Shutterfly 2012 Annual Report Download - page 6

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automatically creates photo products using the customer’s best images. During the fourth quarter of 2012,
we began to integrate the Photoccino technology by offering smart product creation capabilities to a select
set of customers. We expect to further integrate the Photoccino technology into the products and services
that our brands offer.
On September 14, 2012, we acquired Penguin Digital, Inc., a mobile application development company
that has an iPhone application that allows users to access their photos from iPhones or their Facebook or
Instagram accounts and create customized products and gifts from their mobile devices. We subsequently
introduced our new Shutterfly iPhone Photo App which combines storage, viewing and photo gift creation
right from one’s phone.
On December 28, 2012, we acquired ThisLife.com, Inc. (‘‘ThisLife’’) a cloud-based service provider for
protecting, organizing, storing and sharing photos and videos which will strengthen our photo and video
storage and sharing capabilities, as well as the ability to intelligently organize across devices and mobile
platforms and enable the more efficient creation of products across the web and on mobile devices. In
2013, we expect to integrate this technology into the products and services that our Shutterfly brand offers.
We generate the majority of our revenues by producing and selling professionally-bound photo books,
greeting and stationery cards, personalized calendars, other photo-based merchandise and high-quality
prints ranging in size from wallet-sized to jumbo-sized 20x30 enlargements. We manufacture most of these
items in our Charlotte, North Carolina and Phoenix, Arizona production facilities. In 2012, we entered into
a lease for a new facility in Fort Mill, South Carolina that will replace our Charlotte, North Carolina
facility, and is expected to be operational in 2013. By controlling the production process in our own
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
calendars, mugs, canvas prints, mouse pads, magnets, and puzzles. We generate substantially all of our
revenue from sales originating in the United States and our sales cycle has historically been highly seasonal
as we generate more than 50% of our total net revenues during our fiscal fourth quarter.
Our high-quality products and services and the compelling online experience we create for our
customers, combined with our focus on continuous innovation, have allowed us to establish premium
brands. We realize the benefits of premium brands 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 preserving 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 our branded products to colleagues, friends and loved ones throughout the
year, customers reinforce our brands. 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 shopping experience, which helps foster a unique and deep
relationship with our brands.
The Company operates in one geographic area, the United States. Our operations and financial
performance depend on general economic conditions in the United States. The U.S. economy is
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