Stamps.com 2007 Annual Report Download - page 44

PhotoStamps revenue includes the price of postage and is made pursuant to a sales contract that provides for transfer of both
title and risk of loss upon our delivery to the carrier.
On a limited basis, we allow third parties to offer products and promotions to our customer base. These arrangements
generally provide payment in the form of a flat fee or revenue sharing arrangements where we receive payment upon customers
accessing third party products and services. Total revenue from such advertising arrangements was immaterial during the years
ended December 31, 2007, 2006 and 2005.
We provide our customers with the opportunity to purchase parcel insurance directly through our software. Insurance
revenue represents the gross amount charged to the customer for purchasing insurance and the related cost represents the amount
paid to the insurance broker, Parcel Insurance Plan. We recognize revenue on insurance purchases upon the ship date of the
insured package.
Revenue from gift cards, which is recognized at the time of redemption, is currently immaterial to our financial statements.
Because we do not yet have meaningful historical data upon which to base estimates for gift cards that will never be redeemed
(“breakage”), we have not recorded any breakage income related to our gift card program.
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.
F-42
TABLE OF CONTENTS
STAMPS.COM INC.
NOTES TO FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies – (continued)
Promotional Expense
New PC Postage customers are offered promotional items that are redeemed using coupons that are qualified for redemption
after a customer is successfully billed beyond an initial trial period. This includes free postage and a free digital scale and is
expensed in the period in which a customer qualifies using estimated redemption rates based on historical data. Promotional
expense which is included in cost of service is incurred as customers qualify and thereby may not correlate directly with changes
in revenue as the revenue associated with the acquired customer is earned over the customer’s lifetime.
Research and Development Costs
Research and development costs are expensed as incurred. These costs primarily consist 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.
Sales and Marketing
Sales and marketing expense primarily consist of discretionary spend to acquire new customers and compensation and
related expenses for personnel engaged in marketing and business development activities.
Advertising Costs
We expense the costs of producing advertisements as incurred, and expense the costs of communicating and placing the
advertising in the period in which the advertising space or airtime is used. For the years ended December 31, 2007, 2006 and
2005, advertising and tradeshow costs were $2.2 million, $3.2 million and $1.3 million, respectively.
Internet Advertising
We recognize Internet advertising expense based on the specifics of the individual agreements. Under partner and affiliate
agreements, third parties refer prospects to our web site and we pay the third parties when the customer completes the customer