Stamps.com 2007 Annual Report Download - page 25

the decrease in revenue from our PhotoStamps product. As a percentage of revenue, service fee revenue may continue to
increase over future periods as we may experience a lower total volume of PhotoStamps corresponding to our reduction in
consumer PhotoStamps marketing spend. Further, we plan to continue to increase our level of spending on PC Postage customer
acquisition in order to grow our service fee revenue in future periods.
Product revenue increased 11% from $8.7 million in 2006 to $9.6 million in 2007. The increase was primarily attributable to
the following: (1) we launched a new supplies store interface in September 2006 from which we derived the benefit during all of
2007; (2) growth in our paid customer base; (3) marketing the store to our existing customer base; (4) the additional SKUs we
added to our store; and (5) growth in postage printed which helps drive sales of consumable supplies such as labels. Total
postage printed by customers using our service during 2007 was $272 million, a 19% increase from the $229 million printed
during 2006. As a percentage of total revenue, product revenue increased one percentage point to 11% in 2007 from 10% in
2006. We expect product revenue to increase in future periods as we expect continued growth in paid customers and in the
volume of postage printed.
Insurance revenue increased 2% from $1.4 million in 2006 to $1.5 million in 2007, primarily as a result of an increase in the
average of dollar value insured per transaction. As a percentage of total revenue, insurance revenue remained at 2% during each
of 2007 and 2006. We expect insurance revenue to increase in future periods as we expect continued growth in our paid
customer base.
PhotoStamps revenue decreased 5% from $18.8 million in 2006 to $17.9 million in 2007. As a percentage of total revenue,
PhotoStamps revenue decreased one percentage point to 21% in 2007 from 22% in 2006. The decrease, both on an absolute basis
and as a percentage of total revenue, is primarily due to a decrease in the average revenue per sheet shipped. Total PhotoStamps
sheets shipped during 2007 was approximately 1.1 million, a 3% increase compared to 1.0 million in 2006. Average revenue per
sheet shipped for 2007 was $16.34, an 8% decrease compared to $17.74 for 2006. Both the increase in sheets shipped and
decrease in average revenue per PhotoStamps sheet shipped were primarily attributable to a higher mix of high volume business
PhotoStamps orders, which carry a lower per sheet price. We reduced our PhotoStamps consumer sales and marketing spend
during the fourth quarter of 2007 and plan to continue to reduce our consumer sales and marketing spend on PhotoStamps in
future periods to improve profitability in that business. We expect that the reduction will result in lower PhotoStamps revenue in
future periods.
Other revenue decreased 50% from $1.8 million in 2006 to $907,000 in 2007. The decrease in other revenue is mainly
attributable to the expiration of a licensing agreement in June 2007. We do not expect other revenue to be material in future
periods.
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 2% in 2007 to $25.3 million from $24.8 million in 2006. As a percentage of
total revenue, cost of revenue increased one percentage point to 30% in 2007 as compared to 29% in 2006.
Cost of service revenue decreased 2% from $9.9 million in 2006 to $9.7 million in 2007. As a percentage of total revenue,
cost of service revenue decreased one percentage point to 11% in 2007 as compared to 12% in 2006. Promotional expenses are
included in cost of service revenue. This includes free postage and a free digital scale offered to new customers, and was
approximately $2.2 million and $1.7 million in 2006 and 2007, respectively. The decrease in cost of service revenue, both on an
absolute basis and as a percentage of total revenue is primarily due to lower promotional expenses resulting from decreased
coupon redemptions of the promotional items. Promotional expense, which represents a material portion of total cost of service
revenue, is expensed in the period in which a customer qualifies for the promotion while the revenue associated
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with the acquired customer is earned over the customer’s lifetime. As a result, promotional expense for newly acquired
customers may exceed the revenue earned from those customers in that period.
Cost of product revenue increased 22% from $2.7 million in 2006 to $3.3 million in 2007. As a percentage of total revenue,
cost of product revenue increased one percentage point to 4% in 2007 as compared to 3% in 2006. The increase, both on an
absolute basis and as percentage of total revenue, is mainly attributable to the increase in product sales. See “Product Revenue”
in Results of Operation above for further discussion. We expect the cost of product sales to increase in future periods, which is