Shutterfly Inc.’s (SFLY) third quarter loss of 25 cents a share was four pennies better than the Zacks Consensus Estimate of -29 cents per share. The company had reported a loss of 11 cents in the year-ago quarter. The results were driven by a better-than-expected growth in revenue.

Shutterfly’s business is highly seasonal, with a large proportion of net revenues, net income and operating cash flows being generated during the third quarter.

Net revenue was up 13% from the prior-year quarter to $40.5 million, attributable to increases in personalized products and services revenues. Personalized products and services revenues were $23.6 million, up 22% over the prior-year quarter, while print revenues decreased 6% year-over-year to $15.6 million.

The total number of customers totaled 982,000, an increase of 7% from the prior-year quarter. The customers generated about 1.7 million orders which were up 3% year-over-year. Average order value was $23.03, up 6% from the prior-year quarter. Existing customers generated 76% of net revenues while the rest was generated by new customers.

Gross profit margin was 47% compared to 49% in the prior-year quarter. The factors contributing to the year-over-year decline include lower 4×6 print prices and building lease increase for its new Phoenix plant. However, on the positive side, improvements of favorable product mix and continued leverage from shipping and materials cost nearly offset these negative variances.

Operating expenses, excluding $4.0 million of stock-based compensation, totaled $24.1 million. Adjusted EBITDA was $2.0 million compared to $0.1 million in the prior-year quarter. At Sept. 30, 2009, the company had $63,250 of cash and cash equivalents compared to $63,579 at the end of the previous quarter.

Outlook

For the fourth quarter, Shutterfly expects net revenues in the range of $102.6 million to $112.6 million. The company expects GAAP earnings per share (EPS) to range from 55 cents to 66 cents and non-GAAP EPS to range from 68 cents to 78 cents.

For the full fiscal 2009, the company expects net revenues to range from $218 million to $228 million, representing a year-over-year increase of 2% to 7%. On a GAAP basis, the company expects to report a loss of 14 cents to a profit of 1 cent. On a non-GAAP basis, EPS is expected between 27 cents to 40 cents.

Although the reported quarter’s results contained some positive signs, we expect the company’s operations to remain under pressure in 2009 as a result of continuing economic challenges. We currently expect that the fourth quarter of the year — which in 2008 accounted for more than 50% of annual sales and turned out to be the only positive quarter — will account for an even greater percentage of annual sales and earnings in 2009. The company’s performance in the fourth quarter will be critical to its annual results.
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