Classmates.com 2005 Annual Report Download - page 43

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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 $30.3 million, or 17%, to $209.3 million for the year ended December 31, 2005, compared to
$179.0 million for the year ended December 31, 2004. The increase was primarily due to increased expenditures for our social-networking
service. Marketing, promotion and distribution costs increased by $12.3 million primarily due to promotion of our non-access businesses,
particularly our social-networking service, offset partially by a reduction in expenses related to promoting our access services. In addition,
personnel-related expenses increased by $10.0 million and telemarketing expenses related to customer acquisition, retention and up-
sell activities
increased by $5.2 million. Increases in prices to purchase advertising, combined with seasonal factors in the access business 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 maintain our revenues. While our sales and marketing expenses increased in 2005 versus 2004, quarterly sales and marketing expenses, both
in terms of absolute dollars and as a percentage of revenues, decreased beginning the second quarter of 2005 through the fourth quarter of 2005.
We currently anticipate a significant decrease in sales and marketing expenses for 2006 versus 2005. However, the anticipated decrease could be
substantially offset by increased compensation expense recognized in connection with the adoption of SFAS No. 123R, commencing in the
March 2006 quarter. In addition, if we determine that decreased marketing expenses are adversely impacting our business, we may choose to
allocate more to marketing expenses than we currently anticipate, which may adversely impact our profitability.
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 such as VoIP, and
the impact of such activities on our results of operations. While we anticipate that sales and marketing expenses as a percentage of revenues,
excluding the impact of increased compensation expense associated with the adoption of SFAS No. 123R will decrease in 2006 to between 30%
and 35% from approximately 40% in 2005, we may choose to either significantly increase or decrease such expenses as a percentage of revenues
in any particular quarterly period. We have decreased our sales and marketing expenses for our pay access services and expect to continue to
decrease such expenses in future quarters. We have entered into a number of longer-term offline distribution relationships for our access
services. We intend to continue to focus on increasing both our offline and online distribution channels in the near term. Increased fees paid to
distribution partners could result in our spending more on marketing than we currently anticipate. Our ability to increase or decrease our
marketing expenditures from period to period may be more limited to the extent distribution partners constitute a significant portion of our
marketing expenditures. Our pay account base declined during the fourth quarter of 2005. Continued decreases in marketing expenditures will
likely adversely impact our ability to increase or maintain our pay account base.
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