Classmates.com 2004 Annual Report Download - page 32

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Internet search fees primarily provided through our search agreement with Overture. Our agreement with GM expired in December 2003 and
was not renewed.
Cost of Billable Services
Cost of billable services increased by $3.5 million, or 8%, to $46.2 million for the six months ended December 31, 2003, compared to
$42.7 million for the six months ended December 31, 2002. The increase is due to a $2.1 million increase in customer support and billing-
related
costs, a $1.3 million increase in telecommunications costs and a $0.7 million increase in network personnel and overhead-related costs allocated
to billable services. These costs were partially offset by a $0.6 million decrease in network depreciation allocated to billable services.
Telecommunications costs increased as a result of an increase in the average number of pay access accounts, which was partially offset by a 23%
decrease in average hourly telecommunications costs and, to a lesser extent, a decrease in the average hourly usage per pay access account. Our
average hourly telecommunications costs decreased as a result of better port utilization, improvements made in allocating our
telecommunications usage to our lower cost vendors and lower telecommunications prices. Telecommunications hours allocated to our pay
access account base increased to approximately 90% of total telecommunications hours purchased during the six months ended December 31,
2003, compared to approximately 84% during the six months ended December 31, 2002. Network personnel and overhead-
related costs allocated
to billable services increased due to the increase in telecommunications hours utilized by pay access accounts as a percentage of total
telecommunications hours purchased. Customer support and billing-related costs increased as a result of the increase in the average number of
pay access accounts. Depreciation expense allocated to billable services has decreased due to network assets placed in service in prior years
becoming fully depreciated and significantly lower levels of capital expenditures in recent years versus prior years.
Cost of billable services as a percentage of billable services revenues was 27.5% in the six months ended December 31, 2003, compared to
39.0% in the six months ended December 31, 2002. This decrease resulted from an increase in ARPU due to significant adoption of our
accelerator services; a decrease in average hourly telecommunications costs per pay access account; decreased customer billing and support costs
per pay access account as a result of better pricing obtained from our primary customer support vendor; decreased depreciation expense; and a
slight decrease in average hourly usage per pay access account.
Cost of Free Services
Cost of free services decreased by $2.9 million, or 43%, to $4.0 million for the six months ended December 31, 2003, compared to
$6.9 million for the six months ended December 31, 2002. The decrease was due to a $2.4 million decrease in telecommunications costs, a
$0.3 million decrease in network depreciation allocated to free services, a $0.1 million decrease in customer support costs allocated to free
services and a $0.1 million decrease in network personnel and overhead-related costs allocated to cost of free services. The decrease in
telecommunications costs is a result of a decrease in average hourly telecommunications costs, a decrease in the number of active free access
accounts and a decrease in the average hourly usage of our free access accounts. Our active free access account base consisted of approximately
2.4 million users at December 31, 2003, compared to approximately 2.8 million users at December 31, 2002. This decrease in active free access
accounts has resulted primarily from active free access accounts upgrading to our pay services and fewer new accounts signing up for our free
access services. Depreciation expense allocated to free access services has decreased due to assets placed in service in prior years becoming fully
depreciated, significantly lower levels of capital expenditures in recent years versus prior years and a decrease in free access accounts as a
percentage of total active access accounts. Telecommunications hours allocated to our free access account base decreased to approximately 10%
of total telecommunications hours purchased during the
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