Incredimail 2013 Annual Report Download - page 39

Cost of Revenues
Cost of revenues consists primarily of salaries and related expenses, license fees, amortization of acquired technology, amortization of
capitalized research and development costs and payments for content and server maintenance, all related to our product revenues and
communicating with our users. The direct cost relating to search and advertising revenues are immaterial. The number of employees included in
the calculation of cost of goods sold was 14, 11, and 13 at the end of 2011, 2012 and 2013, respectively.
Research and Development Expenses, net
Our research and development expenses consist primarily of salaries and other personnel-
related expenses for employees primarily
engaged in research and development activities, allocated facilities costs, subcontractors and consulting fees. Our research and development
expenditures in 2013 increased compared to the prior year but decreased as a percentage of sales. The increase was primarily due to costs
associated with our continued mobile product development for Smilebox on the iPhone, IncrediMail for the iPad, iPhone and Android, which
were released in 2013, and Guardius, which is an application that enhances the speed and security of the browser. We expect this trend to
continue in 2014, with our research and development costs continuing to increase in nominal dollars, while decreasing as a percentage of sales,
as our sales continue to grow at an accelerated pace due largely to the ClientConect Acquisition. The nominal increase will enable us to continue
to enrich our product pipeline going forward, particularly on mobile platforms. The number of employees in research and development were 69,
117, and 105 at the end of 2011, 2012 and 2013, respectively.
Selling and Marketing Expenses
Our selling and marketing expenses consist primarily of customer acquisition costs, as well as salaries and other personnel-
related
expenses for employees primarily engaged in marketing activities, allocated facilities costs, as well as other outsourced marketing activity. As
part of our strategy to accelerate growth, we increased customer acquisition costs dramatically, both nominally and as a percentage of sales,
every year since 2011 and expect to continue increasing the rate of investment in customer acquisition even further in 2014. With this investment
we aim to increase the number of product downloads, users, search queries generated by those downloading our software or that of our partners,
and subsequently, revenue from search, premium subscriptions and advertising. Customer acquisition costs were $8.0 million, $22.1 million and
$32.3 million in 2011, 2012 and 2013, respectively. The number of employees in sales and marketing was 32, 50, and 49 at the end of 2011,
2012 and 2013, respectively.
General and Administrative Expenses ("G&A")
Our general and administrative expenses consist primarily of salaries and other personnel-
related expenses for executive and
administrative personnel, allocated facilities costs, professional fees and other general corporate expenses. In order to facilitate our strategy for
accelerated organic and non-
organic growth, we continue to enhance our management team with experienced professionals capable of managing
constant change and rapid organic and acquired growth. As a result, G&A expenses increased nominally in 2011, 2012 and in 2013. In each of
those years, on a GAAP basis, G&A expenses also included significant direct acquisition expenses incurred in connection with the acquisitions
made in those years. However, excluding acquisition-
related expenses, as a percentage of sales, G&A in 2013 was at its lowest level since we
went public in 2006. Looking forward, in 2014 we expect G&A expenses (excluding costs stemming from new acquisitions) to continue to
increase nominally to accommodate our growth and meet our regulatory requirements without increasing as a percentage of sales. The number of
employees in G&A was 24, 30, and 36 at the end of 2011, 2012 and 2013, respectively.
Income Tax Expense
For our Israeli operations we have elected to implement a tax incentive program pursuant to a 2011 Israeli tax reform, referred to as a
"Preferred Enterprise", starting with our 2011 "preferred income", according to which a reduced tax rate of 15% is applied to our preferred
income. A distrib ution from a Preferred Enterprise out of the preferred income would be subject to 15% withholding tax for Israeli-
resident
individuals and non-Israeli residents (subject to applicable treaty rates).
See Item 10.E “Taxation - Israeli Taxation - Law for the Encouragement of Capital Investments, 1959" and Item 8. “
Financial
Information - Consolidated Statements and Other Financial Information -
Policy on Dividend Distribution" for more information about this
program and the Company’s dividend policy.
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