Earthlink 2011 Annual Report Download - page 92

Table of Contents
EARTHLINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Cost of revenues for the Company's Consumer Services segment primarily consists of telecommunications fees and network operations
costs incurred to provide the Company's Internet access services; fees paid to content providers for information provided on the Company's
online properties; and the cost of equipment sold to customers for use with the Company's services. Consumer Services cost of revenues also
includes sales incentives, which include the cost of promotional products and services provided to potential and new subscribers, including free
modems and other hardware and free Internet access on a trial basis.
Selling, General and Administrative Expense
The Company's selling, general and administrative expenses consist of expenses related to sales and marketing, customer service, network
operations, information technology, regulatory, billing and collections, corporate administration, and legal and accounting. Such costs include
salaries and related employee costs (including stock-
based compensation), outsourced labor, professional fees, property taxes, travel, insurance,
rent, advertising and other administrative expenses.
Advertising Costs
Advertising costs are expensed as incurred and included in selling, general and administrative expense in the Consolidated Statements of
Operations. Advertising expenses were $13.8 million, $12.4 million and $8.6 million during the years ended December 31, 2009, 2010 and 2011,
respectively.
Stock-Based Compensation
As of December 31, 2011, EarthLink had various stock-based compensation plans, which are more fully described in Note 11, "Stock-
Based Compensation." The Company measures compensation cost for all stock awards at fair value on the date of grant and recognizes
compensation expense over the requisite service period for awards expected to vest. The Company estimates the fair value of stock options using
the Black-
Scholes valuation model, and determines the fair value of restricted stock units based on the quoted closing price of EarthLink's
common stock on the date of grant. Such value is recognized as expense over the requisite service period, net of estimated forfeitures, using the
straight-line attribution method. For performance-
based awards, the Company recognizes expense over the requisite service period, net of
estimated forfeitures, using the accelerated attribution method when it is probable that the performance measure will be achieved. The estimate
of awards that will ultimately vest requires significant judgment, and to the extent actual results or updated estimates differ from the Company's
current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. The Company considers many
factors when estimating expected forfeitures, including types of awards, employee class and historical employee attrition rates. Actual results,
and future changes in estimates, may differ substantially from the Company's current estimates.
Restructuring and Acquisition
-Related Costs
The Company recognizes a liability for costs associated with an exit or disposal activity when the liability is incurred. Facility exit and
restructuring liabilities include estimates for, among other things, severance payments and amounts due under lease obligations, net of estimated
sublease income, if any. Key variables in determining lease estimates include operating expenses due under lease arrangements, the timing and
amounts of sublease rental payments, tenant improvement costs and brokerage and other related costs. The Company periodically evaluates and,
if necessary, adjusts its estimates based on currently-available information. Such adjustments are classified as restructuring and acquisition-
related costs in the Consolidated Statements of Operations.
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