Earthlink 2007 Annual Report Download - page 43

cable providers. Cost of revenues also includes sales incentives. We offer sales incentives such as free modems and Internet access on a trial
basis.
Total cost of revenues increased 16% from $375.6 million during the year ended December 31, 2005 to $433.9 million during the year
ended December 31, 2006, and increased 2% to $442.7 million during the year ended December 31, 2007. The increases during the years ended
December 31, 2006 and 2007 were comprised of increases of $69.4 million and $30.4 million, respectively, in business services cost of revenue
and decreases of $11.1 million and $21.7 million, respectively, in consumer services cost of revenues. Business services cost of revenues
increased due to increases in average monthly costs per subscriber, primarily as a result of New Edge subscribers and their associated cost. New
Edge subscribers have a higher average cost per subscriber as New Edge provides high-speed data networks to small and medium-sized
businesses. Consumer services cost of revenues decreased due to the decreases in average subscribers, offset by increases in sales incentives due
to an increase in modems and other equipment provided to customers for IP-based voice services.
Sales and marketing
Sales and marketing expenses include advertising and promotion expenses, fees paid to distribution partners to acquire new paying
subscribers, personnel-related expenses and telemarketing costs incurred to acquire subscribers. Sales and marketing expenses remained
relatively constant at $389.5 million and $390.6 million during the years ended December 31, 2005 and 2006, respectively. Sales and marketing
expenses decreased 25% to $291.1 million during the year ended December 31, 2007. This decrease consisted primarily of a decrease in
consumer services sales and marketing expenses as we decreased spending aimed at customers that have high acquisition costs and early life
churn and realized benefits from the 2007 Plan. This decrease was offset by an increase in business services sales and marketing expenses which
was primarily due to the inclusion of New Edge sales and marketing expenses for the full year. We expect sales and marketing expenses to
decrease in 2008 as we continue to scale back sales and marketing efforts in connection with our refocused strategy and as a result of the 2007
Plan.
Operations and customer support
Operations and customer support expenses consist of costs associated with technical support and customer service, providing our
subscribers with toll-free access to our technical support and customer service centers, maintenance of customer information systems, software
development and network operations. Operations and customer support increased 4% from $233.9 million during the year ended December 31,
2005 to $243.6 million during the year ended December 31, 2006. The increase consisted of an increase in business services expenses offset by a
decrease in consumer services expenses. The increase in business services operations and customer support expenses was primarily the result of
the inclusion of New Edge operations and customer support expenses. The decrease in consumer services operations and customer support
expenses was a decrease resulting from the decline in our premium narrowband services, including a decrease in communications costs for
providing subscribers with toll-free access to our technical support and customer service centers, offset by an increase in operations expense for
our value-added services and an increase due to stock-based compensation expense from the adoption of Statement of Financial Accounting
Standards ("SFAS") No. 123(R) on January 1, 2006.
Operations and customer support expenses decreased 9% from $243.6 million during the year ended December 31, 2006 to $221.4 million
during the year ended December 31, 2007. The decrease primarily consisted of a decline in consumer services operations and customer support
expenses attributable to a reduced back-office cost structure and benefits realized as a result of our corporate restructuring plan. The decrease
related to personnel-related costs, outsourced labor and professional fees. Offsetting the decrease was an increase in business services operations
and customer support expenses due to the inclusion of New Edge. We expect operations and customer support expenses to decrease in 2008 as a
result of the 2007 Plan.
38