Enom 2013 Annual Report Download - page 50

Operating Expenses
Operating expenses consist of service costs, sales and marketing, product development, general and administrative, and amortization of
intangible assets. Included in our operating expenses are stock-based compensation and depreciation expenses associated with our capital
expenditures.
Service Costs
Service costs 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; personnel costs related to in-house edito
rial, customer service and information technology;
outsourced product manufacturing costs; shipping and handling; artist royalties; ad serving fees; and certain content production costs such as our
premium multi-channel video deal with YouTube in 2012 and costs associated with our paid content initiatives. Our service costs are dependent
on a number of factors, including the amount of traffic on our platform and the volume of domain registrations and value-added services
supported by our Registrar. In the near term, we expect increases in costs associated with our investment in new business initiatives in 2014
(including new gTLDs, Society6, content solutions and content expenses on our owned and operated websites) resulting in higher service costs
compared to historical results.
Registry fee expenses consist of payments to entities accredited by ICANN as the designated registry related to each top level domain
(“TLD”). These payments are generally fixed dollar amounts per domain name registration period and are recognized on a straight-line basis
over the registration term. The costs of renewal registration fee expenses for owned and operated undeveloped websites are also included in
service costs. Amortization of the cost of website names and media content o wned by us is included in amortization of intangible assets.
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 growth in our business, including expenses required to support our Content Solutions and new gTLD initiatives. Due to our recent shift
to focus on p remium programmatic offerings that utilize advertising network exchanges rather than a direct sales force, we currently anticipate
that our sales and marketing expenses will decrease in the near term as a percent of revenue, with Content & Media sales and marketing expense
decreases offset by investing in activities to support the growth of 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 ex penses 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 Society6, but remain relatively flat as a percentage of revenue compared to 2013.
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, 2013 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. We anticipate general and administrative expenses will remain relatively flat in the near term.
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 undevelope d websites, including
initial registration costs. We amortize these costs on a straight-line basis over the related expected useful lives of these assets. We determine the
appropriate useful life of intangible assets by performing an analysis of expected cash flows based on
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