I’ve received requests to consolidate the three part series, A BUSY DAY, A BUSY FUTURE, and A CALL TO ACTION into one seamless article. In doing so I’ve done some editing, reformatting and adding to the content. I encourage you to spend some time with the section titled Examine Your Business.
Tuesday, February 5th was a busy day for Shutterfly. First there were a couple of surprising press releases followed by a previously scheduled investor call reporting on Q4 and 2018 financial results. This article provides a quick summary of that day’s announcements and examines Shutterfly’s vision of the future. Additionally, it identifies Shutterfly’s plans for 2019, offers my perspective on how Lifetouch fits into those plans and closes with a call for independent photographers to take action.
CEO STEPPING DOWN
Chris North, CEO will be stepping down at the end of August 2019 in order to return to the UK with his family. He remains as CEO through August 31st and will support the board in identifying and effecting a smooth transition to his replacement. The Transition Agreement was filed with the SEC on Tuesday.
During the investors call later in the day North reiterated his excitement in the company’s future and assured investors “that the team and I are laser focused on executing our strategy and 2019 plans.”
North was hired on March 14, 2016 and oversaw significant growth during his tenure; however stock prices have performed like a roller coaster the past several months essentially giving up everything gained through the announcement of the acquisition of the country’s largest photography company Lifetouch.
STRATEGIC REVIEW COMMITTEE
It was also announced that Shutterfly’s Board of Directors formed a strategic review committee and retained the services of Morgan Stanley as a financial advisor to the board. They explained that the committee is conducting an ongoing review of strategic alternatives and evaluating the company’s capital structure and capital return policy. On the investor’s call North stated, “Our board continues to be committed to evaluating all options that maximize shareholder value.”
POTENTIALLY UP FOR SALE
All of which might be the result of another announcement made by the company. It was reported, “that in recent months Shutterfly had been approached by a third party about the potential acquisition of the company. The company and board subsequently engaged with several additional third parties regarding a potential acquisition of the company, but no proposals have been received. The board had not set the time table for the conclusion of its preview of strategic alternatives, and it does not intend to comment further…”
During the Investor Q&A North stated, “We did not say that the company received an offer…the board felt that given the multiple expressions of interest over sustained period of time, it makes sense to form the strategic review committee to look at potential expressions of interest, as well as things like the capital structure, the debt leverage and other strategic things.”
North made it clear that the activity may not result in a transaction or other outcome.
2018 A TRANSFORMATIONAL YEAR & A NEW VISION
North positioned 2018 as a transformational year in which the company nearly doubled its size with the purchase of Lifetouch on April 2ndand told investors that the acquisition creates “the only end-to-end memory solution for families” by combining Shutterfly’s strength as the leader in personalized photo-based products and photo storage with Lifetouch’s strength as the leader in school and family photography.
North went on to say that they (Shutterfly and Lifetouch) have a unique value proposition for their customers. Together, they will capture, preserve and share their customers’ most important memories and create the only end-to-end memory solution for families. He pointed out that, “In doing so, we significantly increase our potential to create shareholder value.”
SHUTTERFLY 2018 COMPANY REVIEW & Q4 PERFORMANCE
On the investors call CEO Chris North summed up the year by saying, “Overall, we had many successes in 2018, including Lifetouchschools account growth, as well as preschool and studios overall performance; in Shutterfly Business Solutions, strong growth and margin improvement; in Shutterfly Consumer, personalized gifts and home décor growth acceleration, new category launches and rapid mobile growth…we also made significant progress against the Lifetouch integration.”
2018 Non-GAAP net revenue was $2.001 billion and GAAP net revenue was 950 million, an impressive increase year over year.
Shutterfly Consumergrowth was well below expectations highlighted by softness in prints, cards and stationary. Prints declined 8% in 2018 underperforming the market, which is relatively flat to modestly declining. Photo books and calendars performed well. Shutterfly Business Solutionsachieved better-than-expected performance and Lifetouch achieved solid performance.
In 2018 Shutterfly launched 47 new products and a new product category, Shutterfly Kids, targeting the parents of children aged 4 to 14 with school gear, kids room items, toys and games etc. a logical extension attractive to Lifetouch’s customers.
In January 2019 Shutterfly repaid $200 million of their Term Loan B debt used to finance the acquisition.
Mobile significantly outperformed expectations. Q4 revenue generated by the Shutterfly app increased 68% year-over-year and full year app revenues grew 59% year-over-year. The app performed well in cost effectively gaining new customers, growing repeat customers, increasing revenue per customer, and driving a large increase in photo uploads. Shutterfly Photos now hosts more than 50 billion photos.
Shutterfly views Mobile as critical to its future and in 2019 intends to focus on acquiring new customers and monetizing existing customers through its app. North said the app would allow them to, “…drive deeper and more personalized engagement with our customers in 2019.”
Lifetouch’s fiscal 4thquarter performance appeared to be in line with expectations reporting GAAP revenue of $348M and Non-GAAP revenue of $350M.
North said, “Overall, we continue to be pleased with Lifetouch’s performance in its third quarter as a part of Shutterfly.”
CFO Mike Pope shared that; “Lifetouch generated $799 million of non-GAAP revenue for the nine months ended December 31, 2018.” Shutterfly appeared pleased with Lifetouch’s nine month performance as a part of the company stating, “The schools, preschool and studios business units performed well, meeting our expectations for the year, while the church business continues to decline as expected.”
It was reported that the school and preschool business units realized net account growth resulting from increased account retention of 93.5% and a growth in new accounts of 3%.
Declining participation in the industry appears to have impacted Lifetouch with North sharing that the positive net account growth was partially offset by the participation rate, which “was slightly below our expectations.”
In response North stated that they plan to make significant investments designed to improve the participation rate in 2019 and beyond, recognizing that a significant driver of participation is the parent’s awareness of picture day.
He emphasized that the integration has made significant progress and he cited efforts to gain synergies. North explained that much of the modernization planned for Lifetouch was not possible in 2018 due to the short time-frame between the acquisition’s close and Lifetouch’s peak fall season.
“We’re focused on realizing substantial cost and revenue synergies over a multiyear period. In Q4, we tested a broad range of marketing approaches and Shutterfly benefits for Lifetouch customers, including a lightweight first phase of technology integration as a step towards broader integration in 2019 and beyond.”
The initial enhancements made to Lifetouch’s online ordering platform resulted in a significant increase in customers shifting from paper based to online ordering. It was reported that 58% of the fall school picture day orders were purchased online, a substantial increase year-over-year.
So, Shutterfly produces mixed results but nonetheless demonstrates the opportunities within its Business Solutions segment and more importantly shows the investment community that the school picture business might just have potential.
Shutterfly’s initial investments in modernizing Lifetouch’s online ordering and introducing Lifetouch’s customer to Shutterfly’s mobile app appear to be paying off.
But, can Shutterfly deliver on the promise of converting the more than 10 million image active households of Lifetouch customers to Shutterfly’s photo management service and its broad product portfolio? If they do, Shutterfly will have disrupted the volume photography industry and in so doing shifted the traditional school photography paradigm as well.
2019 LIFETOUCH PLANS
Lifetouch revenue is planned to be relatively flat throughout 2019 with continued growth in schools and preschools, a modest decline in studios and continued declines in church. Continuing the net increase in accounts, improving AOV and stabilizing the participation rate should fuel the growth they expect in the schools business.
North shared that they conducted dozens of customer facing tests and elaborated that, “…in 2019, we will further develop our tools and programs to drive awareness, including investing in building marketing teams, integrating platforms, developing programs and dramatically increasing the portion of the customer base we can reach with direct consumer communications.”
In other words, 2019 is the year in which Shutterfly intends to equip and launch Lifetouch into the digital age that has become a way of life for the millennial household’s CMO (Chief Memory Officer).
North emphasized the importance of having added Lifetouch to the Shutterfly portfolio when he said, “Lifetouch also represents our best opportunity to step change the size of the Shutterfly consumer customer base. As a reminder, Lifetouch has more than 15 million estimated three-year active customers, that is customers that have made any purchase in the last three years, with only 27% overlap with Shutterfly, leaving more than 11 million estimated non-overlapping three-year active customers. Our 2018 testing and research confirms that Lifetouch customers want their photos on Shutterfly, and see it as a natural extension of their Lifetouch buying experience. We also discovered something we had not expected that Lifetouch could be an effective channel for reengaging overlapping customers who had lapsed on Shutterfly.”
Most Lifetouch customers will continue to place orders on the Lifetouch website in 2019, but Shutterfly is preparing for an integrated, customer facing e-commerce platform. They committed to significantly increase the number of Lifetouch customers who will be able to use Shutterfly Photos as their exclusive delivery method for their digital photos in 2020.
This integrated experience will be made available for fall picture day, the prestige portraits graduation business, the preschool business and the studios business.
The result is Lifetouch customers will be able to store, organize, share, create product and purchase their Lifetouch and personal photos on a single platform with a single set of account credentials.
PROJECT ASPEN – COMMON MANUFACTURING PLATFORM
North introduced a major initiative called Project Aspen, a single next-generation manufacturing platform serving Shutterfly Consumer, Lifetouch and Shutterfly Business Solutions. The intent is to drive cost synergies through a common manufacturing platform thereby facilitating greater utilization during seasonal peaks and leveraging their newly combined purchasing power and scale. The plan is for Project Aspen to result in approximately $130 million in savings over five years. North explained, “As we bring these businesses together over the next few years, we have opportunities to create significant value to the cost and revenue synergies.”
Part of the cost savings includes closing four legacy Lifetouch plants in the second half of 2019.
These plants will be replaced in the first half of 2020 with new technology in a new 237,000 square-foot facility in Texas serving both Lifetouch and Shutterfly.
2019 SHUTTERFLY PRIORITIES
During the investor’s call North stated, “We are not doing as well as we need to in attracting new customers to Shutterfly as a whole…” He committed to increase Shutterfly’s marketing spend on building brand awareness, to improve their holiday card business by introducing a good, better, best strategy and to continue growing mobile. He cited continuing the integration of Lifetouch thereby attracting and converting Lifetouch customers to the broader array of products and services available through Shutterfly.
Mobile is playing a significant role in the plan to create shareholder wealth having driven strong performance across the key metrics measured by Shutterfly including growth in new customers, repeat customers, revenue per customer and new customer acquisitions.
Shutterfly will focus on growing mobile’s impact in 2019 by adding new products, improving and simplifying the customer experience, and by expanding product creation technology. North plans to, “drive deeper and more personalized engagement with our customers in 2019.”
Enhancing the customer’s mobile experience coupled with the customer’s dependence on Shutterfly’s photo storage could yield improved customer loyalty, incremental purchases and increased AOV for Shutterfly and Lifetouch.
EXAMINE YOUR BUSINESS
So what does this mean? I believe it means it’s time to thoughtfully examine your business and determine what and where you need to transform your operation and take action.
First, two quick points, both of which balance the importance of relationships with the power of new technologies.
ACCOUNT GROWTH – OUR RELATIONSHIP WITH SCHOOLS
Shutterfly expects Lifetouch to continually produce net account growth. To do so, expect Shutterfly and Lifetouch to join forces to increase Lifetouch’s attractiveness to schools.
One specific example of this was launched in the 4th quarter of last year. Lifetouch introduced an affiliate program referred to as the Shutterfly Fundraising Storefront. Purchases made by Lifetouch school customers on Shutterfly.com result in an 8% cash back reward to the school. Lifetouch purchases are excluded from the promotion. Marketing initiatives and promotions of this kind reward the school for signing with Lifetouch and encourage moms to engage with Shutterfly to create and purchase products through Shutterfly.
The net result is the potential for more money for the school, increased customer acquisition for Shutterfly and now, having increased the switching cost, greater likelihood of mom’s and the school’s loyalty to Shutterfly/Lifetouch.
Relationships remain important in acquiring and retaining accounts, however, don’t fool yourself into thinking that attractive new benefits and programs can be ignored forever.
CUSTOMER LIFETIME VALUE – OUR RELATIONSHIP WITH MOM
I believe there are inherent weaknesses in the traditional school picture model. One of which I refer to as a “one and done model.”
Most school photographers have a limited number of contact points with the customer generally capturing one sale and if lucky a reorder. A one and done model. Shutterfly’s photo storage, image curation process, and consumer marketing provide Lifetouch’s customers with choice unheard of in the traditional school picture package or on-line through most school picture company’s websites. Shutterfly can monetize the Lifetouch customer for a lifetime. No more one and done.
I think this means less profitable schools can become more profitable over time as the customer lifetime value increases…getting more for a longer period of time from mom.
It also means mom has a voice in the marketplace. The school picture industry is ripe for a disruption. Our business model has remained relatively stagnant in an age where technology and innovation drive consumer expectations of product and experience.
Mom is social and she’s mobile. Do you conduct business where she does? If not, how can you have a beneficial long-term relationship with her? Is it time for change?
WHAT CAN WE EXPECT?
As you review the list below think about how Shutterfly and Lifetouch’s progress in these areas may impact your market, your schools and consumers and ultimately your business.
Volume photographers you can anticipate progressfrom Shutterfly and Lifetouch in 2019.
CALL TO ACTION – IS IT TIME FOR CHANGE?
Shutterfly is revitalizing Lifetouch’s relationship with its consumers and school accounts. Are you invested in revitalizing your relationships with your customers and schools? Is it time for change? What steps do you need to take to remain competitive in this changing industry?
Remember, if we don’t innovate, we’ll evaporate.
To view past articles on the school photography industry and specifically Shutterfly’s acquisition of Lifetouch please visit my blogs at http://pspconsulting.info