Carbonite 2011 Annual Report Download - page 44

Table of Contents
scale and purchase equipment and services in larger quantities. There has also been a long term downward trend in the cost of storage equipment and
broadband service, which we expect will continue in the future.
Gross profit and gross margin
Gross profit is our revenue less our cost of revenue. Our gross margins have historically expanded due to price increases for our consumer
solutions and from economies of scale. We expect our gross margins to remain flat in the near term as we add new data centers and expand modestly
thereafter.
Operating expenses
Research and development. Research and development expenses consist primarily of wages and benefits for development personnel, consulting
fees, rent, and depreciation. We have focused our research and development efforts on both improving ease of use and functionality of our existing
services and developing new offerings. The majority of our research and development employees are located at our corporate headquarters in the U.S.,
with another group at our offices in China. We expect that research and development expenses will increase in absolute dollars on an annual basis and
decrease modestly as a percentage of revenue, as we continue to enhance and expand our services.
General and administrative . General and administrative expenses consist primarily of wages and benefits for management, finance, accounting,
human resources, legal and other administrative personnel, legal and accounting fees, insurance, and other corporate expenses. We expect to continue to
add personnel and enhance our internal information systems in connection with the growth of our business. We expect our general and administrative
expenses to increase, given that we have become a public company. We expect our accounting, legal, and personnel-related expenses and directors and
officers insurance costs to increase as we have instituted and continue to monitor a more comprehensive compliance and board governance function,
maintain and review internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act, and prepare and distribute
periodic reports, as required by the rules and regulations of the Securities and Exchange Commission. As a result, we expect that our general and
administrative expenses will continue to increase in absolute dollars on an annual basis, but decrease as a percentage of revenue.
Sales and marketing . Sales and marketing expenses consist primarily of advertising costs, wages and benefits for sales and marketing personnel,
creative expenses for advertising programs, credit card fees, commissions paid to third-party partners and affiliates, and the cost of providing free trials.
The largest component of sales and marketing expense is advertising for customer acquisition, principally television, radio and print advertisements.
Online search costs consist primarily of pay-per-click payments to search engine operators. Advertising costs are expensed as incurred. To date,
marketing and advertising costs have been incurred principally in the U.S., but we expect to increase our marketing and advertising expenditures in other
countries. We expect that we will continue to commit significant resources to our sales and marketing efforts to grow our business and awareness of our
brand and services. We expect that sales and marketing expenses will continue to increase in absolute dollars on an annual basis, but decrease as a
percentage of revenue.
Critical Accounting Policies
Our financial statements are prepared in accordance with accounting principles generally accepted in the U.S., or GAAP. The preparation of our
financial statements and related disclosures requires us to make estimates, assumptions, and judgments that affect the reported amount of assets,
liabilities, revenue, costs and expenses, and related disclosures. We base our estimates and assumptions on historical experience and other factors that
we believe to be reasonable under the circumstances, but all such estimates and assumptions are inherently uncertain and unpredictable. We evaluate our
estimates and assumptions on an ongoing basis. Actual results may differ from those estimates and assumptions, and it is possible that other
professionals, applying their own judgment to the same facts and circumstances, could develop and support alternative estimates and assumptions that
would result in material changes to our operating results and financial condition. Our most critical accounting policies
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