Shutterfly Inc. SFLY posted narrower-than-expected second-quarter 2015 loss per share of 56 cents. The Zacks Consensus Estimate was of a loss of $1.05 per share. Further, the loss compared favorably with the prior-year quarter loss of 63 cents owing to increased revenues.

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Net revenue increased 16% year over year to $183.9 million. Revenues were above management's guidance range of $175.5 million to $179.5 million. Revenues benefited from the strong performance of both the Consumer and Enterprise segments. Further, the top line beat the Zacks Consensus Estimate of $179 million by approximately 2.5%.

Net revenue included a change in accounting estimate related to flash deal deferred revenue breakage of $7.5 million.

Behind the Headline Numbers

Revenues from the Consumers category were $171.3 million, up 14% year over year backed by strong customer orders.

Enterprise segment revenues surged 73% to $12.6 million. The company is confident of the potential of this segment as it utilizes the available capacity of market-leading digital printing capabilities. Given the potential, the company believes that the enterprise sales pipeline will continue to produce significant growth opportunities in 2015 as well.

In the quarter, total number of customers was 3.1 million, up 19% year over year. Total orders generated were 5 million, a 21% year-over-year increase. Average order value (excluding flash deal deferred revenue breakage) was $32.50, down 10% from the year-ago quarter. Average order value without the impact of the flash deal deferred revenue breakage, the Groovebook acquisition and Treat – closed in the first quarter – was $36.51, down 1% year over year.

Gross margin contracted 90 basis points to 49.1% due to favorable shipping costs and labor efficiencies.

Operating expenses totaled $115.6 million, up 13% year over year, owing to increased technological costs, marketing spend and general and administrative expenses. Sales and marketing expense was $50.4 million, up 13% year over year. However, excluding the impact of the deferred marketing expense related to flash deal breakage, sales and marketing expense increased 6%. The growth in sales and marketing expense was largely driven by higher media costs in the paid marketing channels for both desktop and mobile traffic and promotional activity with co-marketing partners.

Adjusted EBITDA was $15.6 million, up 33.3% from the year-ago quarter.

Third-Quarter Guidance

The personalized products and service provider’s business is highly seasonal and it incurs losses in the first three quarters of the year.

For the third quarter of 2015, the company expects adjusted loss per share in the range of $1.39 to $1.24.

Net revenue is likely in the range of $164.5 million to $167.5 million, a year-over-year increase of 15.8% to 18%. Adjusted gross profit margin is expected within 36.2% to 37.1% of net revenue.

2015 Outlook

Shutterfly expects 2015 bottom line to range within a loss of 3 cents to earnings of 20 cents per share.

The company expects revenues in the range of $1,040 million to $1,060 million, up 12.8% to 15% year over year.

Gross profit margin is projected in the range of 51.7% to 52.1% of net revenue.

Our Take

Shutterfly’s acquisitions, improved offerings in the growing mobile e-Commerce segment, aggressive promotions, affordable prices and easy-to-use products have helped it to post strong quarterly results. The company announced certain strategic initiatives for 2015 to streamline its business, which would reduce costs in the near term and create an integrated technological platform. We believe that these initiatives will boost revenues, going ahead.

However, we are concerned about the elevated costs which might negatively impact the company’s profits in the near term.

Shutterfly currently sports a Zacks Rank #1 (Strong Buy).

Other Stocks to Consider

Investors interested in the industry may also consider stocks like XO Group Inc. XOXO, Points International Ltd. PCOM and Taomee Holdings Ltd. TAOM. All these stocks carry a Zacks Rank #2 (Buy).

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