Enom 2014 Annual Report Download - page 38

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with
Part II, Item 6, “Selected Financial Data” and our consolidated financial statements included elsewhere in this Annual Report on
Form 10-K. In addition to historical data, this discussion contains forward-looking statements about our business, operations and
financial performance based on current expectations that involve risks, uncertainties and assumptions. Our actual results may differ
materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those
discussed in “Special Note Regarding Forward-Looking Statements” and Item I, Part 1A, “Risk Factors” included elsewhere in this
Annual Report on Form 10-K.
Overview
We are a diversified Internet company with leading online media properties and marketplace platforms that enable communities
of creators to reach passionate audiences in large and growing lifestyle categories. Our business is comprised of two service offerings:
Content & Media and Marketplaces.
Content & Media
Our Content & Media service offering includes a leading online content creation platform that publishes content to our owned
and operated online properties as well as to online properties operated by our customers. Through our innovative content creation
platform, DemandStudios.com, a large community of qualified freelance professionals utilizes propriety technology and automated
workflow processes to identify valuable topics and then create high-quality content in text, video, photography and designed visual
formats. This content is published to our leading owned and operated online properties across several key categories, including
eHow.com, a how-to reference destination, and Livestrong.com, a health and healthy living destination. We also own and operate
Cracked.com, a humor site offering original and engaging comedy-driven text articles, video series and blogs created by our in-house
editorial staff, comedians and website enthusiasts. Our content creation studio also provides and publishes content for third-party
brands, publishers and advertisers as part of our Content Solutions service.
Our Content & Media service offering derives the majority of its revenue from the sale of advertising on our owned and
operated online properties. Our advertising revenue is principally dependent on the number of visits to our properties and the
corresponding ad unit rates. Since 2011, the number of visits to our properties, particularly eHow.com, has substantially declined due
to lower search engine referrals resulting from ongoing changes to search engine algorithms by Google, Yahoo! and Bing. We believe
that there are opportunities to increase the number of visits, both from search engine referrals and direct visits by users, by improving
the user experience and engagement on our online properties. Such improvements include redesigning our websites; refining our
content library through select removals, rewrites and additions; reducing the number of advertisements per page; and developing a
greater variety of content formats, particularly formats better suited for mobile devices. These changes will likely negatively impact
revenue and significantly increase our operating expenses in the near term, but we believe that by providing consumers with an
improved user and content experience we will be able to increase the number of visits and revenue in a sustained fashion over the
long-term. However, visits across our owned and operated online properties continue to shift from desktop to mobile, and ad unit rates
for mobile remain lower than for desktop. In addition, we have experienced declines in ad unit rates for both desktop and mobile
during 2014, resulting in lower advertising revenue. If ad unit rates continue to decline, we could experience lower advertising
revenue even if the number of visits to our properties increases.
The majority of our advertising revenue currently is and historically has been generated by our relationship with Google. Google
also serves as one of the principal technology platform partners in connection with our programmatic ad sales offering. Any change in
the type of services that Google provides to us, or to the terms of our agreements with Google, could adversely impact our results of
operations.
Marketplaces
Through our Marketplaces service offering, we operate two leading artist marketplaces where large communities of artists can
market and sell original artwork or original designs printed on a wide variety of products. Society6.com, which we acquired in June
2013, provides artists with an online commerce platform to feature and sell their original designs on art prints, phone and tablet cases,
t-shirts and other consumer products. SaatchiArt.com, which we acquired in August 2014, is an online art gallery featuring a wide
selection of original paintings, drawings, sculpture and photography that provides a global community of artists a curated environment
in which to exhibit and sell their work directly to consumers around the world.
Our Marketplaces service offering generates revenue from the sale of products and services through our online artist
marketplaces. On Society6.com, revenue is generated from the sale of print-on-demand products. SaatchiArt.com primarily generates
revenue through commissions on the final sale price of original works of art. Our Marketplaces service offering is principally