Cincinnati Bell 2006 Annual Report Download - page 140

The increase in selling, general and administrative expenses in 2006 compared to 2005 was primarily due to
an increase in labor costs to support the increased revenues.
Depreciation expense was higher in 2006 primarily due to the increased capital expenditures for the data
centers. The Company expects depreciation expense to be higher in 2007 due to new data center construction in
late 2006 and early 2007.
Amortization expense in 2006 results from the allocation of a portion of the purchase price to the customer
relationship intangible asset associated with the ATI acquisition. See Note 5 to the Consolidated Financial
Statements.
2005 Compared to 2004
Revenue
In March 2004, CBTS sold certain out-of-territory operations, which negatively impacted 2005 telecom and
IT equipment distribution revenue by $20.7 million. This decrease was more than offset by increased hardware
sales from core operations. This increase in hardware sales was due to a $49.1 million increase in IT and
computer-related hardware revenue, resulting primarily from increased hardware revenue from data center
customers. CBTS expanded its data center business with the opening of a data center in late 2004 and June 2005.
The increased hardware sales were for equipment used in CBTS data centers as well as for equipment to be used
at customer facilities. Higher revenue for the sale of telephony and other equipment accounted for the remaining
increase in 2005.
The newly operational data centers and increased hardware sales directly contributed to an increase of
$13.7 million in data center and managed services revenue in 2005. Data center service revenue increased in
2005 as a result of the opening of its new facilities as well as from services provided to customers outside of
CBTS facilities.
Professional services revenue decreased by $6.4 million primarily due to the sale of out-of-territory offices
for $3.5 million, the transfer of the Company’s internal IT support group to CBT, and a pricing decrease
associated with the renegotiation of a contract.
Costs and Expenses
Cost of services and products increased for 2005 by $34.8 million as compared to 2004. Higher sales from
IT and computer-related hardware and telephony hardware caused an increase to cost of goods sold of
$44.6 million and $1.9 million, respectively, which was partially offset by a decrease of $19.8 million related to
the sale of out-of-territory operations. Operational costs of the new data center facilities increased $5.7 million in
2005 as both facilities were running during 2005, and managed services costs increased $7.2 million related to
higher revenue. These increases in 2005 were partially offset by lower professional services costs and lower
operating costs due to the sale of out-of-territory operations.
The $0.7 million increase in selling, general and administrative expenses for 2005 compared to 2004 is
attributed to increased employee benefits expenses, sales commissions, and other performance-based
compensation as a result of the revenue and earnings increases over 2004, offset by decreases as a result of the
sale of out-of-territory assets in 2004.
The increase in depreciation expense in 2005 over 2004 is due to capital expenditures associated with
providing data center collocation services.
Although revenue increased during 2005, operating margins decreased from 2004. The margin decrease is
primarily due to an increased proportion of equipment sales, which have lower operating margins than service
revenue.
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