Enom 2012 Annual Report Download - page 53

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Service costs primarily consist of: fees paid to registries and ICANN associated with domain registrations; advertising
revenue recognized by us and shared with others as a result of our revenue-sharing arrangements, such as TAC and content
creator revenue-sharing arrangements; Internet connection and co-location charges and other platform operating expenses
including depreciation of the systems and hardware used to build and operate our Content & Media platform and Registrar
service; personnel costs related to in-house editorial, customer service and information technology; and certain content
production costs. Our service costs are dependent on a number of factors, including the number of page views generated across
our platform and the volume of domain registrations and value-added services supported by our Registrar service. In the near
term, we expect higher overall registration costs as a percentage of revenue due to the recent growth in higher volume, lower
margin Registrar customers and the Name.com acquisition as well as increased costs associated with our investment in new
business initiatives in 2013, including our preparation for new gTLDs. We also anticipate increased traffic acquisition costs
due to growth in network revenue and that content production costs will comprise a lower proportion of total service costs in
2013 compared to 2012, due to the substantial reduction in costs (and revenue) associated with our premium multi-channel
video initiative with YouTube.
Sales and Marketing
Sales and marketing expenses consist primarily of sales and marketing personnel costs, sales support, public relations,
advertising, marketing and general promotional expenditures. Fluctuations in our sales and marketing expenses are generally
the result of our efforts to support the growth in our Content & Media service, including expenses required to support our direct
advertising and content channel sales teams. We currently anticipate that our sales and marketing expenses will continue to
increase in the near term as a percent of revenue as we continue to build our sales and marketing organizations and invest in
marketing activities to support the growth of our business including our new gTLD initiative.
Product Development
Product development expenses consist primarily of expenses incurred in our software engineering, product development
and web design activities and related personnel costs. Fluctuations in our product development expenses are generally the result
of hiring personnel to support and develop our platform, including the costs to further develop our content algorithms, our
owned and operated websites and future product and service offerings of our Registrar. We currently anticipate that our product
development expenses will increase as we continue to hire more product development personnel and further develop our
products and offerings to support the growth of our business, including our gTLD initiative and acquisition of Name.com, but
remain relatively flat as a percentage of revenue compared to 2012.
General and Administrative
General and administrative expenses consist primarily of personnel costs from our executive, legal, finance, human
resources and information technology organizations and facilities related expenditures, as well as third party professional fees,
insurance and bad debt expenses. Professional fees are largely comprised of outside legal, audit and information technology
consulting. During the year ended December 31, 2011 and 2012, our allowance for doubtful accounts and bad debt expense
were not significant and we expect that this trend will continue in the near term. However, as we grow our revenue from direct
advertising sales, which tend to have longer collection cycles, our allowance for doubtful accounts may increase, which may
lead to increased bad debt expense. As we continue to expand our business, we anticipate general and administrative expenses
will increase in the near term, primarily due to higher rent expense related to our expansion into new corporate headquarters in
Santa Monica in 2013 and professional fees related to the potential separation of our business into two public companies.
Amortization of Intangibles
We capitalize certain costs allocated to the purchase price of certain identifiable intangible assets acquired in connection
with business combinations, to acquire content that our models predict to embody probable economic benefit, and to acquire
undeveloped websites, including initial registration costs. We amortize these costs on a straight-line basis over the related
expected useful lives of these assets, which have a weighted average useful life of approximately 5.3 years on a combined basis
as of December 31, 2012. We estimate our capitalized content to have a weighted average useful life of 5.1 years as of
December 31, 2012. The Company determines the appropriate useful life of intangible assets by performing an analysis of
expected cash flows based on its historical experience of intangible assets of similar quality and value. We expect intangible
amortization expense to be relatively flat in the near term as we reduced our investment in content intangible assets in 2012 as
compared to prior years and as a result of our election to remove certain articles from service in 2012, offset by additional
amortization of other intangible assets, such as the amortization expense related to the Name.com acquisition in December
2012. Amortization as a percentage of revenue will depend upon a variety of factors, such as the amounts and mix of our
investments in content and identifiable intangible assets acquired in business combinations.