Stamps.com 2004 Annual Report Download - page 24

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Revenue. Revenue was derived primarily from three sources: (1) service fees charged to customers for use
of our Internet Postage service; (2) PhotoStamps revenue from the direct sale of PhotoStamps; and (3) product sales
and other revenue, consisting of online store revenue from the direct sale of consumables and supplies, advertising
revenue from controlled access advertising to our existing customer base, insurance revenue from our parcel
insurance offering, and licensing revenue. Revenue increased from $21.2 million in fiscal 2003 to $38.1 million in
fiscal 2004, an increase of 80%.
Service fee revenue increased from $17.6 million in fiscal 2003 to $27.9 million in fiscal 2004, an increase
of 59%. As a percentage of total revenue, service fee revenue decreased 10 percentage points from 83% in fiscal
2003 to 73% in fiscal 2004. The increase in service fee revenue is primarily due to the increase in the size of the
customer base. Furthermore, during the fiscal year 2004 our customer base included a greater percentage of Power
Plan customers compared to fiscal year 2003. This resulted in higher service fee revenues per customer. The
decrease in service fee revenue as a percentage of total revenue is attributable to the addition of revenue from our
new PhotoStamps product. As of December 31, 2004, Power Plan customers accounted for 51% of total registered
customers as compared to 30% at the end of December 31, 2003. We expect our service fee revenue to again
increase in future periods as we convert our Simple Plan customers to the Power Plan and as we add to our customer
base.
PhotoStamps revenue was approximately $2.3 million in fiscal 2004, which represented 6% of total
revenue; we had no PhotoStamps revenue in the fiscal year 2003. In July 2004, we received authorization from the
US Postal Service to proceed with a limited market test of a new form of postage called PhotoStamps™ that coupled
the technology of PC Postage with the simplicity of a web-based image up load and order process to allow
consumers and businesses to order fully customized postage. In September 2004, the USPS asked us to conclude our
market test effective on October 1, 2004, to allow the USPS to conduct a review of the results of the test run. We
concluded the market test with more than 138,000 total sheets, or 2.8 million individual PhotoStamps, ordered.
There is no assurance that we will receive final approval or receive authorization for further market tests from the
USPS for this new form of postage.
Product sales and other revenue increased from $3.6 million in fiscal 2003 to $7.8 million in fiscal 2004, an
increase of 116%. As a percentage of total revenue, product sales and other revenue increased 4 percentage points
from 17% in fiscal 2003 to 21% in fiscal 2004. The increase is primarily due to the expansion of our consumable
and supplies sales through our online store and a new licensing revenue stream which was approximately $450,000
in each of the third and fourth quarters of fiscal 2004. We expanded the number of available products from
approximately eighteen stock keeping units (“skus”) as of December 31, 2003 to approximately eighty-six skus at
the end of December 31, 2004, including specialty NetStamps labels, shipping labels, Internet Postage labels,
dedicated postage printers, digital scales, and printer cartridges, among other items. In addition, in October 2003, we
introduced our parcel insurance offering provided in partnership with Parcel Insurance Plan and underwritten by
Fireman’ s Fund. We expect product sales and other revenue to continue to increase as we add additional skus to our
online store, and as we market the use of our insurance offering to our existing and new customers.
Cost of Revenue. Cost of revenue principally consists of the cost of customer service, certain promotional
expenses, system operating costs, credit card processing fees, the cost of postage for PhotoStamps, printing and
fulfillment costs for PhotoStamps, parcel insurance offering costs, customer misprints and products sold through our
online store and the related costs of shipping and handling. Cost of revenue increased from $8.3 million in fiscal
2003 to $13.3 million in fiscal 2004, an increase of 61%. As a percentage of total revenue, cost of revenue decreased
4 percentage points from 39% in fiscal 2003 to 35% in fiscal 2004. This decrease primarily relates to the
promotional expense decline as a percent of revenue from 15% in 2003 to 9% in 2004. Promotional costs are
primarily incurred as customers are acquired and thereby do not correlate with changes in revenue.
Cost of service revenue increased from $7.2 million in fiscal 2003 to $9.5 million in fiscal 2004, an
increase of 33%. As a percentage of total revenue, cost of service revenue decreased 9 percentage points from 34%
in fiscal 2003 to 25% in fiscal 2004. The increase in cost of service revenue is primarily due to the increase in credit
card processing fees and customer support costs as a result of our larger customer base. In addition, promotional
expense increased by approximately $573,000 in fiscal 2004 compared to fiscal 2003, an increase of 19%. The
increase in promotional expense is also due to the increase in our customer base. The decrease in cost of service
revenue as a percentage of total revenue is due to the promotional expense decline as a percent of revenue from 15%
in 2003 to 9% in 2004. Promotional costs are primarily incurred as customers are acquired and thereby may not
correlate with changes in revenue.