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Shutterfly Soars

Personal-publishing service Shutterfly (Nasdaq: SFLY  ) defied gravity with outstanding sales growth in its second quarter. But perhaps even more attractive than the numbers is a new partnership that the company unveiled in its conference call.

Customers are flocking to Shutterfly, which operates an Internet-based "social expression and personal publishing service." In addition to letting users store and share photos online, the service also lets them adorn various types of merchandise with their digital prints. Shutterfly then mails the personalized wares to the customers.

The growth is impressive, but according to CEO Jeffrey Housenbold during the conference call, Shutterfly may just be scratching the surface. He revealed that only 6% of potential customers -- those with digital cameras that are also plugged in to the Internet -- have used a personal publishing service for photo merchandise.

The lack of awareness is one reason Shutterfly is starting to look at strategic partnerships with key retailers. In pursuing that goal, it recently teamed up with Target (NYSE: TGT  ) to make Shutterfly available in key Target stores and on the website.

Shutterfly is also looking at the pet lovers' market as holding great potential. This summer, the company packaged special offers with Del Monte's (NYSE: DLM  ) pet food, and it's currently testing partnerships with retailers such as Petco and websites such as

As for how it all played out in the second quarter, revenues jumped 52% over the same period a year ago. Equally important is that the company didn't sacrifice gross-margin performance for the sake of growth -- in fact, gross margins actually improved slightly, to 50.4%. Shutterfly has yet to achieve profitability, however, since operating expenses still outweigh gross income.

Investors should also know that Shutterfly isn't the only player in this game. Others include Kodak (NYSE: EK  ) , Yahoo! (Nasdaq: YHOO  ) and its Flickr service, News Corp. (NYSE: NWS  ) and its recently acquired Photobucket operation, and Hewlett-Packard's (NYSE: HPQ  ) Snapfish. But according to Housenbold, Shutterfly is the only major pure-play operation in this segment, and having that sole focus, he believes, will further growth.

Shutterfly is definitely up against some big-time players, and so far, it is holding its own quite nicely. But can it continue the growth while it also achieves profitability by improving operating efficiencies?

Stay tuned.

Yahoo! is a Motley Fool Stock Advisor selection. For a snapshot of Tom and David Gardner's market-beating recommendations, open up a free 30-day trial of the newsletter service. It's great for the investor, photographer, or pet lover in you.

Fool contributor Jeremy MacNealy has no financial interest in any company mentioned. The Motley Fool has a disclosure policy.

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