Stamps.com 2005 Annual Report Download - page 28

Supplies Store and enhanced insurance sales as a result of our continued effort to market to our existing customers. In addition, we had four
quarters of licensing revenue in fiscal 2005 as compared to two quarters in fiscal 2004.
During the year we expanded the number of available products from approximately 86 stock keeping units (“SKUs”) as of December 31,
2004 to approximately 160 SKUs at the end of December 31, 2005, including specialty NetStamps labels, shipping labels, mailing labels,
dedicated postage printers, digital scales, and printer cartridges, among other items. As a percentage of total revenue, product sales and other
revenue decreased four percentage points from 21% in fiscal 2004 to 17% in fiscal 2005 as a result of greater increases in revenue from service
fees and PhotoStamps. We expect product sales and other revenue to continue to increase on an absolute basis as we add additional SKUs to
our Supplies Store, and as we continue to market the use of our insurance offering to our existing and new customers.
Cost of Revenue. Cost of revenue principally consists of the cost of customer service, certain promotional expenses, system operating
costs, credit card processing fees, the cost of postage for PhotoStamps, image review, printing and fulfillment costs for PhotoStamps, parcel
insurance offering costs, customer misprints and products sold through our Supplies Store and the related costs of shipping and handling. Cost
of revenue increased from $13.3 million in fiscal 2004 to $17.4 million in fiscal 2005, an increase of 31%. As a percentage of total revenue,
cost of revenue decreased seven percentage points from 35% in fiscal 2004 to 28% in fiscal 2005. This decrease primarily relates to the
promotional expense decline as a percent of revenue. Promotional costs are primarily incurred as customers are acquired and thereby may not
correlate with changes in revenue.
Cost of service revenue decreased from $9.5 million in fiscal 2004 to $9.2 million in fiscal 2005, a decrease of four percent. As a
percentage of total revenue, cost of service revenue decreased ten percentage points from 25% in fiscal 2004 to 15% in fiscal 2005. The
decrease in total cost of service is a result of a decrease in promotional expense, offset by an increase in cost of sales owing to an increase in
credit card processing fees and an increase in customer support costs.
The decrease in promotional expense is attributable to the decrease in the redemption rate of our promotional offerings as well as a reduced
carrying cost of promotional items. Promotional expenses are primarily incurred as customers are acquired and thereby may not correlate
directly with changes in revenue. Promotional expense includes free postage and a free digital scale offered to new customers, and was
approximately $2.2 million and $3.6 million in fiscal 2005 and 2004, respectively. Promotional expense, which represents a material portion of
total cost of service revenue, is expensed in the period in which a customer is acquired. However, the revenue associated with the acquired
customer is earned over the customer's lifetime. Therefore, promotional expense for newly acquired customers may be higher than the revenue
earned from those customers in that period.
The increase in credit card processing fees is a result of higher total revenue levels. The increase in customer support costs is a result of
growth in the customer support workforce needed to support more customers. In addition, during the first quarter of fiscal 2004, we incurred a
charge of approximately $185,000 relating to cash and stock distributed to customer service employees as compensation for a loss in value of
employee stock options as a result of our return of capital cash dividend of $1.75 per share in February 2004. We did not incur a similar charge
in 2005 and we do not anticipate a similar charge in the future. We expect the total cost of service revenue to increase in future periods as we
increase our customer base resulting in larger promotional expenses, higher credit card processing fees, and higher customer support costs.
Cost of PhotoStamps revenue increased from $1.5 million in fiscal 2004 to $5.5 million in fiscal 2005, an increase of 270%. As a
percentage of total revenue, cost of PhotoStamps revenue increased five percentage points from four percent in fiscal 2004 to nine percent in
fiscal 2005. The cost of PhotoStamps revenue increase, both on an absolute basis and as a percentage of total revenue, is primarily due to the
increase in customer orders as a result of our marketing efforts, and from seasonal strength from holiday demands. Cost of PhotoStamps
revenue includes the face value of the postage, credit card processing fees, customer support costs, and cost associated with the printing and
fulfillment of the product.
Cost of product sales and other revenue increased from $2.3 million in fiscal 2004 to $2.8 million in fiscal 2005, an increase of 20%. The
increase in cost of product sales and other revenue is primarily due to the increased revenue from sale of products offered through our Supplies
Store, and due to the amortization cost of the patents related to licensing revenue. As a percentage of total revenue, cost of product sales and
other revenue decreased two percentage points from six percent in fiscal 2004 to two percent in fiscal 2005.
We expect the cost of product sales
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