Incredimail 2014 Annual Report Download - page 42

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Revenues
We generate our revenues primarily from two major sources: (i) search-
generated revenues; and (ii) advertising and other. The
following table shows our revenues by category (in thousands of U.S. dollars):
Our search revenues decreased by 46% in 2013, despite an increase in the number of searches, primarily because the fee rates payable
to us under our search agreement with Microsoft decreased significantly beginning in 2013. That decrease in revenues had the greatest impact in
North America, where Microsoft served as the main provider of our search. In 2014, revenues increased by 19% due to organic growth, as well
as the acquisition of Perion’s search activity.
Advertising and other revenues increased in 2013, as a result of introducing and marketing other applications in our toolbar being
distributed as part our search-
generated revenues. In 2014, while that activity actually decreased, the increase was primarily a result of acquiring
the Perion's activity, including display advertising and sales of the proprietary products Smilebox and IncrediMail.
While revenues increased over 19% year over year, this increase was due to the increase experienced in the first half of 2014. Revenues
in the fourth quarter of 2014 were $78.1 million, reflecting a 7% decrease compared to the same quarter in 2013. With the continued lack of
visibility due to multiple changes applied by third parties outside of our control, and as a result of our continuing to invest lower amounts in
customer acquisition, we expect 2015 revenues to be at a lower level than that of the last quarter of 2014 on an annualized basis.
Cost of Revenues
Cost of revenues consists primarily of salaries and related expenses, license fees, amortization of acquired technology and payments for
content and server maintenance, all related to our product revenues and communicating with our users. Cost relating to search and advertising
revenues are immaterial. Therefore, the percentage of cost of revenues increased with the Perion acquisition, where cost of revenues was higher
relating to the product revenues. The number of employees included in cost of revenues was zero in both 2012 and 2013, and 22 at the end of
2014.
Customer Acquisition Costs
Our customer acquisition costs consist primarily of payments to publishers and developers who distribute our search properties together
with their products, as well as the cost of distributing our own products. These amounts are primarily based on fixed fee arrangements and on
revenue share agreements with our traffic sources. We increased customer acquisition costs dramatically in 2013, with the aim to increase the
number of product downloads, users, search queries generated by those downloading our software or that of our partners, and subsequently,
revenue from search, premium subscriptions and advertising, in an effort to offset the decreasing revenue levels under our search agreement with
Microsoft. In order to mitigate some of the risk inherent in the lack of visibility regarding the generation of future revenues by the users of our
partners' software, starting the third quarter of 2014, we have sought to work with higher margin partners, and we have been gradually shifting
our model, with an emphasis on revenue share agreements instead of fixed fee arrangements. Customer acquisition costs were $119.6 million,
$185.4 million, and $174.6 million in 2012, 2013, and 2014, respectively. The reduction in customer acquisition costs in 2014 as compared to
2013 was primarily in the second half of the year. In the fourth quarter of 2014, customer acquisition costs were approximately $29.0 million,
compared to $59.6 million in the first quarter of 2014. We continue to seek higher quality and higher margin partners, as well as to prefer the
sharing of future revenues and the risk inherent in them, rather than pay an up-
front fixed fee to our partner software developers. Accordingly,
we expect customer acquisition costs in 2015 to continue at a level similar to that of the fourth quarter of 2014.
Year Ended December 31,
2012
2013
2014
Search
$
517,060
$
277,275
$
330,757
Advertising and other
19,948
48,233
57,974
Total Revenues
$
537,008
$
325,508
$
388,731
37