Shutterfly 2015 Annual Report Download - page 55

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selling price is fixed or determinable and collection of resulting receivables is reasonably assured. Customers
place Consumer product orders through our websites and pay primarily using credit cards. Enterprise customers
are invoiced upon fulfillment. Shipping charged to customers is recognized as revenue at the time of shipment.
For camera, lenses, and video equipment rentals from our BorrowLenses brand, we recognize rental revenue
and the related shipping and insurance revenue, ratably over the rental period. Revenue from the sale of rental
equipment is recognized upon shipment of the equipment.
For gift card sales and flash deal promotions through group buying websites, we recognize revenue on a
gross basis, as we are the primary obligor, when redeemed items are shipped. Revenues from sales of prepaid
orders on our websites are deferred until shipment of fulfilled orders or until the prepaid period expires. Our
share of revenue generated from our print to retail relationships, is recognized when orders are picked up by our
customers at the respective retailer.
We provide our customers with a 100% satisfaction guarantee whereby products can be returned within a 30-
day period for a reprint or refund. We maintain an allowance for estimated future returns based on historical data.
The provision for estimated returns is included in accrued expenses. During the year ended December 31, 2015,
returns totaled less than 1.3% of net revenues and have been within management’s expectations.
We periodically provide incentive offers to our customers in exchange for setting up an account and to
encourage purchases. Such offers include free products and percentage discounts on current purchases.
Discounts, when accepted by customers, are treated as a reduction to the purchase price of the related transaction
and are presented in net revenues. Production costs related to free products are included in cost of revenues upon
redemption.
Our advertising revenues are derived from the sale of online advertisements on our websites. Advertising
revenues are recognized as “impressions” (i.e., the number of times that an advertisement appears in pages
viewed by users of the Company’s websites) are delivered; as “clicks” (which are generated each time users of
our websites click through the advertisements to an advertiser’s designated website) are provided to advertisers;
or ratably over the term of the agreement with the expectation that the advertisement will be delivered ratably
over the contract period.
In the second quarter of 2015, we changed our accounting estimate related to flash deal deferred revenue.
Beginning in 2010, we began to market product offers on flash deal websites such as Groupon and LivingSocial.
With limited history as to customer redemption patterns, we had been deferring all amounts to our flash deal
deferred revenue liability until customer redemption. We now have sufficient relevant historical flash deal
redemption data to support a change in estimate of the flash deal deferred revenue based on historical customer
redemption patterns. The historical data supports the probability of redemption after two years from the issuance
of a flash deal offer as remote. In addition, our attempts to re-market the unredeemed flash deals over the last six
months resulted in no meaningful change in customer behavior. Accordingly, flash deal breakage revenue is now
recognized based upon our historical redemption patterns. It represents the unredeemed flash deal offers for
which we believe customer redemption is remote and it is not probable that we have an obligation to escheat the
value of the flash deal revenue under unclaimed property laws. In the year ended December 31, 2015, we
recognized revenue of $10.0 million associated with this change.
Certain Enterprise revenue arrangements with multiple deliverables, including products and services, are
divided into separate units and revenue is allocated using estimated selling prices if we do not have vendor-
specific objective evidence or third-party evidence of the selling prices of the deliverables. We allocate the
arrangement price to each of the elements based on the relative selling prices of each element. Estimated selling
prices are management’s best estimates of the prices that we would charge our customers if we were to sell the
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