Shutterfly Acquires WMSG - Analyst Blog

Shutterfly Inc. (SFLY), a leading Internet-based social expression and personal publishing service, announced that it acquired certain assets and liabilities of Dallas-based WMSG Inc. (WMSG) for $6 million of cash. WMSG is a privately held, digital direct marketing company. The acquisition will enable Shutterfly to step up the deployment of growing print-on-demand market.

The deal was sealed on November 5, and was structured as an asset purchase. The transaction will not have a material impact on Shutterfly's net revenue, operations or cash flows in the quarter ending December 31.

Shutterfly launched a commercial printing business in 2008 to better utilize its digital production assets, which have substantial available capacity during the non-holiday season. However, the business had been suffering since last few quarters and contributing a meager share to the company's total revenue. Despite the various sponsorships and advertising programs, Shutterfly's commercial print initiative has not been progressing as quickly as planned.

Management expects revenues from commercial print transactions to improve modestly on a sequential basis and the full-year contribution to total revenue to be only around $4 million. Notably, the company's full-year guidance for total revenue is $290 million to $295 million.

We believe WMSG's digital marketing and print-on-demand solutions will help Shutterfly to strengthen its struggling commercial print business.  This acquisition will also allow Shutterfly an opportunity to garner high returns on invested capital through  direct marketing campaigns.

Additionally, Shutterfly's business model is highly seasonal. The company derives over 50% of its revenues from the fourth quarter of every year owing to the holiday season.

We think the expansion of Shutterfly's commercial print business will provide an important alternative use for its non-seasonal manufacturing capacity.