Shutterfly 2011 Annual Report Download - page 20

If either facility where our computer and communications hardware is located fails or if any of our production facilities fails, our business
and results of operations would be harmed.
Our ability to successfully receive and fulfill orders and to provide high-
quality customer service depends in part on the efficient and
uninterrupted operation of our computer and communications systems. Substantially all of the computer hardware necessary to operate our
website is located at one third-
party hosting facility in Santa Clara, California, and our production facilities are located in Charlotte, North
Carolina and Phoenix, Arizona. Our systems and operations could suffer damage or interruption from human error, fire, flood, power loss,
insufficient power availability, telecommunications failure, break-
ins, terrorist attacks, acts of war and similar events. In addition, Santa Clara is
located near a major fault line increasing our susceptibility to the risk that an earthquake could significantly harm the operations of these
facilities. We maintain business interruption insurance, however, this insurance may be insufficient to compensate us for losses that may occur,
particularly from interruption due to an earthquake which is not covered under our current policy. We do not presently have redundant systems
in multiple locations. In addition, the impact of any of these disasters on our business may be exacerbated by the fact that we are still in the
process of developing our formal disaster recovery plan and we do not have a final plan in place.
Capacity constraints and system failures could prevent access to our website, which could harm our reputation and negatively affect our net
revenues.
Our business requires that we have adequate capacity in our computer systems to cope with the high volume of visits to our website. As our
operations grow in size and scope, we continually need to improve and upgrade our computer systems and network infrastructure to ensure
reliable access to our website, in order to offer customers enhanced and new products, services, capacity, features and functionality. The
expansion of our systems and infrastructure may require us to commit substantial financial, operational and technical resources before the
volume of our business increases, with no assurance that our net revenues will increase.
Our ability to provide high-
quality products and service depends on the efficient and uninterrupted operation of our computer and
communications systems. If our systems cannot be expanded in a timely manner to cope with increased website traffic, we could experience
disruptions in service, slower response times, lower customer satisfaction, and delays in the introduction of new products and services. Any of
these problems could harm our reputation and cause our net revenues to decline.
Our technology, infrastructure and processes may contain undetected errors or design faults that could result in decreased production,
limited capacity or reduced demand.
Our technology, infrastructure and processes may contain undetected errors or design faults. These errors or design faults may cause our
website to fail and result in loss of, or delay in, market acceptance of our products and services. If we experience a delay in a website release that
results in customer dissatisfaction during the period required to correct errors and design faults, we would lose revenue. In the future, we may
encounter scalability limitations, in current or future technology releases, or delays in the commercial release of any future version of our
technology, infrastructure and processes that could seriously harm our business.
We currently depend on third party suppliers for our photographic print paper, printing machines and other supplies, which expose us to
risks if these suppliers fail to perform under our agreements with them.
We have historically relied on an exclusive supply relationship with Fuji Photo Film U.S.A. to supply all of our photographic paper for
silver halide print production, such as 4x6 prints. In March 2010, we renewed our supply agreement with Fuji which expires in March 2013. If
that agreement is not renewed before it expires in March 2013, or if Fuji fails to perform in accordance with the terms of our agreement and if
we are unable to secure a paper supply from a different source in a timely manner, we would likely fail to meet customer expectations, which
could result in negative publicity, damage our reputation and brand and harm our business and results of operations. We purchase other photo-
based supplies from third parties on a purchase order basis, and, as a result, these parties could increase their prices, reallocate supply to others,
including our competitors, or choose to terminate their relationship with us. In addition, we purchase or rent a substantial portion of the machines
used to produce certain of our photo-based products from Hewlett-
Packard, which is one of our primary competitors in the area of online digital
photography services. This competition may influence their willingness to provide us with additional products or services. If we were required to
switch vendors of machines for photo-based products, we may incur delays and incremental costs, which could harm our operating results.
We currently outsource some of our customer service activities and our production of photo-
based products to third parties, which exposes us
to risks if these parties fail to perform under our agreements with them.
We currently outsource some of our customer service activities and the production of some of our print and photo-
based products to third
parties. If these parties fail to perform in accordance with the terms of our agreements and if we are unable to secure another outsource partner in
a timely manner, we would likely fail to meet customer expectations, which could result in negative publicity, damage our reputation and brand
and harm our business and results of operations.
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