Incredimail 2011 Annual Report Download - page 41

Other revenues
. These revenues more than doubled in 2011, from $1.3 million in 2010 to $2.8 million in 2011. This increase is attributable to collaboration
with other vendors for the sale of their product to our users and an increase in other advertising revenues through a toolbar, on our homepage and other. We believe we
will be able to maintain a similar nominal level of these sales in 2012. However, we currently have no plans for increasing our investment to grow these sales beyond
that.
Cost of revenues
. Cost of revenues in 2011 was $2.8 million, as compared to $1.6 million in 2010. This increase was primarily due to the acquisition of
Smilebox who’
s associated direct costs of approximately $0.6 million, included amortization of intangible assets and direct content costs. Smilebox content costs were
based on usage, and as a result included in the cost of revenues. Since the acquisition, the Company has been working to transition these relationships to a model
where the Company acquires the full rights to the content regardless of usage, paying for what is expected to be a much lower sum in advance. However, this positive
effect will be more than offset by the fact that the Company will be consolidating a full year of Smilebox’
s activity in 2012 as compared to only 4 months in 2011. As
a result, we expect that although gross profits will increase, the gross profit margin will decline somewhat in 2012. In addition, direct cost in 2011 also included
approximately $0.3 million payments to third-party search partners.
Research and development expenses, net ("R&D")
. R&D increased by $0.9 million, from $6.6 million in 2010 to $7.5 million in 2011, decreasing as a
percentage from sales from 23% in 2010 to 21% in 2011. The increase was as a result of our investing in enriching our product pipeline in 2011, with the Fixie product
already selling in the fourth quarter of 2011, the mobile version of our Smilebox product announced shortly after the acquisition, and the recently announced PhotoJoy
product for iPad and iPhone platforms. In 2012, we expect this expenditure to further increase nominally, although generally remain stable as a percentage of sales as
we continue to organically enrich our product pipeline.
Selling and marketing expenses
. Selling and marketing expenses more than doubled from $5.2 million in 2010 to $13.0 million in 2011. This increase was
primarily attributable to the increased investment in customer acquisition costs, which increased from $1.8 million in 2010 to $8.1 million in 2011. In addition,
marketing expenses increased due to personnel costs incurred by our increasing the size of our marketing department to enable us to make these investments and
subsequently track the return generated. Finally, the increase was also due to the marketing expenses incurred by the acquisition of Smilebox and the marketing
expenses needed to support that product. As we look to 2012, we expect to continue to increase customer acquisition costs significantly, possibly even double, in order
to further accelerate the growth in revenues. That being said, we continue to condition this investment on a positive return on investment (“RoI”)
within one year, and
to the extent we cannot ramp up and maintain a positive RoI, we may draw back on this expenditure.
General and administrative expenses ("G&A").
G&A increased from $4.7 million in 2010 to $7.6 in 2011. This increase was primarily due to our building a
management team, primarily in the latter part of 2010, capable of scaling the business model and taking the Company to the next level, both organically and through
acquisitions. As a result, in 2011 G&A on average was at a level similar to that off the last quarter of 2010. In addition, the Company recorded over $1.0 million in
expenses related to the acquisition of Smilebox Inc., which in according to US GAAP is accounted for as an expense when incurred
. . With exception to costs that
could be incurred by future acquisitions, we expect G&A to increase nominally, primarily as a result of consolidating Smilebox for a full year, as compared to only
four months in 2011, although decrease as a percentage of sales.
Taxes on Income.
Income tax in 2011 was $0.2 million, compared to $3.2 million in 2010. The decrease in income tax was a result of a number of tax credits
received with respect to past years, tax refund due to settlement of tax audit with the Israeli tax authorities and the discontinuation of our dividend distribution policy.
Assuming a similar tax environment in 2012, we expect an effective tax rate less than 20% for our activity in Israel and the effective tax rate for our activity in
Washington will be dependent on our ability to utilize accumulated losses from prior periods.
Net Income.
Net income in 2011 was $5.7 million, compared to $8.4 million, in 2010. As described above, this decrease was primarily a result of the $6.2
million increase in customer acquisition costs, amortization of intangibles resulting from Smilebox acquisition, partially offset by increased profits from the increase in
revenues and capitalization of research and development costs.
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