Classmates.com 2007 Annual Report Download - page 62

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related to our Classmates Media segment. Sales and marketing expenses related to our Classmates Media segment and our Communications
segment constituted 34.4% and 65.6%, respectively, of total segment sales and marketing expenses for the year ended December 31, 2006 versus
20.7% and 79.3%, respectively, for the year ended December 31, 2005.
Classmates Media Sales and Marketing Expenses. Classmates Media sales and marketing expenses increased by $17.6 million, or 41%,
to $60.7 million, or 43.6% of Classmates Media revenues, for the year ended December 31, 2006, compared to $43.2 million, or 50.9% of
Classmates Media revenues, for the year ended December 31, 2005. The increase was primarily related to $12.2 million of costs associated with
our loyalty marketing service, which we acquired in April 2006, and, to a lesser extent, a $2.8 million increase in marketing costs related to
acquiring new free social networking members, a $2.0 million increase in personnel- and overhead-related expenses related to increased
headcount associated with our social networking services and a $0.6 million increase in stock-based compensation in connection with the
adoption of SFAS No. 123R in the quarter ended March 31, 2006.
Communications Sales and Marketing Expenses. Communications sales and marketing expenses decreased by $49.9 million, or 30%, to
$116.0 million, or 30.3% of Communications revenues, for the year ended December 31, 2006, compared to $165.9 million, or 37.7% of
Communications revenues, for the year ended December 31, 2005. This decrease was attributable to a $61.0 million decline in advertising,
promotion and distribution costs related to our dial-up Internet access services, the majority of which was due to reductions in media and other
advertising costs. These decreases were partially offset by a $5.1 million increase in VoIP marketing expenses, a $4.7 million increase in
personnel- and overhead-related expenses and a $1.9 million increase in stock-based compensation in connection with the adoption of SFAS
No. 123R in the quarter ended March 31, 2006.
Product Development
Consolidated Product Development Expenses. Consolidated product development expenses increased by $12.6 million, or 31%, to
$52.6 million for the year ended December 31, 2006, compared to $40.0 million for the year ended December 31, 2005. The increase was
attributable to increases in expenses in the Communications segment and, to a lesser extent, increases in expenses in the Classmates Media
segment, as well as a $1.6 million increase in depreciation. Product development expenses related to our Classmates Media segment and our
Communications segment constituted 21.9% and 78.1%, respectively, of total segment product development expenses for the year ended
December 31, 2006, compared to 15.2% and 84.8%, respectively, for the year ended December 31, 2005.
Classmates Media Product Development Expenses. Classmates Media product development expenses increased by $4.9 million, or 87%,
to $10.5 million, or 7.5% of Classmates Media revenues, for the year ended December 31, 2006, compared to $5.6 million, or 6.6% of
Classmates Media revenues, for the year ended December 31, 2005. The increase was due to $1.7 million of costs associated with our loyalty
marketing service, a $2.5 million increase in personnel-
related expenses due to increased headcount related to our social networking services and
a $0.5 million increase in stock-based compensation in connection with the adoption of SFAS No. 123R in the quarter ended March 31, 2006.
Communications Product Development Expenses. Communications product development expenses increased by $6.1 million, or 20%, to
$37.4 million, or 9.8% of Communications revenues, for the year ended December 31, 2006, compared to $31.3 million, or 7.1% of
Communications revenues, for the year ended December 31, 2005. The increase was the result of a $3.8 million increase in stock-based
compensation in connection with the adoption of SFAS No. 123R in the quarter ended March 31, 2006, a $1.6 million increase in personnel-
related expenses and a $0.8 million increase in overhead-related costs. Capitalized compensation costs were $7.3 million and $4.0 million in the
years ended December 31, 2006 and 2005, respectively. The increase in capitalized compensation costs was due to
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