NEW YORK (AFX) - Shutterfly Inc., an online photo printing and sharing service, is gearing up to become a publicly traded company, putting it in sharp contrast to similar sites that rely on the deep pockets of corporate parents.
The Redwood City, Calif.-based company said Thursday it plans to sell 5.8 million shares at $13 to $15 per share. The offering will result in 23.6 million shares outstanding and a market capitalization between $310 million and $350 million.
Shutterfly is an independent holdout among digital photo printing sites. Since 2001, Eastman Kodak Co. has bought Ofoto Inc. and renamed it Kodak EasyShare Gallery. CNET Networks Inc. acquired Webshots, Web portal business Yahoo Inc. snapped up photo-community site Flickr, and printer maker Hewlett-Packard Co. bought online photo service Snapfish.
Today, Shutterfly, Snapfish and Kodak EasyShare are the top three online sellers of digital prints, according to data from Photo Marketing Association International, a trade group based in Jackson, Mich. According to its updated prospectus, Shutterfly has sold about 370 million prints since its December 1999 launch.
Shutterfly and its competitors, along with photo sharing sites that make money from advertisements rather than direct sales, are operating in a booming market.
In recent notes to investors, Citigroup analyst Matthew Troy wrote that U.S. digital camera sales grew 28 percent in July compared with last year. In June, online printing more than doubled year-over-year, according to Troy.
While prints made at home or at a store outnumber prints ordered online two to one, online orders are growing, according to the Photo Marketing Association. The trade group estimates people will order 1.8 billion prints online in 2006, up from 1 billion in 2005.
But a price war among retail stores that do photo processing, such as Wal-Mart, and the top online businesses has slashed margins on 4x6 prints of digital photos. Shutterfly dropped its price to 19 cents per print, from 29 cents, following second-quarter 2005 price cuts by competitors. Even so, prints from Snapfish and Kodak remain less expensive.
Shutterfly says its market position and loyal customers justify the premium. Nonethelses, price pressure from the big company-backed players is a real risk, said Shaw Wu, an analyst for American Technology Research. For H-P, Snapfish is less a cash cow than a way of learning more about the universe of consumer digital photo printing, said Wu. H-P operates Snapfish on a break-even basis, and 'can afford to price aggressively.'
To make up for lost margins on standard prints, Shutterfly and others have turned to higher-margin items like mugs, photo books, calendars and apparel.
Shutterfly owns its photo printing and photo-gift manufacturing facilities, which is one factor behind the IPO.
To meet revenue projections, the company said its busy holiday quarters will need to get even busier; to accommodate that growth in demand, Shutterfly said it will need to expand production capacity. The company plans to use net proceeds of about $73 million from the offering to bulk up manufacturing facilities, as well as its Web site.
While the photo printing site reported year-over-year growth in both the top and bottom lines, it also stated that its year-end audit of internal controls found material weaknesses. Although the company said it adjusted its figures for 2005 to correct inaccuracies, hired a controller and other finance personnel and modified its control systems, it also stated that it cannot assure it won't have problems leading to restatements in the future.
Jack Ciesielski, publisher of The Analyst's Accounting Observer, a research service of R.G. Associates Inc., said those statements are 'serious, (but) not necessarily fatal.'
The statements amount to 'admissions of failure,' Ciesielski said, and the company has work to do to keep problems from cropping up again. 'For a company that's young and growing, these are problems you'd expect to find.'
Shutterfly posted a 2005 profit of about $28.9 million on revenue of $83.9 million, including a tax benefit of about $24.1 million. At the end of the first half of 2006, the company had an operating loss of $39.8 million.
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