Redwood City’s Shutterfly posts substantial gains thanks to new services and social media

Shutterfly's flagship product is its Photo Book line. (Photo courtesy of Shutterfly)

Owing to investments in expanded retail presence enhanced product features and increased use of social media, web-based personal photo publishing service Shutterfly, Inc. (NASDAQ; SFLY) reported robust earnings for the fourth quarter of 2010 and the year overall.

This month, the company reported fourth-quarter income of $32.5 million, or $1.09 per share, an improvement of more than 35 percent over 2009, when it reported net income of $24.1 million, or 88 cents per share.

Excluding items, Shutterfly reported fourth quarter net income of $35.1 million, or $1.18 per share, an increase from the $27.6 million, or $1.01 per share, reported this time last year.

That trumped analysts’ expectations on Wall Street, where a gain of 95 cents per share was anticipated.

The Redwood City-based company also showed greater year-end profits, reporting net income of $17.1 million, or 59 cents per share, an almost 200 percent gain over the reported 2009 income of $5.85 million, or 22 cents per share.

Excluding items, the company reported year-end net income of $28.1 million, or 96 cents per share, compared to $17 million, or 64 cents per share.

Revenues also went up for both the quarter and full year. The fourth quarter for 2010 brought Shutterfly $166.2 million, a gain of 27 percent over the $131 million posted in 2009.

Last year brought $307.7 million in revenue, an improvement of 25 percent over revenues of $246.4 million in 2009.

Shutterfly typically sees a much larger profit in the fourth quarter, during the holiday season when its products are in high demand.

On the company’s earnings call, Chief Executive Officer Jeffrey Housenbold attributed the rise in income in 2010 to “consistent execution against our key strategic initiatives letting us focus on the customer and strong financial discipline,” as well as continued success in its personalized product line, which now include a home décor collection, redesigned calendar lineup, and 1,400 new designs for cards and stationery products.

Housenbold also connected Shutterfly’s financial success in 2010 to its entry into the social media sphere. The company invested in Shutterfly share sites, which Housenbold described as web pages “where family, friends and groups can create their own secure website, stay connected and share their memories.” In particular Housenbold mentioned the youth sports and classroom share sites, in which contact information, reminders and media can be distributed.

Other factors that Housenbold credited to the company’s 2010 success were partnerships with Best Buy Co. Inc., Target Corp, Walgreen Co and CVS Caremark Corp, to give customers more shopping options, and more activity on Shutterfly’s blog, Twitter feed and Facebook page, which now has a fan base of over 185,000.

On the same earnings call, Chief Financial Officer Mark Rubash said that Shutterfly’s profitability in the fourth quarter was the latest in a series of “very healthy trends that we have seen over the past six quarters.” Rubash pointed to a continuing increase in new customers, especially over the holiday season.

A large part of this new customer base involves Shutterfly’s expansion into the commercial printing field. The company acquired WMSG Inc., a digital direct marketing firm in November, and plans to increase its presence in the digital marketing industry in 2011.

Rubash called 2010 “another very successful year for Shutterfly, despite the continuing economic challenges.”

Looking ahead, in the first quarter of 2011, he said he expected the company to post a loss of between $1 million and $2 million. The company typically sees net losses in the first three quarters of the year, only to more than compensate for them during the holiday season in the fourth quarter.

In the 2011, Shutterfly anticipates a large amount of additional revenue thanks to the WMSG acquisition and continued improvements and additions to its existing product line.

“Rapid product innovation and steadily leveraging the benefits from scale will create the greatest long-term differentiation from our competitors,” Rubash said.

While the company’s traditional competition includes other photo-sharing and/or printing services such as Eastman Kodak Co or Flickr, 2010 also saw a rise in specialized photo-sharing apps on various mobile platforms such as the iPhone. Housenbold said he was confident that Shutterfly would remain an industry leader, however, adding that many companies with a novel concept lack the “robust monetization or business schema model” of his company.

Analyst Mitch Bartlett of Craig-Hallum Capital Group agreed with the assessment, saying in an interview that “there’s no up and coming guys that have the breadth and offering that they have. Shutterfly is this all-encompassing brand that will survive against any niche offering.”

Shutterfly’s stock price, which has climbed steadily over the past year, reacted well to the earnings announcement. At the 4 p.m. close of trading on the NASDAQ Stock Market on Feb. 2, prior to the earnings announcement, shares were at $34.31. In late trading, shares rose $5.49, or 16 percent, to close at $39.80, as compared to the 52-week low of $17.04 and the 52-week high of $43.75, which the stock hit a week later.

Analysts were pleased with Shutterfly’s 2010 and fourth quarter earnings, but not particularly surprised.

Bartlett said, “It wasn’t a surprise. For the first nine months, they had added so many customers, and I think it’s a story about customers. I had believed it was going to be a very strong quarter.”

James Cakmak of Sidoti and Co. agreed. “I was pleased across the board, and I don’t think you could ask for more.” Cakmak disagreed, however, with the company’s expectations for the first quarter of 2011. “The first quarter guidance is unreasonable, it’s too low. Looking at the numbers alone, I just don’t see how they’re going to lose money,” he said.

Nevertheless, Shutterfly showed marked success and improvement on its earnings for the quarter and year, as did its stock price. Bartlett summed it up, saying, “it was just another quarter of acceleration, that’s what investors reacted to.”