Incredimail 2009 Annual Report Download - page 39

Revenues from product
s. These revenues decreased from $9.2 million in 2008 to $6.7 million in 2009. We believe this decrease is
attributable to the decreasing popularity in purchasing downloadable software and the effect of the economic downturn in 2009 had on
discretionary purchases. We believe that in 2010 we will be able to reverse this trend and see some growth in product sales, as a result of
increased marketing efforts and an improvement in the economic environment.
Cost of revenues
. Cost of revenues from products in 2009 was $1.6 million, as compared to $1.8 million in 2008. This decrease was
primarily a result of a reduction in compensation expenses, as well as the aforementioned decrease in product sales and their associated
costs. As a result of the increasing portion of revenues attributable to search and the decrease in direct costs, the gross profit margin in 2009
increased to 94%, as compared to 92% in 2008. As search generated revenues continue to account for a growing portion of our revenues, we
expect the gross profit margin to remain at its current level.
Research and development expenses (“R&D”) .
R&D decreased by $1.6 million, from $7.6 million in 2008 to $6.0 million in 2009.
This was a result of our refocusing our activities on our core competencies discontinuing some projects and freezing others. After releasing
PhotoJoy
in
2008, in 2009 we suspended most of the development and marketing costs related to this product, until the viral marketing aspects
were achieved. In addition, in August 2009 we released a substantially new version of our back-bone email client product IncrediMail
®
,
enabling us to further reduce some of our development costs. As a result of the above, as a percentage of revenues, R&D decreased from 35% in
2008 to 22% in 2009. We expect our research and development expenditures to remain as a percentage of sales, at the general current level of
the last couple of quarters, increasing only to enable us to pursue our current strategy for increasing downloads, reducing churn and continue
enhancing our existing suite of products.
Selling and marketing expenses
. Selling and marketing expenses, decreased by $2.5 million, or 34%, from $7.3 million in 2008 to $4.8
million in 2009. This decrease was primarily attributable to a $2 million decrease in customer acquisition expenses, from $3.8 million in 2008 to
$1.8 million in 2009, as well as a $0.5 million decrease in other marketing expenses as we refocused our activities. The reduction in customer
acquisition expenses was a result of having achieved the market penetration objectives for HiYo by the end of 2008 and a reduced level of other
customer acquisition costs reflecting the economic environment and our focusing on profitability.
General and administrative expenses (“G&A”).
G&A decreased from $3.8 million in 2008 to $3.3 in 2009. As a percentage of sales,
G&A decreased from to 17% in 2008 to 12% in 2009, and we expect to be able to maintain a similar level of G&A expenditure as a percentage
of sales in 2010.
Goodwill impairment and other charges
. In 2008 the Company realigned its strategy and decided to focus on its core competencies. As
a result it reorganized and suspended certain activities. These expenses included $0.5 million compensation expenses, $0.1 million goodwill
impairment and $0.5 million of other expenses related to activities suspended. As this effort was completed, there were no similar expenses in
2009.
Financial income, net
. We recorded $0.1 million, net, in financial income in 2009, compared to $4.5 million in 2008. The sum in 2008
was primarily due to receiving in the last quarter of 2008 the proceeds from the sale of an Auction Rate Security, which had been written-
off in
the fourth quarter of 2007, and recorded as a gain upon receipt in 2008. In light of the economic situation in general and the financial markets in
particular, we have further tightened our investment policy so that a majority of our investments are in US treasury or US government backed
securities, with the balance in debentures of a limited sum and relatively short-
term maturity, rated at A and higher and dollar denominated or
linked. As a result, the returns on our portfolio have been minimal. Assuming interest rates and the financial environment does not change
drastically we expect the current rate of return to continue going forward.
Income before Tax.
The income before tax in 2009 was $11.6 million, compared to income before tax in 2008 of $4.7 million. While
the income before tax in 2009 was attributable to profit from operations, in 2008 this income was primarily attributable to the aforementioned
$4.5 million financial income.
Taxes on Income.
Income tax in 2009 was $3.6 million compared to $0.3 million in 2008. Our effective tax rate in 2009 was 31%,
reflecting our decision to institute a dividend distribution policy, distributing at least 50% of net income as a dividend, starting 2009. In 2009 we
distributed a dividend totaling $8.5 million, of which $3.8 million was on account of net income on 2009. As a result of the distribution of
dividends and our accounting for this policy, we are not able to take full advantage of the tax reduced tax rates afforded Approved
Enterprises. We expect to continue to distribute dividends and therefore the effective tax rate to remain at a similar level in 2010. The low taxes
on income and effective tax rate in 2008 was due to the fact that the income before tax in 2008 was primarily due to the proceeds from selling an
Auction Rate Security at cost, for which no tax was incurred.
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