Classmates.com 2003 Annual Report Download - page 32

it is difficult for us to accurately forecast seasonal trends and plan accordingly. It is possible that seasonality could result in significant
fluctuations in our results of operations and the number of users signing up for, or accessing, our services.
We may be unable to maintain or grow our advertising revenues, particularly if we lose key advertising relationships.
Advertising and commerce revenues are intended to be an important component of our strategy and revenue base going forward. Our
revenues from advertising have in the past fluctuated, and may in the future fluctuate, due to a variety of factors including, without limitation,
changes in the online advertising market, decreases in capital available to Internet companies, changes in our advertising inventory and the
effect of key advertising relationships.
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A small number of customers have accounted for, and may in the future account for, a significant portion of our advertising and commerce
revenues. In the past, we have experienced a number of situations where significant advertising arrangements were terminated early, were not
renewed, were renewed at significantly lower rates or were renegotiated during the term of the arrangement. During the six months ended
December 31, 2003, GM represented approximately 44% of our advertising and commerce revenues. Our agreement with GM expired in
December 2003 and will not be renewed. The GM agreement has not been replaced by a similar arrangement and, as such, we may experience
a decline in advertising and commerce revenues following the December 2003 quarter. In addition, we derived approximately 21% of our
advertising and commerce revenues during the six months ended December 31, 2003 from Internet search fees primarily provided through our
agreement with Overture. Our agreement with Overture expires in March 2007. If there were a significant decrease in search fees from our
agreement from Overture, such decrease would adversely impact our results of operations. Our business, financial position, results of
operations and cash flows may be materially and adversely affected if we are unable either to maintain or renew our significant agreements or
to replace such agreements with similar agreements with new customers.
Competition for Internet-based advertising revenues is intense and the demand for advertising space has declined. These and other factors
have caused Internet advertising rates to decline, and it is possible that rates will decline in the future. Many of our advertising competitors
have longer operating histories, greater name recognition, larger user bases, significantly greater financial, technical, sales, development and
marketing resources and more established relationships with advertisers than we do. We must also compete with television, radio, cable and
print media for a share of advertisers' total advertising budgets. Advertisers may be reluctant to devote a significant portion of their advertising
budget to Internet advertising if they perceive the Internet to be a limited or ineffective advertising medium.
In light of these factors, we cannot assure you that we will be able to maintain or grow our advertising revenues, and we may experience a
decline in advertising revenues in the March 2004 quarter from the December 2003 quarter.
If our users' usage increases or our telecommunications costs increase, our business may suffer.
An increasing percentage of our total pay subscribers use our accelerated services, and these subscribers have a higher average monthly
usage than our standard dial-
up users. An increase in Internet usage by our pay access subscribers may adversely impact our profitability. If the
average monthly usage of our pay access subscribers exceeds our expectations, or if our average hourly telecommunications cost increases, we
may not be able to operate our pay access services profitably. We may have to impose hourly limits on our pay services or increase our
standard pricing, either of which could adversely impact our ability to attract and retain pay subscribers or compete effectively.
Our business is dependent on a small number of telecommunications carriers and our inability to maintain agreements at attractive
rates with such carriers may negatively impact our business.
Our business substantially depends on the capacity, affordability, reliability and security of our telecommunications networks. Only a
small number of telecommunications providers offer the network and data services we require, and the majority of our telecommunications
services is currently purchased from Level 3 Communications LLC, ICG Telecom Group, Inc., and MCI. Several vendors have ceased
operations or ceased offering the services we require, causing us to switch vendors. In addition, several vendors are experiencing significant
financial difficulties and may be unable to perform satisfactorily or to continue to offer their services. In particular, MCI, StarNet, Inc. and
Allegiance Telecom Company Worldwide are in bankruptcy proceedings and Level 3 Communications has a significant amount of debt
obligations. The loss of vendors has resulted, and may in the future result, in increased costs, decreased service quality and the loss of users. In
particular, the failure of
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Level 3 Communications, ICG Telecom Group or MCI to continue to provide the scope, quality and pricing of services currently provided
could materially and adversely affect our business and results of operations. Some of our telecommunications services are provided pursuant to
short-term agreements that the providers can terminate or elect not to renew. In addition, each of our telecommunications carriers provides
network access to some of our competitors and could choose to grant those competitors preferential network access or pricing. Many of our