Incredimail 2012 Annual Report Download - page 45

Product s revenues
. Product revenues increased by 144% in 2012, from $7.2 million in 2011 to $17.6 million in 2012. This increase
was primarily attributable to the addition of Smilebox to our product portfolio in September 2011, and the subsequent growth in sales of our
Smilebox product. Revenues from our Smilebox product in 2012 were $11.6 million, compared to $2.2 million in 2011. IncrediMail product
revenues increased by $1.0 million in 2012, as a result of our discontinuing the Gold Gallery Lifetime subscription. We believe that in 2013 we
will see increasing revenues from our products, particularly from our Smilebox product, as we improve the product and our marketing and
distribution techniques. In addition, we expect to focus future acquisitions on product oriented companies, enriching our product portfolio and
providing for a more balanced revenue stream.
Other revenues
. Advertising and other revenues increased 63% in 2012, from $2.8 million in 2011 to $4.6 million in 2012. This
increase is attributable to increased distribution of our software and to the offering of our homepage, which includes display advertising, and the
subsequent acceptance of this offer by our users. We believe these revenues will continue to increase in 2013, as our distribution increases,
nominally and as a percentage of total sales.
Cost of revenues
. Cost of revenues in 2012 was $5.2 million, as compared to $2.8 million in 2011. Amortization of intangible assets
increased by $1.2 million due to the acquisition of SweetIM, and the balance was due to the inclusion of Smilebox for a full year in 2012 and
additional infrastructure costs. The increase in amortization expenses stemming from the SweetIM acquisition caused a slight decrease in gross
profit margin from 92% in 2011, to 91% in 2012. As we expect search generated revenues to grow at a higher pace than product revenues, this
will offset the increase in amortization expenses, so our gross profit margin will still remain above 90%.
Research and development expenses, net ("R&D")
. R&D increased by $3.2 million in 2012, from $7.5 million in 2011 to $10.7 million
in 2012, decreasing as a percentage of sales from 21% in 2011 to 18% in 2012. The increase was as a result of our investing in enriching our
product pipeline in 2012, primarily by making our products available on mobile platforms. A mobile version of our Smilebox product, available
for the iPhone, was announced in the third quarter of 2011 and already has accumulated over 1 million downloads. In the first quarter of 2013,
we released a mobile version of our IncrediMail product for the iPad. In 2013 we intend to develop additional mobile versions of our products
for other platforms, such as Android, and possibly others. As a result, we expect this expenditure to further increase nominally, although to
continue to decrease as a percentage of sales as our sales continue to grow more rapidly.
Selling and marketing expenses
. Selling and marketing expenses more than doubled, from $13.0 million in 2011 to $29.5 million in
2012. This increase was primarily attributable to the increased investment in customer acquisition costs, which increased from $8.0 million in
2011 to $22.1 million in 2012. This increase reflects a ramping up of these expenses all through 2012, reaching $9.7 million in the fourth quarter
of 2012. This investment is to fuel future accelerated growth and we expect to
further increase this investment in 2013, even as a percentage of
sales, in order to fuel growth in 2013 and 2014. In addition, marketing expenses increased due to personnel costs incurred by increasing the size
of our marketing department as we added the Smilebox marketing department in 2012. We expect these expenses, excluding the customer
acquisition costs, to grow only nominally from the level established in the last quarter of 2012. In 2013, we expect to continue and increase
customer acquisition costs to more than $50 million, in order to further accelerate the growth of our revenues. That being said, we continue to
condition this investment on a positive return on investment (“RoI”)
within one year, and to the extent we cannot maintain a positive RoI, we
may curtail this expenditure.
General and administrative expenses ("G&A").
G&A increased from $7.6 million in 2011 to $8.6 in 2012. This increase was primarily
due to costs associated with the acquisition of subsidiaries in 2012, compared to the previous year. G&A expenses from organic operations in
2012 were at a level similar to that of 2011. As a result, and even after the increased in acquisition expenses, G&A as a percentage of sales
decreased from 22% in 2011 to 14% in 2012. With the exception of costs that could be incurred in connection with future acquisitions, although
we expect G&A cash expenses to increase nominally; we expect these cash expenses to decrease as a percentage of sales in 2013.
Taxes on Income.
Income tax in 2012 was $2.5 million, compared to $0.2 million in 2011. The increase in income tax was primarily a
result of a number of tax credits received in 2011 with respect to past years, a tax refund due to the settlement of a tax audit with the Israeli tax
authorities and the discontinuation of our dividend distribution policy. In 2012, we did not benefit from these credits, and while our maximum
statutory tax rate is 25%, we suffered from non-recurring tax expenses which coupled with an increase in non-
deductible expenses, caused an
effective tax rate of 41%. As we look towards 2013, we do not currently expect a recurrence of the tax credits from 2011, or as significant non-
recurring tax expenses experienced and accrued for in 2012.
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