Shutterfly 2009 Annual Report Download - page 46

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 2008, we fulfilled more than 7.5 million orders, to more than 2.7 million customers, at an average order value of more than $28 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.
Our operations and financial performance depend on general economic conditions. The U.S. economy recently experienced, and could
continue to experience, an economic downturn due to the crisis in credit markets, slower economic activity, concerns about inflation, increased
energy costs, and decreased consumer confidence, high consumer debt levels and unemployment rates and other adverse business conditions.
Such fluctuations in the U.S. economy could cause, among others, deterioration and continued decline in consumer spending and increase in the
cost of labor and materials. As a result, given the combination of the current economic conditions, very low consumer sentiment and limited
discretionary funds, the economic slowdown could exacerbate the seasonal decline in sales that we typically see in the first three quarters of the
calendar year. Throughout this period we intend to focus on actions that are within our control and initiatives that will increase revenue,
earnings, free cash flow and long term shareholder value.
Basis of Presentation
Net Revenues. We generate revenues primarily from the printing and shipping of photo-
based products, such as photo books, cards and
calendars, photo prints, and photo-
based merchandise, such as mugs, mouse pads and magnets. Revenues are recorded net of estimated returns,
promotions redeemed by customers and other discounts. Customers place orders through our website and pay primarily using credit cards.
Our personalized products and services revenues are derived from the sale of photo-based products, photo-
based merchandise and ancillary
products and services, and the related shipping revenues. Revenue from advertising displayed on our website and commercial print services are
also included in personalized products and services revenue. We believe our products and services are differentiated from other traditional photo
processors by our high quality production and numerous form factors and templates, which are key to attracting and retaining customers.
Our business is subject to seasonal fluctuations. In particular, we generate a substantial portion of our revenues during the holiday season in
the calendar fourth quarter. We also typically experience increases in net revenues during other shopping-
related seasonal events, such as Easter,
Mother’s Day, Father’
s Day, and Halloween. We generally experience lower net revenues during the first, second and third calendar quarters
and, have incurred and may continue to incur losses in these quarters. Due to the relatively short lead time required to fulfill product orders,
usually one to three business days, order backlog is not material to our business.
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