Shutterfly 2013 Annual Report Download - page 21

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year and is expected to increase. As new mobile devices and platforms are released, it is difficult to predict
the problems we may encounter in developing products for these alternative devices and platforms, and we
may need to devote significant resources to the creation, support, and maintenance of such products. In
addition, if we experience difficulties in integrating our mobile applications into mobile devices or if
problems arise with our relationships with providers of mobile operating systems or mobile application
download stores, such as Apple or Google, if our applications receive unfavorable treatment compared to
the promotion and placement of competing applications, such as the order of our products in the Apple
AppStore, or if we face increased costs to distribute our mobile applications, our future growth and our
results of operations could suffer.
Interruptions to our websites, mobile applications, information technology systems, print production processes or
customer service operations could damage our reputation and brands and substantially harm our business and
results of operations.
The satisfactory performance, reliability and availability of our websites and mobile applications,
information technology systems, printing production processes and customer service operations are critical
to our reputation, and our ability to attract and retain customers and maintain adequate customer
satisfaction. Any interruptions that result in the unavailability of our websites or mobile applications,
reduced order fulfillment performance or the unavailability of our customer service operations could result
in negative publicity, damage our reputation and brands and cause our business and results of operations
to suffer. This risk is heightened in the fourth quarter, as we experience significantly increased traffic to
our websites during the holiday season. Any interruption that occurs during such time would have a
disproportionately negative impact than if it occurred during a different quarter. For example, during the
fourth quarter of 2013, a software bug caused a minority of orders from our Tiny Prints brand to go
unfulfilled. Once the bug was identified and corrected, many of those orders were not received by
customers within the expected time frame. As a result, we refunded many orders which reduced net
revenue, and we recognized excess costs related to expedited shipping upgrades and increased customer
service costs which impacted our gross margin and our brand.
We depend in part on third parties to implement and maintain certain aspects of our communications
and printing systems. Therefore many of the causes of system interruptions or interruptions in the
production process may be outside of our control. As a result, we may not be able to remedy such
interruptions in a timely manner, or at all. Our business interruption insurance policies do not address all
potential causes of business interruptions that we may experience, and any proceeds we may receive from
these policies in the event of a business interruption may not fully compensate us for the revenues we may
lose.
We may have difficulty managing our growth and expanding our operations successfully.
We have website operations, offices and customer support centers in Redwood City, California, Santa
Clara, California, and Tempe, Arizona and production facilities in Fort Mill, South Carolina, Phoenix,
Arizona and Elmsford, New York and new facilities in Shakopee, Minnesota and Tempe, Arizona and are
expected to be operational in 2014 and 2015, respectively. Our growth has placed, and will continue to
place, a strain on our administrative and operational infrastructure. Our ability to manage our operations
and growth will require us to continue to refine our operational, financial and management controls,
human resource policies and reporting systems.
If we are unable to manage future expansion, we may not be able to implement improvements to our
controls, policies and systems in an efficient or timely manner and may discover deficiencies in existing
systems and controls. Our ability to provide a high-quality customer experience could be compromised,
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