Stamps.com 2007 Annual Report Download - page 26

consistent with our expectation that product sales will increase in future periods.
Cost of insurance revenue increased 3% from $442,000 in 2006 to $455,000 in 2007. The increase is mainly attributable to
the increase in insurance sales as a result of the increase in the average of dollar value insured per transaction. As a percentage of
total revenue, cost of insurance revenue was 1% in each of 2006 and 2007. We expect the cost of insurance to increase in future
periods, which is consistent with our expectation that insurance revenue will increase in future periods.
Cost of PhotoStamps revenue increased 14% from $11.6 million in 2006 to $11.9 million in 2007, primarily due to the
increase in high volume business orders. Additionally, the gross margin from PhotoStamps is significantly lower than that of our
other sources of revenue because we include the stated value of USPS postage as part of our cost of PhotoStamps revenue. As a
result, future increases in PhotoStamps sales would further increase the overall cost of PhotoStamps revenue as a percentage of
total revenue, but would not affect our profitability. While we expect PhotoStamps revenue to decrease in future periods, cost of
PhotoStamps revenue may grow in future periods if high volume business PhotoStamps orders, which carry a lower gross
margin compared with PhotoStamps website orders, compose a higher percentage of total orders.
Cost of other revenue decreased 68% from $165,000 in 2006 to $52,000 in 2007, primarily due to the expiration of one of
our licensing agreements in June 2007. As a percentage of total revenue, cost of other revenue remained at less than one percent
in each of 2006 and 2007.
Sales and Marketing
Sales and marketing expense principally consists of spending to acquire new customers and compensation and related
expenses for personnel engaged in sales, marketing, and business development activities. Sales and marketing expense increased
19% from $27.8 million in 2006 to $33.1 million in 2007. As a percentage of total revenue, sales and marketing expense
increased six percentage points to 39% in 2007 from 33% in 2006. The increase, both on an absolute basis and as a percentage of
total revenue, is primarily due to the increase in various marketing program expenditures relating to the acquisition of customers
for our PC Postage business, partially offset by a decrease in marketing expenditures related to PhotoStamps. Ongoing marketing
programs include the following: traditional advertising, partnerships, customer referral programs, customer re-marketing efforts,
telemarketing, direct mail, and online advertising. We expect to increase our sales and marketing expenses in our PC Postage
business during 2008, and to decrease sales and marketing expenses in our PhotoStamps business as we focus on profitability in
that business.
Research and Development
Research and development expense principally consists of compensation for personnel involved in the development of our
services, depreciation of equipment and software and expenditures for consulting services and third party software. Research and
development expense decreased 6% from $8.8 million to $8.3 million in 2007. This decrease is primarily due to a decrease in
SFAS 123R stock-based compensation and lower headcount related expenses. As a percentage of total revenue, research and
development expense was 10% in each of 2006 and 2007. We expect research and development expense to increase in future
periods due to expected increase in headcount related expenses.
General and Administrative
General and administrative expense principally consist of compensation and related costs for executive and administrative
personnel, fees for legal and other professional services, depreciation of equipment and software used for general corporate
purposes and amortization of intangible assets. General and administrative expense increased 8% from $11.6 million in 2006 to
$12.5 million in 2007. As a percentage of total revenue, general and administrative expense increased one percentage point to
15% in 2007 from 14% in 2006. The
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increase, both on an absolute basis and as a percentage of total revenue, is primarily due to the increase in legal expenses relating
to existing litigation and to increased SFAS 123R stock-based compensation expense. We currently expect general and
administrative expenses to continue to increase in 2008 primarily because of increased activity in existing litigation and
increased SFAS 123R stock-based compensation expense.
Other Income, Net
Other income, net consists of interest income from cash equivalents and short-term and long-term investments. Other
income, net decreased 12% from $5.1 million in 2006 to $4.5 million in 2007. As a percentage of total revenue, other income,
net decreased one percentage point to 5% in 2007 as compared to 4% in 2005. The decrease, both on an absolute basis and as a