Shutterfly (SFLY)updated Friday, September 29 to a trading price of $16

Shutterfly	SLFY, C, 6
online photo service						Post-IPO shrs:24mm
Redwood City, CA	2003	2004	2005	6mos June	6mos 2005	IPO Mkt
Rev ($mm)	$31.0	$54.0	$84.0	$36.5	$27.0	Cap (mm)
Gross profit	54.8%	55.6%	56.0%	49.3%	51.9%	$378
Operating income %	8.1%	8.1%	5.8%	-16.7%	-5.2%	@$16
Income ($mm)	$2.0	$3.7	$28.5	-$3.7	-$1.3
Net income %	6.5%	6.9%	33.9%	-10.1%	-4.8%
Notes
. Six months revenue growth on a comparative basis is 35%
. Notice declining gross profit, and non-profitable operations for the June six months
Non-recurring
. Also: 2005 results include $24.1 million in tax benefit, see the following:
During the fourth quarter of 2005, SFLY concluded that it was more likely than not that it would
be able to realize the benefit of deferred tax assets in the future. Consequently, SFLY recognized
a non-cash tax benefit of $24.1 million in the fourth quarter of 2005 resulting primarily from the
release of the entire net deferred tax valuation allowance
. 2005 results include $3.3mm in stock-based compensation charges
Adjustments
. For 2005 for operating income, add back $3.3mm in stock-comp charges
. Operating income is then 10%
. Assume sales for the 2006 year are up the same 35% as in the first six months
. Then full year sales would be $113mm
. Resulting in $11.3mm in operating earnings
. Assuming a combined tax rate of 40%, after tax earnings would be $4.52 million
. Which is an adjusted P/E ratio of 84 based on the above assumptions
VALUATION RATIOS	IPO Mrkt	Price /	Price /	Price /	Price /	% offered
	Cap (mm)	Sales	Earnings	BookValue	TangibleBV	in IPO
Shutterfly (SFLY)	$378	0.5	-51	2.8	2.6	25%
SCORECARD		Mgt	Market	Market Do-	Proprie-	Total
1-5, 5 is high			Growth	mination	tary	rating
20 is perfect		2	2	1	1	6
Business – online photo service
Print revenues are derived from sales of photo processing of digital images, including sales of 4x6
prints, and the related shipping revenues from these sales.
Seasonal
Generates a disproportionate amount of revenues during the holiday season in the fourth quarter of the calendar year
Prices declining
. Historically, average selling prices for prints have declined, and they may continue to decline in
the future.
. For example, in the second quarter of 2005, certain competitors reduced the list prices of their
4×6 prints from $0.29 to $0.12.
. In response, SFLY lowered the list price of 4×6 prints to $0.19 in order to remain competitive.
This decrease negatively affected print revenues for the six months ended June 30, 2006.
. A further drop in 4×6 prices without a corresponding increase in volume would also
negatively impact net revenues.
. Larger competitors could elect to further reduce the list prices of their 4×6 prints or use lower
pricing of prints as a loss leader. If this were to occur, we might not be able to remain competitive
on pricing for 4×6 prints, which could result in a loss of customers.
Competiton
• Online digital photography services companies such as Kodak EasyShare Gallery (formerly
known as Ofoto), Snapfish, which is a service of Hewlett-Packard, Sony’s ImageStation and
others;
• "Big Box" retailers such as Wal-Mart, Costco and others that are seeking to offer low cost
digital photography products and services, such as in-store fulfillment and self-service kiosks for
printing, and that may, among other strategies, offer their customers heavily discounted in-store
products and services that compete directly with our offerings;
• Drug stores such as Walgreens, CVS and others that offer in-store pick-up from Internet orders;
• Regional photography companies such as Wolf Camera and Ritz Camera that have established
brands and customer bases in existing photography markets;
• Internet portals and search engines such as Yahoo!, AOL, Google and CNET that offer broad
reaching digital photography and related products and services to their large user bases;
• Home printing service providers such as Hewlett-Packard, Epson and Canon, that are seeking to
expand their printer and ink businesses by gaining market share in the emerging digital
photography marketplace; and
• Photo-related software companies such as Adobe, Apple, Microsoft, Corel and others.
Use of $78mm in IPO proceeds
. Expects capital expenditures to be between $30 million and $35 million in the second half of
2006 and through 2007, which will be funded by a combination of cash and cash equivalents,
expected cash flows from operations and the net proceeds from the offering.
. Expects to spend approximately half of this amount to purchase manufacturing equipment, obtain
new manufacturing facilities and on improvements to our new and existing manufacturing
facilities, with the remainder to be allocated for the purchase of website infrastructure equipment.