Stamps.com 2006 Annual Report Download - page 31

Service fee revenue increased from $27.9 million in fiscal 2004 to $42.4 million in fiscal 2005, an increase of 52%. The increase in service
fee revenue was primarily due to the growth of our customer base and the migration of our existing customers from our Simple Plan price point
of $4.49 per month to the Power/Pro Plan at $15.99 per month and the Premier Plan at higher price points, resulting in higher service fee
revenue per customer. As of December 31, 2005, Power/Pro Plan or Premier Plan customers accounted for 94% of total registered customers as
compared to 51% as of December 31, 2004. We successfully billed approximately 291,000, 300,000, 293,000 and 299,000 unique customers
during the first, second, third and fourth quarters of 2005, respectively, as compared to approximately 249,000, 258,000, 264,000 and 286,000
unique customers during the first, second, third and fourth quarters of 2004, respectively. Average monthly service fee revenue per paid
customer increased approximately 35% from $8.8 during fiscal 2004 to $11.9 during fiscal 2005. As a percentage of total revenue, service fee
revenue decreased four percentage points from 73% in fiscal 2004 to 69% in fiscal 2005. The decrease in service fee revenue as a percentage of
total revenue is attributable to the increase in revenue from our PhotoStamps product.
PhotoStamps revenue increased from $2.3 million in fiscal 2004 to $8.9 million in fiscal 2005, an increase of 283%. As a percentage of
total revenue, PhotoStamps revenue increased eight percentage points from 6% in fiscal 2004 to 14% in fiscal 2005. The PhotoStamps revenue
increase, both on an absolute basis and as a percentage of total revenue was primarily due to the increase in customer orders as a result of our
marketing efforts from seasonal demand during the holiday period and due to the limited sales period of PhotoStamps in 2004.
Product revenue increased from $5.5 million in fiscal 2004 to $7.4 million in fiscal 2005, an increase of 33%. The increase was primarily
due to the expansion of our consumable and supplies sales through our Supplies Store as a result of the growth in the size of our customer base
and our continued effort to market these offerings to our existing and new customers. As a percentage of total revenue, product revenue
decreased three percentage points to 12% in fiscal 2005 as compared to 15% in fiscal 2004. This decrease was primarily due to the increase in
PhotoStamps revenue.
Other revenue increased from $2.3 million in fiscal 2004 to $3.3 million 2005, an increase of 41%. This was primarily due to the increase
in licensing revenue. We had four quarters of licensing revenue in fiscal 2005 as compared to two quarters in fiscal 2004. As a percentage of
total revenue, other revenue decreased one percentage point to 5% in fiscal 2005 as compared to 6% in fiscal 2004. Included in other revenue
was our branded insurance program which was approximately $1.2 million and $1.4 million in fiscal 2004 and 2005, respectively, or
approximately 3% and 2%, respectively.
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, image review, printing and fulfillment costs for PhotoStamps, parcel
insurance offering costs, customer misprints and products sold through our Supplies Store and the related costs of shipping and handling. Cost
of revenue increased from $13.3 million in fiscal 2004 to $17.4 million in fiscal 2005, an increase of 31%. As a percentage of total revenue,
cost of revenue decreased seven percentage points from 35% in fiscal 2004 to 28% in fiscal 2005. This decrease primarily related to the
promotional expense decline as a percentage of revenue. Promotional costs were primarily incurred as customers were acquired and thereby
may not correlate with changes in revenue.
Cost of service revenue decreased from $9.5 million in fiscal 2004 to $9.2 million in fiscal 2005, a decrease of four percent. As a
percentage of total revenue, cost of service revenue decreased ten percentage points from 25% in fiscal 2004 to 15% in fiscal 2005. The
decrease in total cost of service was a result of a decrease in promotional expense, offset by an increase in cost of sales owing to an increase in
credit card processing fees and an increase in customer support costs.
The decrease in promotional expense was attributable to the decrease in the redemption rate of our promotional offerings as well as a
reduced carrying cost of promotional items. Promotional expenses were primarily incurred as customers were acquired and thereby may not
correlate directly with changes in revenue. Promotional expense includes free postage and a free digital scale offered to new customers, and
was approximately $2.2 million and $3.6 million in fiscal 2005 and 2004, respectively. Promotional expense, which represents a material
portion of total cost of service revenue, is expensed in the period in which a customer is acquired. However, the revenue associated with the
acquired customer is earned over the customer’
s lifetime. Therefore, promotional expense for newly acquired customers may be higher than the
revenue earned from those customers in that period.
The increase in credit card processing fees was a result of higher total revenue levels. The increase in customer support costs was a result
of growth in the customer support workforce needed to support more customers. In
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