Digital River 2006 Annual Report Download - page 52

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 $6.3 million
for the three months ended June 30, 2006, up from $4.7 million for the same period in the prior year. For the
six months ended June 30, 2006, network and infrastructure expense was $13.7 million, up from $9.2 million
for the same period in the prior year. The increase resulted primarily from personnel added to support our
revenue growth as well as those gained through acquisition of other businesses, 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 $27.6 million for the three months ended June 30, 2006 from $15.8 million for the same
period in the prior year, an increase of $11.9 million, or 75.3%. Sales and marketing expense increased to
$54.6 million for the six months ended June 30, 2006 from $32.2 million for the same period in the prior year,
an increase of $22.4 million, or 69.5%. The increase 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 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 38.7% and 36.5% in the
three months and six months ended June 30, 2006, compared to 30.8% and 30.5% for the same periods in the
prior year. During the first half of 2006, we continued to expand our presence in global markets, our strategic
marketing services programs, and our oneNetwork affiliate program. We currently believe that sales and
marketing expenses will increase in absolute dollars in 2006 compared to 2005, as we continue to grow and
expand our reach to clients, as we continue to offer increased levels of strategic marketing services, as we
incur costs for acquisitions completed in 2005 and 2006, 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 SFAS 123(R), “Share Based Payment,” which we adopted on January 1, 2006.
PRODUCT RESEARCH AND DEVELOPMENT. Our product research and development expense line
item includes the costs of personnel and related expenses associated with developing and enhancing our
technology platforms and related systems. Product research and development expense increased to $7.5 million
and $15.1 million, respectively, for the three and six months ended June 30, 2006 from $5.2 million and
$9.7 million for the same periods in the prior year, an increase of $2.3 million, or 45.1%, and $5.4 million, or
56.2%, respectively. The increase was primarily driven by increases in personnel-related expenses to support
our 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 the first half of
2006, we continued to advance our remote-control technology, as well as the international and e-marketing
capabilities. We capitalized approximately $0.0 million and $0.4 million of software development costs related
to these efforts in the six months ended June 30, 2006 and 2005, respectively. We did not capitalize any
material costs related to software development during the six months ended June 30, 2006 and do not expect
to capitalize any such costs for the balance of 2006. As a percentage of revenue, product research and
development expense was 10.5% and 10.1% in the three and six months ended June 30, 2006, compared to
10.1% and 9.1% for the same periods in the prior year. We currently believe that product research and
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