Shutterfly 2010 Annual Report Download - page 12

ITEM 1A. RISK FACTORS
Our net revenues, operating results and cash requirements are affected by the seasonal nature of our business.
Our business is highly seasonal, with a high proportion of our net revenues, net income and operating cash flows generated during the fourth
quarter. For example, we generated more than 50% of our net revenues for 2009 in the fourth quarter of 2009, and the net income that we
generated during the fourth quarter of 2009 was necessary for us to achieve profitability on an annual basis. In addition, we incur significant
additional expenses in the period leading up to the fourth quarter holiday season including expenses related to the hiring and training of
temporary workers to meet our seasonal needs, additional inventory and equipment purchases and increased advertising. If we are unable to
accurately forecast and respond to consumer demand for our products during the fourth quarter, our financial results, reputation and brand will
suffer and the market price of our common stock would likely decline.
We also base our operating expense budgets on expected net revenue trends. A portion of our expenses, such as office, production facility,
and various equipment leases and personnel costs, are largely fixed and are based on our expectations of our peak levels of operations. We may
be unable to adjust spending quickly enough to offset any unexpected revenue shortfall. Accordingly, any shortfall in net revenues may cause
significant variation in operating results in any quarter.
In addition, our operations and financial performance depend on general economic conditions. The U.S. economy continues to experience
slow economic activity, concerns about inflation, decreased consumer confidence, higher unemployment rates and other adverse business
conditions. Such fluctuations in the U.S. economy could cause, among others, prolonged decline in consumer spending and increase in the cost
of labor and materials. These conditions could exacerbate variability in our forecasting and could negatively affect our results of operations.
Our limited operating history makes it difficult to assess the exact impact of the seasonal factors on our business or the extent to which our
business is susceptible to cyclical fluctuations in the U.S. economy. In addition, our historically rapid growth may have overshadowed whatever
seasonal or cyclical factors might have influenced our business to date. Seasonal or cyclical variations in our business may become more
pronounced over time and may harm our future operating results.
Economic trends could adversely affect our financial performance.
We are subject to macro-economic fluctuations in the U.S. economy. Macro-
economic issues involving the broader financial markets,
including the housing and credit system and the liquidity issues in the auction rate securities that we have invested in have negatively impacted
the economy and our financial performance.
Weak economic conditions and declines in consumer spending and consumption may harm our operating results. Purchases of our
products are often discretionary. If the economic climate does not improve, customers or potential customers could delay, reduce or forego their
purchases of our products and services, which could impact our business in a number of ways, including lower prices for our products and
services and reduced sales. In addition, the current economic conditions may lead to price increases by our suppliers or increase our operating
expenses due to, among others, higher costs of labor, energy, equipment and facilities. A prolonged economic downturn or slow economic
recovery may also lead to additional restructuring actions and associated expenses. For example, during the first quarter of 2009, we reduced our
headcount by 5%. Due to reduced consumer spending and increased competitive pressures in the current economic environment, we may not be
able to pass these increased costs on to our customers. The resulting increased expenses and/or reduced income would negatively impact our
operating results.
If the negative macro-
economic conditions persist, or if the economy enters a prolonged period of decelerating growth, our results of
operations may be further harmed.
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