Incredimail 2010 Annual Report Download - page 40

Cost of revenues
. Cost of revenues from products in 2010 was $1.6 million, as compared to $1.5 million in 2009. This increase was
primarily due to our allocating increasing communication and other infrastructure costs to maintain and servicing our existing user base, as
opposed to marketing to new users in the past. Despite this nominal increase, as a result of the increasing portion of revenues attributable to
search, the gross profit margin in 2010 increased to 95%, as compared to 94% in 2009. 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 increased by $0.3 million, from $6.3 million in 2009 to $6.6 million in 2010,
decreasing as a percentage from sales from 24% in 2009 to 22% in 2010. This decrease was a result of us maintaining the existing product suite
without enriching the product pipeline for future years. Looking at 2011, we expect this expenditure to increase, although generally remain
stable as a percentage of sales. The increase in expenditure in 2011 is planned for contributing to a richer product pipeline to fuel future growth.
Selling and marketing expenses
. Selling and marketing expenses, increased by $0.6 million, or 14%, from $4.6 million in 2009 to $5.2
million in 2010. This increase was primarily attributable to the consumer research contracted in the fourth quarter as well as the marketing and
sales consultants hired. Marketing expenses included approximately $1.8 million in customer acquisition costs in 2010, similar to the level in
2009. In 2011, as we implement our strategy for growth, we intend to increase this expense more than three-
fold, with most of the increase being
in the latter part of 2011. As a result, we can expect operating margins to be lower during that part of 2011, due to the fact that a substantial part
of the return on that investment is only expected in 2012.
General and administrative expenses ("G&A").
G&A increased from $3.3 million in 2009 to $4.7 in 2010. This increase was primarily
due to our building a management team capable of scaling the business model and taking the Company to the next level, both organically and
through acquisitions. In the third quarter we engaged a new experienced CEO (while still retaining the prior CEO through the end of the year),
created a corporate and business development department, hired a new VP of Corporate Development and started staffing that department. We
expect to further invest in enhancing our management team in 2012, however, we do not expect this expenditure to increase as a percentage of
revenues.
Financial income, net
. We recorded $0.3 million, net, in financial income in 2010, compared to $0.1 million in 2009. We continue to
maintain a stringent 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 do not change drastically we expect the
current rate of return to continue going forward.
Taxes on Income.
Income tax in 2010 was $3.2 million, with an effective tax rate of 28%, compared to $3.5 million, with the same
effective tax rate of 31% in 2009. This rate reflects our decision to institute a dividend distribution policy, distributing at least 50% of net
income as a dividend, in 2009 and 2010. We distributed dividends of $8.5 million in each of the years, 2009 and 2010. As a result of our policy
to distribute dividends, we are not able to take full advantage of the tax reduced tax rates afforded to Approved and Beneficiary Enterprises. As
we announced in November 2010, we have changed our dividend distribution policy and do not intend to distribute dividends from earnings in
2011 or beyond. As a result, and assuming a similar tax environment in 2011, we expect to have a substantially lower effective tax rate in 2011.
Net Income.
The Net Income in 2010 was $8.4 million, compared to $8.0 million, in 2009. As described above, this was a result of our
increase in revenues being offset by a higher level of expenditure.
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
Revenues from advertising, primarily search, and other services
. These revenues increased by 61%, from $12.7 million in 2008, to
$20.5 million in 2009. The increase in revenues was due to an $8.2 million increase in search generated revenues, partially offset by a $0.5
million decrease in other advertising and other revenues. In 2009 we continued to collaborate with two search providers; with approximately
88% of search generated revenues being provided by our partnership with Google and the remaining 12% coming from other search providers,
primarily InfoSpace. The continued increase in search generated revenues reflects the success of our strategy to leverage our large user base,
primarily those using our free products. In 2010 we expected to further increase these revenues, while diversifying, our search generated
revenues through our continued market penetration of HiYo, adding our PhotoJoy user base and additional search assets. In addition, we
intended to invest in increasing other advertising based revenues from affiliates other than companies powering search.
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