Classmates.com 2004 Annual Report Download - page 53

We have expended, and may in the future expend, significant resources developing, acquiring and implementing new services such as our
proposed VoIP service. Product development involves a number of uncertainties, including unanticipated delays and expenses. New services
may have technological problems or may not be accepted by our consumers or advertisers. We cannot assure you that we will be successful in
developing or acquiring new or enhanced services, such as our proposed VoIP service, or that new services will be commercially successful.
Seasonal trends in Internet usage and advertising sales may cause fluctuations in our results of operations.
Seasonal trends could affect revenues, operating expenses and the rate at which users sign up for our services. Decreased usage during
seasonal periods could decrease advertising inventory and adversely impact advertising revenue. Increased usage due to seasonality may result in
increased telecommunications costs for such period. We have experienced lower usage of our access services in the summer months and this
trend may continue. We also have experienced a lower rate of people signing up for our access services during the spring and summer months
when compared to the fall and winter months, and this trend may continue. Because our operating history for certain of our services is limited,
particularly as it relates to our community-based networking services, it is difficult for us to accurately forecast seasonal trends and plan
accordingly. Seasonality may 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. Reduced
advertising revenues may reduce our profits.
Advertising and commerce revenues are an important component of our revenues and profitability. 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 and other companies, changes in our advertising inventory and the effect of key advertising
relationships. As discussed above, competition for advertising dollars is intense and our advertising revenues could decline as a result of reduced
rates as well as reduced inventory.
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. We derived approximately 34% of
our advertising and commerce revenues during the December 2004 quarter from Internet search fees provided through our agreement with
Overture. Our agreement with Overture expires in March 2007. The competition among search services is increasing. If there were a significant
decrease in search fees from our agreement from Overture due to users using competitive services or other factors, 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.
If our access accounts usage increases or our telecommunications costs increase, our business may suffer.
Other than sales and marketing, our telecommunications costs are our largest expense. If the average monthly usage of our pay access
subscribers increases, or if our average hourly telecommunications cost increases, our profitability may be adversely impacted.
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