XO Communications 2010 Annual Report Download - page 45

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Also important to Broadband services growth are the data and internet products which grew
$24.7 million, or 7.5%, and $29.5 million, or 15.2%, respectively. Dedicated Private Line, the largest
component of Data Services, increased $19.2 million, or 6.9%. Investments in our long haul network continue
to support the growth of Dedicated Private Line. Ethernet increased $12.6 million, or 36.7%, year-over-year
supported by continued strong demand for EoC which utilizes existing telephony infrastructure to deliver
high-speed IP connectivity at a competitive value. Low cost access utilizing EoC also supported growth in
DIA of $16.9 million, or 10.6%.
Integrated/Voice. Integrated/Voice services revenue decreased by $45.6 million, or 14.4%, compared to
2008 reported results. These products include traditional CLDT and older integrated offerings which are not
IP-enabled. Customers continue to migrate away from these products to IP-enabled offerings which offer more
flexibility and better value.
Legacy/TDM Services. In 2009 revenue from Legacy/TDM services decreased $38.5 million, or 7.9%,
compared to 2008. Though XO continues to offer and service these products and services, they are largely
based upon TDM which is not a significant focus of marketing efforts.
Cost of Service — 2010 Compared to 2009
Our cost of service (‘‘COS’’) includes telecommunications services costs, network operations costs and
pass-through taxes. Telecommunication services costs include expenses directly associated with providing
services to customers, such as the cost of connecting customers to our network via leased facilities, leasing
components of network facilities and interconnect access and transport services paid to third-party service
providers. Network operations include costs related to network repairs and maintenance, costs to maintain
rights-of-way and building access facilities, and certain functional costs related to engineering, network,
system delivery, field operations and service delivery. Pass-through taxes are taxes we are assessed related to
selling our services which we pass through to our customers. COS excludes depreciation and
amortization expense.
The following table summarizes our COS by component for the years ended December 31 (dollars in
thousands):
2010 %of
Revenue 2009 %of
Revenue
Change
Dollars Percent
Telecommunications
services ............ $619,372 40.5% $627,379 41.2% $ (8,007) (1.3)%
Network operations ...... 193,874 12.7% 197,652 13.0% (3,778) (1.9)%
Pass-through taxes ...... 56,124 3.7% 54,948 3.6% 1,176 2.1%
Total cost of services..... $869,370 56.8% $879,979 57.8% $(10,609) (1.2)%
The primary factors that contributed to the year-over-year decrease in the costs related to providing
Telecommunications services were a $46.8 million decrease in the rates for terminating the wholesale long
distance usage due to traffic terminating to lower cost locations, as well as $41.0 million of incremental cost
savings achieved through planned network optimization projects completed in 2010. 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. These decreases were partially offset by the net growth of our products
(including the increased sales of our Broadband services), resulting in a $45.5 million increase in related
costs, and the increased volume of wholesale long distance usage resulting in an $18.8 million increase in
volume related costs. Additional offset includes $17.1 million of increased costs due to less benefit from our
dispute resolution efforts.
Network operations costs decreased $3.8 million from 2009 to 2010 principally due to network
optimization projects. These projects increased efficiency and improved productivity, resulting in a decline in
payroll and related expenses.
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