SFLY) reported mixed third-quarter 2018 results, with the bottom line surpassing the Zacks Consensus Estimate and top line lagging the same. Earnings beat the consensus estimate for the seventh straight quarter, while revenues missed the mark after four straight beats. Following the results, shares of the company lost 10.3% in after-hour trading.

Adjusted loss came in at $2.12 per share, 12.4% narrower than the consensus estimate of a loss of $2.42. The bottom line was severely dented by higher expenses.

Net revenues of $368.8 million increased 88.7% year over year but lagged the consensus mark of $377 million. The sharp increase in the top line was primarily owing to robust performance by the Lifetouch segment, offset by a weak Shutterfly Consumer. Third-quarter earnings marked the 71st consecutive quarter of year-over-year net revenue growth.

Revenues in Detail

Revenues at the Consumers category totaled $127 million, down 6% year over year due to lower-than-expected Shutterfly brand revenues and the shutdown of the Wedding Paper Divas website which impacted comps growth.

Lifetouch segment generated revenues of $187 million. This segment was formed following the acquisition of Lifetouch. Revenues from the Shutterfly Business Solutions (SBS) segment declined 2% year over year to $59 million.

Unique customers declined 6% year over year to 2.8 million and total orders decreased 12% year over year to 4.3 million. Meanwhile, average order value increased 7% to $29.69 backed by better product mix and shift toward paid revenues.

Operating Performance

Adjusted gross margin in the third quarter was 39.7%. Shutterfly Consumer gross margin contacted 370 basis points to 36.1% primarily due to lower volumes, product mix and an increase in amortization costs.

However, Lifetouch gross margin was 49.7%, in line with the company’s expectation. Shutterfly Business Solutions’ gross margin increased 90 bps to 21.8% due to reduction in technology related expenses.

The company reported adjusted EBITDA loss of $26 million, deteriorating from $3 million profit in the prior-year quarter. Operating expenses totaled $228 million.

Balance Sheet

Shutterfly exited the third quarter with cash and cash equivalents of $165.9 million compared with $489.9 million at the end of 2017. Accounts receivables summed $75.2 million, down from $82.3 million as of Dec 31, 2017. Long-term debt totaled approximately $1,092.1 million compared with $292.5 million at the end of 2017.

Q4 Guidance

The company envisions adjusted earnings per share in the range of $5.14 to $5.59.

Net revenues are projected between $945 million and $995 million. Adjusted gross profit margin is estimated at 61.6%. Adjusted EBITDA is anticipated in the band of $325-$345 million. Operating income is envisioned in the $263-$283 million range. Furthermore, capital expenditures are estimated at $100 million for the current year.

Also, Shutterfly Consumer revenues are projected in the band of $540-560 million, while the same from Shutterfly Business Solutions are likely to be between $64 million and $74 million. Lifetouch revenues are envisioned in the $341-$361 million range.

Zacks Rank & Key Picks

Shutterfly carries a Zacks Rank #3 (Hold). A few better-ranked stocks in the same space include Global Eagle Entertainment Inc. (NASDAQ:ENT) , YY Inc. (NASDAQ:YY) and Yelp Inc. (NYSE:YELP) , carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Global Eagle Entertainment has an expected earnings growth rate of 25.38% for the current year.

YY reported better-than-expected earnings in the trailing four quarters, the average beat being 12.6%.

Yelp has a long-term earnings growth rate of 43.48%.

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