Shutterfly 2013 Annual Report Download - page 52

Average Order Value. Average order value is Consumer net revenues for a given period
divided by the total number of customer orders recorded during that same period. Average order
value is impacted by product sales mix and pricing and promotional strategies, including our
promotions and competitor promotional activity. As a result, we expect that our average order
values may fluctuate on an annual basis.
We believe the analysis of these metrics and others described below under ‘‘Non-GAAP Financial
Measures’’ provides us with important information on our overall net revenue trends and operating results.
Fluctuations in these metrics are not unusual and no single factor is determinative of our net revenues and
operating results.
Cost of Net Revenues. Cost of net revenues consists primarily of direct materials (the majority of
which consists of paper, ink, and photo book covers), payroll and related expenses for direct labor,
shipping charges, packaging supplies, distribution and fulfillment activities, rent for production facilities,
depreciation of the facilities where we are the deemed owner (for accounting purposes only) of the
building, depreciation of production equipment, and third-party costs for photo-based merchandise. Cost
of net revenues also includes payroll and related expenses for personnel engaged in customer service, any
third-party software or patents licensed, as well as the amortization of acquired developed technology,
capitalized website and software development costs, and patent royalties. Cost of net revenues also
includes certain costs associated with facility closures and restructuring.
Operating Expenses. Operating expenses consist of technology and development, sales and marketing,
and general and administrative expenses. We anticipate that each of the following categories of operating
expenses will increase in absolute dollar amounts, but remain relatively consistent as a percentage of net
revenues.
Technology and development expense consists primarily of personnel and related costs for employees
and contractors engaged in the development and ongoing maintenance of our websites, infrastructure and
software. These expenses include depreciation of the computer and network hardware used to run our
websites and store the customer data, including storage for our new ThisLife brand service, as well as
amortization of purchased software. Technology and development expense also includes co-location, power
and bandwidth costs.
Sales and marketing expense consists of costs incurred for marketing programs, and personnel and
related expenses for our customer acquisition, product marketing, business development, and public
relations activities. Our marketing efforts consist of various online and offline media programs, such as
e-mail and direct mail promotions, the purchase of keyword search terms and various strategic alliances.
We depend on these efforts to attract customers to our service.
General and administrative expense includes general corporate costs, including rent for our corporate
offices, insurance, depreciation on information technology equipment, and legal and accounting fees.
Transaction costs are also included in general and administrative expense. In addition, general and
administrative expense includes personnel expenses of employees involved in executive, finance,
accounting, human resources, information technology and legal roles. Third-party payment processor and
credit card fees are also included in general and administrative expense and have historically fluctuated
based on revenues during the period. All of the payments we have received from our intellectual property
license agreements have been included as an offset to general and administrative expense.
Interest Expense. Interest expense consists of interest on our convertible senior notes arising from
amortization of debt discount, amortization of debt issuance costs, and our 0.25% coupon payment; costs
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