Rosetta Stone 2011 Annual Report Download - page 63

Table of Contents
Operating Expenses
Year Ended
December 31, 2011 versus 2010
2011 2010 Change % Change
(in thousands, except percentages)
Sales and marketing $ 161,491 $ 130,879 $ 30,612 23.4%
Research and development 24,218 23,437 781 3.3%
General and administrative 62,031 53,239 8,792 16.5%
Lease abandonment — (583) 583 100.0%
Total operating expenses $ 247,740 $ 206,972 $ 40,768 19.7%
Sales and Marketing Expenses
Sales and marketing expenses for the year ended December 31, 2011 were $161.5 million, an increase of $30.6 million, or 23%, from the year ended
December 31, 2010. As a percentage of total revenue, sales and marketing expenses were 60% for the year ended December 31, 2011, compared to 51% for
the year ended December 31, 2010. The dollar and percentage increase in sales and marketing expenses were primarily attributable to the continued expansion
of our direct marketing activities in the U.S. and international markets. Media and marketing activities grew by $20.2 million, primarily outside of the U.S.,
including the launch of our new advertising campaign focused on promoting language learning and our brand, increased media associated with the launch of
Version 4 TOTALe in the United Kingdom, Japan and Korea as well as ReFLEX in Korea, and increased internet marketing due to increased spending in
online social media networks. Professional services increased by $4.7 million over the prior year period as a result of increased consulting related to
international brand strategy, segmentation study and market research conducted in 2011, as well as clerical service expenses related to institutional and
international retail sales. Personnel-related costs as a result of growth in our institutional sales channel, non-kiosk consumer, and marketing and sales support
activities increased by $6.0 million over the prior year period of which, $0.8 million related to the addition of the Long Term Incentive Program, or LTIP,
which was subsequently cancelled late in 2011. Additionally, travel and training expense increased by $0.5 million over the prior year period as a result of
increased travel in our institutional sales channel and global initiatives, commissions increased by $0.7 million as a result of increased institutional and
international consumer revenue, $0.5 million increase in depreciation and amortization due to increased capitalized software costs in 2011, $1.0 million
increase in IT related product development and improvement projects, $0.6 million in recruitment expenses due to our entry into new international markets, as
well as $0.3 million increase in trade shows driven by Korea and U.S. These costs were partially offset by a decrease of $4.4 million in kiosk related expenses
as the number of worldwide kiosks decreased from 259 as of December 31, 2010 to 174 as of December 31, 2011. We plan to continually evaluate our kiosk
performance as we balance the positive branding with the profitability of the kiosk, potentially closing additional underperforming kiosk locations.
Research and Development Expenses
Research and development expenses were $24.2 million for the year ended December 31, 2011, an increase of $0.8 million, or 3%, from the year ended
December 31, 2010. As a percentage of revenue, research and development expenses remained flat at 9% for the years ended December 31, 2011 and 2010.
The dollar increases were primarily attributable to personnel-related increases in development personnel of $2.9 million of which, $1.1 million related to the
addition of the LTIP compensation program which was subsequently cancelled in the fourth quarter of 2011. This increase in personnel costs was partially
offset by a $1.3 million decrease in consulting-related costs, $0.3 million decrease in travel expenses, and $0.3 million decrease in hardware and software
expenses related to the increased costs in 2010 associated with the development of new products and services as we launched our new
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