Support.com 2006 Annual Report Download - page 39

Cost of maintenance. Cost of maintenance consists primarily of compensation costs, travel costs, related overhead expenses for
customer support personnel. Cost of maintenance was $1.2 million in 2006, $1.0 million in 2005, and $418,000 in 2004. Cost of
maintenance increased by $237,000, or 24%, in 2006 from 2005 and $570,000, or 136%, in 2005 from 2004. The year over year
increases in cost of maintenance were due primarily to increases in salary and related employees costs and travel expenses as a result
of an increase in the number of customer support personnel.
Cost of services. Cost of services consists primarily of compensation costs, travel costs, related overhead expenses for
professional services personnel and costs from third parties for subcontracted consulting services. Cost of services revenue was $13.6
million in 2006, $13.1 million in 2005, and $9.6 million in 2004. Cost of services revenue increased by $471,000, or 4%, in 2006 from
2005, and $3.5 million, or 37%, in 2005 from 2004. The year over year increases in cost of service revenue were due primarily to
increases in salary and related employees costs and travel expenses as a result of an increase in the number of professional services
personnel. Included in cost of services for the year ended December 31, 2006 was $379,000 of stock−based compensation expense.
There were no comparable expenses in the prior years, because we adopted the provisions of SFAS 123R effective January 1, 2006.
We plan to hire additional professional services personnel in 2007 and therefore expect cost of services to increase over 2006. Cost of
services also includes the third−party costs for our outsourced call center and other costs to support our consumer technology support
offering that was launched in January 2007. Although such costs were not a significant portion of cost of services in 2006, we expect a
substantial increase in these costs for 2007.
Amortization of intangible assets. There is no change in amortization of intangible assets in 2006 from 2005. Amortization of
intangible assets increased approximately $727,000, or 200%, in 2005 from 2004. The increase in amortization of intangible assets in
2005 from 2004 was due primarily to the acquisition of substantially all of the assets of Core Networks which was effective
September 2, 2004. Consequently, 2006 and 2005 include a full twelve months of amortization, compared with only four months of
amortization in 2004.
Operating expenses
($ in thousands)
2006 % Change 2005 to 2006 2005 % Change 2004 to 2005 2004
Research and
development $ 9,247 (17)% $ 11,185 15% $ 9,746
Sales and marketing 23,336 (7)% 25,159 5% 23,965
General and
administrative 10,163 18% 8,618 34% 6,454
In−process research &
development — N/A — (100)% 1,618
Total operating expenses $ 42,746 (5)% $ 44,962 8% $ 41,783
Research and development. Research and development costs are expensed as incurred. Research and development expense
consists primarily of compensation costs, third−party consulting expenses and related overhead costs for research and development
personnel. Research and development expense was $9.2 million in 2006, $11.2 million in 2005, and $9.7 million in 2004. Research
and development expense decreased approximately $1.9 million, or 17%, in 2006 from 2005. The decrease in research and
development expense in 2006 from 2005 was due primarily to a workforce reduction in the third quarter of 2006 designed to align
staffing with our new initiatives. The increase in research and development expense of $1.4 million, or 15%, in 2005 from 2004 was
primarily due to additional headcount and related expenses resulting from the acquisition of Core Networks in September 2004.
Twenty three employees were added to our research and development organization from the acquisition of Core Networks. Included in
research and development expense for the year ended December 31, 2006 was $422,000 of stock−based
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Source: SUPPORTSOFT INC, 10−K, March 16, 2007