Overstock.com 2005 Annual Report Download - page 48

warehousing costs (excluding packaging costs), customer service costs and credit card fees. Fulfillment costs as a percentage of sales
may vary due to several factors, such as such as significant changes in the number of units received and fulfilled, the extent we utilize
third party fulfillment services and warehouses, and our ability to effectively manage customer service costs and credit card fees.
Year ended December 31,
2003 2004 2005
Total revenue $ 238,945 100 % $ 494,635 100 % $ 803,822 100 %
Cost of goods sold
Product costs and other cost of goods sold 192,851 81 % 394,118 80 % 623,335 78 %
Fulfillment costs 20,302 8%34,278 7%59,931 7%
Total cost of goods sold 213,153 89 %428,396 87 %683,266 85 %
Gross profit $ 25,792 11 %$ 66,239 13 %$ 120,556 15 %
Operating expenses
Sales and marketing. Sales and marketing expenses totaled $40.5 million and $79.7 million for the years ended December 31,
2004 and 2005, respectively, representing an increase of 97%. For the year ended December 31, 2004 and 2005, sales and marketing
expenses equaled 8% and 10%, respectively, of total revenue.
We direct customers to our websites primarily through a number of targeted online marketing channels, such as sponsored search,
portal advertising, e-mail campaigns, and other initiatives. We also utilize channels such as nation-wide television, print and radio
advertising campaigns. Our marketing expense is variable and is measured as a percentage of overall sales.
Overall online marketing expenditures has increased in absolute terms during the year ended December 31, 2005 compared to
prior years as a result of increased online marketing rates during 2004 and 2005, and an increase in our ongoing online marketing
efforts, particularly with the large portals (MSN, Yahoo & AOL), and keyword search (Google). In addition, we continued our
television, print and radio campaigns throughout 2005. Our marketing costs have also increased as a percentage of sales due to
marketing efforts in our auctions and travel businesses. Since we record revenues in these businesses on a net basis, they typically
have higher marketing expenses as a percent of revenue. These businesses currently account for 80 basis points of our total marketing
costs as a percent of sales.
While costs associated with our discounted shipping promotions are not included in marketing expense (they are accounted for as
a reduction of revenue), we consider discounted shipping promotions as an effective marketing tool, and intend to continue to offer
them as we deem appropriate.
Technology expenses. Technology expenses increased 233%, from $8.4 million in the year ended December 31, 2004 to
$28.1 million in same period ended December 31, 2005.
We incurred a "stair-step" increase in technology costs during 2005 in an effort to prepare us for growth we anticipate over the
next few years. The increase in expenditures was attributable to the increase in hardware, software and personnel costs, and
depreciation associated with the development of the new infrastructure, including the ERP implementation, expansion of corporate
systems and a database site license. The increase in technology expenses also included the costs associated with the strategic projects,
including the development of an enterprise data warehouse and customer analytics system, completion of our auctions lab,
reconstruction of our travel website, and development of our search engine and keyword management application.
Although we plan to continue to invest in technology, we expect overall capital expenditures to decrease to approximately $30
million, or half of 2005 levels. This includes some additional investment in
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