Shutterfly 2010 Annual Report Download - page 35

Total Number of Orders.
We closely monitor total number of orders as a leading indicator of net revenue trends. We recognize the
net revenues associated with an order when the products have been shipped and all other revenue recognition criteria have been
met. 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 while we anticipate this trend to continue in the future, the number of orders is
dependent on whether we are successful in executing our strategy, the conditions of the overall economic environment and a continued
increase in consumer trends towards photo-based products.
Personalized Products and Services Revenues as Percentage of Net Revenues.
We continue to innovate and improve our
personalized products and services and expect the net revenues from these products and services to increase as a percentage of total net
revenues as we continue to diversify our product offerings. Personalized products and services as a percentage of total net revenue was
56% in 2007, 61% in 2008 and 66% in 2009.
We believe the analysis of these metrics and others provides us with important information on our overall net 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 Net Revenues.
Cost of net revenues consists primarily of direct materials (the majority of which consists of paper, ink, 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 net revenues also
includes payroll and related expenses for personnel engaged in customer service, any third-
party software or patents licensed, as well as the
amortization of acquired developed technology, capitalized website development costs, and patent royalties. In addition, cost of net revenues
includes certain costs associated with the closure of our Hayward manufacturing and production facility.
Operating Expenses.
Operating expenses consist of technology and development, sales and marketing, and general and administrative
expenses. We anticipate that each of the following categories of operating expenses will increase in absolute dollar amounts, but remain
relatively consistent as a percentage of net revenues.
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, as well as amortization of purchased software. Technology and
development expense also includes co-location, power 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 during the period.
All of the payments we have received from our intellectual property license agreements have been included as an offset to general and
administrative expense. In 2009, we received annual payments from two different cross-
licensing agreements. We expect to recognize a final
payment due from one of the agreements when it is received in the first quarter of fiscal year 2010.
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