What does Shutterfly, Inc. (SFLY) Look Like After Board Shakeup?


Shutterfly, Inc. (NASDAQ:SFLY)’s direction has been questioned by investors including Marathon Partners Equity Management, which owns more than 5.4% of the company. It eventually came to pass last week that Marathon succeeded to put its representatives on the board of Shutterfly.

What does the victory of Marathon mean for Shutterfly’s investor community? The simple answer is more shareholder-friendly reforms. However, one needs to better understand what Marathon believes to better appreciate or celebrate its two wins on the board of Shutterfly.

What does Marathon stand for?

Marathon, an activist investor firm, intended to grab three seats on Shutterfly’s board at the Annual Shareholder Meeting. It got two, namely Thomas D. Hughes and Mario Cibelli.

What Marathon has always insisted is that Shutterfly is not heading in the right direction. The firm went public with its criticism of the board and management of Shutterfly after it noted that its private lobbying wasn’t bearing fruit.

Among the issues that Marathon found uncomfortable with Shutterfly is that the company lacked incentives for long-term investors. Another area that worried the firm was that Shutterfly wasn’t making prudent acquisitions or investments. For that reason, Marathon was convinced that only a shakeup of the board would help the situation.

It is clear that Marathon favors shareholder-friendly reforms, and its win of two seats on the board of Shutterfly is a victory for all shareholders.

Things look attractive with Marathon on the board

The pro-reform directors seconded to the board of Shutterfly by Marathon are likely to push for more favorable changes with greater chances of success. The areas of interest for Marathon include reformation of executive compensation. The firm especially wants executive compensation to be tied to earnings and long-term financial targets.

A sale of Shutterfly, Inc. (NASDAQ:SFLY) is one of the proposals that have been made toward unlocking shareholder value. With Marathon’s representatives on the board, a push to sell the company could gain momentum if that approach is considered a favorable option for shareholders.

In its push for reforms, Marathon cited that there wasn’t enough openness in the way Shutterfly dealt with shareholders. As such, shareholders of Shutterfly should look to a company run more transparently with Marathon’s representatives on the board.

Keeping the management of Shutterfly on its toes should be beneficial to all investors.

Vote of confidence on CEO

Shareholders re-elected Jeff Housenbold to the board of Shutterfly. The development carries a lot of gestures. It shows that shareholders are confident in the leadership of Housenbold. The re-election of Housenbold also shows that Marathon doesn’t seem to have problems with him individually.

Retaining Housenbold on the board also eliminates the risk of business disruption, and possible subsequent departure of other executives. The outcome is also a positive given the track record of Housenbold at the helm and his knowledge in the photo services business.

Favorable management measures

Cost reduction and monetization: Shutterfly, Inc. (NASDAQ:SFLY) is consolidating its apps and the result should be lower development costs in the long-term. The company is also expanding availability of ThisLife, which should lead to greater engagement on Shutterfly.com and boost monetization opportunities.

In addition to expanding ThisLife, Shutterfly is also enriching the service with more features to enhance its appeal to users.

Supply chain reorganization: Shutterfly is shifting acquisition of equipment, especially production machines, away from Hewlett-Packard Company (NYSE:HPQ). It has cut exposure to HP to nearly 50% and continues to reach out to alternative suppliers like Xerox Corp (NYSE:XRX). The company is shifting away from HP as the company has a competing offering under Snapfish.com.

Shutterfly had previously concentrated its supply chain but it is beginning to take action to dismantle that risky arrangement, which is a positive move.

Areas of concern

Low barriers to entry:

There are no high barriers to entry in the photo services industry, which exposes Shutterfly, Inc. (NASDAQ:SFLY) to intense competition. Shutterfly currently leads in the personalized products and services category, but it is an area that social networks could present intense competition in if they choose to enter the category.

Social networks could give Shutterfly a run for its money in the digital image business, given that most of them are well-funded and have a large audience.

Facing Facebook in photo business:

Facebook is a serious threat to Shutterfly. The largest social network with 1.4 billion users already knows a thing or two about the photo business. As a photo sharing site, Facebook could generate incremental revenue.

Facebook could either join forces with Shutterfly, which could lead to some value proposition for shareholders, or go it alone. In the worst case scenario, Facebook could partner with a competitor of Shutterfly to accelerate its penetration in the photo business.

Whether Facebook goes it alone or teams up with Shutterfly’s rival, the implications of such a move would be disastrous for Shutterfly, especially given Facebook’s financial might.

High capital needs:

Shutterfly spends a lot of money to deliver customer expectations and raise or maintain its brand profile. The result is that the company encounters higher levels of fixed expenses. High fixed expenses means that the company must continue to grow its revenue to generate decent earnings. Also, a high level of fixed costs also means that the company’s earnings are unpredictable.

Additionally, any small disruption to the revenue stream because of economic sensitivities or business seasonality can lead to adverse material impact on Shutterfly’s financial results.

1

Business seasonality:

Shutterfly’s business is highly season, with the bulk of its annual revenue being generated in a single quarter – the fourth quarter (4Q). The company looks to the holiday season for 50% of its annual revenue and most of its net income. As such, the company incurs expenses throughout most parts of the year leading up to the festive season.

The high premium placed on the 4Q puts pressure on the management to execute because a miss in that quarter can send almost everything down. A more spread out revenue strategy would be great for the company to avoid the 4Q execution pressure.

2

Pricing pressure:

Shutterfly, Inc. (NASDAQ:SFLY) understands the challenge of being in the highly commoditized segment of the photo business. However, it still has exposure to the photo print category with shipping being an important source of its revenue. However, online competitors are getting more aggressive in photo pricing, which could force the company to cut its shipping pricing. Such a move would hurt its margins.

Acquisition rumors

There has been speculation that Shutterfly, Inc. (NASDAQ:SFLY) could be acquired, although it is currently difficult to tell whether such a deal would happen in the foreseeable future. What is true though, is that Shutterfly has exciting assets that make it an attractive buyout target.

Conclusion

Going forward, Shutterfly, Inc. (NASDAQ:SFLY) has the assets to help it grow in leaps and bounds. However, the success of the company relies more on enriching its platform to retain existing users than simply a major drive for new subscriber additions. That does not mean that the company doesn’t need to grow its subscriber base from this point, but it could do more by simply bolstering its products and services.

The presence of Marathon representatives on the board of Shutterfly inspires confidence about favorable reforms.


Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Neha Gupta

Neha Gupta has been in the financial space for over six years now. Gupta earned her MBA degree from Symbiosis Centre of Distance Learning in 2009 and her passion for finance led her to pursue Chartered Financial Analyst (CFA) course. She has successfully completed Level II of her CFA. She is a veteran in article writing, which is depicted in her numerous pieces published on SeekingAlpha, Nextiphonenews, InsiderMonkey, MarketWatch, and Techinsider. Her crisp and eloquent writing finds its best place in Researchcows, where emphasis is given on developing rich content for various websites, products, business plans, trainings, and book writing.

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