Enom 2013 Annual Report Download - page 48

Our advertising revenue is primarily generated by advertising networks, which include both performance-based advertising, such as cost-
per-click advertising where an advertiser pays only when a user clicks on their advertisement, and display advertising, where an advertiser pays
each time an advertisement is displayed. The majority of our advertising revenue has historically been generated by our relationship with
Google, and for the year ended December 31, 2013, approximately 34% of our total consol idated revenue was derived from our advertising
arrangements with Google. Google maintains the direct relationships with advertisers and provides us with cost-per-click and display
advertisements, which we deploy to our owned and operated websites as well as certain websites owned by our customers with whom we share a
portion of the advertising revenue. Any change in the type of services that Google provides to us could adversely impact our results of
operations. Google also serves as the technology platform partner in connection with our programmatic ad sales offering.
We have recently shifted our advertising strategy to focus on programmatic offerings that utilize advertising network exchanges rather
than a direct sales force. This shift requires us to actively manage the sale of inventory for our owned and operated websites on an advertising
exchange. An inability to successfully implement and manage this process could negatively impact our results. Additionally, brands and
advertisers are increasingly foc using a portion of their online advertising budgets on social media outlets such as Facebook and Twitter. If this
trend continues and we are unable to offer competitive or similarly valued advertising opportunities, this could adversely impact our revenue
from display advertising.
Substantially all of our Domain Name Services revenue is currently derived from domain name registrations and related value-added
service subscriptions from our wholesale and retail customers to our registrar platform. Growth in our revenue is dependent upon our ability to
attract wholesale and retail customers to our registrar platform, to sustain those recurring revenue relationships by maintaining consistent domain
name registration and value-added service renewal rates and to grow those relationships th rough competitive pricing on domain name
registrations, differentiated value-added service and customer service offerings, and best-in-class reseller integration tools. Over the past few
years our revenue growth has been driven by the addition of reseller customers with large volumes of domain names as well as the acquisition of
Name.com, a leading retail registrar. Certain of our large reseller customers account for a large portion of our Domain Name Service revenue,
and from time to time, we enter into multi-year agreements with those customers.
Going forward, we are diversifying our Domain Name Service offerings and expect to become a leading domain name registry offering
new gTLDs, which we believe will help us attract new wholesale and retail customers as well as grow domain name registration volumes with
existing customers. During the years ended December 31, 2013 and 2012, we paid $3.9 million and $18.2 million, respectively, for certain gTLD
applications under the New gTLD Program in the pursuit of o ur ownership of certain gTLD operator rights.
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 Domain Name Services revenue we generate. In the near term, we expect
that the period-over-period growth in our Content & Media revenue will be slightly declining offset by growth in our Domain Name Service
revenue, and we expect that our service costs will increase in 2014 compared to 2013 in line with Registrar and Society6 revenue growth. We
believe that these factors, together with costs associated with our investment in new gTLDs, will constrain our operating margin growth in the
short-term as we increase our investment in new business initiatives to support future growth. We will also continue to monitor changes and
emerging trends in search engine algorithms and methodologies, including the resulting impact that these changes may have on future operating
results, the economic performance of our long-
lived assets, the market price of our stock, anticipated future cash flows and other indicators of the
fair value of our reporting units to determine if an interim impairment test is necessary. If we are required to record an impairment charge on the
carrying value of our long-lived assets, including our media content and goodwill arising from acquisitions, it could have a material adverse
effect on our results of operations and financial condition, particularly in the period such charge is taken.
We are currently pursuing the separation of our business into two independent, publicly-traded companies: an Internet-based content and
media company and a domain name services company. We expect to complete the proposed busin ess separation by the end of the third quarter
of 2014, but completion of the separation is at the discretion of our board of directors and subject to the satisfaction or waiver of various
conditions, and the separation may not be consummated. Furthermore, the proposed business separation requires significant time and attention
from our management and employees and requires us to incur significant costs, which could disrupt our ongoing operations and adversely affect
our results of operations. Additionally, following completion of the proposed business separation, we will be a less diversified company and our
results may be more likely to fluctuate from period to period.
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