Classmates.com 2005 Annual Report Download - page 23

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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 search activity 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. 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, changes in usage and the effect of
key advertising relationships. Although we experienced an increase in advertising revenues in the December 2005 quarter from the immediately
preceding quarter, we have experienced declines in advertising revenues in certain prior periods. The majority of our advertising revenues are
derived from our access services and decreases in our access account base would likely result in decreased inventory and, potentially, decreased
advertising revenues. As discussed above, competition for advertising dollars is intense and our advertising revenues may decline in future
periods.
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 26% of
our advertising and commerce revenues during the year ended December 31, 2005 from Internet search fees provided through our agreement
with Yahoo! Search. Our agreement with Yahoo! Search expires in March 2007. The competition among search services is increasing. If there
were a significant decrease in search fees from our agreement with Yahoo! Search 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 access users
increases, or if our average hourly telecommunications cost increases, our profitability may be adversely impacted.
Our access business is dependent on a small number of telecommunications carriers. Our inability to maintain agreements at attractive
rates with these carriers may negatively impact our business.
Our access 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 most of our telecommunications services is
currently purchased from Level 3 Communications, MCI, Pac-West and Qwest. Furthermore, in the past, several vendors have
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