Classmates.com 2007 Annual Report Download - page 54

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compared to the year ended December 31, 2006 primarily due to the fact that no such sales and marketing expenses 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). In addition,
the increase was the result of a $5.8 million increase in marketing costs related to acquiring new free social networking members, a $2.6 million
increase in personnel- and overhead-related expenses associated with our social networking services as a result of growth in our business and a
$0.4 million increase in stock-based compensation.
Communications Sales and Marketing Expenses. Communications sales and marketing expenses decreased by $31.9 million, or 27%, to
$84.1 million, or 26.3% of Communications revenues, for the year ended December 31, 2007, compared to $116.0 million, or 30.3% of
Communications revenues, for the year ended December 31, 2006. This decrease was attributable to a $24.3 million decline in advertising,
promotion and distribution costs related to our dial-up Internet access services and an $8.6 million decrease in advertising costs associated with
our VoIP services as a result of our decision during 2007 to exit our VoIP services. These decreases were partially offset by a $1.5 million
increase in advertising costs related to our DSL Internet access service, which was launched in the December 2006 quarter.
Product Development
Product development expenses include expenses for the maintenance of existing software and technology and the development of new or
improved software and technology, including personnel-related expenses for the software engineering department and the costs associated with
operating our facility in India. Costs incurred by us to manage and monitor our product development activities are generally expensed as
incurred, except for certain costs relating to the acquisition and development of internal-use software, which are capitalized and depreciated over
their estimated useful lives, generally three years.
Consolidated Product Development Expenses. Consolidated product development expenses decreased by $1.6 million, or 3%, to
$51.0 million, or 9.9% of consolidated revenues, for the year ended December 31, 2007, compared to $52.6 million, or 10.1% of consolidated
revenues, for the year ended December 31, 2006. The decrease was attributable to a decrease in expenses in the Communications segment,
partially offset by an increase in expenses in the Classmates Media segment and a $0.7 million increase in depreciation. Product development
expenses related to our Classmates Media segment and our Communications segment constituted 35.1% and 64.9%, respectively, of total
segment product development expenses for the year ended December 31, 2007, compared to 21.9% and 78.1%, respectively, for the year ended
December 31, 2006.
Classmates Media Product Development Expenses. Classmates Media product development expenses increased by $5.5 million, or 53%,
to $16.0 million, or 8.3% of Classmates Media revenues, for the year ended December 31, 2007, compared to $10.5 million, or 7.5% of
Classmates Media revenues, for the year ended December 31, 2006. The increase in expenses was primarily due to a $2.7 million increase in
personnel-related expenses due to increased headcount to develop new product features related to our social networking services. In addition, a
portion of the increase was related to expenses associated with 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. Product development expenses associated with our loyalty marketing service increased by $2.3 million in the year ended December 31,
2007 compared to the year ended December 31, 2006 primarily due to the fact that no such product development expenses 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). The increase
in expenses was also due to a $0.4 million increase in overhead expenses and a $0.3 million increase in stock-based compensation.
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