Digital River 2006 Annual Report Download - page 44

international sites, expanded strategic marketing activities with a larger number of clients, and acquisitions.
Sales of security software products for PCs represent the largest contributor to our revenues. Acquisitions
made during each of 2006, 2005 and 2004 generated approximately 3.5%, 2.0% and 16.1% of our total
revenue for those years, respectively. International sales represented approximately 41%, 39% and 31% of
revenue in the years ended December 31, 2006, 2005 and 2004, respectively. That growth is attributable to a
larger number of international stores being operated for our clients as well as the European outsourced
e-commerce providers we acquired in 2004 and 2005. Sales of products for one software publisher client,
Symantec Corporation, accounted for approximately 30.2% of our revenue in 2006, 29.7% in 2005 and 27.2%
in 2004. In addition, revenues derived from proprietary Digital River services sold to Symantec end-users and
dealer network sales of Symantec products amounted to approximately 16.6% of our total revenue in 2006,
14.4% in 2005 and 10.8% in 2004.
Direct Cost of Services. Our direct cost of services line item primarily includes the personnel costs and
costs related to product fulfillment, physical on demand, our proprietary back-up CD production and client-
specific related costs. Direct cost of service expense was $7.7 million, $5.1 million, and $5.2 million, in 2006,
2005 and 2004, respectively. The increase in 2006 compared with 2005 resulted primarily from (i) personnel
added to serve new clients, and to handle increased transaction volumes, (ii) recent acquisitions and (iii) stock-
based compensation expense related to employee stock options and employee stock purchases recognized
under SFAS 123(R). The cost remained flat in 2005 compared with 2004 as we were able to leverage our
installed infrastructure to support the higher level of revenue.
We currently believe that direct costs of services will increase in absolute dollars in 2007 compared to
2006 as we continue to expand our worldwide fulfillment capacity in order to meet anticipated shipment
volumes from sales.
Network and Infrastructure. Our network and infrastructure expense line item primarily includes the
personnel costs and related expenses to operate and maintain our technology platforms, customer service, data
communication and data center operations. Network and infrastructure expense was $29.3 million in 2006, up
from $19.8 million and $15.2 million in 2005 and 2004, respectively. The increase in 2006 from 2005, and in
2005 from 2004, resulted primarily from personnel added to support our revenue growth as well as those
gained through acquisition of other businesses, and costs related to operating new international data centers.
Expenses in 2006 were also higher due to stock-based compensation expense related to employee stock
options and employee stock purchases recognized under SFAS 123(R).
We currently believe that network and infrastructure expenses will increase in absolute dollars in 2007
compared to 2006 as we continue to expand our worldwide customer service capacity, and as we expand the
number of operating global data centers, expected increased network usage, which will drive higher Internet
connection charges.
Sales and Marketing. Our sales and marketing expense line item primarily includes personnel costs and
related expenses, advertising, promotional and product marketing expenses, credit card transaction and other
payment processing fees, credit card chargebacks and bad debt expense. Sales and marketing expense
increased to $113.5 million in 2006, from $69.4 million and $52.1 million in 2005 and 2004, respectively. As
a percentage of revenue, sales and marketing expense increased to 36.9% in 2006 from 31.5% in 2005. The
increase in 2006 from 2005 resulted primarily from credit card fees directly associated with the increase in
revenue and additional sales, the addition of new international payment methods, personnel and related
expenses to support our global growth initiatives, costs from recent acquisitions, and stock-based compensation
expense related to employee stock options and employee stock purchases recognized under SFAS 123(R).
During 2006, we continued to expand our presence in global markets, the consumer electronics market, our
strategic marketing services programs, and our oneNetwork affiliate program. We also expanded our relation-
ships with two of our major partners, Symantec and Microsoft. The increase in 2005 from 2004 resulted
primarily from increases in credit card transaction fees. During 2005, sales and marketing expense decreased
as a percentage of revenue to 31.5% from 33.8% in 2004, primarily due to our revenue growing faster than
these expenses.
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