Rosetta Stone 2011 Annual Report Download - page 62

Table of Contents
Cost of Product Revenue and Subscription and Service Revenue and Gross Profit
The following table sets forth cost of product revenue and subscription and service revenue, as well as gross profit for the year ended December 31, 2011
and 2010:
Year Ended
December 31, 2011 versus 2010
2011 2010 Change % Change
(in thousands, except percentages)
Revenue
Product $ 195,382 $ 215,590 $ (20,208) (9.4)%
Subscription and service 73,067 43,278 29,789 68.8%
Total revenue 268,449 258,868 9,581 3.7%
Cost of revenue
Cost of product revenue 36,497 32,549 3,948 12.1%
Cost of subscription and service revenue 12,619 6,450 6,169 95.6%
Total cost of revenue 49,116 38,999 10,117 25.9%
Gross profit $ 219,333 $ 219,869 $ (536) (0.2)%
Gross margin percentages 81.7% 84.9% (3.2)%
Cost of Product Revenue
Cost of product revenue for the year ended December 31, 2011 was $36.5 million, an increase of $3.9 million, or 12%, from the year ended
December 31, 2010. As a percentage of product revenue, cost of product revenue increased to 19% for the year ended December 31, 2011 compared to 15%
for the prior year period. The dollar increase in cost was primarily attributable to a $2.9 million increase in expense associated with product support activities,
a $0.6 million increase in freight, and a $0.4 million increase in commission expenses associated with our partners and affiliates. This increase was slightly
offset by a $0.6 million decrease in inventory obsolescence and scrap associated with the U.S. Version 4 TOTALe launch in the third quarter of 2010. We are
exploring the possibility of moving more of our business online, which should reduce the cost of product revenue as the cost of producing and shipping CD's
would decline. However, we could experience a temporary increase in the cost of our product revenue as we scrap existing packaging.
Cost of Subscription and Service Revenue
Cost of subscription and service revenue for the year ended December 31, 2011 was $12.6 million, an increase of $6.2 million, or 96% from the year
ended December 31, 2010. As a percentage of subscription and service revenue, cost of subscription and service revenue increased to 17% for the year ended
December 31, 2011 compared to 15% for the prior year period. The increase in cost was primarily attributable to our web-based service offerings in our
Version 4 TOTALe and ReFLEX products that include a component of dedicated online language conversation coaching and higher direct costs to deliver to
customers than our previous software solutions. We expect our cost of subscription and service revenue will increase in future periods, as a percent of
revenue, associated with the launch of our Version 4 TOTALe and ReFLEX solutions in our international markets.
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