XO Communications 2009 Annual Report Download - page 44

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the increased volume of wholesale long distance usage resulting in a $47.4 million increase in related costs.
Additionally, 2008 did not include the beneficial change related to the FCC’s TRRO that decreased 2007 cost
of service by $22.1 million. These increases were partially offset by a $11.3 million decrease in the cost of
terminating the wholesale long distance usage due to traffic terminating to lower cost locations. Additional
offsets include $40.2 million of incremental cost savings achieved through planned network optimization
projects completed in 2008 and $16.4 million of decreased costs due to improved results from our dispute
resolution. Telecommunications services costs as a percentage of revenue increased from 2007 to 2008 due to
the $22.1 million revision to the 2007 TRRO estimate previously mentioned. Excluding the impact of this one-
time benefit in 2007, Telecommunications services costs as a percentage of revenue would have decreased
from 42.5% in 2007 to 42.1% in 2008.
Selling, General and Administrative — 2009 Compared to 2008
Selling, general and administrative expense (“SG&A”) includes expenses related to payroll, commissions, sales
and marketing, information systems, general corporate office functions and collection risks. SG&A decreased
in 2009 as payroll and related expenses were $7.4 million lower than in 2008 as a result of headcount
reductions and changes in employee benefit programs. Sales and marketing cost reductions of $4.5 million
further decreased SG&A in 2009. In addition, office related expenses decreased by approximately $5.9 million
year over year, mostly due to increased sublease income and changes in our estimated liability related to
expected technical site decommissioning costs. Offsetting these 2009 decreases in SG&A expense, legal
expenses in 2008 were reduced by $9.8 million due to favorable developments in ongoing litigation.
SG&A as a percentage of revenue decreased to 32.2% for 2009 from 33.7% for 2008. This improvement was
principally driven by our continued execution on our initiatives to increase revenue growth, while improving
our internal cost structure. We plan on continuing to invest in the resources and infrastructure necessary to
help grow and support our business units during 2010 while continuing to realize cost savings. Our goal during
2010 is to further decrease SG&A as a percentage of revenue through implementation of our transformation
initiative.
Selling, General and Administrative — 2008 Compared to 2007
The decrease in SG&A for 2008 compared to 2007 was due to (i) an $11.0 million reduction in legal
expenses, resulting partially from the settlement of the ATLT litigation, (ii) a $7.7 million decline in use and
property taxes, (iii) a $4.8 million increase in the level of capitalized costs on fixed asset projects, (iv) a
$4.2 million reduction in the level and costs of contractor and professional services, (v) a $2.7 million
reduction in our directors’ and officers’ insurance costs, and (vi) a $2.4 million reduction in bad debt expense
due to improvements in our collections efforts, offset partially by a $20.7 million increase in payroll and
commissions expenses and a $4.2 million increase in sales and marketing costs.
Depreciation and Amortization
Depreciation and amortization did not include amortization expense for 2009 and 2008 because our definite
lived intangible assets became fully amortized during 2007. For 2007 depreciation and amortization included
amortization expense of $10.0 million.
Depreciation expense for 2009 and 2007 included adjustments related to changes in depreciable lives of certain
fixed assets. These changes resulted in adjustments of $4.2 million and $13.3 million in 2009 and 2007,
respectively. No adjustments related to changes in depreciable lives were recorded during 2008. Excluding
these changes in estimate, depreciation expense for 2009, 2008 and 2007 was $175.9 million, $189.2 million
and $183.7 million, respectively. The year over year changes in depreciation expense were primarily due to the
retirement of assets, for which depreciation expense was accelerated, such that the assets were fully
depreciated at the time of their retirement. Additional expense relating to the retirement of these assets was
approximately $0.8 million, $15.4 million and $6.2 million for 2009, 2008 and 2007, respectively.
We expect depreciation expense to increase slightly in 2010 as we continue to increase our fixed assets in
order to continue to grow our revenue and enhance our networks.
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