Classmates.com 2004 Annual Report Download - page 26

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competition could adversely impact our ability to maintain or grow this service and could result in pressure on the ARPU for this service. We
currently anticipate that some or all of these trends may continue and believe that ARPU will continue to decrease, at least in the near term. If we
continue to experience decreases in ARPU, our billable services revenues may decrease, and our total revenues may decrease.
Advertising and Commerce Revenues
Our advertising and commerce revenues consist of fees from our Internet search partners that are generated as a result of our users utilizing
our partners' Internet search services, fees generated by our users viewing and clicking on third-party Web site advertisements and fees from
referring our users to, and our users creating pay accounts or making purchases on, sponsors' Web sites. We also generate revenues from
providing third parties with data analysis capabilities and traditional market research services, such as surveys and questionnaires. Our
advertising and commerce revenues are generated from our active account base, including our pay accounts. Factors impacting our advertising
and commerce revenues generally include changes in orders from significant customers, the state of the online search and advertising markets,
seasonality, increases or decreases in our active accounts, limitations on our free services and increases or decreases in advertising inventory
available for sale. In the past, we have imposed limitations on our free services that have adversely impacted our volume of advertising
inventory.
Advertising and commerce revenues increased by $4.7 million, or 14%, to $37.8 million for the year ended December 31, 2004, from
$33.1 million for the year ended December 31, 2003. The increase is attributable to an increase in revenue generated from our search
arrangement with Overture Services, Inc. ("Overture"), a subsidiary of Yahoo! Inc., and advertising revenues generated from our 2004 Web
hosting and Classmates acquisitions. The increase was offset partially by a decrease in revenues generated from our expired agreement with
General Motors Corporation ("GM"), from which we derived 6% and 41% of our advertising and commerce revenues for the years ended
December 31, 2004 and 2003, respectively.
Cost of Billable Services
Cost of billable services includes direct costs of billable services and costs that have been allocated to billable services. Direct costs consist
of costs related to providing telephone technical support, customer billing and billing support to our pay accounts and domain name registration
fees. Allocated costs consist primarily of telecommunications and data center costs, personnel and overhead-related costs associated with
operating our networks and data centers, and depreciation of network computers and equipment. We allocate costs associated with access
services between billable services and free services based on the aggregate hourly usage of our pay access accounts as a percentage of total hours
used by our active access accounts. We allocate costs associated with Web hosting between billable services and free services based on
estimated bandwidth used by pay Web-hosting accounts relative to estimated bandwidth used by free Web-hosting accounts. Costs associated
with our community-based networking services are allocated based on the number of Web site visits by pay accounts relative to the total number
of visits.
Cost of billable services increased by $2.2 million, or 2%, to $95.0 million for the year ended December 31, 2004, compared to
$92.8 million for the year ended December 31, 2003. The increase is due to a $4.2 million increase in customer support and billing-related costs
as a result of an increase in the number of pay accounts, a $1.3 million increase in network personnel and overhead-related costs allocated to
billable services and a $0.5 million increase in network depreciation allocated to billable services. These costs were offset partially by a
$3.8 million decrease in telecommunications costs. Telecommunications costs decreased as a result of a decrease in the average monthly usage
per pay access account and a decrease in average hourly telecommunications costs, offset partially by an
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