America Online 2014 Annual Report Download - page 60

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AOL INC.
PART II—ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Costs of revenues for the years ended December 31, 2014 and 2013 are as follows (in millions):
Years Ended December 31,
2014 2013
Change
from 2013
to 2014
% Change
from 2013
to 2014 2012
Change
from 2012
to 2013
% Change
from 2012
to 2013
Costs of revenues:
Personnel costs .............. $ 611.4 $ 643.6 $ (32.2) (5)% $ 648.8 $ (5.2) (1)%
Facilities costs ............... 54.1 56.4 (2.3) (4)% 53.5 2.9 5%
TAC ...................... 703.2 479.4 223.8 47% 356.9 122.5 34%
Network-related costs ......... 165.8 148.5 17.3 12% 160.6 (12.1) (8)%
Non-network depreciation and
amortization .............. 62.3 57.6 4.7 8% 63.0 (5.4) (9)%
Content costs ................ 80.2 86.0 (5.8) (7)% 77.9 8.1 10%
Other costs of revenues ........ 243.5 234.7 8.8 4% 226.5 8.2 4%
Total costs of revenues ............ $ 1,920.5 $ 1,706.2 $ 214.3 13% $ 1,587.2 $ 119.0 7%
2014 vs 2013
The increase in costs of revenues was primarily driven by the increase in TAC. The increase in TAC was
mainly driven by an increase in Third Party Properties advertising revenues, including revenues associated with
Adap.tv, which resulted in higher variable revenue share payments to our publishing partners of $164.7 million
(approximately 55% of the increases for the year resulted from the acquisition of Adap.tv). We also had an
increase in TAC related to marketing-related efforts on search revenue of $63.6 million. Network-related costs
increased driven by acquisitions.
Offsetting these increases in cost of revenues was a decrease in personnel related costs mainly due to lower
headcount, including declines related to Patch.
Comparison of costs of revenues expense between years was impacted by the long-lived asset impairment
charges of $10.0 million related to the write-off of capitalized software development costs in the first quarter of
2014, long-lived asset impairment charges of $10.4 million in the third quarter of 2013, primarily related to
Patch, and the favorable settlement of a tax matter resolved in the first quarter of 2013.
2013 vs 2012
The increase in costs of revenues was primarily driven by the increase in TAC. The increase in TAC was
mainly driven by an increase in Third Party Properties advertising revenues, which resulted in higher variable
revenue share payments to our publishing partners of $84.1 million (approximately 58% of the increase for the
year resulted from the acquisition of Adap.tv), and the increase in marketing-related efforts on search revenue of
$35.2 million.
The increase in costs of revenues was also driven by other long-lived asset impairment charges of $10.4
million included in other costs of revenues, the majority of which related to Patch. In addition, costs of revenues
increased due to our investment in programmatic platforms and premium formats, partially offset by special
items incurred in 2012 related to a year-end employee bonus and an acquisition-related bonus.
The decrease in network-related costs was primarily due to fewer depreciable network assets. Other costs of
revenues also includes a decline in sales tax expense of $9.6 million related to expense incurred in 2012 from a
Virginia sales tax settlement and an additional decline in sales and use tax expense of $3.5 million due to the
favorable settlement of a tax matter resolved in the first quarter of 2013.
44