Incredimail 2011 Annual Report Download - page 40

Recently issued accounting pronouncements.
See Item 18. Financial Statements. Note 3(w).
The following table sets forth, for the periods indicated, our statements of operations expressed as a percentage of total revenues (the percentages may not
equal 100% because of the effects of rounding):
As shown in the above table, our operations are generally characterized by high margins, which are attributable mainly to two factors: (i) we do not have
manufacturing costs for our products, and (ii) we sell our products online and until the second half of 2011 relied primarily on viral marketing. Starting the second half
of 2011, we increased our investment in customer acquisition costs dramatically to fuel future growth. These expenses increased from $1.8 million in 2010 to $8.1
million in 2011. This was the primary reason for selling and marketing expenses increasing in 2011, both nominally and as a percentage of sales, resulting in lower
operating and net income margins in 2011. We expect to further increase our customer acquisition costs in 2012, increasing our sales and marketing expenses, and
having a negative effect on the operating margin in 2012. However, as a result of the increased expenditure in 2011 and the subsequent increase in revenues in 2012,
we expect operating margins to improve in 2012.
Year Ended December 31, 2011 Compared to Year Ended December 31, 2010
Search revenues
. These revenues increased by 12%, from $22.8 million in 2010, to $25.5 million in 2011. This increase was due to an increase in the number
of downloads and subsequently the number of users using our search service. As the number of downloads of our IncrediMail products increased, while the number of
downloads of our Magentic and HiYo products decreased, search generated revenues through our partnership with Google accounted for more than 94% of these
revenues, with the remaining revenues coming from other search providers. Our current agreement with Google continues until January 31, 2013 and we therefore
expect them to continue to account for virtually all the search generated revenues. We have begun to implement our search generating revenue model with our
PhotoJoy and Smilebox products. While these products did not contribute significantly to search revenues in 2011, we expect them, particularly Smilebox, to generate
growing search revenues in 2012, through our partnership with Google and our ability to apply this technology and the back systems required to support and track
these revenues.
Product
s revenues. These revenues grew by over 33% in 2011, from $5.4 million in 2010 to $7.2 million in 2011. This increase was primarily attributable to
our recent acquisition of Smilebox Inc. whose products sales were $2.2 million, partially offset by a $0.4 million decrease of organic products sales. We believe that in
2012 we will see increasing revenues from the Smilebox product as a result off; (i) consolidating these product sales for a full year, as compared to only 4 months in
2011, (ii) a result of the accounting rules regarding acquired deferred revenues, deferred revenues from Smilebox product prior to the closing are adjusted downward
to their fair value as of the acquisition and the resulting reduction in revenues will decrease as we complete a year post acquisition, and (iii) continued organic growth
in sales of this product. In addition, we expect to record increasing sales of our IncrediMail products and recently introduced Fixie product in 2012.
Year Ended December 31,
2009
2010
2011
Revenues:
Search
74
%
77
%
72
%
Products
24
19
20
Other
2
4
8
Total revenues
100
%
100
%
100
%
Cost of revenues
6
5
8
Gross profit
94
95
92
Operating expenses
Research and development, net
23
23
21
Selling and marketing
17
18
37
General and administrative
12
16
22
Total operating expenses
52
57
80
Operating income
42
38
12
Financial income, net
-
1
4
Income before taxes on income
42
39
16
Income tax expense
13
11
-
Net income
29
%
28
%
16
%
37