Shutterfly 2009 Annual Report Download - page 21

ITEM 1A. RISK FACTORS
Our net revenues, operating results and cash requirements are affected by the seasonal nature of our business.
Our business is highly seasonal, with a high proportion of our net revenues, net income and operating cash flows generated during the fourth
quarter. For example, we generated approximately 50% of our net revenues for 2008 in the fourth quarter of 2008, and the net income that we
generated during the fourth quarter of 2008 was necessary for us to achieve profitability on an annual basis for 2008. In addition, we incur
significant additional expenses in the period leading up to the fourth quarter holiday season including expenses related to the hiring and training
of temporary workers to meet our seasonal needs, additional inventory and equipment purchases and increased advertising. If we are unable to
accurately forecast and respond to consumer demand for our products during the fourth quarter, our financial results, reputation and brand will
suffer and the market price of our common stock would likely decline.
We also base our operating expense budgets on expected net revenue trends. A portion of our expenses, such as office, lab facility, and
various equipment leases and various personnel costs, are largely fixed and are based on our expectations of our peak levels of operations. We
may be unable to adjust spending quickly enough to offset any unexpected revenue shortfall. Accordingly, any shortfall in net revenues may
cause significant variation in operating results in any quarter.
In addition, our operations and financial performance depend on general economic conditions. The U.S. economy recently experienced, and
could continue to experience, an economic downturn due to the crisis in credit markets, slower economic activity, concerns about inflation,
increased energy costs, decreased consumer confidence, high consumer debt levels and unemployment rates and other adverse business
conditions. Such fluctuations in the U.S. economy could cause, among others, deterioration and continued decline in consumer spending and
increase in the cost of labor and materials. As a result, given the combination of the current economic conditions, very low consumer sentiment
and limited discretionary funds, the economic slowdown could exacerbate the seasonal decline in sales that we typically see in the first three
quarters of the calendar year.
Our limited operating history makes it difficult to assess the exact impact of the seasonal factors on our business or the extent to which our
business is susceptible to cyclical fluctuations in the U.S. economy. In addition, our historically rapid growth may have overshadowed whatever
seasonal or cyclical factors might have influenced our business to date. Seasonal or cyclical variations in our business may become more
pronounced over time and may harm our future operating results.
Economic trends could adversely affect our financial performance.
We are subject to macro-economic fluctuations in the U.S. economy. Recent macro-
economic issues involving the broader financial
markets, including the housing and credit system and the liquidity issues in the auction rate securities that we have invested in have negatively
impacted the economy and our financial performance.
Weak economic conditions and declines in consumer spending and consumption have harmed and may further harm our operating
results. Purchases of our products are often discretionary. If the economic climate does not improve or continues to deteriorate, customers or
potential customers could further delay, reduce or forego their purchases of our products and services, which could impact our business in a
number of ways, including lower prices for our products and services and reduced sales. In addition, the current economic conditions may lead
to price increases by our suppliers or increase our operating expenses due to, among others, higher costs of labor, energy, equipment and
facilities. Economic downturns may also lead to restructuring actions and associated expenses. Due to reduced consumer spending and
increased competitive pressures in the current economic environment, we may not be able to pass these increased costs to our customers. The
resulting increased expenses and/or reduced income would negatively impact our operating results.
If the negative macro-economic conditions persist, or if the economy enters a prolonged period of decelerating growth, our results of
operations may be further harmed.
19