Overstock.com 2007 Annual Report Download - page 62

include as costs in calculating gross margin. We believe that some companies in our industry, including some of our competitors, account for fulfillment costs
within operating expenses, and therefore exclude fulfillment costs from gross margin. As a result, our gross margin may not be directly comparable to others
in our industry.
The following table has been included to provide investors additional information regarding our classification of fulfillment costs and gross margin, thus
enabling investors to better compare our gross margin with others in our industry (in thousands):
Years ended December 31,
2006 2007
Total revenue $788,150 100% $760,161 100%
Cost of goods sold
Product costs and other cost of goods sold 632,494 80% 585,514 77%
Fulfillment costs 60,856 8% 47,076 6%
Total cost of goods sold 693,350 88% 632,590 83%
Gross profit $ 94,800 12% $127,571 17%
As displayed in the above table, fulfillment costs during the years ended December 31, 2006 and 2007 were $60.9 million and $47.1 million,
representing 8% and 6% of total revenue for those respective periods. Fulfillment costs as a percentage of sales may vary due to several factors, such as our
ability to manage costs at our warehouses, significant changes in the number of units received and fulfilled, the extent to which we utilize third party
fulfillment services and warehouses, and our ability to effectively manage customer service costs and credit card fees.
The decrease in fulfillment costs in 2007 has been the result of improved efficiencies in both our warehousing costs (including the reduction of
warehouse space), and in our customer service operations.
Operating expenses
Sales and marketing. Sales and marketing expenses totaled $70.9 million and $55.5 million for the years ended December 31, 2006 and 2007,
representing 9% and 7% of total revenue for those respective periods. Comparing 2006 and 2007, sales and marketing expenses decreased 22% from 2006 to
2007. We direct customers to our Website primarily through a number of targeted online marketing channels, such as sponsored search, affiliate marketing,
portal advertising, e-mail campaigns, and other initiatives. We also utilize channels such as nation-wide television, print and radio advertising campaigns.
Sales and marketing expenses also include stock-based compensation related to the adoption of SFAS 123(R) in 2006 of $301,000 and $336,000 for the years
ended December 31, 2006 and 2007, respectively.
Costs associated with our discounted shipping promotions are not included in marketing expense. Rather they are accounted for as a reduction of revenue
and therefore affect sales growth and gross profit. We consider discounted shipping promotions as an effective marketing tool, and intend to continue to offer
them as we deem appropriate as part of our overall marketing plan.
Technology expenses. Technology expenses totaled $65.2 million and $59.5 million for the years ended December 31, 2006 and 2007, respectively (8%
of revenue in both years). From 2006 to 2007, technology expenses decreased 9% primarily due to decreased depreciation expense. Technology expenses also
included stock-based compensation related to the adoption of SFAS 123(R) in 2006 of $684,000 and $764,000 for the years ended December 31, 2006 and
2007, respectively.
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