10-K 1 xoxo2016123110-k.htm 10-K Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________ 

FORM 10-K
______________________
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2016
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 000-28271
____________________________ 
XO GROUP INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
13-3895178
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification Number)
195 Broadway, 25th Floor
New York, New York 10007
(Address of Principal Executive Offices and Zip Code)
(212) 219-8555
(Registrant’s Telephone Number, Including Area Code) 
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange on which Registered
Common Stock, par value $0.01 per share
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No ý
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer o
Accelerated Filer x
Non-Accelerated Filer o
(Do not check if a smaller reporting company)
Smaller Reporting Company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes o No ý

The aggregate market value of voting common stock held by non-affiliates of the registrant as of June 30, 2016 was approximately $386,791,622. The number of shares outstanding of the registrant’s common stock as of March 1, 2017 was 26,295,190. The registrant does not have any non-voting stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for the 2017 Annual Meeting of Stockholders, which we plan to file within 120 days after December 31, 2016, are incorporated by reference into Part III.



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XO GROUP INC.
2016 FORM 10-K ANNUAL REPORT

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SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements relating to future events and the future performance of XO Group Inc. based on our current expectations, assumptions, estimates and projections about us and our industry. The statements contained in this Annual Report on Form 10-K that are not purely historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These forward-looking statements can be identified by the use of forward-looking terminology such as “may,” “should,” “expect,” “intend,” “estimate,” “are positioned to,” “continue,” “project,” “guidance,” “target,” “forecast,” “anticipated” or comparable terms.

These forward-looking statements involve risks and uncertainties. Our actual results or events could differ materially from those anticipated in such forward-looking statements as a result of certain factors, as more fully described in Item 1A (Risk Factors) and elsewhere in this report. We undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.


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Unless the context otherwise indicates, references in this report to the terms “XO Group,” the “Company,” “we,” “our” and “us” refer to XO Group Inc., its divisions and its subsidiaries.

PART I

Item 1. Business

Company Overview

Our mission is to help people navigate and truly enjoy life’s biggest moments together. Our multi-platform brands guide couples through transformative life stages - from getting married with The Knot, to moving in together with The Nest, to having a baby with The Bump, and helping bring important celebrations to life with entertainment vendors from GigMasters.

The Knot. The Knot is the nation’s leading wedding resource and marketplace that seamlessly engages, matches, and connects couples with the right products, services, and local wedding professionals they need to plan their wedding. We believe that The Knot, as the flagship brand of XO Group, reaches a majority of couples getting married in the U.S. through the #1 wedding website, TheKnot.com, its mobile apps, national and local wedding magazines, and nationally published books. Based on ComScore data, The Knot generates more unique visitors than the next three largest wedding websites combined. The Knot apps have thousands of daily downloads, and at times have been ranked in the top 50 lifestyle apps in the Apple app store this year. By our estimates, we believe we have inspired over 25 million couples during their wedding process. Based on research conducted by our internal team, including The Knot Market Intelligence’s Annual Real Wedding Survey, we estimate the spend associated with weddings, including payment to vendors who fulfill wedding day needs, engagement rings, and registry gifts, totals approximately $100 billion annually.

The Bump. The Bump is a leading pregnancy and parenting brand, providing personalized information, content, and tools for navigating the journey from fertility to pregnancy and parenting through the toddler years. The Bump reaches millions of expectant and new parents across its seamless app and web experience. The Bump has twice earned a spot in Forbes’ Top 100 Best Websites for Women. Based on information from the NCHS National Vital Health Statistics Reports and the United States Department of Agriculture, we estimate total annual spend on children ages 0-2 to be greater than $60 billion.

The Nest. The Nest is a brand focused exclusively on nesters setting up homes and navigating their lives together. The site takes a hip, how-to approach to all things “grown up”: merging finances, buying and decorating homes, entertaining and more through content, expert Q&As, online community and interactive tools.

GigMasters. GigMasters.com Incorporated (“GigMasters”) is a leading event marketplace for finding and booking the perfect entertainment and vendors for birthday parties, weddings, anniversaries, corporate events and more. Combining the efficiency of the web with the personal touch of a private event planner, GigMasters features over 40,000 of the best, client-reviewed entertainers and event vendors in the U.S. and Canada.

Services

We offer multiplatform media and marketplace services that enable our advertising and transaction partners to connect with our highly engaged audience in the wedding, pregnancy and parenting, nesting, and local entertainment markets. We reach our audience through several platforms, including websites, mobile applications, magazines and books, television, and video.

We create value for our audience, advertisers, and partners by delivering relevant and personalized solutions at key decision making moments for some of life’s proudest and happiest events. We generate revenue through three distinct and diversified products:

Online Media Advertising. We offer online advertising solutions for national advertisers that enable them to reach our audience at a critical time in their lives when they are forming brand loyalties. For local wedding professionals, we provide both free and paid online listing products that enable them to connect with our audience in their local market. We recognize revenue from these sources as National Online Advertising and Local Online Advertising, respectively, as described below.

National Online Advertising. Online programs include, but are not limited to, (i) display advertisements, (ii)custom and brand-integrated content, (iii) lead generation marketing, including direct e-mails and (iv) placement in our online search tools. Advertisers can purchase the right to promote products or services on specific areas of our

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properties and can purchase a special feature on the Company’s sites. In 2016, national online advertising represented 26% of our consolidated revenue.

Local Online Advertising. Our local programs include, but are not limited to, (i) online listings, (ii) digital advertisements, and (iii) direct e-mail marketing. At December 31, 2016, TheKnot.com hosted over 300,000 free and paid local storefront listings in more than 86 local markets highlighting offerings for over 44 categories of wedding planning services. On a trailing twelve month basis, TheKnot.com ended 2016 with more than 23,600 paying vendors, spending an average of $2,803 per year. In addition to TheKnot.com paid storefront listings, local online advertising revenue includes listings revenue generated via GigMasters.com, an entertainment marketplace, and TwoBrightLights.com, a wedding photography syndication marketplace. In 2016, local online advertising represented 46% of our consolidated revenue.

Transactions. Our transaction offerings provide opportunities for our audience to purchase products and services. We offer programs that enable partners to sell through our online properties and their own branded websites and properties. We earn fixed fees, a percentage of sales, per-unit activity fees, or some combination thereof with respect to these transactions. Our transaction offerings include a registry service that enables users to create, manage, and share multiple retail store registries from a single source, and retailer and other vendor offerings such as invitations, stationery, reception decor, and personalized gifts. Through our GigMasters.com website, our audience has the opportunity to find, research, and book the right entertainment vendor for them. In 2016, transaction revenue represented 15% of our consolidated revenue and was our fastest growing revenue stream.

Publishing and Other. We publish traditional magazines for our flagship brand, The Knot. The Knot publishes a national magazine four times a year, and a regional magazine semi-annually in 16 U.S. markets. Each magazine provides original, expert-driven content in our signature voice, driving readers back to our digital assets for an interactive experience and additional connections and services. In 2016, publishing and other represented 13% of our consolidated revenue.

Strategy

At XO Group, we address some of the most critical moments in couples lives: getting married, starting a new family, having a baby, and celebrating these memories throughout their lives. These are long and challenging processes full of uncertainty, angst and joy. We build tools and content that makes our couples successful.

Our audience is largely millennial women, who are tech savvy and have high, evolving expectations of their applications and services. We believe these dynamics put us in an advantaged position to create more value for our users, partners and stockholders. In order to capitalize on this opportunity, our management is pursuing the following strategy, which has been approved by our Board of Directors.

As leaders in the wedding space, we believe our first and biggest business opportunity is to connect more couples with the local wedding professionals who will help execute their wedding. There are hundreds of thousand local wedding professionals who, by our estimates, are booking over $60 billion of spend every year. Our strategy is to improve these connections every year. If we succeed, we will be able to accommodate many more paying vendors on our platform, and our service will become even more valuable to them.

Secondly, we help couples communicate with their guests through digital tools that enable them to share relevant information about their wedding, including their wedding websites and gift registries. Based on our research, wedding guests give more than $10 billion worth of cash and gifts to marrying couples each year. The better we connect couples to their guests, and guests to the gifts that the couple wants, the more value we can drive to our retail partners and our company via commission payments. Additionally, we have the opportunity to drive more transaction revenue by better integrating product and service providers that address our couples' needs, such as invitations, reception decor, and hotel room blocks. We measure success in these initiatives by our ability to grow traffic and increase conversion, average order value, and our take rate.

Our third business objective is to continue to serve brand advertisers by allowing them to reach our audience through online advertising. We develop relevant, integrated offerings across our products including custom advertising content, display ads, and lead generation products to help our partners communicate their value to our couples.

Our fourth business objective is to profitably manage our legacy print business through the challenges of the decline of the print industry.


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Finally, we are a leading event marketplace that connects people to entertainers, photographers, party rentals, and more through our Gigmasters brand. We not only help people get married and have babies, we also help them throw the anniversary and birthday parties to commemorate the occasions for the rest of their lives.

In order to fund our initiatives we pursue a measured capital allocation strategy. Our capital allocation strategy is to balance internal investments, strategic investments, mergers and acquisitions, and stock repurchases.

We believe our strategy will put us in a position to accelerate our revenue growth profitably over the long-term.

Competition

We compete with companies that seek the attention of our audience and/or the advertising and marketing budgets of our business partners, including, but not limited to, local marketplaces, general market media and internet companies, wedding and baby media and internet companies, social networks, and search engines. We expect ongoing competition because of the size of the markets we serve and business opportunities presented by the growth of the internet and transactional marketplaces. Competition may also intensify as a result of industry consolidation and a lack of substantial barriers to entry in our market. For information regarding competition-related risks, see the information in “Item 1A: Risk Factors” under the caption “We face intense competition in our markets. If we do not continue to innovate and provide products and services that are useful to users, we may not remain competitive, and our revenue and results of operations could be adversely affected.”

Infrastructure and Technology

Our technology infrastructure has been designed around industry-standard architectures to reduce downtime in the event of outages or catastrophic occurrences. We strive to continually improve our technology to enhance the customer experience and to increase efficiency, scalability, and security.

There are four major components to our online services comprised of our web, domain name service (“DNS”), network infrastructure, and database servers. Our web, DNS servers, and network infrastructure allow for the failure of multiple components with minimal or no effect expected on site operations. We have multiple database servers along with data caching serving various parts of our sites, allowing us to segregate parts of the sites for maintenance and upgrades.

Our operations are dependent on the ability to maintain our computer and telecommunications system in effective working order and to protect our systems against damage from fire, theft, natural disaster, power loss, telecommunications failure, or similar events. A portion of our systems hardware is located at a Level 1 third-party facility in Austin, Texas, and a second failover site with restoration capabilities in Omaha, Nebraska. The data centers are network-connected and application data is replicated from Austin to Omaha on a continuous basis. We have similar capacity in China for our software development operations there. Additionally, the majority of our production applications are on the Amazon Web Services Cloud (AWS). Our operations depend, in part, on the ability of these third parties to protect their own systems and our systems from similar unexpected adverse events. These third parties provide us with auxiliary power through the use of battery and diesel generators in the event of an unexpected power outage. We maintain multiple backups of our data, allowing us to quickly recover from any disaster. Additionally, at least once a week, copies of backup tapes are sent to off-site storage.

Regular capacity planning allows us to upgrade existing hardware and integrate new hardware to react quickly to a rapidly expanding member base and increased traffic to our sites. Our systems generally operate at 99% uptime. We employ several layers of security to protect data transmission and prevent unauthorized access. We are certified PCI DSS (Payment Card Industry Data Security Standard) compliant with Bank of America and American Express. We keep all of our production servers behind firewalls. We do not allow direct outside access, and we enforce strict password management with two-factor authentication and physical security measures. We monitor all systems continuously, and emergency response teams respond to all alerts. We have also contracted the services of an outside company to independently monitor our site to help ensure that the site is available.

Government Regulation

We are subject to a number of laws and regulations that apply to transactions, online services, and the internet generally. Such laws address a range of issues, such as user privacy, freedom of expression, unsolicited commercial e-mail (spam),

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pricing, payments, content and quality of services and products, taxation, advertising, intellectual property rights, net neutrality, information and cybersecurity, and restrictions or technological requirements regarding the collection, use, storage, protection or transfer of consumer data. We monitor pending domestic and foreign legislation and regulatory initiatives to ascertain relevance, analyze impact and develop strategic direction surrounding regulatory trends and developments.

Regulators and industry groups have also released self-regulatory principles and guidelines for various data privacy and security practices. Interpretation of these laws and guidelines and their application to online services in the U.S. and foreign jurisdictions is ongoing, and cannot be fully determined at this time.

For more information regarding the risks associated with government regulation, see the information in “Item 1A: Risk Factors” under the captions: “Fraudulent or unlawful activities on our marketplace could harm our business, and could severely diminish consumer confidence in and use of our marketplace,” “We may be subject to legal liability associated with providing online services or content,” “Privacy concerns relating to our technology could damage our reputation and deter current and potential users from using our products and services” and “We could face additional regulatory requirements, tax liabilities and other risks related to our continuing operations in China and Hong Kong, and other markets outside the United States where we may commence operations.”

Intellectual Property and Proprietary Rights

We rely on a combination of trade secrets, copyrights, trademarks, trade dress, domain names and patents to protect our intellectual property. We own a portfolio of patents and patent applications in the United States and regularly file patent applications to protect intellectual property that we believe is important to our business, including intellectual property related to gift registry systems and methods. We believe the duration of our patents is adequate relative to the expected lives of our products and services. We pursue the registration of our domain names, trademarks and tradenames in the United States and in certain locations outside the United States. Our portfolio of trademarks and tradenames include “The Knot”, “The Bump”, “The Nest”, and “GigMasters”, as well as others. We also own copyrights, including certain content in our websites, publications and designs on certain of our products. These intellectual property rights are important to our business and marketing efforts. We protect our intellectual property rights by relying on federal, state, and common law rights, including registration, in the United States and certain foreign jurisdictions, as well as contractual restrictions. The duration of property rights in trademarks, service marks and tradenames in the United States, whether registered or not, is predicated on our continued use. We are currently using all of our material marks. We have renewed the registrations (or applied for variant forms of the registration, where appropriate, to assure continued protection) of our material registered trademarks. We plan to continue to use all of our material brand names and marks and to renew the registrations of all of our material registered trademarks so long as we continue to use them. We enforce and protect our intellectual property rights through litigation from time to time, and by controlling access to our intellectual property and proprietary technology, in part, by entering into confidentiality and invention assignment agreements with our employees and contractors, and confidentiality agreements with third parties.

We have granted licenses to other parties to sell specified products under trademarks in specified distribution channels and geographic areas. Some of these license agreements contain advertising commitments. Some are for a short term and may not contain specific renewal options. We do not license from third parties any trademarks that are material to our business.

Seasonality

We believe the impact of the frequency of weddings varying from quarter-to-quarter results in lower transactions revenue in the first and fourth quarters. Our publishing business experiences fluctuations resulting in quarter-to-quarter declines in the first and third quarters due to the cyclical publishing schedule of our regional publications. As our business continues to change, we could experience new and potentially different seasonal patterns in the future.

Employees

As of December 31, 2016, we had a total of 727 full-time employees, of whom 367 were involved in product and content development, 298 were involved in sales and marketing and 62 were involved in general and administrative functions. Of these totals, 134 employees were located in China. None of our employees are represented by a labor union. We have not experienced any work-stoppages, and we consider relations with our employees to be good.

Segments and Geographic Areas

We operate in one reportable segment, as we are organized around our online and offline media. Our CEO is our Chief Operating Decision Maker, and he receives weekly financial results, which contains revenues, cost of revenues and gross

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margin of the three components of our business: (i) National (ii) Local Marketplace and (iii) Transactions. We incur a substantial amount of product, content, technology, sales and marketing, and general and administrative costs that directly benefit all service lines, but are not allocated to the components. Revenue information at the product or service level is not captured in the Company’s financial reporting systems and is not included in internal management reporting.

Information about geographic revenue is set forth in Note 2 of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K under the heading “Segments and Geographic Areas.” For a discussion of the risks related to foreign operations, see the information in Part I, Item 1A of this Annual Report on Form 10-K under the heading “Risk Factors” under the caption “We could face additional regulatory requirements, tax liabilities and other risks related to our continuing operations in China and Hong Kong, and other markets outside the United States where we may commence operations.” For a discussion of revenue, net income and total assets, see Part II, Items 7 and 8 of this Annual Report on Form 10-K.

Corporate History

We were incorporated in the state of Delaware and commenced operations in 1996. In 1999, we listed on the NASDAQ National Market. We transferred our listing from the NASDAQ Global Market to the New York Stock Exchange in June 2011. At the same time, we changed our corporate name to XO Group Inc. (from The Knot, Inc.), and our stock symbol to XOXO (from KNOT), in order to highlight our expanded footprint across multiple life stages.

Available Information

XO Group’s corporate website is located at www.xogroupinc.com. XO Group makes available free of charge, on or through our corporate website, our annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing such reports with, or furnishing to, the Securities and Exchange Commission (“SEC”). Information contained on XO Group’s corporate website is not part of this report or any other report filed with the SEC.

XO Group’s Corporate Governance Guidelines; Code of Business Conduct and Ethics that applies to all officers, directors and employees; Code of Ethics for the Chief Executive Officer and Senior Financial Officers (and any amendments to, or waivers under such code); and the charters of the Audit, Compensation and Nominating and Corporate Governance Committees of our Board of Directors, are also available on XO Group’s corporate website and are available in print to any stockholder upon request by writing to XO Group Inc., 195 Broadway, 25th Floor, New York, New York 10007, Attention: Investor Relations.

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Item 1A. Risk Factors

Certain factors may have a material adverse effect on our business, financial condition and/or results of operations. In addition to other information in this Annual Report on Form 10-K, the following risk factors should be carefully considered in connection with your investment in our common stock. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. Because of the following factors, as well as other factors affecting our financial condition and results of operations, past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.

Risks Related to Our Business and Industry

Our operating results may fluctuate, are difficult to predict and could fall below expectations.

Our operating and financial results have fluctuated significantly on a quarterly basis during our operating history and may continue to fluctuate significantly as a result of a variety of factors, many of which are outside of our control. These factors include:

the level of online usage and traffic on our digital properties;
the addition or loss of advertisers;
the advertising budgeting cycles of specific advertisers;
the ability of our consumers and vendors to transact on our properties;
the regional and national magazines’ publishing cycles;
the amount and timing of capital expenditures and other costs relating to the expansion of our operations, including those related to acquisitions;
the introduction of new sites and services by us or our competitors;
changes in our pricing policies or the pricing policies of our competitors; and
general economic conditions, as well as economic conditions specific to the Internet, online and offline media and transactions.

We cannot assure you that we will be able to meet rapidly changing advertiser, vendor and consumer demands for content, products and user engagement in a timely manner, if at all, even if we are successful in enhancing and upgrading our digital properties (including our websites and mobile properties) in response to advances in technology and evolving preferences. If the number of visitors to our digital properties stagnates or declines, we may not be able to create or maintain sufficient advertiser or vendor interest in our digital platforms. Even if we are successful in driving consumer traffic to our digital properties, advertisers and vendors are sensitive to general economic conditions and reductions in consumer spending, among other events and trends, which could result in lower transactions revenue and reduced advertising expenditures, particularly from national advertisers. We cannot assure you that our current advertisers will fulfill their obligations under existing contracts, continue to advertise beyond the terms of existing contracts or enter into any additional contracts with us. Our advertising and other revenue could also decline as a result of pricing pressures on digital advertising rates due to industry developments, such as the fragmentation of digital media. If we are unable to effectively monetize our digital properties, our business, results of operations, financial condition and prospects could be materially and adversely affected.

Due to the foregoing or other factors, it is also possible that our results of operations in one or more future quarters may fall below the expectations of investors and/or securities analysts. We also experience some seasonal trends that may produce variations in quarterly results and financial conditions. To the extent there are significant fluctuations in our financial results, the trading price of our common stock could decline materially. In view of the rapidly evolving nature of our business, period-to-period comparisons of our results of operations may not be meaningful, and you should not rely upon them as an indication of future performance.

Our business depends on strong brands, and failing to maintain and enhance our brands would hurt our business.

Our brands have contributed significantly to the success of our business. Building and maintaining the brand recognition of The Knot, The Bump, The Nest, GigMasters, and our other brands is critical to attracting and expanding our base of online users and offline readership, advertisers, corporate customers and other partners, and increasing their engagement with our services, and will depend largely on our ability to maintain member trust, be a technology leader and continue to provide high-quality solutions, which we may not do successfully. Our brands may be negatively affected by a number of factors, including the reputation of our content and products and our ability to adapt to technological changes. Despite our efforts to protect and prevent misuse of our brands, if others misuse our brands or pass themselves off as being endorsed or affiliated with us, it could harm our reputation,

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and our business could suffer. Our brands are also important in attracting and maintaining highly qualified employees. If we fail to build or maintain awareness of our brands, our business and our results of operations could be materially and adversely affected.

Our ongoing investment in new businesses and new products, services, and technologies is inherently risky, and could disrupt
our ongoing business and/or fail to generate the results we are expecting.

We have invested in, and expect to continue to invest in, new businesses, products, services and technologies. We cannot be certain that our products, services and digital properties will appeal to, and garner acceptance from, the public or our advertisers and other third-party partners. We expect to continue to increase our operating expense growth in excess of historic rates in the near future to launch new products or upgrade existing products. We may not be able to successfully leverage our audience share or brand positioning to create and maintain use of our new products and services. Moreover, even if new features and services prove to be commercially successful, they may reduce usage of our existing features and services. If we are unable to generate sufficient revenue from new services and features to gain a return on our investments, or if our revenue from existing services declines as a direct result of a shift in consumer usage to new services, our business, results of operations and financial condition could be adversely affected.

If we are unable to continue to develop solutions that generate revenue from advertising and other services delivered to mobile devices, our business could be harmed.

The number of people who access the internet through devices other than computers, including mobile phones and handheld computers such as notebooks and tablets, and who use mobile payment and transaction services, has increased substantially in recent years and is expected to continue to grow. A significant and growing portion of users access our digital platforms through mobile devices. If we do not succeed in providing effective mobile platforms for advertising and other service solutions, we may be unable to attract and retain customers for advertisers or other services. In addition, if we are unable to implement successful monetization strategies for mobile users, or if we incur excessive expenses in our effort to do so, our business and results of operations could be adversely affected.

We face intense competition in our markets. If we do not continue to innovate and provide products and services that are useful to users, we may not remain competitive, and our revenue and results of operations could be adversely affected.

The Internet and mobile advertising markets, online markets and publishing markets in which our brands operate are intensely competitive, and we expect competition to intensify in the future. For example, our brands face competition for members, users, readers and advertisers from the following areas:

stand-alone online services, websites, mobile applications or blogs targeted at brides and grooms, such as those offered by WeddingWire, Weddingbee, Honeybook, Thumbtack, and MyWedding.com, and at new parents, such as Johnson & Johnson’s BabyCenter and others;
online and brick and mortar retail stores, manufacturers and regional directories;
wedding sub-domains, channels or niche sites of major online destinations or portals, such as Pinterest, Amazon, Google and AOL’s Huffington Post and Style Me Pretty;
bridal magazines and their online destinations, such as Condé Nast’s Brides, and Sequential Brands Group's Martha Stewart Weddings;
parenting magazines and their online destinations; and
online and retail stores offering gift registries, especially from retailers offering specific gift registries.

Marketplaces compete in two-sided markets, and must attract both consumers and vendors in order to be successful. Consumers who might use our marketplaces to buy goods or services have a wide variety of alternatives, including traditional department, warehouse, boutique, discount and general merchandise stores (as well as the online and mobile operations of these traditional retailers), online retailers and their related mobile offerings, online and offline classified services and other shopping channels. In addition, consumers have a large number of online and offline channels focused on one or more of the categories of products and services offered on our sites. Consumers and vendors who might use our sites to sell goods or services also have many alternatives, including general online ecommerce sites, and more specialized sites, such as websites operated by bridal gown designers, wedding hall venues, destination wedding resorts, etc. Vendors who use our marketplace may also choose to sell their goods and services through other channels.

The principal competitive factors for marketplaces like ours include the following:

ability to attract, retain and engage consumers and vendors, as well as maintain user engagement;
volume of transactions and price and selection of products and services;

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trust in the vendor and the transaction;
customer service (both that provided by us and that provided by the vendors in our marketplace);
brand recognition;
website, mobile platform and application ease-of-use and accessibility;
system reliability;
level of service fees; and
ease of use and quality of search tools.

We expect competition to increase because of the business opportunities presented by the growth of the Internet and transaction-based marketplaces. Our competition may also intensify as a result of industry consolidation and a lack of substantial barriers to entry. Many of our current and potential competitors have longer operating histories, significantly greater financial, technical and marketing resources, greater name recognition and substantially larger user bases than we have and, therefore, have significant ability to attract advertisers, vendors and users. In addition, many of our competitors may be able to respond more quickly than we can to new or emerging technologies and changes in digital user requirements, as well as devote greater resources than we can to the development, promotion and sale of services.

We cannot assure you that our current or potential competitors will not develop services and products comparable or superior to those that we develop or adapt more quickly than we do to new technologies, evolving industry trends or changing Internet user preferences. Increased competition could result in price reductions, lower margins or loss of market share, any of which would materially and adversely affect our business, results of operations and financial condition. We cannot assure you that we will be able to compete successfully against current and future competitors.

Our businesses could be negatively affected by changes in Internet search engine algorithms and email marketing policies.

We depend in part on various Internet search engines (such as Google, Bing and Yahoo!) to direct traffic to our websites and properties. Similarly, we depend on high-traffic digital, social, and other properties, as distribution channels, to promote our websites and properties. Our ability to maintain the number of potential customers directed to our websites and properties is not entirely within our control. For example, search engines often revise their algorithms in an attempt to improve the search results presented to their users. Our ability to influence the search engine rankings of our websites and properties, through our search engine optimization efforts or otherwise, is limited. In addition, we cannot assure you that distribution through high-traffic digital, social, and other properties will yield additional users or that such relationships will continue to be available on commercially reasonable terms. Changes by Internet search engines in their algorithms, or changes to competitive dynamics that affect our distribution relationships in a negative manner, could cause our websites and properties to receive less user traffic. Fewer potential customers could materially and adversely affect our business, results of operations and financial condition. In addition, email marketing policies and standards are evolving domestically and internationally. If we fail to prevent being blacklisted from major service providers, or if our emails are otherwise blocked by spam filters, we may be subject to significant loss of email marketing revenues and user traffic.

Our transactions business is dependent on third-party participants, whose lack of performance could adversely affect our results of operations.

A growing portion of our revenue is from transactions. Our transactions revenue is dependent on third parties’ participation in our transactions programs, and the success of those partners and vendors. We are dependent on our retail partners and local vendors to manage competitive pressures, and to the extent they are unable to do so, we may experience lower revenue, which could materially and adversely affect our results of operations. Such businesses are also dependent on our partners keeping their respective websites and other digital properties operational, as well as on the visitors who use those sites. Any decline in traffic or technical difficulties experienced by these websites or mobile devices may negatively affect our results of operations.

The fulfillment and delivery of products purchased by customers are processed and delivered by our third-party partners. As a result, we are dependent on our partners to manage inventory, process orders and distribute products to our customers in a timely manner. We also rely on information provided by these partners to update and integrate information daily. If our partners experience problems with customer fulfillment or inventory management, or if we cannot integrate our processes with those of our partners, our business, results of operations and financial condition would be harmed.

In addition, our partners are highly dependent on the health of the U.S. or foreign economies and many are further dependent on local economic conditions in the states or countries in which they primarily conduct their businesses. Deterioration in macroeconomic conditions and consumer confidence that negatively impacts our partners’ businesses could result in lower revenue to our business, which could materially and adversely affect our results of operations.


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Fraudulent or unlawful activities on our marketplace could harm our business, and could severely diminish consumer confidence in and use of our marketplace.

The law relating to the liability of marketplace operators is currently unsettled. We face risks with respect to fraudulent activities on our marketplace and periodically receive complaints from consumers who may not have received the goods or services that they had contracted to purchase. We may also incur losses from claims that the consumer did not authorize the purchase, from consumer fraud, from erroneous transmissions and from consumers who have closed bank accounts or have insufficient funds in them to satisfy payments they are obligated to make. Although we have implemented measures to detect and reduce the occurrence of fraudulent activities, combat bad consumer experiences and increase customer satisfaction, including evaluating vendors on the basis of their transaction history and restricting or suspending their activity where appropriate, we cannot assure you that these measures will be effective in combating fraudulent transactions or improving overall satisfaction among consumers and other participants. Additional measures to address fraud could negatively affect the attractiveness of our marketplace to consumers or vendors, resulting in a reduction in the ability to attract new consumers or vendors or retain current consumers or vendors, damage to our reputation, or a diminution in the value of our brand names. We also may be unable to prevent vendors on our marketplace from selling unlawful goods or services, or selling goods or services in an unlawful manner, and could face civil or criminal liability for unlawful activities by our vendors.

We may be subject to legal liability associated with providing online services or content.

We may be subject to claims for defamation, negligence, copyright or trademark infringement, personal injury or other legal theories relating to the information we publish, display or distribute. These types of claims have been brought, sometimes successfully, against online services, as well as other print publications in the past. We could also be subject to claims based upon the content that is accessible from our online sites through links to other online sites or through content and materials that may be posted by users in message bulletin boards, listings, wedding websites and other areas of the site. Our insurance, which covers commercial general liability, may not adequately protect us against these types of claims.

The laws that shield online service providers such as us from liability for the activities of users of their online services are often challenged in the United States and internationally. We may be unable to prevent users of our services from providing negligent, unlawful or inappropriate advice, information or content via our services, or from behaving in an unlawful manner, and we may be subject to allegations of civil or criminal liability for negligent, fraudulent, unlawful or inappropriate activities carried out by users of our services. Claims could be made against online services companies under both United States and foreign law such as fraud, defamation, libel, invasion of privacy, negligence, data breach, copyright or trademark infringement, or other theories based on the nature and content of the materials disseminated by users of our services. In addition, domestic and foreign legislation has been proposed that could prohibit or impose liability for the transmission over the Internet of certain types of information. Our defense of any of these actions could be costly and involve significant time and attention of our management and other resources.

The listing or sale by our vendors of unlawful, counterfeit or stolen goods or unlawful services, or sale of goods or services in an unlawful manner, may result in allegations of civil or criminal liability for unlawful activities against us involving activities carried out by vendors through our marketplace. Allegations of infringement of intellectual property rights, including but not limited to counterfeit items, have resulted in threatened and actual litigation from time to time by rights owners against the operators of other marketplaces. Plaintiffs in these and similar suits seek, among other remedies, injunctive relief and damages. Statutory damages for copyright or trademark violations could range up to $150,000 per copyright violation and $2,000,000 per trademark violation in the United States, and may be even higher in other jurisdictions.

If we become liable for information provided by our users and carried via our service in any jurisdiction in which we operate, we could be directly harmed and we may be forced to implement new measures to reduce our exposure to this liability. In addition, the increased attention focused upon liability issues as a result of these lawsuits and legislative proposals could harm our reputation or otherwise impact the growth of our business. Any costs incurred as a result of this potential liability could harm our business. In addition, negative publicity and user sentiment generated as a result of fraudulent or deceptive conduct by users of our services could damage our reputation, reduce our ability to attract new users or retain our current users, and diminish the value of our brand.

In the future, we may be required to spend substantial resources to take additional protective measures or discontinue certain service offerings, either of which could harm our business. Any costs incurred as a result of potential liability relating to the sale of unlawful services or the unlawful sale of services could harm our business.

Consumers may sue us if any of the products that our retail or other partners sell online or otherwise make available are defective, fail to perform properly or injure the user. Liability claims could require us to spend significant time and money in

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litigation or to pay significant damages. As a result, any such claims, whether or not successful, could seriously damage our financial results, reputation and brand name.

We may be unable to continue to use the domain names that we use in our business, or prevent third parties from acquiring and using domain names that infringe on, are similar to, or otherwise decrease the value of our brand or our trademarks or service marks.

We have registered domain names for the websites that we use in our business, such as TheKnot.com, TheBump.com, TheNest.com, and GigMasters.com. If we lose the ability to use a domain name, whether due to trademark claims, failure to renew the applicable registration or any other cause, we may be forced to market our products under a new domain name, which could cause us substantial harm or cause us to incur significant expense in order to purchase rights to the domain name in question. In addition, others could attempt to capitalize on our brand recognition by using domain names similar to ours. Domain names similar to ours have been registered by others in the United States and elsewhere. We may be unable to prevent third parties from acquiring and using domain names that infringe on, are similar to or otherwise decrease the value of our brand or our trademarks or service marks. Protecting and enforcing our rights in our domain names may require litigation, which could result in substantial costs and diversion of management’s attention.

Our intellectual property rights are valuable, and any inability to protect them could reduce the value of our products, services and brands.

We rely on copyright, trademark, patent and other intellectual property laws to protect our rights in our proprietary technology, processes, designs, content and other intellectual property to the extent such protection is sought or secured at all. We also depend on trade secret protection through, among other things, confidentiality agreements and/or invention assignment agreements with our employees, licensees and others, as well as through license agreements with our licensees and other partners. We may not have agreements containing adequate protective provisions in every case, and the contractual provisions that are in place may not provide us with adequate protection in all circumstances. In addition, the steps we might otherwise take may not be adequate to protect against infringement and misappropriation of our intellectual property by third parties. As an example, we may be unable to secure patent or other intellectual property rights broad or strong enough to protect the underlying proprietary technology.
    
Intellectual property laws afford us only limited protection. The duration of the protection afforded to our intellectual property depends on the type of property in question, the laws and regulations of the relevant jurisdiction and the terms of our license agreements with others. A third party may be able to develop similar or superior technology, processes, content or other intellectual property independently. In addition, monitoring the unauthorized use of our intellectual property, including our copyrights, trademarks, service marks and patents, is difficult. Third parties may register marks that are confusingly similar to the trademarks or services marks that we have used in the United States and our failure to monitor foreign registrations or mark usage may impact our rights in certain trademarks or services marks. Judicial decisions, legislation, and other patent and intellectual property reform efforts could also undermine the validity, scope, and enforceability of our patent and intellectual property holdings. The unauthorized reproduction or misappropriation of our intellectual property rights could enable third parties to benefit from our technology without paying us for it, diminish the value of our brands, competitive advantages or goodwill and result in decreased sales. If this occurs, our business and prospects would be materially and adversely affected.

In addition, other parties may assert infringement claims against us or claim that we have violated a patent or infringed a copyright, trademark or other proprietary right belonging to them, whether on our own or by virtue of our use of certain third-party technology. If we are subject to claims of infringement or are infringing the rights of third parties, we may not be able to obtain licenses to use those rights on commercially reasonable terms, if at all. In that event, we might need to undertake substantial reengineering to continue our online offerings. Any effort to undertake such reengineering might not be successful, resulting in a failure to continue to provide our services or sell our products. Furthermore, a party making such a claim could secure a judgment that requires us to pay substantial damages. An injunction or other court order could prevent us from operating products or our business.

Furthermore, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States. In addition, we have not obtained copyright and trademark protection for all of our proprietary technology, processes, content and brands in all of the countries where we sell our products or otherwise operate. This could leave us helpless to stop potential infringers or possibly even unable to sell our products or provide our services in certain territories.

Disputes concerning the ownership of our rights to use intellectual property could be costly and time-consuming to litigate, may distract management from other tasks of operating the business and may result in our loss of significant rights and the loss of our ability to operate our business. Litigation has been and may continue to be necessary to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others.

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System disruptions, failures, or breaches in of our systems or our third-party service providers, including those resulting from cyber-attacks, security vulnerabilities, defects or errors, natural disasters and acts of terrorism, could harm our business.

The continuing, uninterrupted and secure performance of our computer systems is critical to our success. While we continue to expand our focus on this issue and are taking safeguarding measures, we are vulnerable to the increasing risk of cyber-attacks and other security incidents, such as computer viruses, denial of service attacks, phishing attacks, electronic break-ins and similar disruptions. Because the techniques used in cyber-attacks are becoming more sophisticated in ways that avoid detection, we or our service providers may not be able to anticipate, prevent, identify or adequately remediate such incidents. In addition, third parties may attempt to fraudulently induce employees, users, or our third-party service providers to disclose information in order to gain access to our data. A cyber-attack or other security incident involving our or our service providers’ systems may result in unauthorized access, loss, or other compromise to, among other things, our data, including trade secrets, our customers’ data, billing data such as credit or debit card information, and any other data that is confidential or subject to applicable domestic or foreign privacy or security laws or regulations. If we suffer a cyber-attack or other security incident due to third-party or employee conduct, we could be subject to lawsuits, regulatory investigations, increased costs associated with regulatory compliance and systems remediation, investigations and fines by payment card companies, harm to our brand and reputation, disruption in our ability to provide our services, any of which could reduce revenue, increase costs, and materially harm our business and results of operations. Although we carry general liability insurance, our insurance may not cover any claims by dissatisfied advertisers or customers and may not be adequate to indemnify us for any costs or liability that may be imposed on us as a result of any system disruptions, failures, cyber-attacks, security breaches or other compromise or to our ability to provide various services to our customers and users.

Our business operations are vulnerable to damage or interruption from power losses, telecommunications failures, terrorist attacks, acts of war, human errors, break-ins, earthquakes, fires, floods, and similar events. Any of these events could have a material adverse impact on our business, results of operations, financial condition, data and reputation, and our insurance coverage may be insufficient to compensate us for losses that may occur. In addition, acts of terrorism could cause disruptions in our business or the economy as a whole. Our principal executive offices are located in New York City, a region that has experienced acts of terrorism in the past. Our servers may also be vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with our computer systems, which could lead to interruptions, delays, loss of critical data or the unauthorized disclosure of confidential customer data. Although we have disaster recovery capabilities, we cannot assure you that we will not suffer from business interruption as a result of any such events, and any such event could also result in large expenditures necessary to repair or replace such networks or information systems or to protect them from similar events in the future. As we rely heavily on our servers, computer and communications systems and the Internet to conduct our business and provide high-quality service to our customers, such disruptions could negatively impact our ability to run our business, result in loss of existing or potential customers and increased maintenance costs, which would adversely affect our results of operations and financial condition.

Any of these events could have a material adverse impact on our business, results of operations, financial condition, data and reputation, and our insurance coverage may be insufficient to compensate us for losses that may occur.

Privacy concerns relating to our technology could damage our reputation and deter current and potential users from using our products and services.

We currently face a myriad of U.S. federal and state statutory and regulatory rules regarding the collection, use, transfer, and retention of personal information and other data privacy and security issues. These laws and regulations continue to be in a state of flux and are expanding. In addition, because our services are accessible worldwide, certain foreign jurisdictions may claim that we are required to comply with their laws, even if we don’t have a local entity, employees or infrastructure. In general, foreign data protection, privacy, and other laws and regulations are more restrictive than those in the United States. As in the U.S., the substance and applicability of such laws in Europe and other foreign jurisdictions are subject to continued development and interpretation by agencies and courts. For example, the European Union and many countries within the European Union have adopted and are developing data privacy protection and security directives relating to the collection, use, storage and transfer of data that are more stringent than in the United States. In addition, the application, interpretation, and enforcement of these laws and regulations are often uncertain, particularly in our rapidly evolving industry, and may be interpreted and applied inconsistently from country to country and inconsistently with our current policies and practices.

The cost of compliance with any applicable laws could be material, and we may not be able to comply with them in a timely or cost-effective manner, if at all. Compliance with any applicable laws could also delay or impede the development of new products or services, result in negative publicity and damage to our brand an reputation, increase our operating costs, require significant management time and attention, or subject us to inquiries or investigations, claims or other remedies, including fines or demands that we modify or cease existing business practices. In addition, changes to existing laws or the passage of new laws

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could create uncertainty in the marketplace that could reduce demand for our services or increase the cost of doing business as a result of litigation costs or increased service delivery costs or otherwise have a material adverse effect on our business, results of operations and financial condition.

In addition, privacy concerns in general may cause visitors to avoid online sites like ours that collect and use information, for purposes such as behavioral targeted advertising, and even the perception of privacy or security concerns, whether or not valid, may inhibit market acceptance of our services. In addition, if our privacy practices are deemed unacceptable by watchdog groups or privacy advocates, such groups may attempt to harm our business by blocking access to our sites or disparaging our reputation and our business and may have a material effect on our results of operations and financial condition. We may also be subject to claims of liability or responsibility for the actions of third parties with whom we interact or upon whom we rely in relation to various services, including but not limited to vendors and business partners. These third parties may be vulnerable to privacy violations, and threats, such as computer hacking, cyber-terrorism or other unauthorized attempts to access, modify or delete our or our customers' information or business assets that they service or maintain on our behalf. The foregoing could have a material effect on our business, results of operations, and financial condition.

We are subject to payments-related risks.

We accept payments using a variety of methods, including credit card, debit card, credit accounts (including promotional financing), gift cards, direct debit from a customer’s bank account, consumer invoicing, physical bank check, and payment upon delivery. As we offer new payment options to our customers, we may become subject to additional regulations and compliance requirements (including obligations to implement enhanced authentication processes that could result in significant costs and reduce the ease of use of our payments products), as well as fraud. If we were found to be in violation of applicable laws or regulations, we could be subject to additional requirements and civil and criminal penalties, or forced to cease providing certain services. For certain payment methods, including credit and debit cards, we pay interchange and other fees, which may increase over time and raise our operating costs and lower profitability. We rely on third parties to provide certain payment methods and payment processing services, including the processing of credit cards, debit cards, electronic checks, and promotional financing. In each case, it could disrupt our business if these companies become unwilling or unable to provide these services to us.

We are also subject to payment card association operating rules, including data security rules, certification requirements, and rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. If we fail to comply with these rules or requirements, or if our data security systems are breached or compromised, we may be liable for card issuing banks’ costs, subject to fines and higher transaction fees, and lose our ability to accept credit and debit card payments from our customers, process electronic funds transfers, or facilitate other types of online payments, and our business, our reputation, our brand name, and our results of operations could be adversely affected.

We may rely on third-party license agreements for technology related to our products and services, and the failure to secure such agreements could delay or prevent us from being able to commercialize our products and services.

We might need to license third-party software to enhance our products and services and meet evolving customer requirements. These licenses may not continue to be available on commercially reasonable terms or at all. Some of this technology could be difficult to replace once integrated. The loss of, or inability to obtain, these licenses could result in delays or reductions of our applications until we identify, license and integrate or develop equivalent software, and new licenses could require us to pay higher royalties. If we are unable to successfully license and integrate third-party technology, we could experience a reduction in functionality and/or errors or failures of our products or services, which may reduce demand for our products and services. Third-party licenses may expose us to increased risks, including risks associated with the integration of new technology, the impact of new technology integration on our existing technology, open source software disclosure risks, the diversion of resources from the development of our own proprietary technology, and our inability to generate revenue from new technology sufficient to offset associated acquisition and maintenance costs.

We depend on our management team. Loss of any key member of that team may prevent us from executing our business plan in a timely manner.

Our success depends largely upon our ability to attract and retain executive officers and other key personnel, including senior creative, technical, operational and finance executives. If our management team, including any new-hires, fails to work together effectively and to execute our plans and strategies on a timely basis, or if we fail to successfully integrate newly hired executives or senior managers, or if we fail to attract, integrate or retain key personnel or other highly qualified employees, our business could be harmed. We cannot assure you that if we were to experience a high degree of management change in the future, we would be able to replace departing members of management in a timely manner or successfully integrate newly-hired executives, managers or highly qualified personnel.

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Our business could be adversely affected if we are not able to integrate any future acquisitions successfully or operate successfully under our strategic partnerships.

In the past, we have completed numerous acquisitions and investments in other companies, as well as strategic partnerships. In the future, we may acquire, or invest in, complementary companies, products or technologies or enter into new strategic partnerships. Acquisitions, investments and partnerships involve numerous risks, including:

difficulties in integrating operations, technologies, products and personnel;
diversion of financial and management resources from existing operations;
operating under commercial agreements entered into by an acquisition target;
risks of entering new markets;
potential loss of key employees; and
inability to generate sufficient revenue to offset acquisition or investment costs.

To pay for an acquisition or to enter into a strategic alliance, we might use equity securities, debt, cash, or a combination of the foregoing. If we use equity securities, our existing stockholders may experience dilution. Any such acquisitions or strategic alliances may require us to obtain additional equity or debt financing, which may not be available on commercially acceptable terms, if at all.

Impairment charges related to assets may have a material adverse effect on our financial results.

We have several investments and intangible assets that, depending upon competitive and economic conditions, could become impaired, which could have a material adverse effect on our financial results. In the past we have recorded charges against our earnings for amortization of intangibles with a definite life, as well as impairment charges on certain intangible assets with indefinite lives and investments, and we may be required to take other charges, including write-downs of significant amounts, in the future. Our results of operations and financial condition could be materially and adversely affected by such charges.

Our effective tax rate is subject to significant fluctuations, which could have a material adverse effect on our financial results.

Our effective tax rate could fluctuate significantly and could be adversely affected to the extent earnings are lower than anticipated in states where we have lower statutory tax rates and higher than anticipated in states where we have higher statutory tax rates. Our effective tax rate could also fluctuate due to changes in the valuation of our deferred tax assets or liabilities or changes in tax laws, regulations, accounting principles or interpretations thereof. These fluctuations in our effective tax rate, including the impact of adverse outcomes from tax audits by domestic and foreign tax authorities, could have a material adverse effect on our business, results of operations and financial condition.

We have identified a material weakness in our internal control over financial reporting which could, if not remediated, adversely impact the reliability of our financial reports.

We recently identified a material weakness in our internal control over financial reporting, and our business and stock price may be adversely affected if our internal control over financial reporting is not effective. Under Section 404 of the Sarbanes‑Oxley Act of 2002 and rules promulgated by the SEC, we are required to conduct a comprehensive evaluation of our internal control over financial reporting. To complete this evaluation, we are required to document and test our internal control over financial reporting; management is required to assess and issue a report concerning our internal control over financial reporting; and our independent registered public accounting firm is required to attest to the effectiveness of our internal control over financial reporting. Our internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Even effective internal control over financial reporting can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements.

In the course of the external audit of the Consolidated Financial Statements for the year ended December 31, 2016, we identified a material weakness in our controls over national online advertising revenue recognition. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. A more complete description of the recently identified errors and the resulting material weakness is included in “Part II. Item 9A. Controls and Procedures” in this annual report on Form 10‑K. Although we are evaluating certain measures in order to remediate this material weakness, we can provide no assurance that our remediation efforts will be effective or that additional material weaknesses in our internal control over financial reporting will not be identified in the future.


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The existence of a material weakness could result in errors in our financial statements that could result in a restatement of financial statements, which could cause us to fail to meet our reporting obligations, lead to a loss of investor confidence and have a negative impact on the trading price of our common stock.

We could face additional regulatory requirements, tax liabilities and other risks related to our continuing operations in China and Hong Kong, and other markets outside the United States where we may commence operations.

We have continuing operations in China and Hong Kong. There are risks related to doing business in international markets in general, such as:

difficulties in staffing and managing our current and future foreign operations;
challenges caused by language, cultural differences and by doing business with foreign agencies and governments;
changes in regulatory requirements and uncertainty regarding liability for services and content, including data privacy and cybersecurity issues;
tariffs and other trade barriers;
fluctuations in currency exchange rates and foreign exchange controls
adverse tax consequences;
stringent local labor laws and regulations; and
political or social unrest or economic instability.

One or more of these factors could harm our current or future international operations.

In addition, compliance with complex foreign and U.S. laws and regulations that apply to our international operations increases our cost of doing business and could interfere with our ability to offer, or prevent us from offering, our products and services to one or more countries or expose us or our employees to fines and penalties. These numerous and sometimes conflicting laws and regulations include import and export requirements, content requirements, trade restrictions, tax laws, sanctions, internal and disclosure control rules, data privacy and security requirements, restrictions on the collection and use of consumer data, labor relations laws, U.S. laws such as the Foreign Corrupt Practices Act, and local laws prohibiting corrupt payments to governmental officials. Violations of these laws and regulations could result in fines, criminal sanctions against us, our officers, or our employees, prohibitions on the conduct of our business, and damage to our reputation. Although we have implemented policies and procedures designed to address these laws, we cannot assure you that our employees, contractors, or agents will not violate our policies or any applicable laws or regulations. Any such violations could include prohibitions on our ability to offer our products and services to one or more countries, and could also materially damage our reputation, our brand, our ability to expand our international operations, our ability to attract and retain employees, our business, and our results of operations, and could expose us to lawsuits and regulatory investigations. In addition, we cannot predict whether duties, taxes, or other similar restrictions will be imposed by the U.S., Asia, or other countries in the future, or what effect any of these actions would have, if any, on our business, results of operations, and financial condition. Changes in regulatory, geopolitical, social, economic, or monetary policies and other factors, including those which may result from the outcome of the 2016 U.S. presidential election, if any, may have a material adverse effect on our business in the future, or may require us to significantly modify our current business practices.

In addition to the risks associated with our continuing operations in China and Hong Kong, on December 30, 2014, we completed the disposition of our Ijie operations; while we experienced cost savings as a result of this disposition, any benefits we receive may be offset by contingent liabilities or additional tax obligations associated with this disposition. For example, if third parties seek to hold us responsible for the liabilities of the Ijie operations, or if any disputes arise between us and the purchasers of the Ijie operations, our business could be harmed.

It is possible that we may not be able to obtain additional financing necessary to execute our business strategy.

We currently believe that our current cash and cash equivalents will be sufficient to fund our working capital and capital expenditure requirements for the foreseeable future. Our ability to meet our obligations in the ordinary course of business is dependent upon our ability to maintain profitable operations and/or raise additional financing through public or private equity or debt financings, or other arrangements with corporate sources or other sources of financing to fund operations. However, there is no assurance that we will maintain profitable operations or that additional funding, if required, will be available to us in amounts or on terms acceptable to us.

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Risks Related to Our Common Stock

Our stock price has been, and will likely continue to be, highly volatile and subject to significant price and volume fluctuations.

In the recent past, the equity trading markets have experienced, and may continue to experience, significant periods of volatility, resulting in highly variable and unpredictable pricing of equity securities. The market price of our common stock could change in ways that may or may not be related to our business, our industry or our operating performance and financial condition. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. Our common stock has experienced significant volume and price fluctuations in the past. Our current market price and valuation may not be sustainable. If the market price of our common stock declines significantly, you may be unable to resell your common stock at or above your purchase price. In the past, companies that have experienced volatility in the market price of their stock have been the object of securities class action litigation. If we were to become the subject of securities class action litigation, we could face substantial costs and be negatively affected by diversion of our management’s attention and resources. We cannot assure you that the market price of our common stock will not fluctuate or decline significantly, including a decline below your purchase price, in the future. In addition, the stock markets in general can experience considerable price and volume fluctuations, which could result in substantial losses for our stockholders.

Future sales of shares of our common stock, or the perception that these shares might be sold, could adversely affect the market price of our common stock.

In the past, we have filed shelf registration statements with the SEC covering re-sales of shares of our common stock by institutional investors who purchased our shares in private placements. Certain future holders of our common stock may be granted rights to participate in, or require us to file, registration statements for re-sales of common stock, and we may complete public offerings of shares or issue shares pursuant to acquisitions that are freely tradable.

We cannot predict the effect, if any, that future sales of shares of our common stock into the market, or the availability of shares of common stock for future sale, will have on the market price of our common stock. Sales of substantial amounts of common stock (including shares issued upon the exercise of outstanding stock options or vesting of restricted stock), or the perception that such sales could occur, may materially and adversely affect prevailing market prices for our common stock.

Provisions in our certificate of incorporation, bylaws and Delaware law could deter takeover attempts, which could adversely affect the price of our common stock.

Provisions of our certificate of incorporation, bylaws and Delaware law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. We may issue shares of preferred stock in the future without stockholder approval and upon such terms as our board of directors may determine. Our issuance of this preferred stock could have the effect of making it more difficult for a third party to acquire or of discouraging a third party from acquiring, a majority of our outstanding stock and potentially prevent the payment of a premium to stockholders in an acquisition. In addition, our certificate of incorporation includes provisions giving the board the exclusive right to fill all board vacancies, providing for a classified board of directors and permitting removal of directors only for cause and with a super-majority vote of the stockholders.

These provisions also could discourage proxy contests and make it more difficult for you and other stockholders to elect directors and take other corporate actions. As a result, these provisions could make it more difficult for a third party to acquire us, even if doing so would benefit our stockholders, and may limit the price that investors are willing to pay in the future for shares of our common stock.

As a Delaware corporation, we are also subject to certain Delaware anti-takeover provisions. Under Delaware law, a corporation may not engage in a business combination with any holder of 15% or more of its outstanding voting stock unless the holder has held the stock for three years or, among other things, the board of directors has approved the transaction. Our board of directors could rely on Delaware law to prevent or delay an acquisition of us. This could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company or may otherwise discourage a potential acquirer from attempting to obtain control from us, either of which in turn could have a material adverse effect on the market price of our common stock.

Item 1B. Unresolved Staff Comments

Not applicable.

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Item 2. Properties

The following table sets forth the location, primary use and size of our properties as of December 31, 2016, all of which are leased. The leases expire at various times through 2022, subject to renewal options. During 2017 we plan to expand our leased office space in Austin, Texas and Guangzhou, China by approximately 8,300 square feet and 3,400 square feet, respectively. We believe that our existing facilities and planned expansions are suitable for our current needs.
Location
 
Use
 
Approximate Square Footage
 
Lease Expiration
New York, New York
 
Principal executive office
 
64,000

 
August 2022
Omaha, Nebraska
 
Local sales and operations
 
16,000

 
January 2021
Guangzhou, China
 
Technology development
 
10,100

 
April 2021
Austin, Texas
 
Information technology
 
9,000

 
June 2018
South Norwalk, Connecticut
 
Local sales and operations
 
4,400

 
February 2017
Los Angeles, California
 
National sales
 
760

 
January 2018
Wanchai, Hong Kong
 
Technology management
 
350

 
January 2018
Chicago, Illinois
 
National sales
 
140

 
February 2017

Item 3. Legal Proceedings

We are engaged in legal actions arising in the ordinary course of business and do not believe that the ultimate outcome of these actions will have a material effect on our results of operations, financial position or cash flows.

Item 4. Mine Safety Disclosures

None.


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Table of Contents         

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Price Range of Common Stock

Our common stock currently trades under the symbol “XOXO” on the New York Stock Exchange. The table sets forth, for the periods indicated, the high and low sales prices per share of our common stock as reported on the New York Stock Exchange.
 
 
High
 
Low
2015:
 
  

 
  

First quarter
 
$
18.37

 
$
14.58

Second quarter
 
$
17.91

 
$
15.83

Third quarter
 
$
16.68

 
$
13.55

Fourth quarter
 
$
17.21

 
$
13.82

2016:
 
  

 
  

First quarter
 
$
16.36

 
$
13.64

Second quarter
 
$
18.18

 
$
15.31

Third quarter
 
$
19.57

 
$
17.00

Fourth quarter
 
$
20.89

 
$
15.76


On December 31, 2016, the last reported sales price of our common stock on the New York Stock Exchange was $19.45. On March 1, 2017, the last reported sales price of our common stock on the New York Stock Exchange was $16.50.

Holders

As of March 1, 2017, there were approximately 216 holders of record of our common stock. This does not include the number of persons whose stock is in nominee or “street name” accounts through brokers.

Dividend Policy

We have never declared or paid any cash dividends on our capital stock. The payment of cash dividends in the future will be at the discretion of our board of directors.

Issuer Purchases of Equity Securities
Period
 
Total Number of Shares Purchased (a)
 
Average Price Paid per Share (a)
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (b)
 
Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (c)
October 1 to October 31, 2016
 
2,907

 
$
18.53

 

 
$
27,068,320

November 1 to November 30, 2016
 
14,909

 
$
18.34

 
63,117

 
$
25,996,002

December 1 to December 31, 2016
 
3,081

 
$
19.08

 
21,790

 
$
25,603,555

Total
 
20,897

 


 
84,907

 
 
_____________

(a)
The terms of some awards granted under certain of our stock incentive plans allow participants to surrender or deliver shares of XO Group's common stock to us to pay for the exercise price of those awards or to satisfy tax withholding obligations related to the exercise or vesting of those awards. The shares listed in the table above represent the surrender or delivery of shares to us in connection with such exercise price payments or tax withholding obligations. For purposes of this table, the “Average price paid per share” is determined by reference to the closing sales price per share of XO Group's common stock on the New York Stock Exchange on the date of such surrender or delivery (or on the last date preceding such surrender or delivery for which such reported price exists).


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Table of Contents         

(b), (c)
On April 10, 2013, we announced that our Board of Directors had authorized the repurchase of up to $20.0 million of our common stock from time to time in the open market or in privately negotiated transactions. On May 26, 2016, our Board of Directors authorized an additional $20.0 million repurchase of our common stock from time to time on the open market or in privately negotiated transactions. The repurchase program may be suspended or discontinued at any time, but it does not have an expiration date. As of December 31, 2016, we have repurchased a total of 864,642 shares of our common stock under this program for $14.4 million.

Stock Performance Graph

The graph below compares the yearly change in cumulative total stockholder return on XO Group’s common stock with the cumulative total return of (1) the NYSE Composite Index, (2) the Russell 2000 Index, and (3) the RDG Internet Composite Index for the five-year period ending on December 31, 2016. Historical stock price performance should not be relied upon as an indication of future stock price performance, our 2016 fiscal year end.


a10kchart.jpg


Notwithstanding anything to the contrary set forth in any of our previous or future filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, that might incorporate by reference this Annual Report on Form 10-K or future filings made by XO Group under those statutes, the Stock Performance Graph is not deemed filed with the Securities and Exchange Commission, is not deemed soliciting material and shall not be deemed incorporated by reference into any of those prior filings or into any future filings made by XO Group under those statutes, except to the extent that XO Group specifically incorporates such information by reference into a previous or future filing, or specifically requests that such information be treated as soliciting material, in each case under those statutes.

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Table of Contents         

Item 6. Selected Financial Data

The selected statements of operations data for the years ended December 31, 2016, 2015 and 2014 and the selected balance sheet data as of December 31, 2016 and December 31, 2015 have been derived from our audited financial statements included elsewhere herein. The selected statements of operations data for the years ended December 31, 2013 and 2012 and the selected balance sheet data as of December 31, 2014, 2013 and 2012 have been derived from our audited financial statements not included herein. You should read these selected financial data in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations," our financial statements and the notes to those statements included elsewhere herein.
 
 
Year Ended December 31,
  
 
2016
 
2015
 
2014
 
2013
 
2012
  
 
(In Thousands, Except for per Share Data)
Consolidated Statements of Operations Data:
 
  

 
  

 
  

 
  

 
  

Net revenue:
 
  

 
  

 
  

 
  

 
  

Online advertising
 
$
109,184

 
$
101,705

 
$
89,549

 
$
81,661

 
$
76,475

Transactions
 
22,819

 
14,700

 
10,370

 
7,926

 
6,231

Merchandise
 

 
878

 
15,908

 
18,406

 
21,359

Publishing and other
 
20,113

 
24,361

 
27,837

 
25,821

 
25,066

Total net revenues
 
152,116

 
141,644

 
143,664

 
133,814

 
129,131

Gross profit
 
142,362

 
131,257

 
122,469

 
111,413

 
106,529

Operating expenses(a)
 
124,496

 
114,021

 
113,572

 
98,906

 
92,280

Income from operations(a)
 
17,866

 
17,236

 
8,897

 
12,507

 
14,249

Net income(b);(c)
 
12,120

 
5,464

 
462

 
5,794

 
8,649

Plus: net income attributable to noncontrolling interest
 

 

 

 

 
65

Net income attributable to XO Group Inc.
 
$
12,120

 
$
5,464

 
$
462

 
$
5,794

 
$
8,714

Net income per share attributable to XO Group Inc. common stockholders:
 
 
 
 
 
 
 
 
 
 
Basic
 
$
0.48

 
$
0.22

 
$
0.02

 
$
0.24

 
$
0.35

Diluted
 
$
0.47

 
$
0.21

 
$
0.02

 
$
0.23

 
$
0.35

Weighted average number of shares used in calculating earnings per share
 
 
 
 
 
 
 
 
 
 
Basic(d)
 
25,314

 
25,164

 
25,210

 
24,620

 
24,649

Diluted(d)
 
25,640

 
25,530

 
25,589

 
25,596

 
25,218

Consolidated Percentage of Total Net Revenue Data:
 
 
 
 
 
 
 
 
 
 
Net revenue:
 
 
 
 
 
 
 
 
 
 
Online advertising
 
71.8
%
 
71.8
%
 
62.3
%
 
61.0
%
 
59.3
%
Transactions
 
15.0
%
 
10.4
%
 
7.2
%
 
5.9
%
 
4.8
%
Merchandise
 

 
0.6
%
 
11.1
%
 
13.8
%
 
16.5
%
Publishing and other
 
13.2
%
 
17.2
%
 
19.4
%
 
19.3
%
 
19.4
%
Gross margin
 
93.6
%
 
92.7
%
 
85.2
%
 
83.3
%
 
82.5
%
Operating expenses
 
81.8
%
 
80.5
%
 
79.1
%
 
73.9
%
 
71.5
%
Operating margin
 
11.7
%
 
12.2
%
 
6.2
%
 
9.3
%
 
11.0
%
Net income
 
8.0
%
 
3.9
%
 
0.3
%
 
4.3
%
 
6.7
%
Net income attributable to XO Group Inc.
 
8.0
%
 
3.9
%
 
0.3
%
 
4.3
%
 
6.7
%

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Table of Contents         

 
 
As of December 31,
  
 
2016
 
2015
 
2014
 
2013
 
2012
  
 
(In Thousands)
Balance Sheet Data:
 
  

 
  

 
  

 
  

 
  

Cash, cash equivalents and investments(d)
 
$
105,703

 
$
88,509

 
$
89,955

 
$
90,697

 
$
77,407

Working capital(d)
 
100,701

 
83,522

 
84,789

 
86,875

 
74,297

Total assets(d)
 
210,186

 
196,741

 
193,582

 
193,242

 
183,354

Total equity(d)
 
174,550

 
159,467

 
157,926

 
155,890

 
144,507


___________

(a)
Impairment charges of $0.3 million and $0.8 million were recorded during the years ended December 31, 2015 and 2014 for certain assets. The amount of impairment charges recorded for the year ended December 31, 2016 was immaterial.
(b)
In 2015, amounts include impairment charge of $4.0 million of cost method investments. In 2014 and 2013, amounts include executive separation and other severance charges.
(c)
Includes $3.2 million of a loss on disposition of our Ijie operations during 2014, including $1.4 million of tax expense.
(d)
Reference is made to Note 9: Capital Stock in the Notes to the Consolidated Financial Statements on this Form 10-K, for further details addressing the stock repurchases made during the years ended December 31, 2016, 2015, and 2014.



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Table of Contents         

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis in conjunction with our Consolidated Financial Statements and related notes included elsewhere in this report. This discussion contains forward-looking statements relating to future events and the future performance of XO Group based on our current expectations, assumptions, estimates and projections about us and our industry. These forward-looking statements involve risks and uncertainties. Actual results or events could differ materially from those anticipated in such forward-looking statements as a result of certain factors, as more fully described in this section and elsewhere in this report. We undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

Executive Overview

During 2016, we continued to make investments in our company that led to higher audience engagement with our brands, our partners, and our local wedding professional marketplace. These investments contributed to the overall financial performance of our Company and continued to lay the foundation in what we see as our biggest area of opportunity ahead, potential acceleration in our local online business revenue growth due to the evolution of our marketplace.

During the year-ended 2016:

Total revenue increased 7%, or $10.5 million, year-over-year, resulting in $152.1 million of revenue.

Transactions revenue grew
55%, or $8.1 million, year-over-year. This increase primarily resulted from product enhancements from recent years that, in 2016, drove more traffic and deeper user adoption of our guest and commerce tools. In addition, following completion of our acquisition of GigMasters in the fourth quarter of 2015, revenue from bookings through GigMasters contributed approximately $1.2 million of our transactions revenue growth in 2016.

Total online advertising revenue increased 7%, or $7.5 million, year-over-year. National online advertising revenue increased 9% due to continued emphasis on custom and brand integrated content advertising and performance of display advertisements on The Knot and The Bump. Local online advertising revenue increased 7%, or $4.3 million. Subscriptions on GigMasters contributed $2.5 million of incremental revenue to local online advertising in 2016. Local online advertising growth slowed as we implemented a new order management system in the first quarter of 2016 and the local sales organization faced productivity challenges during the first half of the year.

Our publishing business continued to face the declines that are also being experienced across the industry. Our publishing and other revenue declined 17%, or $4.2 million, year-over-year. In 2016, we did not have any Merchandise revenue, resulting in revenue decline of $0.9 million year-over-year.
    
Operating expenses grew 9% as we continued to invest in key initiatives to enhance our marketplace to create the best user experience for our couples. In addition, we invested in marketing support to increase brand awareness, user engagement, and guest traffic to our transactions products and advertising partners. Headcount increased 10% during 2016 as investments, predominantly in sales and marketing and product and content, continued.
        
Our business continued to be profitable, delivering an Adjusted EBITDA margin of 21% and free cash flow of $23.1 million. We ended the year with a solid cash balance of $105.7 million, after we repurchased shares totaling $4.0 million during the year.

Performance Indicators

We evaluate our operating and financial performance using various performance indicators. Our management relies on the key performance indicators set forth below to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts and assess operational efficiencies. We discuss revenue and gross margin under Results of Operations, and cash flow results under Liquidity and Capital Resources. Other measures of our performance, including Adjusted EBITDA, Adjusted net income and Free cash flow are defined and discussed under Non-GAAP Financial Measures below.


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Table of Contents         

 
 
Years Ended December 31,
 
 
2016
 
2015
 
2014
 
 
(Dollar Amounts in Thousands)
Total net revenue
$
152,116

 
$
141,644

 
$
143,664

Total gross margin(a)
93.6
%
 
92.7
%
 
85.2
%
Net Income
$
12,120

 
$
5,464

 
$
462

Adjusted EBITDA(b)
$
32,597

 
$
29,472

 
$
24,602

Adjusted net income(b)
$
10,697

 
$
10,601

 
$
6,256

Free cash flow(b)
$
23,093

 
$
16,999

 
$
14,947

Cash and cash equivalents at December 31
$
105,703

 
$
88,509

 
$
89,955

Total full-time employees at December 31
727

 
660

 
641

(a) The increase in total gross margin from 2014 to 2015 was driven by our decision to exit our lower gross margin merchandising operations.
(b) See "Non-GAAP Financial Measures" section for reconciliation to Adjusted EBITDA, Adjusted net income, and Free cash flow.






23

Table of Contents         


Results of Operations

Year Ended December 31, 2016 Compared to Year Ended December 31, 2015

The following table summarizes results of operations for 2016 compared to 2015:

 
 
Year Ended December 31,
  
 
2016
 
2015
 
Increase/(Decrease)
  
 
Amount
 
% of Net
Revenue
 
Amount
 
% of Net
Revenue
 
Amount
 
%
  
 
(Dollars in Thousands, Except for per Share Data)
Net revenue
 
$
152,116

 
100.0
%
 
$
141,644

 
100.0
%
 
$
10,472

 
7.4
%
Cost of revenue
 
9,754

 
6.4

 
10,387

 
7.3

 
(633
)
 
(6.1
)
Gross profit
 
142,362

 
93.6

 
131,257

 
92.7

 
11,105

 
8.5

Operating expenses
 
124,496

 
81.8

 
114,021

 
80.5

 
10,475

 
9.2

Income from operations
 
17,866

 
11.7

 
17,236

 
12.2

 
630

 
3.7

Gain (loss) in equity interests
 
(328
)
 
(0.2
)
 
520

 
0.3

 
(848
)
 
(163.1
)
Interest and other expense, net
 
146

 
0.1

 
(4,023
)
 
(2.8
)
 
4,169

 
(103.6
)
Income before income taxes
 
17,684

 
11.6

 
13,733

 
9.7

 
3,951

 
28.8

Income tax expense
 
5,564

 
3.7

 
8,269

 
5.8

 
(2,705
)
 
(32.7
)
Net income
 
$
12,120

 
8.0
%
 
$
5,464

 
3.9
%
 
$
6,656

 
121.8
%
Net income per share:
 
  

 


 
  

 
  

 
  

 
  

Basic
 
$
0.48

 


 
$
0.22

 
 
 
$
0.26

 
118.2
%
Diluted
 
$
0.47

 
 
 
$
0.21

 
 
 
$
0.26

 
123.8
%

Net Revenue

The following table sets forth revenue by category for the year ended December 31, 2016 compared to the year ended December 31, 2015, the percentage increase or decrease between those periods, and the percentage of total net revenue that each category represented for those periods:

 
 
Year Ended December 31,
  
 
Net Revenue
 
Percentage
Increase/
(Decrease)
 
Percentage of
Total Net Revenue
  
 
2016
 
2015
 
2016
 
2015
  
 
(In Thousands)
 
 
 
 
 
 
National online advertising
 
$
38,945

 
$
35,764

 
8.9
%
 
25.6
%
 
25.2
%
Local online advertising
 
70,239

 
65,941

 
6.5

 
46.2

 
46.6

Total online advertising
 
109,184

 
101,705

 
7.4

 
71.8

 
71.8

Transactions
 
22,819

 
14,700

 
55.2

 
15.0

 
10.4

Merchandise
 

 
878

 
(100.0
)
 

 
0.6

Publishing and other
 
20,113

 
24,361

 
(17.4
)
 
13.2

 
17.2

Total net revenue
 
$
152,116

 
$
141,644

 
7.4
%
 
100.0
%
 
100.0
%

Online advertising — Revenue from national online advertising increased 9%. Such increase was primarily due to an increase in custom and display advertising. The increase in display advertising was driven by a greater number of impressions sold, offset by declines in CPMs. National online advertising revenue increased 7% on TheKnot.com, 15% on TheBump.com and revenue on TheNest.com, which accounts for less than 1% of our total revenue, decreased 6% compared to 2015.

Local online advertising revenue increased 7%. Such increase was primarily due to the acquisition and subsequent growth in revenue from GigMasters.com resulting from higher membership fees and greater renewal rates during 2016 compared to 2015.

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Table of Contents         

In addition, revenue on The Knot grew, but at a smaller percentage due to the trailing revenue impact of declines in sales resulting from sales team productivity issues encountered early in the year. On a trailing twelve month basis, TheKnot.com ended full year 2016 with 23,662 paying vendors (down 3% from prior year), with an average spend of $2,804 (up 7% from prior year) and a retention rate of 68% (down from a 74% retention rate at December 31, 2015).

Transactions — Revenue from transactions increased 55%, primarily due to an increase in couple and guest purchase conversions with our retail partners. During 2016, increases in purchase conversions were driven by increased traffic and improved conversion for our transactional partners resulting from product enhancements, while average order value and take rate remained stable. Additionally, transactions revenue includes commission revenue generated via our GigMasters brand. Throughout 2016, increased bookings and conversion rates via GigMasters led to higher revenue compared to 2015.

Merchandise — Revenue from merchandising operations decreased 100.0%, due to the exit of our warehouse operations in Redding, California in the first quarter of 2015.

Publishing and other — Revenue from publishing and other decreased 17%, primarily due to a decrease in advertising revenue related to The Knot national and regional publications and The Bump magazines. In June 2015, we discontinued the publication of The Bump print magazine. The last issue of The Bump magazine was distributed in December 2015.

Gross Profit/Gross Margin

The following table presents the components of gross profit and gross margin for the year ended December 31, 2016 compared to the year ended December 31, 2015:

 
 
Year Ended December 31,
  
 
2016
 
2015
 
Increase/(Decrease)
  
 
Gross
Profit
 
Gross
Margin %
 
Gross
Profit
 
Gross
Margin %
 
Gross
Profit
 
%
  
 
(Dollars in Thousands)
Online advertising
(national and local)
 
$
105,520

 
96.6
%
 
$
99,470

 
97.8
%
 
$
6,050

 
6.1
%
Transactions
 
22,819

 
100.0

 
14,700

 
100.0

 
8,119

 
55.2

Merchandise
 

 

 
(3
)
 
(0.3
)
 
3

 
(100.0
)
Publishing and other
 
14,023

 
69.7

 
17,090

 
70.2

 
(3,067
)
 
(17.9
)
Total gross profit
 
$
142,362

 
93.6
%
 
$
131,257

 
92.7
%
 
$
11,105

 
8.5
%

Gross margin improved 1% to 94% in 2016 compared to 93% in 2015. The increase in the total gross margin percentage was primarily due to increases in transactions and online advertising revenue, offset by declines in our lowest margin business, print.

Operating Expenses

Operating expenses increased 9% to $124 million in 2016 compared to $114 million in 2015. This increase was primarily driven by investments made to support our marketplace, attract registry sales and enhance audience development, as well as strengthen our technology infrastructure as our business continues to grow.




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Table of Contents         


The following table presents the components of operating expenses and the percentage of net revenue that each component represented for the year ended December 31, 2016 compared to the year ended December 31, 2015:

 
 
Year Ended December 31,
  
 
Operating Expenses
 
Percentage
Increase/
(Decrease)
 
Percentage of
Total Net Revenue
  
 
2016
 
2015
 
2016
 
2015
  
 
(In Thousands)
 
 
 
 
 
 
Product and content development
 
$
44,668

 
$
40,351

 
10.7
%
 
29.4
%
 
28.5
%
Sales and marketing
 
49,772

 
43,420

 
14.6

 
32.7

 
30.7

General and administrative
 
23,666

 
24,440

 
(3.2
)
 
15.6

 
17.3

Asset impairment charges
 
18

 
266

 
(93.2
)
 

 
0.2

Depreciation and amortization
 
6,372

 
5,544

 
14.9

 
4.1

 
3.8

Total operating expenses
 
$
124,496

 
$
114,021

 
9.2
%
 
81.8
%
 
80.5
%

Product and Content Development — Product and content development expenses primarily consist of salaries, benefits and stock-based compensation for our engineers, product managers, developers and editors. In addition, product and content development expenses include outside services and consulting costs to support new features within the website, as well as costs associated with the maintenance of our website and data servers.

The 2016 increase of 11% was primarily driven by the growth of compensation expense related to the annualized impact of the October 2015 acquisition of GigMasters, as well as additional product and development resources to enhance our marketplace functionality. New tools and features include, but are not limited to, request-to-quote, book-a-tour, closed loop inbox system, and venue price calculator.

Product and content staffing accounted for approximately 64% of the total company's 2016 headcount growth, or 43 employees. We continue to leverage cost efficiencies overseas. The 123 person technology team located in China grew approximately 19% during 2016.

Sales and Marketing — Sales and marketing expenses primarily consist of salaries, benefits, stock-based compensation, travel expense and incentive compensation for our sales and marketing employees. In addition, sales and marketing expenses include branding, consumer marketing and public relations costs.

The 2016 increase of 15% was predominantly driven by an increase in paid media and search engine marketing to enhance and broaden brand awareness, user engagement, and guest traffic to our transactions products and advertising partners. Also contributing to the increase was higher compensation expense related to the annualized impact of the October 2015 GigMasters acquisition, as well as support for our marketplace efforts.

General and Administrative — Our general and administrative expenses primarily consist of salaries, benefits, and stock-based compensation for our executive officers, finance, legal, human resources, and other administrative employees. In addition, general and administrative expenses include outside consulting, legal and accounting services, facilities, and other supporting overhead costs.

The 2016 decrease of 3% was primarily attributable to a decrease in bad debt expense resulting from efficiencies gained through the newly implemented local marketplace operating system. Additionally, collection efforts improved as a result of tightening certain credit monitoring and collections processes. Normalized for the impact of bad debt expense, we estimate general and administrative expenses slightly increased as a result of increased employee headcount to expand the operational support team, offset by decreased professional fee expenses.

Asset impairment charges — During the year ended December 31, 2015, we recorded $0.3 million in impairment charges related to patents. Impairment charges for the year ended December 31, 2016 were immaterial.

Depreciation and Amortization — Depreciation and amortization expenses primarily consist of depreciation on computer equipment, software, capitalized software development costs and amortization of leasehold improvements and purchased intangibles.

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Table of Contents         


The 2016 increase of 15% was primarily attributable to an increase in amortization from intangible assets acquired with the October 2015 acquisition of GigMasters.

Interest and Other (Expense) Income, Net

Interest and other (expense) income for the year ended December 31, 2016 was immaterial. Interest and other (expense) income was $(4.0) million for the year ended December 31, 2015, which included an impairment loss on our equity investment, Touch Media, a company with an interactive in-taxi advertising and media platform with operations in China, of $4.0 million.

Gain (Loss) in Equity Interests

Gain (loss) in equity interests for the years ended December 31, 2016 and December 31, 2015 was $(0.3) million and $0.5 million, respectively. During the year ended December 31, 2016, we recognized $0.3 million of losses from equity method investments. During the year ended December 31, 2015, we recognized a $0.8 million gain associated with our existing investment in GigMasters as part of the 100% acquisition of GigMasters, partially offset by $0.3 million of losses from equity method investments.

Income Tax Expense

The effective tax rate for the year ended December 31, 2016 was 31.5%, compared to 60.2% for the year ended December 31, 2015. The effective tax rate in the current year was favorably impacted by the reversal of certain tax liabilities, primarily resulting from the resolution of an uncertain tax position for a former subsidiary. Additionally the prior year's effective tax rate was negatively impacted by the establishment of certain deferred tax asset valuation allowances. We expect an effective tax rate of approximately 40% on an ongoing basis; however, our effective tax rate may fluctuate significantly based on the mix of our taxable income among states, changes in the valuation of our deferred tax assets or liabilities, and changes in tax laws, regulations, or interpretations thereof.

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Table of Contents         


Year Ended December 31, 2015 Compared to Year Ended December 31, 2014

The following table summarizes results of operations for 2015 compared to 2014:
 
 
Year Ended December 31,
  
 
2015
 
2014
 
Increase/(Decrease)
  
 
Amount
 
% of Net
Revenue
 
Amount
 
% of Net
Revenue
 
Amount
 
%
  
  
(Dollars in Thousands, Except for per Share Data)
Net revenue
 
$
141,644

 
100.0
%
 
$
143,664

 
100.0
%
 
$
(2,020
)
 
(1.4
)%
Cost of revenue
 
10,387

 
7.3

 
21,195

 
14.8

 
(10,808
)
 
(51.0
)
Gross profit
 
131,257

 
92.7

 
122,469

 
85.2

 
8,788

 
7.2

Operating expenses
 
114,021

 
80.5

 
113,572

 
79.0

 
449

 
0.4

Income from operations
 
17,236

 
12.2

 
8,897

 
6.2

 
8,339

 
93.7

Gain/(loss) in equity interest
 
520

 
0.3

 
(232
)
 
(0.2
)
 
752

 
324.1

Interest and other expense, net
 
(4,023
)
 
(2.8
)
 
(1,740
)
 
(1.2
)
 
(2,283
)
 
131.2

Income before income taxes
 
13,733

 
9.7

 
6,925

 
4.8

 
6,808

 
98.3

Income tax expense
 
8,269

 
5.8

 
6,463

 
4.5

 
1,806

 
27.9

Net income
 
$
5,464

 
3.9
%
 
$
462

 
0.3
%
 
$
5,002

 
NM
Net income per share attributable to XO Group Inc. common stockholders:
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
$
0.22

 
 
 
$
0.02

 
 
 
$
0.20

 
NM
Diluted
 
$
0.21

 
 
 
$
0.02

 
 
 
$
0.19

 
NM

Net Revenue

Net revenue decreased to $142 million for the year ended December 31, 2015, from $144 million for the year ended December 31, 2014. The following table sets forth revenue by category for the year ended December 31, 2015 compared to the year ended December 31, 2014, the percentage increase or decrease between those periods, and the percentage of total net revenue that each category represented for those periods:

 
 
Year Ended December 31,
  
 
Net Revenue
 
Percentage Increase/ (Decrease)
 
Percentage of
Total Net Revenue
  
 
2015
 
2014
 
2015
 
2014
  
 
(In Thousands)
 
 
 
 
 
 
National online advertising
 
$
35,764

 
$
30,456

 
17.4
 %
 
25.2
%
 
21.2
%
Local online advertising
 
65,941

 
59,093

 
11.6

 
46.6

 
41.1

Total online advertising
 
101,705

 
89,549

 
13.6

 
71.8

 
62.3

Transactions
 
14,700

 
10,370

 
41.8

 
10.4

 
7.2

Merchandise
 
878

 
15,908

 
(94.5
)
 
0.6

 
11.1

Publishing and other
 
24,361

 
27,837

 
(12.5
)
 
17.2

 
19.4

Total net revenue
 
$
141,644

 
$
143,664

 
(1.4
)%
 
100.0
%
 
100.0
%

Online advertising - Revenue from national online advertising increased 17% driven primarily by a 25% growth in advertising on TheBump.com and a 12% growth in advertising on TheKnot.com and our other wedding properties.

Local online advertising revenue increased 12%, attributable to an increase in the number of TheKnot.com local vendors advertising with us on our network of websites as a result of new vendors and increased customer retention rates. On a trailing twelve month basis, The Knot ended full year 2015 with 24,340 paying vendors (up 7% from prior year), with an average spend of $2,628 (up 4% from the prior year) and a retention rate of 74% (down from a 78% retention rate at December 31, 2014). 

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Transactions - Revenue from transactions increased 42%, primarily driven by a 28% increase in revenue related to guest purchase conversions with our retail partners. Increases in guest purchases were driven by an increased number of events with registries and guest user engagement with our registry aggregation pages. Additionally, transactions revenue includes commission revenue generated via our GigMasters brand, a company we acquired on October 1, 2015.

Merchandise - Revenue from merchandising operations decreased 94%, resulting from the exit of our warehouse operations in Redding, California in the first quarter of 2015.

Publishing and other - Revenue from publishing and other increased 12%, primarily driven by an increase in advertising revenue related to The Knot national and The Bump magazines. In June 2015, we decided to discontinue the publication of The Bump print magazine. The last issue of The Bump magazine was distributed in December 2015.

Gross Profit/Gross Margin

Cost of revenues consists of the cost of merchandise sold, which includes outbound shipping and personalization costs, costs related to the production of national and regional magazines, payroll and related expenses for our personnel who are responsible for the production of online and offline media, and costs of internet and hosting services. Gross margin improved 7 percentage points to 93%, compared to 85% in 2014. The following table presents the components of gross profit and gross margin for the year ended December 31, 2015 compared to the year ended December 31, 2014:

 
 
Year Ended December 31,
  
 
2015
 
2014
 
Increase/(Decrease)
  
 
Gross
Profit
 
Gross
Margin %
 
Gross
Profit
 
Gross
Margin %
 
Gross
Profit
 
%
  
 
(Dollars in Thousands)
Online advertising
(national and local)
 
$
99,470

 
97.8
 %
 
$
87,779

 
98.0
%
 
$
11,691

 
13.3
 %
Transactions
 
14,700

 
100.0
 %
 
10,370

 
100.0
%
 
4,330

 
41.8
 %
Merchandise
 
(3
)
 
(0.3
)%
 
4,994

 
31.4
%
 
(4,997
)
 
(100.1
)%
Publishing and other
 
17,090

 
70.2
 %
 
19,326

 
69.4
%
 
(2,236
)
 
(11.6
)%
Total gross profit
 
$
131,257

 
92.7
 %
 
$
122,469

 
85.2
%
 
$
8,788

 
7.2
 %

Gross margin improved 7% to 93% compared to 85% in 2014. The increase in the total gross margin percentage was primarily attributable to our exit our lower gross margin merchandising operations in 2015 as well as increases in revenue for the two lines of business that have the highest gross margins, specifically online advertising and transactions services.

Operating Expenses

Operating expenses increased $0.4 million, or 0.4%, to $114 million for the year ended December 31, 2015. We reinvested savings from the exit of our merchandising operations and the sale of Ijie operations primarily in our marketplace initiatives through product and content, general and administrative, and sales and marketing spending.

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The following table presents the components of operating expenses and the percentage of revenue that each component represented for the year ended December 31, 2015 compared to the year ended December 31, 2014:
 
 
Year Ended December 31,
  
 
Operating Expenses
 
Percentage
Increase/
(Decrease)
 
Percentage of
Total Net Revenue
  
 
2015
 
2014
 
2015
 
2014
  
 
(In Thousands)
 
 
 
 
 
 
Product and content development
 
$
40,351

 
$
35,820

 
12.6
 %
 
28.5
%
 
24.9
%
Sales and marketing
 
43,420

 
44,330

 
(2.1
)
 
30.7

 
30.9

General and administrative
 
24,440

 
25,617

 
(4.6
)
 
17.3

 
17.8

Asset impairment charges
 
266

 
836

 
(68.2
)
 
0.2

 
0.6

Depreciation and amortization
 
5,544

 
6,969

 
(20.4
)
 
3.8

 
4.9

Total operating expenses
 
$
114,021

 
$
113,572

 
0.4
 %
 
80.5
%
 
79.1
%

Product and Content Development - The increase of 13% was primarily attributable to an increase in employee headcount, consultants, and related expenses as a result of our initiatives in product and technology development to create new products and features that create value for our audience, partially offset by savings related to exit our Ijie and merchandising operations.

Sales and Marketing - The decrease of 2% was primarily attributable to savings from the exit of our Ijie operations in December of 2014 and the exit of our merchandise facility during the first quarter of 2015. These savings were partially offset by increased commissions as a result of our increased revenue, along with marketing and sales initiatives related to our product efforts.

General and Administrative - The decrease of 5% was primarily attributable to savings from the exit of our Ijie and merchandising operations and savings related to the executive separation charges incurred during 2014 which were not incurred in 2015. These savings were partially offset by increased expense related to external consulting, legal, and accounting fees.

Asset impairment charges - During the year ended December 31, 2015, we recorded asset impairment charges of $0.3 million related to patents. During the year ended December 31, 2014, we recorded $0.8 million in impairment charges related to a tradename and certain URLs, including $0.6 million related to certain long-lived assets.

Depreciation and Amortization - The decrease of 20% was primarily attributable to the WeddingChannel tradename becoming fully depreciated in 2014, which totaled $2.1 million for 2014. This decrease was partially offset by increased depreciation from software development projects.

Interest and Other Income (Expense), Net

Interest and other expense was $4.0 million for the year ended December 31, 2015, which includes an impairment loss on our equity investment, Touch Media, of $4.0 million. Interest and other (expense) income was $1.7 million for the year ended December 31, 2014, which was primarily related to a $1.8 million loss incurred on the disposition of our Ijie operations in China.

Gain (Loss) in Equity Interests

Gain (loss) in equity interests for the years ended December 31, 2015 and December 31, 2014 was $0.5 million and $(0.2) million, respectively. During the year ended December 31, 2015, we recognized a $0.8 million gain associated with our existing investment in GigMasters as part of the 100% acquisition of GigMasters, partially offset by $0.3 million of losses from equity method investments. During the year ended December 31, 2014, we recognized a loss on our equity investment in GigMasters of $0.2 million, representing our share of this entity's losses prior to our acquisition.

Income Tax Expense

The effective tax rate for the year ended December 31, 2015 was 60.2%, compared to 93.3% for the year ended December 31, 2014. The decrease in our effective tax rate in the current year was primarily attributable to the 2014 sale of our Ijie operations in China. We expect an effective tax rate of approximately 40% on an ongoing basis; however, our effective tax rate may fluctuate significantly based on the mix of our taxable income among states, changes in the valuation of our deferred tax assets or liabilities, and changes in tax laws, regulations, or interpretations thereof.

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Liquidity and Capital Resources

Cash Flow

Cash and cash equivalents consist of cash and highly liquid investments with original maturities of 90 days or less at the date of acquisition. At December 31, 2016, we had $105.7 million in cash and cash equivalents, compared to $88.5 million at December 31, 2015 and $90.0 million at December 31, 2014.

The following table sets forth our cash flows from operating activities, investing activities and financing activities for the periods indicated:
 
 
For the Year Ended December 31,
  
 
2016
 
2015
 
2014
  
 
(In Thousands)
Net cash provided by operating activities
 
$
27,390

 
$
20,548

 
$
20,015

Net cash used in investing activities
 
(4,801
)
 
(11,577
)
 
(16,490
)
Net cash used in financing activities
 
(5,395
)
 
(10,417
)
 
(4,267
)
Increase (decrease) in cash and cash equivalents
 
$
17,194

 
$
(1,446
)
 
$
(742
)

Operating Activities

Net cash provided by operating activities was $27.4 million for the year ended December 31, 2016. This was driven by our net income of $12.1 million adjusted for $16.0 million of non-cash items, including depreciation and amortization expense of $6.4 million, stock-based compensation of $8.4 million, and deferred income tax expense of $1.6 million. Accounts receivable net of deferred revenue decreased $1.5 million, as a result of efficiencies gained via the new local operating system as well as improved collections performance. In addition, our deferred rent balance decreased by $0.8 million as a result of our standard lease obligations. This was offset by accounts payable and accrued expenses, which increased by $1.8 million. This increase was driven by timing of payments made related to 2016 expenses, as well as a larger amount of invoice accruals as a result of our year-over-year growth in operating expenses.

Net cash provided by operating activities was $20.5 million for the year ended December 31, 2015. This was driven by our net income of $5.5 million adjusted for $20.5 million of non-cash items, including depreciation and amortization expense of $5.5 million, stock-based compensation of $6.0 million, and an increase in our allowance for doubtful accounts of $1.8 million. Accounts receivable, net of deferred revenue, increased $4.7 million, driven by a mix shift towards transactions and national advertising revenues, which generally have longer payment terms. Additionally, there was also a continuing impact in the early part of 2015 from the adjustment to our billing practices for our national advertising business which was initiated in 2014. In addition, accounts payable and accrued expenses increased by $0.4 million, driven by higher taxes payable as of December 31, 2015 as compared to December 31, 2014.

Net cash provided by operating activities was $20.0 million for the year ended December 31, 2014. This was driven by our net income of $0.5 million adjusted for non-cash items of $18.2 million, including (i) depreciation and amortization of $7.0 million, (ii) stock-based compensation of $6.1 million, (iii) deferred income tax expense of $2.0 million, (iv) a $1.8 million loss on the disposal of assets, primarily from the sale of our Ijie operations and (v) $1.4 million increase in allowance for doubtful accounts. In addition, cash provided by operating activities included a $3.8 million decrease in other assets driven by a decrease in prepaid taxes and a $1.8 million decrease in inventories as a result of initiating the process of closing our merchandise operations. These increases to cash provided by operating activities were partially offset by an increase in accounts receivable, net of deferred revenue of $4.0 million as a result of a mix shift towards our registry and national advertising revenue lines and the adjustment in our billing practices to be consistent with industry standards, which extended our billing and collection cycle.

Investing Activities

Net cash used in investing activities was $4.8 million for the year ended December 31, 2016, primarily related to investments in capitalized software and other fixed assets of $4.3 million, as well as the $1.4 million payment made for the acquisition of the assets of How He Asked LLC. This was offset by $1.4 million in maturities of our T-Bills, relating to the expiration of the restriction on the letter of credit associated with the terms of our New York lease that were not required to be reinvested.


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Net cash used in investing activities was $11.6 million for the year ended December 31, 2015, primarily related to the acquisition of the portion of GigMasters not already owned by us totaling $5.6 million, as well as $2.5 million of minority investments in Jetaport, Inc. (d/b/a Skipper) and a vendor services company. In addition the Company made $3.1 million of investments in capitalized software.

Net cash used in investing activities was $16.5 million for the year ended December 31, 2014, primarily related to acquisitions totaling $5.7 million, as well as a $4.0 million investment in Touch Media International Holdings, a company with an interactive in-taxi advertising and media platform, with operations in China for a minority equity interest. In addition, the Company made $4.3 million of investments in capitalized software.

Financing Activities

Net cash used in financing activities was $5.4 million for the year ended December 31, 2016, primarily driven by the repurchase of shares totaling $4.0 million and the surrender of restricted common stock for income tax purposes totaling $2.9 million. This was offset by $0.9 million relating to the issuance of common stock during 2016.

Net cash used in financing activities was $10.4 million for the year ended December 31, 2015, primarily driven by the repurchase of shares totaling $8.8 million and the surrender of restricted common stock for income tax purposes totaling $3.1 million.

Net cash used in financing activities was $4.3 million for the year ended December 31, 2014, primarily driven by cash used to satisfy tax withholding obligations for employees related to the vesting of their restricted stock awards of $4.8 million and the repurchase of shares totaling $1.6 million, partially offset by excess tax benefits related to stock awards of $1.3 million and the proceeds from the issuances of common stock in connection with our employee stock purchase plan and the exercise of stock options of $0.9 million.

We expect our sources of liquidity to primarily include cash generated from operations. We believe that our existing cash and cash equivalents, together with cash expected to be generated from operations, will be sufficient to fund our operating activities, anticipated capital expenditures, investments in product and technology, potential business and asset acquisitions, strategic investments, and repurchases of our common stock for the foreseeable future.

Contractual Obligations and Commitments

The following table summarizes XO Group’s contractual obligations as of December 31, 2016:
 
 
Payments Due by Period
  
 
Total
 
Less Than
1 Year
 
1 – 3 Years
 
3 – 5 Years
 
More Than
5 Years
  
 
(In Thousands)
 Operating leases
 
$
16,485

 
$
3,167

 
$
6,158

 
$
5,671

 
$
1,489

 Purchase commitments
 
2,013

 
1,230

 
783

 

 

 Total
 
$
18,498

 
$
4,397

 
$
6,941

 
$
5,671

 
$
1,489


Due to the uncertainty with respect to the timing of future cash flows associated with our unrecognized tax benefits at December 31, 2016, we are unable to make a reasonably reliable estimate of the timing of any potential cash settlements with taxing authorities. Therefore, $1.2 million of unrecognized tax benefits have been excluded from the contractual obligation table above.


Off-Balance Sheet Arrangements

As of December 31, 2016, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.


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Seasonality

We believe the impact of the frequency of weddings varying from quarter-to-quarter results in lower transactions revenue in the first and fourth quarters.  Our publishing business experiences fluctuations resulting in quarter-to-quarter declines in the first and third quarters due to the cyclical publishing schedule of our regional publications.  As our business continues to change, we could experience new and potentially different seasonal patterns going forward. 

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities on an on-going basis. Significant estimates and assumptions made by management include the determination of fair value of equity awards issued, fair value of our reporting unit, valuation of intangible assets (and their related useful lives), certain components of the income tax provisions, including valuation allowances on our deferred tax assets, compensation accruals, allowances for bad debts, reserves for future returns, and the determination of best estimated selling prices in multiple element arrangements. We base our estimates and assumptions on historical experience and on various other factors that we believe to be reasonable under the circumstances. The Company evaluates its estimates and assumptions on an ongoing basis. The level of uncertainty in estimates and assumptions increases with the length of time until the underlying transactions are completed. Actual results could differ from estimates in amounts that may be material to the financial statements.

We believe the following critical accounting policies involve significant areas of management’s estimates and judgments in the preparation of our Consolidated Financial Statements. For further information, refer to Note 2 of the Consolidated Financial Statements included herein.

Revenue Recognition

We recognize revenue primarily from the sale of online advertising programs, commissions earned in connection with the sale of gift registry products, the sale of merchandise and the publication of magazines, provided that there is persuasive evidence of an arrangement, the service has been provided or the product has been shipped, selling price is fixed or determinable, collection is reasonably assured and we have no significant remaining obligation. Online programs include (i) sponsored and brand-integrated content, (ii) digital and native banner advertisements, (iii) placement in our online search tools, (iv) online listings and (v) direct e-mail marketing. Advertisers can purchase the exclusive right to promote products or services on a specific online editorial area and can purchase a special feature on our sites.

Certain elements of online advertising contracts provide for the delivery of a minimum number of impressions. Impressions are the featuring of a customer’s advertisement, banner, link or other form of content on our sites. Performance is measured for advertising contracts that contain minimum guaranteed impressions or other performance criteria primarily through tracking delivery of impressions. Revenue is recognized as performance criteria are met, which is typically on a straight-line basis. To the extent that minimum guaranteed impressions are not met, we are often obligated to extend the period of the contract until the guaranteed impressions are achieved. If this occurs, we defer and recognize the corresponding revenue over the extended period based on impressions delivered. We do not have any material open-ended subscriptions with our vendors.

The Company’s transaction offerings provide opportunities for our audience to purchase products and services. We offer programs that enable vendors to sell through our online properties and their own branded websites and properties. We earn fixed fees, a percentage of sales, per-unit activity fees, or some combination thereof with respect to these transactions. Transactions revenue includes revenue from our transaction services, and primarily represents commissions from retailers who participate in our registry aggregation service, which offers couples and their guests the opportunity to view multiple registries in one location and for guests to order gifts off of these registries. After the retail partners take a sales order or ship the sales order, depending on our contractual agreement with the registry partner, the related commissions are contractually earned by us and recognized as revenue. Product returns or exchanges do not materially impact the commissions earned by us. We only record net commissions, and not gross revenue and cost of revenue associated with these products, since we are not the primary obligor in these transactions, the transactions are not subject to inventory risk and amounts earned are determined using a fixed percentage.

Merchandise revenue generally includes the selling price of wedding supplies through the Company’s websites, as well as related outbound shipping and handling charges since the Company is the primary party obligated in a transaction, is subject to inventory risk and establishes its own pricing and selection of suppliers. Title and risk of loss related to the Company’s merchandise operations passed to buyers generally upon shipment. The Company typically refunded customers or shipped replacement products in the event that there were damaged or lost products prior to delivery to the customer. Merchandise revenue is recognized when

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products are shipped, reduced by discounts as well as an allowance for estimated sales returns. Merchandise revenue excludes related sales taxes collected.

Publishing revenue primarily includes print advertising revenue derived from the publication of national and regional magazines and guides. Publishing revenue is recognized upon the publication of the related magazines, at which time all material services related to the magazine have been performed. Additionally, publishing revenue is derived from the sale of magazines on newsstands and in bookstores. Title and risk of loss passes to our customer at the time they are received by the retailers. Revenue from the sale of magazines is reduced by an allowance for estimated sales returns.

Our advertising arrangements often include multiple-element deliverables, primarily online and print advertising. We evaluate each element in a multiple-element arrangement to determine whether it represents a separate unit of accounting with standalone value. Each of our deliverables typically represents separate units of accounting and the arrangement consideration is allocated to the identified separate units of accounting based on their relative selling prices. We use our best estimated selling price to determine the relative selling price as vendor specific objective evidence and third party objective evidence do not currently exist for any of our separate units of accounting. We evaluate our best estimated selling price by reviewing historical data related to sales of its deliverables. Our best estimate of selling price is intended to represent the price at which we would sell the item regularly on a stand-alone basis. The arrangement consideration allocated to online products and services is recognized as revenue based on delivery from the start date to the end date of the arrangement, which is typically on a straight-line basis, except for direct emails which are recognized on the date of delivery. The arrangement consideration allocated to print products is recognized as revenue upon the publication of the related magazines. During the year ended December 31, 2016, there were no material changes to the methods or assumptions used to determine the best estimated selling price for separate units of accounting that would have a material effect on the allocation of arrangement consideration. We evaluate multiple contracts entered into with the same advertiser as these contracts may need to be combined and accounted for as a single arrangement when the economics of the individual contracts cannot be understood without reference to the arrangement as a whole.

We limit the amount that is allocable to delivered items in our multiple-deliverable arrangements to the amount that is not contingent upon the delivery of other items in the arrangement. We have concluded that our right to receive consideration from the customer for delivered items is not linked to the successful delivery of the remaining performance obligations in the multiple-deliverable arrangement; however, revenue recognized for the value of each deliverable is limited to the amount contracted.

Allowance for Doubtful Accounts and Reserves

We maintain an allowance for doubtful accounts and reserves for estimated losses resulting from the inability of our customers to make required payments and for returns, primarily relating to the sale of our magazines. In determining these allowances, we evaluate a number of factors, including the credit risk of customers, historical trends and other relevant information. If the financial condition of our customers were to deteriorate, additional allowances may be required. Allowance for doubtful accounts and reserves has ranged between $1.4 million to $2.8 million over the three year period ended December 31, 2016. A 1% change in the balance of allowance for doubtful accounts and reserves as a percentage of gross accounts receivable would change our annual operating expense by $0.1 million to $0.2 million.

Goodwill, Other Intangible and Long-lived Assets

The purchase price of acquired companies is allocated between intangible assets and the net tangible assets of the acquired businesses with the residual of the purchase price recorded as goodwill. At December 31, 2016, we had goodwill of $48.7 million and intangible assets, net of accumulated amortization of $4.2 million. We evaluate goodwill and indefinite-lived intangible assets annually as of October 1 for impairment, or more often if events or changes in circumstances indicate that the carrying value may not be recoverable. To complete our impairment analysis of goodwill and indefinite-lived intangible assets, we estimate fair value using multiple approaches and also consider whether events or changes in circumstances such as significant declines in revenue or earnings, or material adverse changes in the business climate indicate that the carrying value of assets may be impaired. There were no impairments of goodwill in any of the periods presented in the Consolidated Financial Statements.

Our definite-lived intangible assets include customer and advertiser relationships, developed technology and patents, media content, trademarks and tradenames and service contracts. All definite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives, which we believe is consistent with the expected future cash flows to be generated by the respective assets. Definite-lived intangible assets and other long-lived assets are evaluated for recoverability whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. In evaluating an asset for recoverability, we estimate the future cash flow expected to result from the use of the asset and eventual disposition. If the expected future undiscounted cash flow is less than the carrying amount of the asset, an impairment loss, equal to the excess of the carrying amount over the fair value of the asset, is recognized. For the years ended December 31, 2015 and 2014, we determined that

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certain definite-lived intangible assets were impaired by $0.3 million and $0.1 million respectively. For the year ended December 31, 2016 impairment charges were immaterial. See Note 7 to our Consolidated Financial Statements for additional details.

Other long-lived assets primarily consist of software, leasehold improvements, computer and office equipment and furniture and fixtures, which are subject to depreciation over the useful life of the asset. The useful lives of other long-lived assets are determined based on our estimate of the period over which the asset will be utilized; such periods are periodically reviewed for reasonableness. We may be required to change these estimates based on changes in our industry or other changing circumstances. If these estimates change in the future, we may be required to recognize increased or decreased depreciation expense for these assets. For the year ended December 31, 2014, we recorded impairments of certain long-lived assets of $0.6 million. There were no impairment charges on long-lived assets in the years ended December 31, 2016 and 2015.

Income Taxes

We account for income taxes using the asset and liability method, as required by the accounting standard for income taxes ASC 740. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as net operating loss and tax credit carryforwards. Deferred taxes are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in results of operations in the period that includes the enactment date. The effects of any future changes in tax laws or rates have not been considered. We regularly review deferred tax assets to assess their potential realization and establish a valuation allowance for portions of such assets to reduce the carrying value if we do not consider it to be more likely than not that the deferred tax assets will be realized. Our review includes evaluating both positive (e.g., sources of taxable income) and negative (e.g., recent historical losses) evidence that could impact the realizability of our deferred tax assets. 
 
We recognize the impact of an uncertain tax position in our financial statements if, in management's judgment, the position is not more-likely-then-not sustainable upon audit based on the position's technical merits. This involves the identification of potential uncertain tax positions, the evaluation of applicable tax laws and an assessment of whether a liability for an uncertain tax position is necessary. We operate and are subject to audit in multiple taxing jurisdictions.
 
We record interest and penalties related to income taxes as a component of income tax expense.
 
A substantial portion of our net operating losses were acquired in connection with the acquisition of WeddingChannel.com and are subject to a limitation on future utilization under Section 382 of the Internal Revenue Code. We currently estimate that the effect of Section 382 will generally limit the amount of the loss carryforwards of WeddingChannel.com that are available to offset future taxable income to approximately $3.6 million annually. The overall determination of the annual loss limitation is subject to interpretation; therefore, the annual loss limitation could be subject to change.

A 1% change to our effective tax rate would have changed our annual net income by approximately $0.2 million, $0.1 million, and $0.1 million during the three years ended December 31, 2016, 2015, and 2014 respectively.

Stock-Based Compensation

We measure the cost of employee services received in exchange for an award of equity instruments based on the measurement-date fair value of the award. The fair value of restricted stock awarded under the 2009 Stock Incentive Plan is determined using the intrinsic value of the stock at the time of grant.

The fair value of the stock options granted during 2016 was determined using the Black-Scholes option pricing model (see Note 4 to our Consolidated Financial Statements for further details). Using this model, fair value was calculated based on assumptions with respect to (i) expected volatility of our stock price, (ii) the expected term of the award, (iii) expected dividend yield on our stock, and (iv) a risk-free interest rate, which is based on quoted U.S. Treasury rates for securities with maturities approximating the expected term. Specifically, the expected term of the options granted during 2016 was determined using the "simplified method" as prescribed by Staff Accounting Bulletin ("SAB") Topic 14D.2, which is presumed to be the midpoint between the vesting date and the end of the contractual term. The simplified method was used to determine the expected term of the options, due to the extended period of time that has lapsed since our last granted options, as well as differences in the contractual terms of the option awards compared to options granted in prior periods, such that our historical share option experience does not provide a reasonable basis to estimate the expected term. We intend to continue to consistently apply the simplified method until a sufficient amount of historical information regarding exercise data becomes available. Expected volatility is calculated using historical prices of our stock. The expected dividend yield is zero, as we have never paid dividends and currently intend to retain future earnings, if any, to finance the expansion of the business

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The fair value of the Employee Stock Purchase Plan (“ESPP”) rights granted from the 2009 Employee Stock Purchase Plan is estimated on the date of grant using the Black-Scholes option-pricing model (see Note 4 to our Consolidated Financial Statements for further details). Using this model, fair value is calculated based on assumptions with respect to (i) expected volatility of our stock price, (ii) the expected life of the award, which for ESPP rights is the period of time between the offering date and the exercise date (as defined in Note 4 to our Consolidated Financial Statements), (iii) expected dividend yield on our stock, and (iv) a risk-free interest rate, which is based on quoted U.S. Treasury rates for securities with maturities approximating the expected term. . The use of different assumptions in the Black-Scholes pricing model would result in different amounts of stock-based compensation expense related to the ESPP; however, in total, stock-based compensation expense for the ESPP is not material to our Consolidated Financial Statements.

For grants of restricted stock and options, we record compensation expense based on the fair value of the shares on the grant date over the requisite service period, less estimated forfeitures. Compensations expense for ESPP rights is recorded in line with each respective offering period.

Forfeitures of equity awards are estimated at the grant date and reduce the compensation recognized. Estimated forfeitures of equity awards are periodically reviewed for reasonableness. We consider several factors when estimating future forfeitures, including types of awards, employee level and historical experience. Actual forfeitures may differ from current estimates.

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Non-GAAP Financial Measures

This Form 10-K includes information about certain financial measures that are not prepared in accordance with U.S. generally accepted accounting principles (“GAAP” or “U.S. GAAP”), including Adjusted EBITDA, Adjusted net income, Adjusted net income per diluted share and free cash flow. These non-GAAP measures have important limitations as analytical tools and should not be considered in isolation or as substitutes for an analysis of our results as reported under U.S. GAAP. Our use of these terms may vary from the use of similarly-titled measures by others in our industry due to the potential inconsistencies in the method of calculation and differences due to items subject to interpretation.

Management defines its non-GAAP financial measures as follows:

Adjusted EBITDA represents GAAP net income (loss) adjusted to exclude, if applicable: (1) income tax expense (benefit), (2) depreciation and amortization, (3) stock-based compensation expense, (4) asset impairment charges, (5) loss in equity interests, (6) interest and other income (expense), net, and (7) other items affecting comparability during the period.

Adjusted net income represents GAAP net income (loss), adjusted for items that impact comparability for incremental or unusual costs incurred in the current period, which may include: (1) asset impairment charges, (2) executive separation and other severance charges, (3) non-recurring foreign taxes, interest and penalties, (4) costs related to exit activities, and (5) discrete tax items.

Adjusted net income per diluted share represents Adjusted net income (as defined above), divided by the diluted weighted-average number of shares outstanding for the period.

Free cash flow represents GAAP net cash provided by operations, less capital expenditures.

Management believes that these non-GAAP financial measures, when viewed with our results under U.S. GAAP and the accompanying reconciliations, provide useful information about our period-over-period growth and provide additional information that is useful for evaluating our operating performance. However, Adjusted EBITDA, Adjusted net income (loss), Adjusted net income (loss) per diluted share and free cash flow are not measures of financial performance under U.S. GAAP and, accordingly, should not be considered substitutes for or superior to net income (loss), net income (loss) per diluted share and net cash provided by operating activities as indicators of operating performance.



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The table below provides reconciliations between the non-GAAP financial measures discussed above to the comparable U.S. GAAP measures (in thousands, except for per share data):


 
Year Ended
 
2016
 
2015
 
2014
 
GAAP Actual
Adjustments
Non GAAP Results
 
GAAP Actual
Adjustments
 
Non GAAP Results
 
GAAP Actual
Adjustments
 
Non GAAP Results
Adjusted Net Income and EPS Reconciliation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
152,116



152,116

 
141,644



141,644

 
143,664



143,664

Cost of Revenues
9,754



9,754

 
10,387



10,387

 
21,195



21,195

Operating Expenses
 


 
 




 




Product & Content Development
44,668



44,668

 
40,351

(11
)
a
40,340

 
35,820

(432
)
i
35,388

Sales & Marketing
49,772



49,772

 
43,420

(265
)
a
43,155

 
44,330

(685
)
i
43,645

General & Administrative
23,666



23,666

 
24,440

(158
)
a
24,282

 
25,617

(644
)
i
24,973

Depreciation & Amortization
6,372



6,372

 
5,544



5,544

 
6,969



6,969

Impairments
18



18

 
266

(266
)
b

 
836

(836
)
f

Total Operating Expenses
124,496



124,496

 
114,021

(700
)

113,321

 
113,572

(2,597
)

110,975

 
 


 
 




 




Operating Income
17,866



17,866

 
17,236

700


17,936

 
8,897

2,597


11,494

 
 


 
 




 




Interest & Other Income/(Loss), Net
146



146

 
(4,023
)
4,000

c
(23
)
 
(1,740
)
1,828

g
88

Gain/(Loss) in Equity Interest
(328
)


(328
)
 
520

(765
)
d
(245
)
 
(232
)


(232
)
Provision for Taxes on Income
5,564

1,423

j
6,987

 
8,269

(1,202
)
e
7,067

 
6,463

(1,639
)
h
4,824

Net Profit/(Loss)
12,120

(1,423
)

10,697

 
5,464

5,137


10,601

 
462

6,064


6,526

Amounts per Share - Diluted
0.47

(0.05
)

0.42

 
0.21

0.21


0.42

 
0.02

0.24


0.26

Weighted Average Number of Shares Outstanding - Diluted
25,640



25,640

 
25,530



25,530

 
25,589



25,589

 




 




 




Adjusted EBITDA Reconciliation




 




 




 




 




 




Operating Income
17,866



17,866

 
17,236

700


17,936

 
8,897

2,597


11,494

Depreciation & Amortization (k)
6,372



6,372

 
5,544



5,544

 
6,969



6,969

Stock Based Compensation (l)
8,359



8,359

 
5,992



5,992

 
6,139



6,139

Adjusted EBITDA
32,597



32,597

 
28,772

700


29,472

 
22,005

2,597


24,602







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Year Ended
 
 
2016
 
2015
 
2014
Net cash provided by operating activities