Incredimail 2011 Annual Report Download - page 44

Research and development expenses, net were $6.3 million, $6.6 million and $7.5 million in the years ended December 31, 2009, 2010 and 2011,
respectively. In 2011 our efforts were focused on developing the back-
end systems required for tracking the usage of our products and their monetization, developing
new products such as our PC optimization tool Fixie that was released in the fourth quarter of 2011 and the iPad and iPhone versions of our photo discovery tool
PhotoJoy. In addition, we continued to invest in the mobile version of our photo sharing product Smilebox. In 2012 we plan on increasing our investment in the mobile
space, developing a new version of our IncrediMail email client for tablet, as well as further organically enriching our product suite with new products adopted and
planned for our demographic of “second wave adopters”.
On a whole, we expect in 2012 this investment will increase nominally, although it will likely decrease as a
percentage of sales relative to 2011.
D. TREND INFORMATION
Sales.
The increase in sales in 2011 compared to 2010 was due to the consolidation of Smilebox activities starting September 2011, as well as a continued
increase in search generated revenues and other advertising revenues, partially offset by a decrease in IncrediMail product sales. Together, these increases contributed
to the 20% year over year growth in revenues. We expect these same factors to continue and contribute to even accelerate growth in 2012, particularly, the
consolidation of Smilebox revenues for a full year, renewed growth in premium product sales both from our Smilebox product and IncrediMail and finally moderate
growth in search generated revenues.
Until the acquisition of Smilebox in the second half of 2011, the percentage of sales attributable to search grew from 74% in 2009 to 77% in 2010 and in the
first half of 2011 was 78%. With the acquisition of Smilebox and resulting rapid growth in premium product sales, search generate revenues accounted for 66% of
total revenues in the second half of 2011, bringing the average for the year to 72%. As a result of the continued rapid growth in premium product sales, while search
generated revenues are expected to grow, we expect they will account for an even smaller portion of total revenues in 2012.
Gross Profit.
While gross profits continue to grow as a result of the growth in revenues, we expect the gross profit margin to decrease somewhat, as it did in
the second half of 2011, since the acquisition of Smilebox. This small decrease is a result of Smilebox’
s cost structure which includes direct costs related to the
payment for the use of premium content by users in sharing their Smilebox creations. We nonetheless anticipate relatively strong profit margins.
R&D
. R&D expenses increased nominally in 2011. However, as a percentage of sales they decreased as they did in 2010. We expect this trend, of nominal
increases while decreasing as a percentage of sales, to continue into 2012.
Sales and marketing expenses
. Our sales and marketing expenses increased by $7.7 million, from $5.2 million in 2010 to $13 million in 2011. This increase
was primarily due to the increase in customer acquisition cost which increased from $1.8 million in 2010 to $8 in 2011. This increase reflects a ramping up of these
expenses within 2011, reaching $3.1 million in the fourth quarter of 2011. This investment is to fuel future accelerated growth and we expect to further increase this
investment in 2012 fueling growth in 2012 and 2013. In addition to the increased investment in customer acquisition costs, sales and marketing expenses have
increased since the acquisition of Smilebox. We expect these expenses to grow only nominally from the level established in the last quarter of 2011.
General and administrative expenses
. G&A expenses increased as well in 2011. This increase is attributable to three main factors; (i) our enhancing
management with new and experienced professionals capable of taking the Company to the next level by implementing organic and non-
organic growth strategies.
This effort began in the latter part of 2010 and had full financial effect in 2011, (ii) the acquisition of Smilebox in the middle of 2011, together with required overhead
to manage that business, and (iii) approximately $1.0 million in one-time transaction costs associated with the Smilebox acquisition.
With exception to possible transaction costs associated with a new acquisition, we expect G&A expenses in 2012 to continue at their current level.
Taxes on Income. In 2011 we benefited from significant non-
recurring tax credits and tax settlements with the Israeli Tax Authorities, as we look towards
2012, we do not currently expect such tax credits and expect an effective tax rate of approximately 20% on our activity in Israel. As to our activity in Redmond,
Washington, this will depend on our ability to utilize losses carried forward from previous periods and other factors.
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