Michel de Guilhermier's Blog

Earnings Report 2.0 : Shutterfly is "Extremely Pleased" to Double its Loss !

Shutterfly, a leading photo sharing and printing website in the US, yesterday reported their first quartely earnings as a public company after their recent IPO.

Revenues grew in the area of +40% up to $21M, which is decent but far lower that what other much bigger e-tailers as Netflix (+48%, up to $256M) or VistaPrint (+73%, up to $50M) had achieved during the quarter.

While revenues grew, gross margin significantly declined (6 full points) and operational loss doubled as fixed costs also soared with higher R&D, G&A and Marketing expenses.

This once again is very different from Netflix or VistaPrint which posted better margins and greater operational profits...

Stephen Recht, Shutterfly CFO, could proudly declare : "We are extremely pleased with our financial performance this quarter...". At the last Jeffrey Broadview Internet conference in NY last February, Stephen Recht, newly appointed CFO, was a strong advocate of Shutterfly's web 2.0 approach. I at least confirm their finance 2.0 approach when one is extremely pleased to narrow its gross margin by 6 full points vs year ago quarter and to double its operational loss !

How about the free cash flow, a metric I particularily pay attention to as concerning my stock market investments ? Well, picture is not that nice, free cash flow is bleeding and will continue so next year with $20 to 25M capex expected while EBITDA should be at the same level at best. In other words, after 8 years of operations, company will still suck cash...

That's sometimes a bias and an issue with American companies and VCs (not all, of course), they can only think "big", they spend big money, no matter what the operational realities are and what the nitty gritties of businesses are, and whether or not frugality is a key success factor (as it is in most e-commerce businesses). They spend like crazy, travel 1st class where coach class should be the norm, and they simply can not adapt their behavior.

They are just formatted in a certain way which is truly great in some environments, but not in all, and when that's not the case, don't expect them to change !

Back to Shutterfly, the story is an interesting one. They were approached in 2004 by HP, a year when they made $55M revenues. There was no deal for valuation concerns, as Shuttefly estimated they were worth well north of $500M. As a consequence, HP acquired Snapfish which was then much smaller (around $30M sales), was hardly profitable, for the extraordinary price of $300M, 10 times sales...

Almost 3 years later, Shutterfly at long last gets public, raises $80M and is now worth around $300M, ie a bit more than $200M "pre-money", which is less than half the price of a deal they turned down 2 and a half years before !

Sure, Shutterfly is worth something, it has clear growth potential, but one has to be realistic about what it's really worth. Business is extremely competitive, there's no striking long term competitive advantage, so don't expect to juice extraordinary margins from such a business, let alone the capex it requires year after year.

Maybe some people dream, I don't ! Shutterfly's market cap of almost 3 times 2006 sales is reasonnable (considering thre $80M cash raised), and I wouldn't really pay more that that at this point.

20 Months to Create $1.6bn !

So, the rumor was founded and Google yesterday evening confirmed it had acquired YouTube for $1.65bn in stock !

For the video sharing site launched in February 2005, and who had raised about $11M, that's a pretty impressive achievement. It had managed to grab almost 50% of the online video market, ahead of MySpace, with Google a very distant third player. 100 Million videos viewed a day, that indeed blows my mind away ! Didn't I say several months ago that video was the next big thing ?

Although $1.65 is very rich by all measures, Google share did not tumble in after market hours (just inching down), so investors don't seem to be much concerned by the acquisition price.

Google had been criticized on relying too much on advertising tied to keywords. Here's a new fast growing source of trafic and advertising possibilities and a way to compete against the other star of the moment, MySpace. The combination of Google Internet prowess with YouTube video stream will intrinsically be very powerful and interesting to watch. Microsoft, Yahoo and NewsCorp must react.

Will Google manage to monetize YouTube trafic in a way it pays for the acquisition, and how, this of course remains to be seen. However, Google has proven they are masters in monetizing trafic more and better than anybody else in the business. So, as I'm concerned, I do think this deal makes sense for both companies : Google acquires a strong brand name and a huge trafic, YouTube teams up with fantastic technological and monetization skills.

Sure, $1.65bn is a price, but that will make no dent in Google's cash position as it's an all stock deal and Google itself is pricey (P/E of 60+, though PËG is a mre reasonable 1.44).

Update 4PM : stock market salutes the acquisition : Google is up slightly while Yahoo and Microsoft are down (googmic Index up to 43%).

Update 10 PM : Google eventually inched down 0,6% but Yahoo lost more than 2%. Yahoo is now at its lowest point in more than 2 years. In the same time, Google has jumped about 300%...

Webwag & Yahoo Into Worldwide Partnership !

Business seems to go pretty well and fast for Frank who launched Webwag - a personalized start page service competitor to NetVibes and PageFlakes (among others) - a bit more than a month ago (see here) : he has just signed a strategic partnership with Yahoo and he now introduces "the personal wide web" search in exclusivity.

See his post.

Update : for French speakers, here's an article in Journal du Net.

YouTube vs Shutterfly ! Video Sharing vs Photo Sharing & Printing !

On my left, Shutterfly, a leading online photo sharing and printing website, launched in early 1999 by Jim Clark, the iconic Silicon Valley entrepreneur (Silicon Graphics, Netscape, MyCFO, etc), which went public last week with a today market cap of $300M, ie 3,5x 2005 sales ($85M).

Shutterfly is a pure e-commerce player, manufacturing 95% of what it sells. It is a sizable, profitable (though not extraordinarily) and very tangible business which should ship an average of 20,000 orders/day in Q4 with a few millions visiting customers. Growth has however significantly slowed down and should be in the area of 25% this year. In total, Shutterfly has raised closed to $180M (including the $85M raised during the IPO).

On my right, YouTube, founded in February 2005, an iconic and booming web 2.0 community site which offers free video sharing (100M video/day viewed), and which is rumored to be in takeover talks with Google for $1.6bn (see here).

Negligible sales (Ouriel indicated $7M), but already close to 20M unique visitors per month. YouTube has raised a total of $11,5M, all from Sequoia, the well known VC.

Well my friends, in the photo sharing and printing field, the leading player has raised $180M and today gets a market cap of $300M despite $110M revenues this year, and in the video sharing field, the leader has raised $11.5M and is now supposed to be valued $1.5bn+ with little revenues today. Value creation doesn't seem to be evenly distributed !

Could seem a bit strange, but honestly, though I'm a very active promoter of down-to-earth analysis, there's some rationale to it, and here's my quick&dirty take :

- Shutterfly : 2 Million clients, sales of $110M with a gross margin of say 48% (2005 level, but decreasing for the last 3 years), growing at 25% this year and probably no more than 15% over the next 5 years, excluding dilutive external growth. In 2011, Shutterfly may well be a business with $250-300M sales with 4 or 5 Million customers buying an average of 50 to $60. Typical retail margins and multiples could justify a 2X multiple at very best when business matures, ie a valuation of $500M in 5 years time. Consequently, $300M market cap today is already well paid.

- YouTube : 20M unique visitors today, spending a significant amount of time watching videos on the website, a likely growth of at least 50% over the next 5 years, therefore a potential massive audience of 150M unique visitors in 2011. Such figures may well generate hundreds of millions of advertising revenues and could easily command a valuation of several billons $.

Une Bulle 2.0 Est-Elle en Route ?

Ouriel Ohayon de TechCrunch se lance dans une série d'interview sur la question. Aujourd'hui, Jérémie Berrebi, Mauro Mariana, Pierre Chappaz et Pascal Rossini donnent leur avis...

Ouriel a aussi réalisé un petit sondage en ligne, à cette heure 240 personnes y ont répondu, et la majorité (61%) pensent que OUI, on vivra une bulle, mais pour des raisons différentes de la 1ère...

J'ai donné ma réponse sur le sujet, je lui laisse le soin de la mettre en ligne !

Ce Que Je Crois en Matière d'E-commerce !

Sans surprise pour les lecteurs avertis de ce blog, je crois 3 choses :

- L'e-commerce offre de très vastes et magnifiques opportunités. Avec une croissance prévisionnelle de 20 à 25%/an sur les 5 prochaines années, et plus sur certains secteurs, il y a une vraie autoroute. C'est un canal de distribution qui va considérablement s'élargir et sous 5 ans 2 européens sur 3 achèteront régulièrement via Internet. Ce n'est pas une hypothèse, mais une certitude basée sur un principle simple : quand en quelques clics on apporte aux consommateurs un vaste choix, des conseils judicieux, un service sans faille, le tout dans un environnement de vente agréable et fluide, ça marche. Et maintenant que chaque foyer ou presque a son PC connecté en haut débit à Internet, le creuset est bien là. No brainer !

- Il y a par ailleurs excessivement peu de vrais e-commerçants qui comprennent toute la complexité et les impératifs de ce métier, et qui l'aiment réellement. Le e-commerce, comme je l'ai maintes fois répété, est à la croisée entre le Commerce, l'Internet et la VPC, avec à la fois le mindset, la chaîne de valeur et les techniques des 3 à reprendre. Rarissime sont ceux qui comprennent l'ensemble de la chaîne de valeur, ont une sensibilité ou des compétences sur ces 3 domaines à la fois, savent arbitrer les ressources et les allouer efficacement au bon moment, et savent recruter les personnes adéquates.

Dans l'e-commerce, ce n'est pas seulement la technologie - le côté "e" - qui est spécifique, mais tout un ensemble de choses. Réduire la spécificité de l'e-commerce à la seule dimension technologique est une erreur que j'ai couramment observée, classique chez les geeks du web.

- Le mindset à adopter dans l'e-commerce est avant tout un mindset "commerce" !

Dans de très nombreux business (web ou pas d'ailleurs) drivés par la technologie et la recherche (ie Google), il y a avant tout des coûts fixes et à partir du moment où le seuil de break-even est atteint, la rentabilité marginale est énorme. Dans ce contexte, le seul vrai impératif, le seul vrai levier clé de rentabilité est logiquement de booster le CA. On est naturellement moins regardant sur les coûts fixes, et on ne traque pas en permanence les coûts variables.

C'est à la fois l'inverse et plus complexe dans l'e-commerce : comme dans le commerce traditionnel, c'est un monde où il faut être frugal et obsédé par ses coûts. Le commerce ne s'accomode pas de trains de vie dispendieux, l'un des impératifs est de constamment chercher à réduire tous ses coûts, fixes de fonctionnement comme variables. Il faut être systématiquement malin et créatif pour imaginer les meilleure solutions en terme de coûts.

Et en parallèle, un commerçant doit avoir une grosse niak, il vit intensément sous une pression constante, car il doit tous les jours aller chercher son chiffre d'affaires qui va dépendre de ce qu'il met sur les étagères comme de l'efficacité de sa politique promotionnelle vs ses concurrents. Et cela est aussi un travail quotidien nécessitant une réactivité immédiate.

Ce que je crois donc finalement, c'est qu'il y a finalement et intrinsèquement bien plus de proximité entre un e-commerçant et Carrefour qu'entre un e-commerçant et Google.

Rappelons pour l'anecdote que Jeff Bezos ne gagne que 100,000$ par an pour gérer une société de 10Mds $...

Prenons une analogie avec un monde que je connais bien et qui me semble parfaitement juste : les sodas ! Pourquoi croyez-vous que Pepsi et Coca ont fondamentalement divisé leur business en 2 : celui du concentré et celui de l'embouteillage/distribution ?

Dans un cas, le business du concentré, on travaille sur des marges brutes de 95%, on a des effectifs finalement assez réduit et le but est de faire un bon et gros marketing (en milliards de dollars) pour booster le CA. Dans l'autre, l'embouteillage/distribution, on travaille sur des marges brutes de 20 à 30%, on a des investissements physiques énormes (usines et flotte de camions), des effectifs énormes (vendeurs sur le terrain, chauffeurs, etc), et le name of the game est de constamment réduire ses coûts et gagner en productivité.

Google, c'est un peu la Coca Cola Company ou PepsiCo (le vendeur de concentré), mais Amazon, c'est plutôt Coca Cola Enterprise ou Pepsi Bottling Group (l'embouteilleur). Marges différentes, economics différents, mentalités totalement différentes, logiques différentes, types de pression différents...

J'aime quant à moi l'e-commerce que je pratique depuis près de 7 ans maintenant, j'aime être proche du consommateur dont je cherche à comprendre les motivations et les freins le plus finement possible, j'aime imaginer de nouveaux produits ou de nouveaux systèmes de vente qui vont apporter au peuple un réel plus, j'aime vivre avec la pression et l'excitation de la vente. Et par nature je ne suis pas un flambeur, la grande frugalité a été la base chez Photoways pendant de nombreuses années (y compris au niveau de mon salaire et de celui de mon associé Martin Genot !)

Enfin, je crois qu'avec une équipe de personnalités et compétences complémentaires, ayant réellement "faim" et sachant rester frugal et très "terrain", on peut réaliser de très belles choses dans l'e-commerce.

Just for the Fun of It !

Please, be quietly seated  before reading the following !

In a note to clients, Jordan Rohan, an analyst at RBC Capital Markets, said that he now believes MySpace's worth as a company will increase tenfold to somewhere around $15 billion by 2009, given the value attributed recently to smaller social-networking sites, MySpace's "massive" international appeal and its ability to inexpensively meet the surging demand for its features.

"The trajectory for profitability of MySpace is every bit as steep as that of Google," the search giant that generated about $6.1 billion in revenues last year, the analyst wrote Wednesday.

That's not bad for a company that at the time of its purchase was barely generating a profit, and three years later is still wrestling with the ways in which it will make money.

"Ridicule is part of the job description of a sell-side analyst, particularly when he is more bullish about a business model than even the management team of a hot Internet property," according to Rohan. "We are acutely aware that some media investors will try to punch holes in our thought pattern, or at the very least, disagree with our valuation."

Really ?

Diner d'Entrepreneurs Web 1.0, 2.0 et 3.0 !

Malgré la faible résolution de mon antique Tréo 650 (by the way, it doesn't sound good for Palm), on reconnaîtra, en partant de la gauche : Fabrice Boutain, Marc Oiknine (debout), Fabrice Grinda, Aymeric Chotard, Patrick Robin (debout) et Gael Duval. Bertrand Pulles, Julien Babin, Antoine Mermet.

A l'initiative de Fabrice qui passait en France, nous étions une bonne brochette d'entrepreneurs de l'Internet français à diner ensemble hier soir !

Enthousiasme, passion, bouillonnement intellectuel, des idées à foison, un peu de rêve et beaucoup de rire, que demander de plus ? Surtout qu'il y avait Marc, d'Atlas Ventures, toujours prêt à nous financer ! Marc Simoncini de Meetic, autre icone de l'internet français, aurait du nous rejoindre mais a eu un empêchement de dernière minute.

Entre Patrick qui s'y prend avec un superbe flair pour monter son site de ventes évenementielles, 24h00.fr, Fabrice qui développe OLX à une vitesse inouie (déja 22 pays ouverts et 50 Millions de pages après juste 5 mois d'exploitation), Aymeric qui a récemment revendu aux 3 Suisses son bébé, 2xmoinscher, l'autre Fabrice qui propose sur le web avec Anxa d'ingénieux packages de coaching (ie perte de poids), Antoine et Julien qui fort de leur superbe expertise en search marketing acquise chez Google et Meetic viennent de monter leur propre structure, Keyade, Gaël, Président Fondateur d'Un77.com, agence de marketing interactif qui s'est associé à Addvisemedia pour fonder Nextedia, Bertrand de la Bourse des Voyages, et enfin Marc, nouveau VC mais ex entrepreneur du web, il y avait là une  exceptionnelle collection de talents et d'expérience web !

A nous tous, nous devions bien cumuler près de 100 années d'expérience web, dont plus de 12 il est vrai déja trustées par le "papy" pionnier du web, Patrick ;-). Pas mal de sociétés Internet revendues également par les amis présents, avec Imaginet et le Web Marchand (Patrick), Aucland et Zingy (Fabrice G), PageFrance (Fabrice B), Alpaga (Gaël), etc. Avec la revente de ma chaîne de distribution lyonnaise ou ma société de conseil en LBO, j'étais un peu en dehors de l'axe !

Fabrice était émouvant quand il rappelait les 63M€ levés au total pour Aucland ! C'était l'époque impressionnante de la bulle 1.0 de 1999 ! Il voyait grand à l'époque, et ça ne l'a pas quitté avec OLX : son dernier bébé s'inscrit dans la droite ligne du web 2.0 : un trafic déja monstrueux, une valo pour le dernier tour de table à me faire tomber par terre, et bien sûr pas encore de revenus ! Mais il vise rien moins que de créer le plus grand site de petites annonces au monde ! Il résume parfaitement en disant "il faut faire rêver". Et c'est vrai, le peuple aura toujours besoin de rêver et de s'enthousiasmer pour quelque chose, et le petit peuple des VCs également ! Think big, think different, et avec une crédibilité de serial entrepreneur, ça passe tout seul ;-). You know what, j'y crois à son projet !

Nul doute que des nombreux talents présents ce soir sortiront quelques concepts web 3.0, une fois la bulle 2.0 éclatée ! Et nous étions tous d'accord sur une chose : nous vivons une époque bénie actuellement : le marché est là, l'argent aussi, il y a pléthore d'opportunités, y a plus qu'à quoi !

Patrick m'indiquait qu'il pensait pouvoir faire 1,5M€ en une seule vente évenementielle ! Pauvre de moi qui doit trimer tous les jours pour sortir des milliers de commandes à 20€ et gagner un peu d'argent !

Some News on WebWag !

Frank's new baby, Webwag, a competitor to NetVibes and PageFlakes, has already received some press coverage both in France and in the US.

On the US side, here's an article in the Alarm Clock.

On the French side, one in "E-commerce & VAD".

Well done Franck ! I very much like your down-to-earth pragmatic approach.

Breakfast with a NewsCorp Top Executive !

I yesterday had breakfast with a good friend of mine I used to work with during my years at Bain & Company. The guy is now one of the top NewsCorp executive in Europe with a responsibility to seek interesting partnerships and investments for Sir Ruppert. He used to report directly to him, so happens to know the incredible man pretty well.

2 striking points which came up in the course of our casual conversation :

- Acquisition decision process within NewsCorp is extremely quick, with potential deals going straight to Murdoch himself and his young (33) and brilliant Chief of Staff. Ruppert Murdoch is a deal maker and can make up his mind in no time as to allocate capital or not . As an example, the so famous MySpace $580M deal was decided in less than 24 hours. MySpace had another SPA (Stock Purchase Agreement) in hands, so Murdoch had to decide quickly whether to overbid, which he did. Rather unusual for a company of that size. Worthless mentioning how we made acquisitions at PepsiCo ! Murdoch has in mind every single price he paid for all the acquisitions of the Group, be it very small ones !

It reminds me my great and so much rewarding days at the Dole Food Company where David Murdock (despite name similarities, nothing to do with Ruppert, one is American, the other Australian, both are billionar !) could also decide the relevance and the price of an acquisition in 2 seconds !  Some people just have an incredible drive and the flair to make quick deals ! Just for the fun of it, on the left side a picture of Governator Schwarzy shaking hand with 83 years old David Murdock, Chairman, CEO and now sole owner of the Dole Food Company (whose HQ is in Westlake, California). Here more info on this incredible guy that David Murdock is, a high schoold drop out, totally obsessed by money (when he was a young boy, he had claimed he wanted to become the world's richest guy !), who went bankrupt twice but always magnificently recovered.

- As an acquirer of Internet companies (ie MySpace again), NewsCorp is seeking highly motivated management who have demonstrated their total commitment to the business. My friend wouldn't be comfortable in investing or acquiring a business whose management haven't put a significant portion of their own money in the venture, especially if they are wealthy. Moreover, they like start-up companies to be managed like start-ups, ie with an adequate cost structure and a frugal standard of living.