Incredimail 2008 Annual Report Download - page 34

being that the income before tax was primarily due to the proceeds from selling this same ARS at cost, there was no tax incurred. In addition, in
2007, the effective tax rate on the other income increased, as the benefits from the Company’
s Approved Enterprise program were greatly reduced
in 2007. As the Privileged Benefit Program for 2008 has already been approved, we expect these benefits to return to a great extent in 2009.
Net Income (Loss). The Net Income in 2008 was $4.4 million, compared to a Net Loss of $2.8 million in 2007. The Net Income in 2008 was
primarily attributable to the aforementioned financial income from the sale of our auction rate security. The cause of the Net Loss in 2007, was
primarily attributable to the aforementioned $4.9 million other-than-temporary loss from our investment, and creating valuation allowance against
the deferred tax asset from that expense.
35
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
Revenues from advertising, primarily search and other services . These revenues increased three fold, from $3.1 million in 2006 to $9.6
million in 2007. The increase in revenues was primarily due to a $6.4 million increase in search generated revenues, as well as a $0.1 million
increase in other advertising and other revenues. The increase in search generated revenues reflects the success of our strategy to migrate from
product sales to subscriptions and leverage the growth potential of search generated revenues and our large user base, comprised primarily of
those using our free products. As our products mature and search availability expands, we expect search generated revenues to increase in the
future at a faster pace than our other revenue streams, and as such, to account for a larger portion of our revenues.
Revenues from products . These revenues increased by $1.3 million, or 17%, from $7.8 million in 2006, to $9.1 million in 2007. This was
achieved by a 39% increase in our Gold Gallery and JunkFilter Plus subscription revenues, partially offset by a 10% decrease in our revenues
from product sales of IncrediMail
®
Premium.
Cost of Revenues
. Cost of revenues from products increased by $0.9 million, from $0.9 million in 2006 to $1.8 million in 2007. The increase
was primarily due to a $0.8 million increase in salaries and related expenses, caused by the increase in support and creative staff, as well as a $0.2
million increase in payments for our anti-spam software, as JunkFilter Plus sales increased. As a result, in parallel with the increase in revenues,
our gross profit margin was 91% in 2007, compared to 92% in 2006. Together with the growth in our search generated revenues, we expect the
gross profit margin to remain at its current level and as long as this remains the trend, possibly improve. The entire cost of revenues is associated
with revenues from our software products and solutions, as there are no direct costs associated with revenues from search, advertising and other
services.
Research and Development Expenses (“R&D”) . R&D increased $2.8 million, from $3.3 million in 2006 to $6.1 million in 2007. The
increase was primarily attributable to an increased investment in products recently introduced and those planned for future release in 2008. In
2006 we released Magentic , a desktop enhancing solution, currently providing wallpapers and screensavers. As of the end of March 2008,
Magentic
has drawn over 6.0 million registered users. In 2007 we began developing a new version of Magentic , dramatically enhancing its
personal photograph tools, and we expect to release Magentic2 during the second quarter of 2008. In addition, we are working on a totally new
version of our back-bone email client product IncrediMail
®
. Although we have released numerous upgrades to this product, this will be the first
full makeover, improving the graphics and numerous user friendly functions, bringing a much more graphically advanced user interface. These
initiatives, together with our ongoing effort to continuously improve our existing suite of products, are expected to cause our R&D expenses to
further increase in 2007. As a percentage of revenues, R&D increased from 30% in 2006 to 33% in 2007.
Selling and Marketing Expenses . We more than doubled our selling and marketing expenses, increasing them from $1.8 million in 2006, to
$4.7 million in 2007. The increase in selling and marketing expenses was primarily attributable to new marketing initiatives, including media
buying which accounted for $1.4 million in 2007, and we expect to further increase the expenditure in this venue significantly in 2008. In 2007,
we also invested in numerous other online marketing initiatives, such as branded content, our social community website – IncrediWorld , as well
as off-line marketing and advertising. These other online and offline initiatives have been since curtailed, as we focus on our core competencies
for growing our user base and revenues in the future. In 2007 we continued to increase the staffing of our marketing department, and we expect to
continue and do so in 2008, focusing on optimization and media buying proficiencies.
General and Administrative Expenses (“G&A”). G&A increased by $1 million, from $2.7 million in 2006 to $3.7 million in 2007. This
increase was caused primarily due to increased staffing to accommodate the Company’s growth; as well as a $0.2 million increase in costs of
investor relations and other public company-related professional fees. Finally, the Company incurred in 2007 a $0.5 million expense incurred by
stock based compensation in accordance with FASB 123(R), compared to $0.4 million in 2006. As a percentage of revenues, G&A decreased
from 25% in 2006 to 20% in 2007.
Financial Expense, net . The financial expense was due to our recording a $4.9 million expense from the other-than-temporary impairment
of our investment in Auction Rate Securities currently not liquid. Recent uncertainties in the credit markets have adversely affected the liquidity of
auction rate securities as potential buyers have been unwilling to purchase these securities, adversely affected by the existing conditions in the
mortgage securities market. The liquidity of these investments has been significantly impacted by these conditions, and the specific security held
by the Company was recently downgraded from AAA to CCC by S&P, although we continue to receive interest payments every 28 days. During
recent months, the Company tried to sell such security, with no success. The Company received from its banker a valuation of this security,
resulting in it recording an, other
-
than
-
temporary impairment of $4.9 million. The Company has no other auction rate securities. This expense was