Shutterfly 2007 Annual Report Download - page 40

Table of Contents
To further understand revenue trends, we monitor several key metrics including:
Average Order Size. Average order size is net revenues for a given period of time divided by the total
number of customer orders recorded during that same period. We seek to increase average order size as a means
of increasing net revenues. Average order size has increased on an annual basis for each year since 2000, and we
anticipate that this trend will continue in the future.
Total Number of Orders. We closely monitor total number of orders as an indicator of revenue trends. We
recognize the revenues associated with an order when the products have been shipped and all other revenue
recognition criteria have been met, which is consistent with our revenue recognition policy discussed in Critical
Accounting Policies and Estimates below. Orders are typically processed and shipped within two business days
after a customer places an order. Total number of orders has increased on an annual basis for each year since
2000, and we anticipate that this trend may continue in the future.
Personalized Products and Services Revenues as Percentage of Net Revenues. We strive to increase our
personalized products and services revenues as a percentage of net revenues through the continued introduction
and improvement of innovative quality products and services.
We believe the analysis of these metrics provides us with important information on our overall revenue trends
and operating results. Fluctuations in these metrics are not unusual and no single factor is determinative of our net
revenues and operating results.
Cost of Revenues. Cost of revenues consist primarily of direct materials (the majority of which consists of
paper and photo book covers), payroll and related expenses for direct labor, shipping charges, packaging supplies,
distribution and fulfillment activities, rent for production facilities, depreciation of production equipment and third-
party costs for photo-based merchandise. Cost of revenues also includes payroll and related expenses for personnel
engaged in customer service. In addition, cost of revenues includes any third-party software or patents licensed, as
well as the amortization of capitalized website development costs. We capitalize eligible costs associated with
software developed or obtained for internal use in accordance with the American Institute of Certified Public
Accountants, or AICPA, Statement of Position No. 98-1, “Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use” and Emerging Issues Task Force, or EITF, Issue No. 00-02, “Accounting
for Website Development Costs.” Costs incurred in the development phase are capitalized and amortized in cost of
revenues over the product’s estimated useful life.
Operating Expenses.
Operating expenses consist of sales and marketing, research and development and general
and administrative expenses. We anticipate that each of the following categories of operating expenses will increase
in absolute dollar amounts, but as a percentage of net revenues will remain consistent with the recent historical
percentages.
Technology and development expense consists primarily of personnel and related costs for employees and
contractors engaged in the development and ongoing maintenance of our website, infrastructure and software. These
expenses include depreciation of the computer and network hardware used to run our website and store the customer
data that we maintain, as well as amortization of purchased software. Technology and development expense also
includes colocation and bandwidth costs.
Sales and marketing expense consists of costs incurred for marketing programs and personnel and related
expenses for our customer acquisition, product marketing, business development and public relations activities. Our
marketing efforts consist of various online and offline media programs, such as e-mail and direct mail promotions,
the purchase of keyword search terms and various strategic alliances. We depend on these efforts to attract customers
to our service.
General and administrative expense includes general corporate costs, including rent for our corporate offices,
insurance, depreciation on information technology equipment and legal and accounting fees. In addition, general and
administrative expense includes personnel expenses of employees involved in executive, finance, accounting, human
resources, information technology and legal roles. Third-party payment processor and credit card fees are also
included in general and administrative expense and have historically fluctuated based on revenues for the period. We
expect our general and administrative expense will increase in the near to intermediate term as we will
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