Classmates.com 2007 Annual Report Download - page 52

increased revenues from post-transaction sales resulting from pay account growth in the year ended December 31, 2007. We have historically
derived a significant portion of our social networking advertising revenues from a post-transaction sales agreement which expired in October
2007. While we entered into a new post-transaction sales agreement with a different advertiser in December 2007, we anticipate decreased
revenues from post-transaction sales going forward.
Communications Advertising Revenues.
Communications advertising revenues increased by $6.3 million, or 15%, to $47.1 million for the
year ended December 31, 2007, from $40.8 million for the year ended December 31, 2006. The vast majority of the increase was attributable to
an increase in search revenues. We anticipate that Communications advertising revenues will decrease going forward as a result of decreasing
pay accounts.
Cost of Revenues
Cost of revenues includes telecommunications and data center costs; costs of providing rewards to members of our loyalty marketing
service; 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; fees associated with the storage and processing of customer credit cards and associated bank fees; and domain name
registration fees. Historically, the costs that comprise our Classmates Media cost of revenues have been relatively fixed. However, as a result of
our loyalty marketing service, which was acquired in April 2006, our cost of revenues has become more variable as the costs associated with this
service tend to fluctuate with revenues. 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 billing support costs per pay account.
Consolidated Cost of Revenues. Consolidated cost of revenues decreased by $2.8 million, or 2%, to $117.2 million for the year ended
December 31, 2007, compared to $120.0 million for the year ended December 31, 2006. The decrease was primarily due to decreased costs
associated with our Communications segment and a $1.1 million decrease in depreciation, partially offset by increased costs associated with our
Classmates Media segment. Cost of revenues related to our Classmates Media segment and our Communications segment constituted 36.3% and
63.7%, respectively, of our total segment cost of revenues for the year ended December 31, 2007, compared to 24.4% and 75.6%, respectively,
for the year ended December 31, 2006.
Classmates Media Cost of Revenues. Classmates Media cost of revenues increased by $12.6 million, or 47%, to $39.5 million, or 20.4%
of Classmates Media revenues, for the year ended December 31, 2007, compared to $26.9 million, or 19.3% of Classmates Media revenues, for
the year ended December 31, 2006. The increase was primarily related to costs of our loyalty marketing service, which we acquired in April
2006 and which was included in our results of operations for the full year ended December 31, 2007 compared to only 266 days for the year
ended December 31, 2006. Cost of revenues from our loyalty marketing service increased by $9.7 million in the year ended December 31, 2007
compared to the year ended December 31, 2006 primarily due to the fact that no such revenues or cost of revenues were included in our
consolidated financial statements in the first three months and nine days of 2006 (the period prior to our acquisition of MyPoints) and an increase
in costs associated with providing rewards in the year ended December 31, 2007 compared to the year ended December 31, 2006. In addition,
customer support, overhead and personnel-related costs associated with our social networking services increased by $2.7 million in the year
ended December 31, 2007 compared to the year ended December 31, 2006 as a result of growth in the business and an increase in headcount. As
a percentage of revenues, Classmates Media cost of revenues increased primarily due
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