XO Communications 2009 Annual Report Download - page 43

The following table summarizes our COS by component for the years ended December 31 (dollars in
thousands):
2009
%of
Revenue 2008
%of
Revenue Dollars Percent
Change
Telecommunications services ........... $627,379 41.2% $622,646 42.1% $ 4,733 0.8%
Network operations .................. 197,652 13.0% 192,379 13.0% 5,273 2.7%
Pass-through taxes ................... 54,948 3.6% 56,420 3.8% (1,472) (2.6)%
Total cost of services ................. $879,979 57.8% $871,445 58.9% $ 8,534 1.0%
The primary factors that contributed to the year over year increase in the costs related to providing
Telecommunications services were the net growth of our products (including the increased sales of our
Broadband services), resulting in a $50.7 million increase in related costs, and the increased volume of
wholesale long distance usage resulting in a $17.4 million increase in related costs. These increases were
partially offset by a $19.5 million decrease in the cost of terminating the wholesale long distance usage due to
traffic terminating to lower cost locations. Additional offsets include $40.9 million of incremental cost savings
achieved through planned network optimization projects completed in 2009 and $5.0 million of decreased
costs due to improved results from our dispute resolution efforts. Network optimization projects are initiatives
and actions we take to reduce our costs associated with providing telecommunications services to our
customers. Network optimization projects include rehoming circuits to the nearest network POP, hubbing
circuits onto the same transport facility, moving network facilities to lower cost providers, disconnection of
capacity from third party providers which is no longer needed and other similar actions which vary in type,
size and duration.
Network operations costs increased from 2008 to 2009 principally due to a $3.2 million increase in building
access rights of way and a $2.4 million increase in network related costs including circuit maintenance and
leased fiber costs.
The decrease in pass-through taxes from 2008 to 2009 principally resulted from a $4.1 million error correction
recorded in 2008 pertaining to the period from 2003 through 2006. We determined certain payments for taxes
due to various state and local jurisdictions had been incorrectly recorded and concluded the correction was not
material to any of the affected years and corrected the liability during the first quarter of 2008.
In 2010, we expect growth in revenue and volume will contribute to increases in our COS, compared to 2009.
Although we continue to undertake initiatives and actions to reduce the cost of providing service to our
customers, we expect the cost savings from network optimization projects to decline in 2010, compared to
2009. Overall, excluding the effects of future dispute settlements, if any, we expect our cost of service as a
percentage of revenue for 2010 will remain relatively consistent with 2009.
COS — 2008 Compared to 2007
The following table summarizes our cost of service by component for the years ended December 31 (dollars in
thousands):
2008
%of
Revenue 2007
%of
Revenue Dollars Percent
Change
Telecommunications services ........... $622,646 42.1% $584,690 40.9% $37,956 6.5%
Network operations .................. 192,379 13.0% 180,836 12.7% 11,543 6.4%
Pass-through taxes ................... 56,420 3.8% 49,486 3.5% 6,934 14.0%
Total cost of services ................. $871,445 58.9% $815,012 57.0% $56,433 6.9%
The cost of service increase for 2008 compared to 2007 was substantially due to the increase in Telecommu-
nications services costs in both dollars and as a percentage of total revenue. The primary factors that
contributed to the year over year increase in the costs related to providing Telecommunications services were
increased growth in sales of our Broadband services, resulting in a $34.6 million increase in related costs, and
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