Classmates.com 2004 Annual Report Download - page 28

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ended December 31, 2004, compared to approximately 12% during the year ended December 31, 2003. The decrease in cost of free services was
partially offset by a $0.2 million increase in personnel and overhead-related costs. Cost of free services could increase as a percentage of
revenues in 2005 as a result of increased compensation expense recognized in connection with the adoption of SFAS No. 123 (revised)
commencing no later than the September 2005 quarter.
Sales and Marketing
Sales and marketing expenses include advertising and promotion expenses, fees paid to distribution partners to acquire new pay and free
accounts, personnel-related expenses for sales and marketing personnel and telemarketing costs incurred to acquire and retain pay accounts and
up-sell pay accounts to additional services. We have expended significant amounts on marketing, including national branding campaigns
comprised of television, Internet, sponsorships, radio, print and outdoor advertising and on retail and other performance-based distribution
relationships. Marketing and advertising costs to promote our products and services are expensed in the period incurred. Advertising and
promotion expenses include media, agency and promotion expenses. Media production costs are expensed the first time the advertisement is run.
Media and agency fees are expensed over the period the advertising runs.
Sales and marketing expenses increased by $58.4 million, or 48%, to $179.0 million for the year ended December 31, 2004, compared to
$120.6 million for the year ended December 31, 2003. Sales and marketing was approximately 40% of revenues for the year ended
December 31, 2004, compared to approximately 36% of revenues for the year ended December 31, 2003. The increase is primarily attributable
to a $48.7 million increase in marketing, promotion and distribution costs as a result of an expansion in marketing activities, which have focused
on promoting our access and accelerator services, increasing our pay access account base, and building our brands. Additionally, sales and
marketing expenses increased as a result of an $8.2 million increase in telemarketing expenses related to customer acquisition, retention and up-
sell activities and a $1.2 million increase in personnel-related expenses. Increases in prices to purchase advertising, combined with seasonal
factors and more intense competition for pay accounts, may adversely impact the effectiveness of our marketing activities and our ability to grow
our pay account base and revenues. Sales and marketing expense could increase as a percentage of revenues in 2005 as a result of increased
compensation expense recognized in connection with the adoption of SFAS No. 123 (revised) commencing no later than the September 2005
quarter.
Our marketing expenditures and the allocation of our marketing resources among our various services may vary significantly from quarter
to quarter depending on a number of factors including the effectiveness of our marketing activities, changes in the mix of our marketing
activities, changes in the cost to purchase advertising, changes in the number of pay accounts, the introduction of new services and the impact of
such activities on our results of operations. While we anticipate that sales and marketing expenses as a percent of revenues in 2005 will be
approximately equal to 2004 without taking into account the effect of increased compensation expense in connection with the adoption of SFAS
No. 123 (revised), we may choose to either significantly increase or decrease such expenses as a percentage of revenues in 2005 or in any
particular quarterly period. We have entered into a number of longer-term offline distribution relationships. We intend to continue to focus on
increasing both our offline and online distribution channels in the near term, which could result in increased marketing expenditures as a result of
fees paid to distribution partners. Our ability to increase or decrease our marketing expenditures from period to period may be more limited to
the extent distribution partners continue to constitute an increasing portion of our marketing expenditures. We anticipate that distribution fees
will represent a larger portion of our marketing expenditures in 2005. There is, however, no assurance that we will be able to increase our
distribution channels or that any future increase in marketing expenditures will be successful in growing or maintaining our pay account base.
Decreases in marketing expenditures would likely adversely impact our ability to increase our pay account base.
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