Shutterfly 2008 Annual Report Download - page 4

PART I
Except for historical financial information contained herein, the matters discussed in this Form 10-K may be considered forward-looking statements within the
meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and subject to
the safe harbor created by the Securities
Litigation Reform Act of 1995. Such
statements include declarations regarding our intent, belief, or current expectations
and those of our management. Prospective investors are
cautioned that any such forward-looking statements are not guarantees of future performance and involve a
number of risks, uncertainties and other factors, some of which are beyond
our control; actual results could differ materially from those indicated by such forward-looking statements. Important factors that could cause actual results to
differ materially from
those indicated by such forward-looking statements include, but are not limited to: (i) that the information is of a preliminary nature and
may be subject to further adjustment;
(ii) those risks and uncertainties identified under “Risk Factors;” and (iii) the other risks detailed from time-to-time in our reports and registration statements filed with the
Securities
and Exchange Commission, or SEC. Except as required by law, we undertake no obligation to revise or update publicly any forward-looking statements, whether as
a result of new
information, future events or otherwise.
ITEM 1. BUSINESS.
Overview
We are an Internet-
based social expression and personal publishing service that enables consumers to share, print and preserve their memories by leveraging our technology,
manufacturing, web-
design and merchandising capabilities. Today, our primary focus is on helping consumers manage their memories through the powerful medium of photos. We
provide a full range of personalized photo-
based products and services that make it easy, convenient and fun for consumers to upload, edit, enhance, organize, find, share, create, print
and preserve their memories in a creative and thoughtful manner.
Consumers use our products and services to stay connected to their friends and family, to organize their memories in a single location, to tell stories and to preserve their memories
for themselves and their children. Our customers purchase physical products both for their own personal use and for giving thoughtful and personalized gifts such as photo books,
calendars, greeting cards and other photo-based products and merchandise.
We currently generate the majority of our revenues by producing and selling professionally-bound photo books, personalized calendars, greeting cards, other photo-
based
merchandise and high-quality prints (ranging in size from wallet-sized to jumbo-
sized 20×30 enlargements). We manufacture these items in our Hayward, California and Charlotte,
North Carolina manufacturing facilities. By controlling the production process in our own manufacturing facilities, we are able to produce high
-
quality products, innovate rapidly,
maintain a favorable cost structure and ensure timely shipment to customers, even during peak periods of demand. Additionally, we sell a variety of photo-
based merchandise that is
currently manufactured for us by third parties, such as mugs, mouse pads, coasters, tote bags, desk organizers, puzzles, playing cards, multi-
media DVDs, magnets and keepsake boxes,
and ancillary products, such as frames, photo albums and scrapbooking accessories.
Our high-
quality products and services and the compelling online experience we create for our customers, together with our focus on continuous innovation, have earned us
numerous third-
party accolades and, more importantly, have allowed us to establish a premium brand. We believe that we realize the benefits of a premium brand through high
customer loyalty, low customer acquisition costs and premium pricing.
Our customers are a central part of our business model. They generate most of the content on our service by uploading their photos and storing their memories. In addition, they
share their photos electronically with their friends and families, extending and endorsing our brand and creating a sense of community. Finally, by giving Shutterfly-
branded products to
colleagues, friends and loved ones throughout the year, customers reinforce the Shutterfly brand. Through these various activities, our customers create a viral network of new users and
customers.
In addition to driving lower customer acquisition costs through viral marketing, our customers provide input on new features, functionalities and products. Close, frequent customer
interactions, coupled with significant investments in sophisticated integrated marketing programs, enable us to fine-
tune and tailor our promotions and website presentation to specific
customer segments. Consequently, customers are presented with a highly personalized Shutterfly shopping experience, which helps foster a unique and deep relationship with our
brand.
Our corporation was formed in 1999 and we have experienced rapid growth since launching our service in December 1999. During fiscal year 2007, we fulfilled more than
seven million orders, to more than two million customers, at an average order value of more than $26 per order.
In June 2005, we completed the acquisition of Memory Matrix, Inc., a Nevada engineering firm dedicated to improving the consumer digital photography experience, in exchange
for 109,302 shares of common stock. In June 2007, we acquired for $1.6 million, certain assets and liabilities of CustomAbility, LLC, a New Jersey publishing company that produces
customized children’s books under the brand name Make It About Me
. On January 4, 2008, for $10.0 million in cash, and stock consideration of approximately $4.0 million, we
acquired Nexo Systems, a privately held on-line sharing and group services company based in Palo Alto, California.
Vision and Mission
Our vision is to make the world a better place by helping people share life’
s joy. Our mission is to build an unrivaled service that enables deeper, more personal relationships
between our customers and those who matter most in their lives.
We believe that people have an intrinsic desire for social expression, as they wish to capture and share their experiences and pass them on to future generations. Since the
beginning of humankind, people have shared detailed stories of their lives through visual expression. Today, with the evolution of digital cameras and technology, millions of people
around the world are capturing their memories and communicating in deeper, more meaningful ways.
We believe people will continue to take pictures of important moments in their lives across various occasions throughout the year, including vacations, weddings, birthdays,
anniversaries, graduations, family reunions and holidays. Our products and services make sharing, printing and preserving those memories easy, convenient and fun, and allow for our
customers to be more thoughtful and creative with their memories. As our customers share these joyous memories, either digitally through our sharing service or physically through
giving personalized photo-based gifts, they are enhancing their personal relationships, creating more joy in the world and making the world a better place.
Industry Overview
Historically, preserving photos and creating original, thoughtful compilations of memories was a difficult, expensive, manual, time-
consuming and often inconvenient process for
consumers. As a result of these constraints, the desire for easy, convenient, versatile, affordable and trusted online photo services has emerged.
Until the widespread adoption of the Internet and digital cameras, there were significant inefficiencies and quality limitations associated with capturing, developing, processing,
storing, editing and sharing images. Photos had to be stored in physical form and were vulnerable to deterioration, destruction or loss. Most people chose the limited option of storing
their 4x6 prints in shoeboxes or simple photo albums because photography-related markets — including film processing, photo printing and scrapbooking —
either did not exist or
were not well-
integrated. In particular, convenient options for photo production, storage and sharing were very limited; consumers had to settle for ordering duplicate 4x6 prints from
either mail-order or local processing labs with varied capabilities and often poor quality control. Furthermore, the “shoebox”
approach created significant difficulties for consumers in
organizing their photos and limited their ability to be thoughtful and creative with their memories. The photo-related industries had not found a way to capitalize on the public’
s need to
preserve memories across generations in a secure, convenient, creative and engaging manner.
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