Enom 2012 Annual Report Download - page 51

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The growth in our Registrar revenue is dependent upon our ability to attract and retain customers to our Registrar platform
through competitive pricing on domain registrations and value added services. Beginning in the first quarter of 2010 and
extending through the third quarter of 2011, we added several customers with large volumes of domains to our Registrar
platform. This resulted in fluctuations in our average revenue per domain over these periods, from which we only recognized
revenue on a portion of these domain names while deferring revenue recognition on the remainder. Beginning July 1, 2011,
we adjusted the number of net new domains to include only new registered domains added to our platform for which we have
recognized revenue. Excluding the impact of this change, average revenue per domain during the year ended December 31,
2012 would have decreased 4% compared to the corresponding prior-year period, primarily due to the acquisition of Name.com
on December 31, 2012 for which we did not recognize any revenue in 2012. In the near term, we anticipate our average
revenue per domain to continue to fluctuate as a result of an increasing mix of large volume customers and the recent
acquisition of Name.com. Due in part to the higher mix of large, higher volume customers in 2012 as compared to 2011, we
also expect that the associated service costs as a percentage of revenue will increase when compared to our historical results.
The Internet Corporation for Assigned Names and Numbers, or ICANN, has approved a framework for the significant
expansion of the number of gTLDs, which is expected to result in the delegation of new gTLDs commencing in 2013. We
believe that such expansion, once completed, could result in an increase in the number of domains registered on our platform
commencing in the second half of 2013. In addition, we believe that the New gTLD Program could also provide us with new
revenue opportunities commencing in 2013, which include operating the back-end infrastructure for new gTLD registries and/
or owning one or more gTLDs in our own right.
During the year ended December 31, 2012, the Company paid $18.2 million for certain gTLD applications under the New
gTLD Program. Payments for gTLD applications represent amounts paid directly to ICANN and third parties in the pursuit of
the Company's ownership of certain gTLD operator rights. While there can be no assurance that the Company will be awarded
any gTLDs, the Company capitalizes payments made for gTLD applications that are determined to embody probable economic
benefit, which are included in other long-term assets at December 31, 2012. During 2013 as part of the New gTLD Program,
the Company may receive partial cash refunds for certain gTLD applications, and to the extent the Company elects to sell or
dispose of certain gTLD applications throughout the process, it may also incur gains or losses on amounts invested. Gains on
the sale of the Company's interest in gTLDs will be recognized when realized, while losses will be recognized when deemed
probable. Upon the delegation of operator rights for each gTLD by ICANN, which the Company expects to commence in
2013, gTLD application fees will be reclassified as finite lived intangible assets and amortized on a straight-line basis over their
estimated useful life. Other costs incurred by the Company as part of its gTLD initiative and not directly attributable to the
acquisition of gTLD operator rights are expensed as incurred.
We expect to incur between $5 million and $10 million of formation expenses related to the New gTLD Program in 2013,
and the total amount of our investment at the completion of the New gTLD Program could be substantially higher or lower than
the amounts invested to date. Revenue is not expected to commence until the third quarter of 2013 at the earliest.
Our service costs, the largest component of our operating expenses, can vary from period to period, particularly as a
percentage of revenue, based upon the mix of the underlying Content & Media and Registrar services revenues we generate. In
the near term, we expect that the period-over-period growth in our Content & Media revenue will exceed the growth in our
Registrar revenue, which would typically provide for higher operating margins. However, we expect that service costs will
increase in 2013 compared to 2012 due to the growth of higher volume, lower margin Registrar customers offset by a
substantial reduction of costs associated with our premium multi-channel initiative with YouTube. We believe that these
factors, together with costs associated with our preparation for new gTLDs becoming available for registration later in 2013,
will constrain our operating margin growth in the short-term as we increase our investment in new business initiatives to
support future growth.
Our content studio identifies and creates online text articles and videos through a community of freelance creative
professionals and is core to our business strategy and long-term growth initiatives. Historically, we have made substantial
investments in our platform to support our community of freelance creative professionals and the growth of our content
production and distribution and expect to continue to make such investments. As we develop new content formats, we may not
be able to attract and retain qualified creative professionals to produce such new content at scale, which may adversely impact
our ability to execute against emerging business opportunities or retain existing content creators.
For the year ended December 31, 2012, more than 90% of our revenue has been derived from websites and customers
located in the United States. While our content is primarily targeted towards English-speaking users in the United States today,
we believe that there is an opportunity in the longer term for us to create content targeted to users outside of the United States
and thereby increase our revenue generated from countries outside of the United States. We plan to further expand our
operations internationally to address this opportunity by launching new websites and expanding our existing web properties