Stamps.com 2010 Annual Report Download - page 41

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TABLE OF CONTENTS
Insurance revenue was essentially unchanged at $1.6 million in both 2009 and 2008. As a percentage of total revenue,
insurance revenue was also unchanged at 2% in each of 2009 and 2008.
PhotoStamps revenue decreased 29% to $8.5 million in 2009 from $11.9 million in 2008. The decrease in revenue was
primarily attributable to a decrease in the number of sheets shipped, as a result of our reduction in PhotoStamps consumer sales
and marketing spending as we focused on profitability. As a percentage of total revenue, PhotoStamps revenue decreased to 10%
in 2009 from 14% in 2008.
Cost of Revenue
Cost of revenue was essentially unchanged at $22.9 million in both 2009 and 2008. As a percentage of total revenue, cost of
revenue increased slightly to 28% in 2009 compared to 27% in 2008.
Cost of service revenue increased 15% to $11.9 million in 2009 from $10.4 million in 2008. The increase is primarily
attributable to an increase in customer service costs aimed at improving our overall customer experience as well as increased
costs of our customer retention program. In addition, promotional expenses, which include free postage and free digital scale
offered to new customers, are included in cost of service revenue. Promotional expenses were $1.7 million and $791,000 during
2009 and 2008, respectively. The increase in promotional expense is primarily attributable to a change in our estimate of future
coupon redemptions that we made in the second quarter of 2008, which provided a one-time benefit in 2008. 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 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.
As a percentage of total revenue, cost of service revenue increased to 14% in 2009 as compared to 12% in 2008.
Cost of product revenue increased 13% to $4.0 million in 2009 from $3.5 million in 2008. The increase in costs is
attributable to increased product revenue as discussed above as well as higher fulfillment costs, as we added an east coast
fulfillment center to reduce delivery times and improve the customer experience. As a percentage of total revenue, cost of
product revenue increased slightly to 5% in 2009 from 4% in 2008.
Cost of insurance was essentially unchanged at approximately $500,000 in both 2009 and 2008, which is consistent with
insurance revenue as discussed above. As a percentage of total revenue, cost of insurance revenue was unchanged at 1% in both
2009 and 2008.
Cost of PhotoStamps revenue decreased 23% to $6.6 million in 2009 from $8.5 million in 2008, corresponding to the
decrease in PhotoStamps revenue. As a percentage of total revenue, cost of PhotoStamps revenue decreased to 8% in 2009 from
10% in 2008.
Sales and Marketing
Sales and marketing expense decreased 5% to $31.7 million in 2009 from $33.5 million in 2008. As a percentage of total
revenue, sales and marketing expense decreased slightly to 39% in 2009 from 40% in 2008. The decrease, both on an absolute
basis and as a percentage of total revenue, is primarily due to the decrease in our enhanced promotion marketing program
expenditures by 53% in 2009 compared to 2008, and the decrease in our marketing expenditures related to PhotoStamps by 57%
in 2009 compared to 2008. The decrease was partially offset by an increase in marketing program expenditures relating to the
acquisition of customers outside the enhanced promotion channel for our PC Postage business, which increased by 12% in 2009
compared with 2008.
Research and Development
Research and development expense increased 3% to $8.7 million in 2009 from $8.4 million in 2008. As a percentage of total
revenue, research and development expense increased slightly to 11% in 2009 from 10% in 2008.
General and Administrative
General and administrative expense decreased 17% to $13.0 million in 2009 from $15.6 million in 2008. As a percentage of
total revenue, general and administrative expense decreased to 16% in 2009 from 18% in 2008. The decrease, both on an
absolute basis and as a percentage of total revenue, is primarily due to the
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