Stamps.com 2004 Annual Report Download - page 27

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percentage of Power Plan customers which resulted in higher service fee revenues per customer. As of
December 31, 2003, Power Plan customers accounted for 30% of total registered customers as compared to 19% at
the end of December 31, 2002.
Product sales and other revenue increased from $1.5 million to $3.6 million, or 148.6%, for the years ended
December 31, 2002 and 2003, respectively. As a percentage of total revenue, product sales and other revenue
increased 8 percentage points from 9% in fiscal 2002 to 17% in fiscal 2003. The increase was primarily due to the
expansion of our consumable and product offerings. We expanded the number of available products from two stock
keeping units (skus) in 2002 to approximately twenty skus by December 31, 2003, including specialty NetStamps
labels, shipping labels, Internet Postage labels, dedicated postage printers, and digital scales, and other items. In
addition, in November 2003, we introduced our parcel insurance offering provided in partnership with Parcel
Insurance Plan and underwritten by Fireman’ s Fund.
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 consumables, customer misprints and
products sold through our online store and the related costs of shipping and handling. Cost of revenue increased
from $5.3 million to $8.3 million, or 55% for the years ended December 31, 2002 and 2003, respectively. As a
percentage of total revenue, cost of revenue increased 6 percentage points from 33% in fiscal 2002 to 39% in fiscal
2003.
Cost of service revenue increased from $5.0 million for the year ended December 31, 2002, to $7.2 million
for the year ended December 31, 2003, an increase of 42.2%. As a percentage of total revenue, cost of service
revenue remained constant at 31% and 34% for fiscal 2002 and 2003, respectively. The increase in cost of service
revenue was primarily due to increased promotional expense as a result of increased customer acquisition.
Promotional expense typically involves offering free postage and a free digital scale to new customers. Such
promotional expense was approximately $1.5 million and $3.0 million for the year ended December 31, 2002 and
2003, respectively. Promotional expenses, which represent a significant portion of total cost of service revenue, are
expensed in the period when a customer is acquired. However, the revenue associated with the acquired customer is
earned over the customers’ lifetime. Therefore, promotional expenses for newly acquired customers may be higher
than the revenue earned from those customers in that period. For this reason, the cost of service revenue increases
may not correlate to the increases in service revenue for the same period.
Cost of product sales and other revenue increased from $299,000 for the year ended December 31, 2002, to
$1.1 million for the year ended December 31, 2003, an increase of 272.2%. As a percentage of total revenue, cost of
product sales and other revenue remained constant at 2% and 5% for fiscal 2002 and 2003, respectively. The
increase in cost of product sales and other revenue was primarily due to the expansion of available products offered
through our online store.
Research and Development. Research and development expense principally consists of compensation for
personnel involved in the development of our service and expenditures for consulting services and third party
software. Research and development expense was approximately $4.8 million for the years ended December 31,
2002 and 2003, respectively. As a percentage of total revenue, research and development expense decreased 6
percentage points from 29% in fiscal 2002 to 23% in fiscal 2003 due to the growth in revenues.
Sales and Marketing. Sales and marketing expense principally consists of costs associated with strategic
partnership relationships, advertising, and compensation and related expenses for personnel engaged in marketing
and business development activities. Sales and marketing expense increased from $2.5 million for the year ended
December 31, 2002, to $6.3 million for the year ended December 31, 2003, an increase of 151.0%. As a percentage
of total revenue, sales and marketing expense increased 15 percentage points from 15% in fiscal 2002 to 30% in
fiscal 2003. In 2003, we increased marketing spending as we increased our level of spending in certain marketing
channels versus 2002. During the year, we focused our acquisition efforts on existing programs as well as new
marketing channels with a greater return on investment.
General and Administrative. General and administrative expenses principally consist of compensation and
related costs for executive and administrative personnel, fees for legal and other professional services, depreciation
of equipment and software used for general corporate purposes and amortization of intangible assets and deferred
compensation. General and administrative expense was $15.5 million for the year ended December 31, 2002 and