Shutterfly 2007 Annual Report Download - page 22

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Table of Contents
and retain customers and to maintain adequate customer satisfaction. We currently conduct scheduled software
releases and periodic site maintenance several times a quarter that require us to take the website down. The scheduled
down times are planned at non-
peak hours, typically at midnight. Any interruptions that result in the unavailability of
our website or reduced order fulfillment performance or customer service could result in negative publicity, damage
our reputation and brand 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 website during the holiday season, and any
interruption that occurs during such time would have a disproportionate impact than if it occurred during a different
quarter.
Because we depend in part on third parties for the implementation and maintenance of certain aspects of our
communications and printing systems, and because many of the causes of system interruptions or interruptions in the
production process may be outside of our control, 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 grown from 190 employees as of January 1, 2006 to 275 employees as of December 31, 2006, with
website operations, offices and customer support centers in Redwood City, California and a production facility in
Hayward, California. Our growth has placed, and will continue to place, a strain on our administrative and
operational infrastructure. To alleviate this strain we have announced that we are opening a new manufacturing and
production plant in Charlotte, North Carolina, which is planned to be operational by the fourth quarter 2007. 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, which would damage our
reputation and brand and substantially harm our business and results of operations.
Competitive pricing pressures, particularly with respect to 4×6 print pricing and shipping, may harm our
business and results of operations.
Demand for our products and services is sensitive to price. Many external factors, including our production and
personnel costs and our competitors’
pricing and marketing strategies, can significantly impact our pricing strategies.
If we fail to meet our customers’ price expectations, we could lose customers, which would harm our business and
results of operations.
Changes in our pricing strategies have had, and may continue to have, a significant impact on our net revenues
and net income. For example, in the second quarter of 2005, certain of our competitors reduced the list prices of their
4×6 prints from $0.29 to $0.12. In response, we lowered the list price of our 4×6 prints from $0.29 to $0.19 in order
to remain competitive. A drop in our 4×6 prices, due to competitive pressures or otherwise, without a corresponding
increase in volume would negatively impact our net revenues and could adversely affect our gross margins.
In addition, we generate a significant portion of our net revenues from the fees we collect from shipping our
products. For example, these fees represented approximately 19% of our net revenues in 2005 and approximately
20% of our net revenues in 2006. We believe that these results are consistent with our seasonal historical trends.
Many online businesses, including Shutterfly, offer discounted or free shipping during promotional periods and
usually based upon a minimum purchase requirement as a means of attracting or retaining customers. In the event
that free shipping offers extend beyond a limited number of occasions, are not based upon a minimum purchase
requirement and become commonplace, our net revenues and results of operations would be negatively impacted. In
addition, many online businesses, including Shutterfly, make offers for free or discounted products and services to
attract and retain customers. In the future, if we increase these offers to respond to actions taken by our competitors,
our results of operations may be harmed.
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