Classmates.com 2006 Annual Report Download - page 37

Content & Media Advertising Revenues. Content & Media advertising revenues increased by $36.6 million, or 156%, to $60.1 million for
the year ended December 31, 2006, compared to $23.5 million for the year ended December 31, 2005. The increase was due to increased
advertising revenues as a result of revenues generated from our loyalty marketing service which was acquired in April 2006, partially offset by a
decline in advertising revenues generated from our social-networking services which was negatively impacted by our decision to significantly
reduce the number of advertising placements per page in June 2006. We anticipate that Content & Media advertising revenues may decrease in
the March 2007 quarter when compared to the December 2006 quarter due to seasonality.
Cost of Revenues
Cost of revenues includes telecommunications and data center costs; personnel and overhead-related costs associated with operating our
networks and data centers; depreciation of network computers and equipment; email technical support and license fees; costs related to providing
telephone technical support; customer billing and billing support to our pay accounts; domain name registration fees; and costs of providing
rewards to members of our loyalty marketing service. The majority of the costs that comprise our Communications cost of revenues are variable.
As such, our Communications cost of revenues as a percentage of revenues is highly dependent on our ARPU, our average hourly
telecommunications cost and usage, and our average customer billing and support costs per pay account. Although the costs that comprise our
Content & Media cost of revenues were relatively fixed in the past, as a result of our loyalty marketing service which was acquired in April
2006, these costs have become more variable and have increased significantly as a percentage of revenues.
Consolidated Cost of Revenues. Consolidated cost of revenues increased by $9.4 million, or 8%, to $120.0 million for the year ended
December 31, 2006, compared to $110.7 million for the year ended December 31, 2005. The increase was primarily due to increased costs
associated with our Content & Media segment as well as a $0.8 million increase in depreciation and a $0.6 million increase in stock-based
compensation in connection with the adoption of SFAS No. 123R in the March 2006 quarter. Cost of revenues for our Communications segment
and for our Content & Media segment constituted 73.9% and 26.1%, respectively, of our total segment cost of revenues for the year ended
December 31, 2006, compared to 87.7% and 12.3%, respectively, for the year ended December 31, 2005.
Communications Cost of Revenues. Communications cost of revenues decreased by $8.2 million, or 9%, to $81.0 million for the year
ended December 31, 2006, compared to $89.3 million for the year ended December 31, 2005. The decrease was primarily due to a $9.8 million
decrease in telecommunications costs and a $3.3 million decrease in customer support and billing-related costs as a result of a decrease in the
number of pay accounts. These decreases were partially offset by an increase of $3.8 million in costs associated with our VoIP service and a $1.1
million increase in network and other overhead-related costs. As a percentage of Communications revenues, Communications cost of revenues
increased to 21.6% in the year ended December 31, 2006, compared to 20.7% in the year ended December 31, 2005, primarily as a result of
VoIP cost of revenues exceeding VoIP revenues. We anticipate that Communications cost of revenues as a percentage of Communications
revenues may be relatively flat in the near term. However, our Communications cost of revenues as a percentage of Communications revenues
may be negatively impacted by our higher cost of revenue DSL broadband access service, which was launched in the December 2006 quarter.
Content & Media Cost of Revenues. Content & Media cost of revenues increased by $16.1 million, or 129%, to $28.6 million for the year
ended December 31, 2006, compared to $12.5 million for the year ended December 31, 2005. The increase was primarily related to costs
associated with our loyalty marketing service which was acquired in April 2006 and, to a lesser extent, increased costs associated with our
social-networking services. As a percentage of Content & Media revenues, Content & Media cost of revenues increased to 19.5% in the year
ended December 31, 2006, compared to 13.4% in the year ended
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