Digital River 2006 Annual Report Download - page 48

from revenue of $158.9 million in the same period of the prior year. The increase was primarily attributable to
higher online sales activity across our client base, increased sales from international sites, expanded strategic
marketing activities with a larger number of clients, and acquisitions made during 2005 and 2006.
International sales were approximately 39% and 39% of total sales in the three month period ended
September 30, 2006 and 2005, respectively, and approximately 40% and 38% of total sales for the nine month
period ended September 30, 2006 and 2005, respectively. The year-to-date 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.
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 dedicated costs. Direct cost of service expense was $1.9 million for the three months ended
September 30, 2006, up from $1.1 million for the same period in the prior year. For the nine months ended
September 30, 2006, direct cost of service expense was $5.7 million, up from $3.6 million for the same period
of the prior year. The increase 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). We currently believe
that direct cost of services will increase in absolute dollars in 2006 compared to 2005 as we continue to
expand our worldwide fulfillment capacity in order to meet anticipated shipment volumes from sales, and
expense related to stock-based compensation. See Note 6 — “Stock-Based Compensation,” in the consolidated
financial statements for a discussion of the impact of SFAS 123(R), “Share Based Payment,” which we
adopted on January 1, 2006.
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 $7.8 million
for the three months ended September 30, 2006, up from $5.0 million for the same period in the prior year.
For the nine months ended September 30, 2006, network and infrastructure expense was $21.5 million, up
from $14.2 million for the same period in the prior year. The increases resulted primarily from personnel
added to support our revenue growth as well as those gained through acquisition of other businesses, costs
related to operating new international data centers and from 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 2006 compared to 2005 as we
continue to expand our worldwide customer service capacity, as we expand the number of operating global
data centers, expected increased network usage, which will drive higher Internet connection charges, and as
we record expense related to stock-based compensation. See Note 6 — “Stock-Based Compensation,” in the
consolidated financial statements for a discussion of the impact of the adoption of SFAS 123(R), “Share Based
Payment,” which we adopted on January 1, 2006.
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 $28.5 million for the three months ended September 30, 2006 from $16.7 million for the
same period in the prior year, an increase of $11.7 million, or 70.0%. Sales and marketing expense increased
to $83.0 million for the nine months ended September 30, 2006 from $48.9 million for the same period in the
prior year, an increase of $34.1 million, or 69.7%. The increases primarily resulted 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). As a percentage of revenue, sales and marketing expense was
37.8% and 37.0% in the three months and nine months ended September 30, 2006, compared to 31.4% and
30.7% for the same periods in the prior year. During the first nine months of 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 relationships with two of our major partners,
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