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Yahoo Must Acquire Shutterfly

Posted on Thursday, Nov 29th 2007

I have covered Shutterfly (Nasdaq: SFLY) a few times here already. I have had my eye on the company for a while, and have pegged it as an acquisition target for Yahoo, especially. Last week, amidst market doldrums, I managed to pick up a chunk of SFLY at a good price, and have already seen some gains. My initial reaction to Shutterfly’s IPO was that it was too soon and going out with too little revenue. However, Shutterfly has consistently delivered.

When I reviewed their service from a Web 3.0 perspective in July I gave them fairly good marks for their overall package.

The company’s 2007 approach relies heavily on customer satisfaction (78% of past revenue derived from repeat customers), and successful marketing via positive word of mouth and brand awareness. From Shutterfly’s perspective plenty of demand still exists, with only 6% of digital camera owners using online services. I happen to agree.

They are also doing a good job with partnerships finally, which was a weakness I had identified earlier. At the beginning of 2007, Shutterfly partnered with David’s Bridal, a leading bridal retailer, allowing Shutterfly to offer its range of photo product to the booming wedding industry.

In addition, Shutterfly made its product distribution easier to the average consumer by linking with Target, enabling Shutterfly to expand its service channels and cross sell products to the millions of Target customers. You load your photos via the Internet, order, and both pay and pick up the prints at your local Target store. This is actually cheaper than having Shutterfly ship them to you.

Q3 Consolidated revenue for the period increased 54% to $32.6 million (up from $29.9 million in Q2) versus $21.2 million in Q3 2006; however, Q3 operating expenses increased to $15.4 million from $11.3 million in Q3 2006. And the company posted a net loss of $3.3 million, worse than the Q3 net loss of $2.7 million in 2006. On a per-share basis the losses have narrowed because there are now 24 million shares outstanding versus the 4 million from the same quarter 2006.

Guidance for Q4 would be $90.5 million to $93.5 million, an increase of 38% to 42% as compared to the fourth quarter of 2006, and total annual revenue is expected at $180-183 million, an increase from Q1 projections of $167-170 million for 2007. The preliminary guidance offered for 2008 showed revenues in the $240-255 million range, up from an estimate $200 million first projected in Q1.

Total market cap currently is $739.87 million and current price is just under $30.02/share.

The company strategy and partnering examples above are working in terms of growth. 45% of revenue comes from personalized products and services while 55% comes from photo printing. Customer numbers have grown YoY 35% to 844,400 in Q3. And the average order value and average number of orders have both increased YoY by 15% and 33% respectively.

Competition is quite serious in the Photo Printing and Merchandising segment, but as I said, the market is early and under-penetrated (only 6% of digital camera owners using internet photo services). Marketing expenses will continue to be significant for the company for a while still, both to combat competition and to educate the market. However, momentum should continue for a while.

My strong belief is that Yahoo should buy Shutterfly and combine it with Flickr, which would give Shutterfly access to a much larger customer base, and Flickr a key position in an important monetization angle – photo merchandising and printing.

Jerry Yang, are you listening?

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I am not sure I totally agree. Yahoo and Google are after websites and products where its user base logs in every day to add, view, share, comment on, etc. That way, Yahoo and Google are able to have more chances to monetize their users and visitors. That is why Flickr is a good property for Yahoo – people access the system everyday – it is a way of life. Shutterfly, on the other hand, is more of a transaction system. Sure you can upload photos and share them, but its primary purpose is for people to upload the photos and print them.

As someone who takes photos, prints them, and is a Yahoo user, I would like to see them make a run at Shutterfly. But from a “how Yahoo makes money” sense (advertising, keywords, etc.) it just doesn’t add up from my perspective.

Tom Thursday, November 29, 2007 at 2:22 PM PT

Tom,

Are you familiar with my web 3.0 thesis?

From a user-experience pov, I hate the fact that I need to load pictures in Flickr to share, but then also load them on another system like Shutterfly or Kodak Gallery to print, share with a select group of people, etc.

On the other hand, from Yahoo’s perspective, I think it needs to go deeper and comprehensive into monetization models by vertical, rather than going “spray and pray” across lots of verticals, and failing to monetize most of them.

In any case, my thesis is around verticalization of the web, and monetization across all revenue models, by verticals.

Sramana

Sramana Mitra Friday, November 30, 2007 at 5:21 AM PT

Sramana
Agree Yahoo needs to kick it up a notch. I think Microsoft want to buy Yahoo, Marchex (MCHX), and Local.com (LOCM). If my prediction is true, the team would be a strong competitor to Google, which is kicking everyone’s teeth in now. Can throw EBAY into the group as well, I have heard that EBAY and GOOG are not on great terms, Meg needs a big surprise so interesting times ahead. What do you think of my thoughts? Appreciate your comments. Thanks

Greg Monday, December 10, 2007 at 11:11 AM PT

EBay and Google are not on great terms because Google is trying to promote Google Checkout to compete against Paypal, while eBay is their #1 customer. I have said all along that eBay and Yahoo should have merged.

Sramana Mitra Monday, December 10, 2007 at 5:12 PM PT

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Very insightful, Sramana, what do you think Jerry Yang is doing lately?

Celerity Wednesday, March 5, 2008 at 7:06 AM PT

Sulking, I think.

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