Incredimail 2011 Annual Report Download - page 42

Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
Search generated revenues
. These revenues increased by 14%, from $20.0 million in 2009, to $22.8 million in 2010. In 2010 we continued to collaborate
with two search providers; with approximately 90% of search generated revenues being provided by our partnership with Google and the remaining 10% coming from
other search providers, primarily InfoSpace. The continued increase in search generated revenues reflects the success of our strategy to leverage our large user base,
primarily those using our free products. In 2011, as we implement our strategy for growth and invest in customer acquisition, we expect to accelerate the growth
coming from these revenues. In 2010, we were not successful in increasing HiYo registrations and revenues, and this product while still generating revenues, no longer
constitutes a product that we are focused on. As to PhotoJoy, while we now have completed a marketable product, we expect that through our customer acquisition
strategy, this product will start attracting a significant number of downloads, and subsequently generate revenues in the latter part of 2011.
Revenues from product
s. These revenues continued to decrease from $6.7 million in 2009 to $5.4 million in 2010. We believe this decrease is attributable to
our continued focus on search generated revenues, as well as the decreasing popularity in purchasing downloadable software and the effect of the economic downturn
in 2009 had on discretionary purchases. In the latter part of 2010, we saw this trend level out, with new product sales increasing. As we increase our marketing efforts
in this area in 2011, we can expect cash sales from products to increase. However, the increase in accounting revenues recorded according to US GAAP, will be
delayed as these revenues are for the most part deferred over the period of their subscriptions.
Advertising and other revenues
. These revenues more than tripled in 2010, from $0.5 million in 2009 to $1.3 million in 2010. This increase is attributable to
collaboration with other vendors for the sale of their product to our users and an increase in other advertising revenues through a toolbar, on our homepage and other.
We expect to be able to continue and grow these revenues, albeit they still are not expected to contribute a significant portion of our revenues in 2011.
Cost of revenues
. Cost of revenues from products in 2010 was $1.6 million, as compared to $1.5 million in 2009. This increase was primarily due to our
allocating increasing communication and other infrastructure costs to maintain and servicing our existing user base, as opposed to marketing to new users in the past.
Despite this nominal increase, as a result of the increasing portion of revenues attributable to search, the gross profit margin in 2010 increased to 95%, as compared to
94% in 2009. As search generated revenues continue to account for a growing portion of our revenues, we expect the gross profit margin to remain at its current level.
Research and development expenses, net ("R&D")
. R&D increased by $0.3 million, from $6.3 million in 2009 to $6.6 million in 2010, decreasing as a
percentage from sales from 24% in 2009 to 22% in 2010. This decrease was a result of us maintaining the existing product suite without enriching the product pipeline
for future years. Looking at 2011, we expect this expenditure to increase, although generally remain stable as a percentage of sales. The increase in expenditure in
2011 is planned for contributing to a richer product pipeline to fuel future growth.
Selling and marketing expenses
. Selling and marketing expenses, increased by $0.6 million, or 14%, from $4.6 million in 2009 to $5.2 million in 2010. This
increase was primarily attributable to the consumer research contracted in the fourth quarter as well as the marketing and sales consultants hired. Marketing expenses
included approximately $1.8 million in customer acquisition costs in 2010, similar to the level in 2009. In 2011, as we implement our strategy for growth, we intend to
increase this expense more than three-
fold, with most of the increase being in the latter part of 2011. As a result, we can expect operating margins to be lower during
that part of 2011, due to the fact that a substantial part of the return on that investment is only expected in 2012.
General and administrative expenses ("G&A").
G&A increased from $3.3 million in 2009 to $4.7 in 2010. This increase was primarily due to our building a
management team capable of scaling the business model and taking the Company to the next level, both organically and through acquisitions. In the third quarter we
engaged a new experienced CEO (while still retaining the prior CEO through the end of the year), created a corporate and business development department, hired a
new VP of Corporate Development and started staffing that department. We expect to further invest in enhancing our management team in 2012, however, we do not
expect this expenditure to increase as a percentage of revenues.
Financial income, net
. We recorded $0.3 million, net, in financial income in 2010, compared to $0.1 million in 2009. We continue to maintain a stringent
investment policy so that a majority of our investments are in US treasury or US government backed securities, with the balance in debentures of a limited sum and
relatively short-
term maturity, rated at A and higher and dollar denominated or linked. As a result, the returns on our portfolio have been minimal. Assuming interest
rates and the financial environment do not change drastically we expect the current rate of return to continue going forward.
39