Shutterfly 2015 Annual Report Download - page 109

Note Hedge
To minimize the impact of potential economic dilution upon conversion of the Notes, the Company entered
into convertible note hedge transactions with respect to its common stock (the “Note Hedge”). In May 2013, the
Company paid an aggregate amount of $63.5 million for the Note Hedge. The Note Hedge will expire upon
maturity of the Notes. The Note Hedge is intended to offset the potential dilution upon conversion of the Notes
and/or offset any cash payments the Company is required to make in excess of the principal amount upon
conversion of the Notes in the event that the market value per share of the Company’s common stock, as
measured under the Notes, is greater than the strike price of the Note Hedge, which initially corresponds to the
conversion price of the Notes and is subject to anti-dilution adjustments substantially similar to those applicable
to the conversion rate of the Notes.
Warrant
Separately, in May 2013, the Company entered into warrant transactions (the “Warrant”), whereby the
Company sold warrants to acquire shares of the Company’s common stock at a strike price of $83.18 per share.
The Company received aggregate proceeds of $43.6 million from the sale of the Warrant. If the average market
value per share of the Company’s common stock for the reporting period, as measured under the Warrant,
exceeds the strike price of the Warrant, the Warrant will have a dilutive effect on the Company’s earnings per
share. The Warrant is a separate transaction, entered into by the Company and is not part of the Notes or the Note
Hedge, and has been accounted for as part of additional paid-in capital. Holders of the Notes and Note Hedge
will not have any rights with respect to the Warrant.
Note 13 — Segment Reporting
The Company reports segment information based on the “management” approach. The management
approach designates the internal reporting used by management for making decisions and assessing performance
as the source of its reportable segments.
The Chief Operating Decision Maker (“CODM”) function uses gross profit to evaluate the performance of
the segments and allocate resources. Management considers gross profit to be the appropriate metric to evaluate
and compare the ongoing performance of each reportable segment as it is the level which direct costs associated
with the performance of the segment are monitored. Cost of revenue for the Consumer segment consists of costs
directly attributable to the production of personalized products for all of the Company’s brands, including direct
materials, shipping charges, and payroll and related expenses for direct labor; rent for production facilities, and
depreciation of production equipment and facilities where we are the deemed owner. Cost of revenue for the
Enterprise segment consists of costs which are direct and incremental to the Enterprise business. These include
production costs of Enterprise products, such as materials, labor and printing costs and costs associated with
third-party production of goods. They also include shipping costs and indirect overhead.
Due to the nature of the Company’s operations, a majority of its assets are utilized across all segments. In
addition, segment assets are not reported to, or used by, the CODM to allocate resources or assess performance of
the Company’s segments. Accordingly, the Company has not disclosed asset information by segment.
The Company’s segments are determined based on the products and services it provides and how the CODM
evaluates the business. The Company has the following reportable segments:
Consumer — Includes sales from the Company’s brands and are derived from the sale of photo-based
products, such as photo books, stationery and greeting cards, other photo-based merchandise, photo prints,
and the related shipping revenues as well as rental revenue from its BorrowLenses brand.
Enterprise — Includes revenues primarily from variable, four-color direct marketing collateral
manufactured and fulfilled for business customers.
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