Shutterfly 2007 Annual Report Download - page 61

Download and view the complete annual report

Please find page 61 of the 2007 Shutterfly annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 125

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125

Table of Contents
SHUTTERFLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts) — (Continued)
transferred to common stock and additional paid-in-capital and the common stock warrants are no longer subject to
re-measurement.
Revenue Recognition
The Company generally recognizes revenue from product sales upon shipment when persuasive evidence of an
arrangement exists, the selling price is fixed or determinable and collection of resulting receivables is reasonably
assured. Revenues from amounts billed to customers, including prepaid orders, are deferred until shipment of
fulfilled orders.
The Company provides its customers with a 100% satisfaction guarantee whereby products can be returned
within a 30-day period for a reprint or refund. The Company maintains an allowance for estimated future returns
based on historical data. The provision for estimated returns is included in accrued liabilities. During the years ended
December 31, 2006, 2005 and 2004, returns totaled less than 1% of net revenues and have been within management’
s
expectations.
The Company periodically provides incentive offers to its customers in exchange for setting up an account and
to encourage purchases. Such offers include free products and percentage discounts on current purchases. Discounts,
when accepted by customers, are treated as a reduction to the purchase price of the related transaction and are
presented in net revenues. Production costs related to free products are included in cost of revenues upon redemption.
Shipping charged to customers is recognized as revenue.
Cost of Revenues
Cost of revenues consist primarily of direct materials, the majority of which consists of paper, 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.
Technology and Development Expense
Technology and development expense consists primarily of payroll and related expenses for the development
and ongoing maintenance of the Company’s website, infrastructure and software. These expenses include
depreciation of the computer and network hardware used to run the Company’s website and store the customer data
that the Company maintains, as well as amortization of purchased software. Technology and development expense
also includes colocation and bandwidth costs. Technology and development costs are charged to operations as
incurred.
Sales and Marketing Expense
Sales and marketing expense consists of costs incurred for marketing programs and personnel and related
expenses for customer acquisition, product marketing, business development and public relations activities. The
Company’s 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. Fees paid to third parties who
drive new customers to our website are charged to expense as incurred.
56