Earthlink 2014 Annual Report Download - page 71

Table of Contents EARTHLINK HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Cost of Revenues
Cost of revenues includes costs directly associated with providing products and services to the Company's customers. Cost of revenues does not
include depreciation and amortization expense. Cost of revenues includes the cost of connecting customers to the Company's networks via leased
facilities; the costs of leasing components of its network facilities; costs paid to third-
party providers for interconnect access and transport
services; the costs of equipment sold to customers; and other costs directly related to our network and services. The Company utilizes other
carriers to provide services where the Company does not have facilities. The Company utilizes a number of different carriers to terminate its long
distance calls outside of its network.
These costs include an estimate of charges for which invoices have not yet been received, and are based upon the estimated number of
transmission lines and facilities in service, estimated minutes of use and estimated amounts accrued for pending disputes with other carriers, as
well as upon the contractual rates charged by the Company's service providers. Subsequent adjustments to these estimates may occur after the
bills are received for the actual costs incurred, but these adjustments generally are not expected to be material to operating results. Experience
indicates that the invoices that are received from other telecommunications providers are often subject to significant billing disputes. Experience
also has shown that these disputes can require a significant amount of time to resolve given the complexities and regulatory issues affecting the
vendor relationships. The Company maintains reserves for any anticipated exposure associated with these billing disputes. The reserves are
reviewed on a monthly basis, but are subject to changes in estimates and management judgment as new information becomes available. Given
the length of time the Company has historically required to resolve these disputes, disputes may be resolved or require adjustment in future
periods and relate to costs invoiced, accrued or paid in prior periods. The Company believes its reserves for billing disputes are adequate.
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
Comprehensive Income (Loss). Advertising expenses were $8.6 million , $9.1 million and $7.8 million during the years ended
December 31,
2012, 2013 and 2014 , respectively.
Stock-Based Compensation
As of December 31, 2014 , the Company had various stock-based compensation plans, which are more fully described in Note 12, "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 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, Acquisition and Integration
-Related Costs
Restructuring, acquisition and integration-
related costs are expensed in the period in which the costs are incurred and the services are received.
Restructuring, acquisition and integration-related costs consist of costs related to the Company's restructuring, acquisition and integration-
related
activities. Such costs include: 1) integration-related costs, such as system conversions, rebranding costs and integration-
related consulting and
employee costs; 2) severance, retention and other employee termination costs associated with restructuring, acquisition and integration activities
and with certain voluntary employee separations; 3) facility-related costs, such as lease termination and asset impairments; and 4) transaction-
related costs, which are direct costs incurred to effect a business combination, such as advisory, legal, accounting, valuation and other