Classmates.com 2008 Annual Report Download - page 62

Table of Contents
ended December 31, 2007, we recorded a tax provision of $40.9 million on pre-tax income of $98.7 million, resulting in an effective income tax
rate of 41.5%. The increase in our effective income tax rate, excluding the impact of the impairment charges, was primarily due to (1) an
increase in nondeductible executive compensation expense; (2) a lower amount of tax-free interest income; and (3) a net increase in the reserve
for uncertain tax positions primarily due to state law changes. These increases were partially offset by (1) a lower state income tax rate, net of
federal income tax benefit and (2) the release of the deferred tax valuation allowance attributable to the utilization of certain foreign net
operating losses.
Classmates Media Segment Results
Classmates Media Revenues. Classmates Media revenues increased by $36.8 million, or 19.0%, to $230.2 million for the year ended
December 31, 2008, compared to $193.4 million for the year ended December 31, 2007. The increase in Classmates Media revenues was
primarily due to a $32.9 million increase in services revenues as a result of a 40% increase in our average number of pay accounts from
2.7 million for the year ended December 31, 2007 to 3.8 million for the year ended December 31, 2008, partially offset by a 7% decrease in
ARPU from $3.31 for the year ended December 31, 2007 to $3.09 for the year ended December 31, 2008. The decrease in ARPU was primarily
attributable to limited-time promotional subscription offerings in the fourth quarter of 2007, which negatively impacted ARPU in the year ended
December 31, 2008 compared to the prior year and, to a lesser extent, a greater percentage of pay accounts represented by international social
networking pay accounts which have lower-priced subscription plans compared to U.S. social networking pay accounts. The increase in
Classmates Media revenues was also due to a $3.9 million increase in advertising revenues as a result of increased advertising revenues
associated with our loyalty marketing and international social networking services, partially offset by decreased advertising revenues associated
with post-transaction sales.
Classmates Media Cost of Revenues.
Classmates Media cost of revenues increased by $1.6 million, or 4.1%, to $41.1 million, for the year
ended December 31, 2008, compared to $39.5 million for the year ended December 31, 2007. Classmates Media cost of revenues as a percentage
of Classmates Media revenues decreased to 17.9% for the year ended December 31, 2008, compared to 20.4% for the prior year period. The
increase of $1.6 million was primarily related to a $2.6 million increase in customer support, overhead and personnel-related costs associated
with our social networking services as a result of growth in the business and an increase in headcount, partially offset by decreased costs
associated with our loyalty marketing service. The decrease in cost of revenues as a percentage of revenues was mainly due to a reduction in the
weighted-average cost of points for our loyalty marketing service and a greater percentage of revenues generated from higher margin services.
Classmates Media Sales and Marketing Expenses.
Classmates Media sales and marketing expenses increased by $2.9 million, or 3.7%, to
$81.9 million, for the year ended December 31, 2008, compared to $78.9 million for the year ended December 31, 2007. Classmates Media sales
and marketing expenses as a percentage of Classmates Media revenues decreased to 35.6% for the year ended December 31, 2008, compared to
40.8% for the prior year period. The increase of $2.9 million was the result of a $3.3 million increase in marketing costs related to acquiring new
social networking and loyalty marketing members, partially offset by a $0.3 million decrease in personnel- and overhead-related expenses. The
decrease as a percentage of Classmates Media revenues was mainly due to lower customer acquisition cost.
Classmates Media Technology and Development Expenses. Classmates Media technology and development expenses increased by
$6.0 million, or 37.2%, to $22.0 million, for the year ended December 31, 2008, compared to $16.0 million for the year ended December 31,
2007. Classmates Media technology and development expenses as a percentage of Classmates Media revenues increased
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