Stamps.com 2005 Annual Report Download - page 29

and other revenue to continue to increase in future periods which is consistent with the aforementioned expectation that product sales and other
revenue will also increase in future periods.
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 sales, marketing, and business development activities. Sales and
marketing expense increased from $12.6 million in fiscal 2004 to $19.8 million in fiscal 2005, an increase of 57%. As a percentage of total
revenue, sales and marketing expense was 33% and 32% in fiscal 2004 and 2005, respectively. The increase in sales and marketing expense is
primarily due to the increase in various marketing program expenditures relating to the acquisition of customers for our core business and for
PhotoStamps. Ongoing marketing programs include the following: traditional advertising; partnerships; customer referral programs; customer
remarketing efforts; telemarketing; direct mail; and online advertising. During the first quarter of fiscal 2004, we incurred a charge of
approximately $328,000 relating to cash and stock distributed to employees to compensate them for the loss in value of employee stock options
held by sales and marketing personnel as a result of our return of capital cash dividend of $1.75 per share in February 2004. We did not incur a
similar charge in 2005 and we do not anticipate a similar charge in the future. We currently expect sales and marketing expenses to increase in
fiscal 2006 as we increase our marketing activity and customer acquisition.
Research and Development. Research and development expense principally consists of compensation for personnel involved in the
development of our services and expenditures for consulting services and third party software. Research and development expense increased
from $6.2 million in fiscal 2004 to $6.6 million in fiscal 2005, an increase of six percent. This increase is primarily due to the increase in
salary, software maintenance, and depreciation expense. During the first quarter of fiscal 2004, we incurred a charge of approximately
$900,000 relating to cash and stock distributed to employees to compensate them for the loss in value of employee stock options held by
research and development personnel as a result of our return of capital cash dividend of $1.75 per share in February 2004. We did not incur a
similar charge in 2005 and we do not anticipate a similar charge in the future. As a percentage of total revenue, research and development
expense decreased five percentage points from 16% in fiscal 2004 to 11% in fiscal 2005 due to the growth in revenues. We currently expect
research and development expense to increase in fiscal 2006 as we expect to continue to increase our investment in our technology.
General and Administrative. General and administrative expense 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. General and administrative expense decreased from $13.0 million in fiscal 2004 to $9.6 million
in fiscal 2005, a decrease of 26%. As a percentage of total revenue, general and administrative expenses decreased 18 percentage points from
34% in fiscal 2004 to 16% in fiscal 2005. The decrease in general and administrative expense both on an absolute basis and as a percentage of
total revenue is primarily due to the decrease in legal expense related to a one-time expense of $1.4 million associated with the settlement of an
eBay litigation in July 2004. In addition, during the first quarter of fiscal 2004, we incurred a charge of approximately $1.6 million relating to
cash and stock distributed to employees to compensate them for the loss in value of employee stock options held by general and administrative
personnel as a result of our return of capital cash dividend of $1.75 per share in February 2004. We currently expect general and administrative
expenses to increase in fiscal year 2006 but decrease as a percentage of total revenue.
Other Income, Net. Other income, net consists of interest income from cash equivalents and short-term and long-term investments and
income relating to a legal settlement in the amount of $64,000 in 2005. Other income, net decreased from $2.3 million in fiscal 2004 to $2.2
million in fiscal 2005, a decrease of six percent. As a percentage of total revenue, other income, net decreased two percentage points from six
percent in fiscal 2004 to four percent in fiscal 2005. The decrease, both on an absolute basis and as a percentage of total revenue, is mainly
attributable to the recognition of legal settlement income of $1.4 million related to the eBay litigation, offset by a loss of $987,000 recognized
for the disposal of assets in fiscal 2004 associated with the relocation of our corporate headquarters. In addition, income from investments
increased by $287,000 in fiscal 2005 as compared to fiscal 2004. We currently expect other income to increase in fiscal year 2006 due to
increased invested balances.
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