Tucows 2012 Annual Report Download - page 35

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the introduction of a wide range of new gTLDs. We believe that such expansion, once completed, will result in an
increase in the number of domains we register and related revenues commencing in 2013. In addition, while the
delegation of New gTLDs could substantially change the domain name industry in unexpected ways, we believe that the
New gTLD Program will provide us with new revenue opportunities commencing in 2013.
Under the terms of the New gTLD program, in April 2012 we paid the required $1.1 million application fee in
support of our application for six domain strings under ICANN's new gTLD Program. A declining percentage of these
evaluation fees are refundable if any application is withdrawn prior to our executing a registry agreement with ICANN.
In May 2012 we withdrew two of our applications and under the terms of the New gTLD application process have
received a full refund of $0.4 million against these applications. While there can be no assurance that we will be awarded
any gTLDs, we have determined that the applications embody probable economic benefit and they have been capitalized
and are included in prepaid expenses and deposits at September 30, 2012. As part of the New gTLD Program, we may
elect to receive partial cash refunds for certain gTLD applications, and to the extent we elect to sell or dispose of certain
gTLD applications throughout the process, we may also incur gains or losses on amounts invested. Gains on the sale of
our 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 we expect 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.
From time-to-time certain of our vendors provide us with Market Development Funds to expand or maintain the
market position for their services. Any decision by these vendors to cancel or amend these programs for any reason, may
result in payments in future periods not being commensurate with what we have achieved during past periods.
Sales of domain names from our domain portfolio have a negative impact on our advertising revenue as these
names are no longer available for advertising purposes. In addition, the timing of larger domain names portfolio sales is
unpredictable and may lead to significant quarterly and annual fluctuations in our Portfolio revenue.
Our revenue is primarily realized in U.S. dollars and a major portion of our operating expenses are paid in
Canadian dollars. Fluctuations in the exchange rate between the U.S. dollar and the Canadian dollar may have a material
effect on our business, financial condition and results from operations. In particular, we may be adversely affected by a
significant weakening of the U.S. dollar against the Canadian dollar on a quarterly and an annual basis. Our policy with
respect to foreign currency exposure is to manage our financial exposure to certain foreign exchange fluctuations with
the objective of neutralizing some or all of the impact of foreign currency exchange movements by entering into foreign
exchange forward contracts to mitigate the exchange risk on a portion of our Canadian dollar exposure. We may not
always enter into such forward contracts and such contracts may not always be available and economical for us.
Additionally, the forward rates established by the contracts may be less advantageous than the market rate upon
settlement.
Net Revenues
Wholesale - OpenSRS Domain Service
Historically, our OpenSRS Domain Service has constituted the largest portion of our business and encompasses
all of our services as an accredited registrar related to the registration, renewal, transfer and management of domain
names. In addition, this service fuels other revenue categories as it often is the initial service for which a reseller will
engage us, enabling us to follow on with other services and allowing us to add to our portfolio by purchasing names
registered through us upon their expiration.
With the acquisition of EPAG Domainservices GmbH (“EPAG”) in August 2011, we now offer registration
services for over 200 TLDs.
With respect to the sale of domain registrations, our pricing structure for domain names provides visibility into
the various fees that make up the cost of a domain name by breaking out the cost of the registry and ICANN fees
separately from our management fee. Effective January 2012, registry fees for the .com and .net registrations were
increased by the registry to $7.85 and $5.11 respectively. In November 2012 Verisign renewed its agreement with
ICANN to serve as the authoritative registry operator for the .com registry until November 2018. Under the terms of the
renewal, Verisign agreed to continue the current pricing of $7.85 per domain name registration throughout the term of
the agreement and in December 2012, announced their intention, effective July 1, 2013, to increase the registry fee for