Stamps.com 2011 Annual Report Download - page 37

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PhotoStamps revenue decreased 16% to $7.2 million in 2010 from $8.5 million in 2009. The decrease in revenue was primarily attributable to a
decrease in the number of sheets shipped, as a result of our reduction in PhotoStamps consumer sales and marketing spending as we focused on
profitability. As a percentage of total revenue, PhotoStamps revenue decreased to 8% in 2010 from 10% in 2009.
Cost of Revenue
Cost of revenue was increased 3% to $23.7 million in 2010 from $22.9 million in 2009. As a percentage of total revenue, cost of revenue was
unchanged at 28% in 2010 and 2009.
Cost of service revenue increased 12% to $13.3 million in 2010 from $11.9 million in 2009. The increase is primarily attributable to an increase
in promotional expenses, which include free postage and free digital scale offered to new customers. Promotional expenses were $2.7 million
and $1.7 million during 2010 and 2009, respectively. The increase in promotional expense is attributable to increased acquisition of new
customers and a new method of offering promotional items to customers, which increased promotional redemption rates. Promotional expense,
which represents a material portion of total cost of service revenue, is expensed in the period in which a customer qualifies for the promotion,
while the revenue associated with the acquired customer is earned over the customer’
s lifetime. As a result, promotional expense for newly
acquired customers may exceed the revenue earned from those customers in that period. As a percentage of total revenue, cost of service
revenue increased to 16% in 2010 as compared to 14% in 2009.
Cost of product revenue increased 9% to $4.3 million in 2010 from $4.0 million in 2009. The increase in these costs was consistent with the 10%
increase in product revenue during the same period. As a percentage of total revenue, cost of product revenue was 5% in both 2010 and 2009.
Cost of insurance increased 30% to $641,000 in 2010 from $500,000 in 2009, which was consistent with the 26% growth in insurance revenue
during the same period. As a percentage of total revenue, cost of insurance revenue was 1% in both 2010 and 2009.
Cost of PhotoStamps revenue decreased 17% to $5.4 million in 2010 from $6.6 million in 2009, corresponding to the decrease in PhotoStamps
revenue. As a percentage of total revenue, cost of PhotoStamps revenue decreased to 6% in 2010 from 8% in 2009.
Sales and Marketing
Sales and marketing expense decreased 2% to $31.2 million in 2010 from $31.7 million in 2009. As a percentage of total revenue, sales and
marketing expense decreased to 36% in 2010 from 39% in 2009. The decrease, both on an absolute basis and as a percentage of total revenue, is
primarily due to the decrease in our enhanced promotion marketing program expenditures by 44% in 2010 compared to 2009, and the decrease in
our marketing expenditures related to PhotoStamps by 63% in 2010 compared to 2009. The decrease was partially offset by an increase in
marketing program expenditures relating to the acquisition of customers outside the enhanced promotion channel for our PC Postage business,
which increased by 2% in 2010 compared with 2009 and increase in compensation expense of $835,000 in 2010 related to the special dividend
we paid on our common stock as described further in Note 2 - “Summary of Significant Accounting Policies—Stock Based Compensation”
of
our accompanying notes to consolidated financial statements.
Research and Development
Research and development expense increased 8% to $9.4 million in 2010 from $8.7 million in 2009. As a percentage of total revenue, research
and development expense was unchanged at 11% in both 2010 and 2009. The increase is mainly attributable to higher headcount related
expenses as (1) we continued to invest in the development and enhancement of our PC postage solutions and (2) we incurred additional
compensation expense of $707,000 in 2010 related to the special dividend we paid on our common stock as described further in Note 2 -
“Summary of Significant Accounting Policies—Stock Based Compensation” of our accompanying consolidated financial statements.
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