Classmates.com 2007 Annual Report Download - page 20

Download and view the complete annual report

Please find page 20 of the 2007 Classmates.com annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 153

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141
  • 142
  • 143
  • 144
  • 145
  • 146
  • 147
  • 148
  • 149
  • 150
  • 151
  • 152
  • 153

subscription revenue is highly dependent on our ability to convince free members to return to our Web sites and become pay accounts. The
number of free members returning to our Web sites has decreased from time to time, and if we were to continue to experience such decreases, it
would likely adversely impact our number of pay accounts.
Although we have recently experienced an increase in the number of pay accounts, this trend may not continue at the same rate, or at all.
We believe that most of our pay accounts elect to purchase our services as a result of a limited number of features. For example, we believe that
our Classmates digital guestbook feature is responsible for a significant portion of the increase in our new pay accounts since the end of 2006. In
addition, international pay accounts are becoming an increasingly large component of our pay account mix and have constituted a significant
portion of our growth in pay accounts. If our social networking pay features are not as compelling and we do not stay current with evolving
consumer trends, our free members may not subscribe for our pay features. Any decrease in our conversion rate of free members to pay accounts
could adversely affect our business and financial results.
A number of our social networking pay account subscriptions each month are not renewed or are cancelled which we refer to as "churn."
The level of churn we experience fluctuates from quarter to quarter due to a variety of factors, including our mix of subscription terms, which
affects the timing of subscription expirations. We must continually add new social networking pay accounts both to replace pay accounts who
churn and to grow our business beyond our current pay account base. We expect that our churn rate will continue to fluctuate from period to
period. A significant majority of our pay accounts are on plans that automatically renew at the end of their subscription period and we have
received complaints with respect to our renewal policies. Any change in our renewal policies or practices could have a material impact on our
churn rate. If we experience a higher than expected level of churn, it will make it more difficult for us to increase or maintain the number of pay
accounts for our services, which could reduce our revenues and adversely affect our financial results.
Failure to increase or maintain the number of free members for our social networking services could cause our business and financial
results to suffer.
The success of our social networking services depends upon our ability to increase or maintain our base of free members because we
generate new pay accounts and advertising revenues from our free member base. Our ability to increase our base of free members is dependent
upon attracting users to our Web sites. From time to time, we have experienced decreases in the number of new free member registrations, and
we may not be able to increase or maintain the level of new free member registrations. Failure to increase or maintain our base of free members
could have a material adverse effect on our business, our ability to implement our strategies, and our financial results.
We use online advertising to promote our social networking services to potential new free members. Most of our online advertising
arrangements are structured such that we pay a fee for each new free account registration generated through a particular advertisement. The cost
of online advertising has generally been increasing in recent periods, which has resulted in an increase in our marketing expenditures. If the cost
of online advertising continues to escalate, we may experience decreases in the number of new account registrations unless we increase our
marketing expenditures. Increases in our marketing expenditures could adversely impact our profitability, and there can be no assurance that our
marketing activities will be successful.
If we are not successful in increasing or maintaining the number of our loyalty marketing service members, and in convincing members
to actively participate in our program, our business and financial results will suffer.
The success of our MyPoints loyalty marketing service is dependent upon our ability to maintain and expand our active member base. The
majority of our new loyalty marketing members are derived
18