Modest Q1 Upside, Re-Platforming and Mobile Strengthens Position Shutterfly (SFLY) for Strong Q4 - Needham & Company

Needham & Company analyst, Kerry Rice, noted the upside in the quarter but believes that Shutterfly (NASDAQ: SFLY) is really a Q4 story. Guidance was below expectations due to promotional activity but has proven conservative in the past. The analyst believes that the shift to mobile and the integration of ThisLife will accelerate order growth going forward. No change to Buy rating but the PT increases to $55 from $50.

The integration of ThisLife on to its new platform and mobile should strengthen its position with consumers, accelerating orders in 4Q16 and delivering upside for the year. Phase 1 of Shutterfly's re-platforming is progressing with the migration of its users from ThisLife to the new platform. Mobile should enable consumers to create and order products easily, and SFLY's core stationery and card products should be available via mobile heading into Q4.

Total revenue was $181.7M, up 14% y/y, above guidance range of $173-180M and above expectation of $178.2M. Gross profit margin was 40.2%, lower than 40.8% in 1Q15, primarily due to the higher contribution of Enterprise in the revenue mix, as well as higher promotion activities in Consumer business. Adjusted EBITDA loss was ($2.6M), which included a $3.3M severance cost, better than consensus of ($3.1M). Last, SFLY repurchased 1.1M shares totaled $47.5M during the quarter. The board has authorized an additional $100M for share buyback, with remaining authorized of $147.8M.

Consumer revenue was $155.4M, below consensus of $159.6M, representing y/y growth of ~4%. Customer totaled 3.3M, below consensus of 3.4M, orders were in line at 5.5M, and average order value (AOV) was slightly lower than consensus of $28.97 at $28.04. Enterprise revenue was $26.3M, increasing 135% y/y, significantly higher than consensus of $18.5M.

Shutterfly's core brand continued to demonstrate near double-digit growth. Mobile accounted for 20% of Shutterfly brand revenue in 1Q16, up from 12% in 4Q15. During Q1, management initiated an unlimited free prints campaign to drive mobile app downloads, which resulted in a record 1M downloads in the quarter, 2.7x that of 1Q15. Management indicated that the campaign will continue on a quarter to quarter basis to maximize ROI.

For an analyst ratings summary and ratings history on Shutterfly Inc. click here. For more ratings news on Shutterfly Inc. click here.

Shares of Shutterfly Inc. closed at $46.32 yesterday.

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