Stamps.com 2012 Annual Report Download - page 31

Cost of service revenue principally consists of the cost of customer service, certain promotional expenses, system operating costs, credit card
processing fees and customer misprints that do not qualify for reimbursement from the USPS. Cost of product revenue principally consists of
the cost of products sold through our Mailing & Shipping Supplies Store and the related costs of shipping and handling. The cost of insurance
revenue principally consists of parcel insurance offering costs. Cost of PhotoStamps revenue principally consists of the face value of postage,
customer service, image review costs, and printing and fulfillment costs.
Cost of service revenue increased 7% to $15.7 million in 2012 from $14.7 million in 2011. The increase in cost of service revenue is primarily
attributable to higher customer service costs to support our growing customer base. 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. Promotional expense decreased 2% to $3.5 million in 2012 from $3.6 million in 2011. The decrease
in promotion expense is primarily attributable to lower coupon redemption rates. As a result, cost of service revenue as a percentage of service
revenue decreased slightly from 19% in 2011 to 18% in 2012.
Cost of product revenue increased 11% to $5.4 million in 2012 from $4.9 million in 2011. The increase in product costs was driven by increased
product revenue. Cost of product revenue as a percentage of product revenue increased slightly from 36% in 2011 to 37% in 2012 as a result of
higher fulfillment costs that were not passed on to customers.
Cost of insurance revenue increased 55% to $2.3 million in 2012 from $1.5 million in 2011. The increase is primarily attributable to increased
insurance revenue resulting from increased activity by our high volume shipping customers. Cost of insurance revenue as a percentage of
insurance revenue decreased slightly from 35% in 2011 to 33% in 2012 as a result of changes and mix shifts in insurance pricing and discounting
to the end customers.
Cost of PhotoStamps revenue decreased 16% to $4.3 million in 2012 from $5.1 million in 2011. The decrease is primarily attributable to the
decrease in PhotoStamps revenue and the decrease in cost of PhotoStamps revenue related to initial application of PhotoStamps retail box
breakage in 2011 that did not repeat in 2012. Cost of PhotoStamps revenue increased from 61% in 2011 to 76% in 2012. This increase was
primarily attributable to the initial application of PhotoStamps retail box breakage accounting in 2011 which was at a higher gross margin
compared to the rest of the PhotoStamps business. As the initial application of PhotoStamps retail box breakage accounting did not repeat in
2012, Cost of PhotoStamps revenue as a percent of PhotoStamps revenue increased to levels more consistent with years prior to 2011.
Operating Expenses
The following table is our operating expense and operating expense as a percentage of total revenue for the periods indicated (in $000s except
percentage):
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 12% to $38.8 million in 2012 from
$34.6 million in 2011. The increase is primarily due to increased marketing expenditures to acquire customers in our Core PC Postage
business. Ongoing marketing programs include the following: traditional advertising, partnerships, customer referral programs, customer re-
marketing efforts, telemarketing, direct mail, and online advertising. Sales and marketing expenses as a percent of total revenue was consistent at
34% for both 2011 and 2012.
Table of Contents
2012
2011
Operating Expenses:
Sales and marketing
$
38,755
34,569
Research and development
10,243
9,395
General and administrative
14,750
14,181
Total operating expenses
$
63,748
$
58,145
Operating expenses as a percentage of total revenue:
Sales and marketing
34
%
34
%
Research and development
9
%
9
%
General and administrative
13
%
14
%
Total operating expenses
55
%
57
%
27