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Executives

David Bigelow

Mark R. Goldston - Chairman, Chief Executive Officer, President and Member of Secondary Compensation Committee

Neil P. Edwards - Chief Financial Officer, Chief Accounting Officer, Executive Vice President and Treasurer

Analysts

Michael Crawford - B. Riley & Co., LLC, Research Division

Daniel L. Kurnos - The Benchmark Company, LLC, Research Division

George F. Sutton - Craig-Hallum Capital Group LLC, Research Division

United Online (UNTD) Q4 2012 Earnings Call February 20, 2013 5:00 PM ET

Operator

Good day, and welcome to the United Online Fourth Quarter Earnings Call. Today's conference is being recorded. I would now like to turn the presentation over to Mr. David Bigelow.

David Bigelow

Hello, and welcome to United Online's conference call to discuss our financial results for the fourth quarter and full year ended December 31, 2012. With me today is Mark Goldston, our Chairman, President and Chief Executive Officer; and Neil Edwards, our Executive Vice President and Chief Financial Officer.

Before I get started, I'd like to mention that we've created a PowerPoint presentation that summarizes our fourth quarter and full year 2012 financial results and operating metrics. I would encourage you to download a copy of this presentation by going to our website, www.unitedonline.com, and clicking on Investor Relations at the top and going into the Quarterly Earnings section.

On today's call, in today's press release and in the accompanying slides that are available within the Investor Relations section of our website, which can be found at www.unitedonline.com, we will refer to certain financial measures that are not determined in accordance with accounting principles generally accepted in the U.S., or GAAP, and should be considered in addition to, and not as a substitute for or superior to, the financial measures determined in accordance with GAAP. Definitions of these non-GAAP financial measures are provided in today's press release and the accompanying slides on our website, along with certain reconciliations to their most comparable GAAP financial measures.

In addition, the company applies Safe Harbor provisions, as outlined in today's press release, to any forward-looking statements that may be made on this call. Statements regarding our current expectations or estimates about our future operations, financial performance, net interest expense, amortization, share numbers, capital expenditures, taxes, operating metrics; the proposed spinoff of the FTD segment and the expected timing of benefits thereof; the exploration of strategic alternatives for our other businesses and monetization opportunities for our patent portfolio; new or planned business initiatives, products, services, features, applications and functionality and the expected performance thereof; strategies and marketing programs, among others, are forward-looking statements that are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from those described or implied in the forward-looking statements.

More information about potential risks that could affect the company's business and its financial results is included in today's press release under the caption Cautionary Information Regarding Forward-Looking Statements and in United Online's most recent filings with the Securities and Exchange Commission, including the company's annual reports on Form 10-K and quarterly reports on Form 10-Q.

Guidance, projections and other nonhistorical information provided in the press release and in today's call are based on information available to management at this time, and management expects that internal projections and expectations may change over time. However, the company does not intend to revise or update this information except as required by law and may not provide this type of information in the future.

And with that, we're going to start out with a few comments from Mark and Neil, and then we're going to open it up for questions. So I'll now give the floor over to our Chairman, President and Chief Executive Officer, Mark Goldston.

Mark R. Goldston

Thanks a lot, Dave. Welcome to our earnings call for the fourth quarter and full year ended December 31, 2012. I'm going to give you an overview of the results for the fourth quarter and an update on our progress toward our planned spinoff of FTD. Neil Edwards, our CFO, will conclude our prepared remarks with a look at the numbers for the quarter and our guidance going forward.

Let's start with some highlights for the fourth quarter of 2012. Number one, both consolidated adjusted OIBDA of $32.7 million and consolidated revenue of $219 million were within our guidance range. Number two, our FTD segment continued to deliver positive results despite aggressive competition in the U.S. and the challenging consumer spending environment in the U.S. and to an even greater extent, in the U.K. The FTD segment achieved its eighth consecutive quarter of year-over-year revenue growth when prior periods are adjusted for the timing of the U.K. Mother's Day in 2011. Number three, our Content & Media segment pay accounts declined by $123,000 during the quarter. Now this is the smallest net decrease since the second quarter of 2010 for that segment. The quarterly net decrease in segment pay accounts has now improved in 4 consecutive quarters from a high of $296,000 in the fourth quarter of 2011 to the $123,000 that we just reported for 4Q 2012. Number four, in our Communications segment, we reduced our revenue decline to just 9% year-over-year. As of December 31, 2012, our NetZero 4G mobile broadband business had approximately 32,000 accounts. Number five, in the fourth quarter of 2012, we recorded a $26.9 million goodwill and intangible asset impairment charge due to a material decline in the fair value of our smallest reporting unit, MyPoints. This was a noncash charge, did not impact adjusted OIBDA, cash flow from operations or free cash flow. I'll give you more about this -- more color on this in the MyPoints section of my remarks.

So now let's take a look at the individual operating segments and we'll start with a review of FTD. Financially, our FTD segment includes both the domestic results of FTD in the U.S. and Canada and the results from our Interflora business in the U.K. and the Republic of Ireland. In the fourth quarter, FTD segment revenues increased 7% compared to the year-ago period. In addition to this representing the eighth consecutive quarter of year-over-year quarterly growth for FTD, after we adjust for the timing of that 2011 U.K. Mother's Day, FTD's 4% year-over-year growth for the full year marks the third consecutive year where FTD segment has increased its annual revenues. Consumer orders in the quarter increased 11% year-over-year, driven in part by the Flying Flowers and Flowers Direct businesses in the U.K. which we acquired in 2012, and increasing marketing spending to acquire new customers, which obviously will help drive our order volume. In addition, we are really pleased with our performance of our exclusive partnerships such as Vera Wang, Better Homes and Gardens, our sympathy partners and our innovative product offerings such as the Color Your Day line and our College Rose Collections. Average order value, or what we call AOV, decreased 3% compared to the year-ago period. This decrease is largely attributable to the fact that the Flying Flowers and Flowers Direct businesses in the U.K. are both value-priced brands that have lower AOVs in the core Interflora business in the U.K. and Flying Flowers and Flowers Direct were not in the year-ago numbers. Segment-adjusted OIBDA was $22.4 million, which is up 2% from the year-ago quarter.

Heading into this year's Valentine's Day holiday season, we launched a brand-new ftd.com website that organized the site's many gift options into easy-to-navigate sections or pages that we call gift shops. There's 7 of these FTD gift shops and they're showcased through our various categories of gifts like jewelry, sweets, gift baskets, plants, college roses, et cetera. And they really help the shopper find the perfect gift for the individual holiday they're looking for like Valentine's Day and other memorable occasions. I would encourage you to go to ftd.com and take a look at this website. It is really a spectacular-looking site within the category.

Now I want to talk a little bit about the 2013 Valentine's Day holiday that was just completed last week. I'm really pleased to report that in a highly competitive market, FTD delivered excellent results in both the U.S. and the U.K. for the recently completed 14-day Valentine's Day holiday period, which is February 1 through February 14. Both FTD domestic and Interflora in the U.K. registered healthy increases versus the 2012 14-day Valentine's Day holiday period in terms of number of consumer orders and the revenues generated from those orders. We're going to give more specific details on this very impressive Valentine's Day result on the Q1 2013's earnings call. But I know, given the timing of this call, that it was important to all of you to understand how the holiday went for us and it went very well.

Now let's take our attention to the Content & Media segment. Now this segment includes the Classmates business of which schoolFeed is now a part, as well as the StayFriends international business and the MyPoints business. Segment revenues were $39.5 million for the quarter, down 13% compared to the year ago. Segment OIBDA was $7.4 million, down 50% compared to the year-ago quarter.

So I want to give you an update on Classmates. Classmates has really made significant progress towards improving its business and its prospects. Classmates is primarily a subscription business and so one of the ways we measure our progress is by the improvement in pay account metrics. We've significantly improved the rate of decline in pay accounts over the last 4 consecutive quarters. And in fact, in 7 out of the last 8 quarters, we've improved our rate of decline in pay accounts. In addition, we registered nearly 3x as many new free members for Classmates in 2012 as we did in 2011. Now we've done this by making the operational and content changes to the business we described over the past few quarters, which includes the addition of significant content like yearbooks, profile photos and personal stories. In the fourth quarter of 2012, the decline in segment pay accounts was $123,000. That is a dramatic improvement versus the decline of $296,000 in Q4 of 2011.

Now the primary vehicle that we used to get members to visit Classmates on the website is email. And we have seen our response rate on our Classmates email program double from a low point in the fourth quarter of 2011 to where it is today. That's a doubling of the response rate in a 1-year period of time and it's a level of response that we have not experienced since mid-2010. Our significant increase in user-generated content on the Classmates website has been a contributing factor to our improving email response rates, improving site engagement and the improvement in the decline of pay accounts. And as you know, the generation of user-generated content has always been our top priority, and it's been something that's been very difficult for us to achieve previously. The comments have always been made that Classmates doesn't have enough photos, it doesn't have enough profiles filled out, there isn't enough to do on the site. And we've agreed with that and have tried numerous programs over the past couple of years to improve that, and we finally found something that has worked for us dramatically. In fact, in the fourth quarter of 2012, we saw this dramatic increase in the number of profile photos and personal stories added to the Classmates website. So while we typically will receive thousands of profile photos and stories in a given quarter, in the fourth quarter, we were able to add literally millions of new photos and profile stories. We're currently on track to keep pace with this level of content growth in the first quarter of 2013, so we expect to add millions more photos and stories. This is versus the thousands that we used to add. So the more engaging and personal we're able to make our Classmates website and the experience, then the more responsive we believe the members act. And in support of this belief, profile visits on classmates.com more than doubled in Q4 2012 versus Q4 2011. That is a key indicator of the vitality of the business. Profile visits are key to helping us power the Classmates flywheel that in turn, we believe, helps bring people back to the site. So another way that we measure user engagement on the Classmates website is the frequency of visits per month by our members. Now our most recent visit frequency levels per month are the highest we've seen in 4 years. In fact, they're highest they've been since March 2009. So we're also continuing our efforts to achieve pay account growth by attempting to capitalize on this really impressive increase in the user engagement levels. So as we look ahead, we intend to continue to expand our distribution of key features, now this is both free and paid, and we'll be doing that on the Facebook platform, across mobile devices, which is key for us, and within our core website. And we believe the massive quantity of new content and the influx of new members will invigorate the Classmates site, which is a critical objective for this business and for our team. Internationally, our social networking business under the StayFriends and Trombi brand names continue to face competitive challenges from free social networking, which contributes to the decline in their subbase. As I discussed in the previous quarters, we've rolled out new initiatives designed to enhance our potential to attract new subs and better retain existing paid subs at StayFriends, including the expansion of the German school information page to include school-specific nostalgia, photos of the school, in addition to social games that we've added to the StayFriends experience. I do want to add that StayFriends has just launched its own app on Facebook in Germany that is designed to drive member growth through Facebook and is very similar to the schoolFeed app. It's just called StayFriends in Germany.

Now I'd like to turn the attention to MyPoints, our smallest business unit, which has faced a challenging operating environment in the last couple of quarters. I mentioned this earlier, but in the fourth quarter of 2012, the MyPoints division recorded a $26.9 million goodwill and intangible asset impairment charge due to a material decline in the fair value of that reporting unit. Now this impairment was largely driven by challenges in the business, as well as the competitive environment noncash. And we're taking significant steps to attempt to address these challenges on that business. But at this point, obviously, we can't be certain that those efforts will prove successful, although we are doing our best on that business.

Next, I want to wrap up with a review of our Communications segment, which consists principally of our NetZero and Juno brands. I'm also going to give you an update on the NetZero 4G mobile broadband services I promised I would do in the last call. So in the Communications segment, quarterly revenues increased 6% compared to the third quarter of 2012. This is the largest sequential quarter increase on the Communications business in almost 8 years. And this increase was driven by increased ad revenues, which are seasonally stronger in the fourth quarter, and by improved growth in our NetZero 4G mobile broadband business, which has now reached 32,000 accounts at the end of 2012. In the fourth quarter of 2012, the Communications segment-adjusted OIBDA margin was 30%, but you have to keep in mind that the 4G mobile broadband service had a negative impact on segment-adjusted OIBDA in the quarter of about $4.6 million due to our investment in the launch of the business. Without the 4G number -- investment in there, the segment OIBDA for Communications would have exceeded 50%. We're roughly 1 month away from the 1-year anniversary of the launch of the NetZero 4G mobile broadband service, and we're continuing to make great progress. When I spoke to you on the last earnings call in November, I discussed the pending transition into Phase 3 of our marketing tests, which involve promotional pricing on the actual 4G devices. The testing has shown very promising results and so now we're continuing to use that Phase 3 discounted pricing on the devices extensively for all of our pay plans. During the fourth quarter of 2012, we saw great progress on a variety of indicators to the 4G line, including improved conversion rates, a much higher percentage of sign-ups for the pay plan versus the free plan and a significantly lower customer acquisition cost, much lower than where it was when we launched.

Back to the fourth quarter of 2012, we were able to achieve a substantially lower customer acquisition cost primarily through our use of our NetZero direct response television ads, which have been very successful.

Now I want to give you an update on the spinoff. We're continuing to make great progress on the planned spinoff of FTD, which will include the domestic and international operations of our FTD segment, and it will become an independent publicly traded company. The spinoff is expected to take the form of a tax free, pro rata distribution to all shareholders of United Online. So towards that objective, we have submitted to the IRS our request for a ruling on the tax-free nature of the spinoff. We just recently did that. And we expect to make the appropriate filings with the Securities and Exchange Commission relating to the spinoff by April of 2013. The spinoff transaction remains subject to a number of conditions, including final approval of the transaction specifics by our board and is now planned to be completed by the end of the third quarter of 2013, after FTD becomes eligible as a 5-year trade or business for tax purposes. And as you know, the anniversary -- 5-year anniversary of our acquisition of FTD will be approximately August 27, 2013, at which point it becomes a 5-year tradable asset.

In addition, we are also continuing to explore strategic alternatives for the Content & Media and Communications businesses and monetization opportunities for our portfolio of patents and patent applications, which is ongoing. We remain confident that the spinoff will highlight FTD as a focused, growth-oriented business and will enhance shareholder value. We also believe that our United Online, the remaining businesses with over 100 million registered accounts, should also be valuable assets as we continue our efforts to improve the growth potential of these businesses, some of which I've shared with you on the phone today.

I'm going to turn the presentation over to Neil Edwards, our CFO right now, and he'll take you through a review of the financial results and our guidance going forward. Neil?

Neil P. Edwards

Thank you, Mark. I'll begin with highlights of the fourth quarter and then I'll provide the guidance going forward. All comparisons represent year-over-year quarterly comparisons, unless I clarify otherwise. And I'll start with the highlights of the consolidated results for the fourth quarter.

Consolidated revenues were $219 million, a slight increase and within our guidance range. Consolidated adjusted OIBDA was $32.7 million, down 30% but also within our guidance range. Diluted net loss per share was $0.14 compared to diluted net income per share of $0.14 in the year-ago quarter. As Mark mentioned, during the fourth quarter of 2012, we recorded a $26.9 million goodwill and intangible asset impairment charge related to our MyPoints reporting unit due to a material decline in the fair value of that business. This was a noncash charge, which did not impact adjusted OIBDA, cash flows from operating activities or free cash flow. We also recorded a $10.2 million tax benefit in connection with the impairment charge. And MyPoints business contributed less than 6% of consolidated revenues in 2012.

Adjusted diluted net income per common share was $0.14, a decline of a 44%. Cash flows from operating activities and free cash flow for the quarter were $41.7 million and $41.8 million, respectively, representing increases of 6% and 19%, respectively. These increases resulted primarily from favorable changes in networking capital and a decrease in capital expenditures, partially offset by lower adjusted OIBDA. Cash and cash equivalents at December 31, 2012, were $136.4 million compared to $108.1 million at September 30, 2012.

Net debt at December 31 was $107.6 million compared to $135.8 million at September 30, 2012. The company defines net debt as total debt net of discounts, less cash and cash equivalents.

Now on to the FTD segment. Segment revenues were $153.2 million, an increase of 7%, driven by consumer order growth. Segment-adjusted OIBDA was $22.4 million, an increase of 2%. Segment-adjusted OIBDA margin was 14.6% compared to 15.2%. In terms of key metrics, consumer orders were $1.8 million, up 11%, which was largely driven by consumer orders from the Flying Flowers and Flowers Direct businesses in the U.K. that we acquired in 2012, as well as increased marketing expenditures. Average order value, or AOV, was $60.13, a decrease of 3%. Excluding the impact of the Flying Flowers and Flowers Direct businesses, which have lower AOVs, AOV was relatively flat compared to the year-ago quarter.

Now on to the Content & Media segment. Segment revenues were $39.5 million, a decrease of 13%. Segment-adjusted OIBDA was $7.4 million, a decrease of 50%. And in terms of key metrics, pay accounts decreased by a net $123,000 in the fourth quarter compared to a net decrease of $133,000 in the third quarter of 2012 and a net decrease of $296,000 in the year-ago quarter. Active accounts were $11.5 million, an increase of 6% sequentially and an increase of 12% year-over-year. Churn was 3.5%, an increase of 10 basis points sequentially and a decrease of 60 basis points year-over-year. Average monthly revenue per pay account or ARPU was $2.52, up 1% sequentially and down 3% year-over-year. Adjusting for the unfavorable impact of foreign currency exchange rates, ARPU was down 1% sequentially and 2% year-over-year.

Now on to the Communications segment. Segment revenues were $26.7 million, a decrease of 9%. Sequentially, segment revenues increased by 6%, the largest sequential quarter increase in almost 8 years. Segment-adjusted OIBDA was $8 million, a decrease of 48% year-over-year. The investment in our NetZero 4G mobile broadband business resulted in a negative adjusted OIBDA impact of approximately $4.6 million during the fourth quarter of 2012. Segment-adjusted OIBDA margin was 30% compared to 52.3% in the year-ago quarter. Excluding the impact of the NetZero 4G mobile broadband business, adjusted OIBDA margin would have been 51.6%. In terms of key metrics, pay accounts decreased by a net $25,000 in the fourth quarter versus a net decrease of $34,000 in the third quarter of 2012 and a net decrease of $49,000 in the year-ago quarter.

The positive performance is reflective of the continued decline in churn among dial-up customers, as well as growth in our NetZero 4G mobile broadband business. ARPU was $9.05, up 1% from the third quarter of 2012 and down slightly from $9.09 in the year-ago quarter. Churn was a record low, 2.9%, down 20 basis points from the third quarter of 2012 and down 50 basis points from the year-ago quarter.

Unallocated corporate expenses. For the quarter ended December 31, 2012, the impact of unallocated corporate expenses on consolidated adjusted OIBDA was $5 million flat compared to the year-ago quarter.

Now on to our business outlook and guidance for the first quarter of 2013. Consolidated revenues are estimated in the range of $243 million to $248 million. Consolidated adjusted OIBDA is estimated in the range of $28 million to $32 million. Net interest expense is estimated at $3.1 million. Amortization of intangible assets is estimated at $8.2 million. Weighted average diluted common shares are estimated to be $91.7 million on a GAAP basis and $91.9 million on an adjusted basis.

For the full year 2013, our annual effective income tax rate is expected to be approximately 38% on a GAAP basis. We expect some variation in our effective income tax rate from quarter-to-quarter due to discrete items and other factors. For the full year 2013, capital expenditures are estimated to range from $21 million to $25 million. At December 31, 2012, we had approximately $3 million of fixed asset purchases that were recorded on the balance sheet but were not included in purchase of property and equipment on our cash flow statement because they were not paid for until the first quarter of 2013. As a result, capital expenditures for the full year 2012 came in below our guidance range at $17.8 million. Therefore, the full year 2013 capital expenditures in our cash flow statement are estimated to range from $21 million to $25 million, which includes the aforementioned $3 million.

It is less than 1 year since the launch of our NetZero 4G mobile broadband business, and we will continue to incur adjusted OIBDA losses in the near term. We expect that the adjusted OIBDA loss from our NetZero 4G mobile broadband business will reduce Communications segment-adjusted OIBDA by approximately $3 million to $4 million in the first quarter of 2013 and by approximately $6 million to $7 million for the full year. And our goal is to have our 4G mobile broadband business profitable in 2014.

That concludes my prepared remarks, so back to you, Mark.

Mark R. Goldston

Thanks, Neil. Operator, if you can please ask people to have questions to get into the question-and-answer queue. We'll be happy to entertain them.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question today comes from Mike Crawford, B. Riley & Co.

Michael Crawford - B. Riley & Co., LLC, Research Division

Neil, since you ended up with the NetZero 4G broadband, can we just continue with that? And what revenue's associated -- what scope is needed in that business to get that profitability?

Neil P. Edwards

What level of revenues did you say, Mike?

Michael Crawford - B. Riley & Co., LLC, Research Division

Yes.

Neil P. Edwards

Well, at the moment, we've got 32,000 accounts, a combination of free and pay. And some of the free accounts -- a number of the free accounts are going to reach their 1-year anniversary in 2013, so they will go from free to pay. And as a Mark alluded to, the marketing programs that we're running right now, the majority of the sign-ups are actually pay sign-ups. So the monthly revenue per use kind of jumps around a little bit and will stabilize more going forward, particularly with the anniversary of the free accounts. But we actually haven't disclosed the split between wireless and dial-up accounts in terms of revenue. But it's something that, as we go forward, we'll consider doing that.

Michael Crawford - B. Riley & Co., LLC, Research Division

Maybe asking separately, is -- once -- I think your market tests are showing that there is a demand for the service that you can fill so you intend to pursue it. So is this a business you envision that can be run at, say, a 30% margin or -- certainly, not a 50%, I wouldn't imagine?

Mark R. Goldston

Yes, when we -- Mike, if you can imagine, we can't give that as a separate projection right now. What we did tell you last quarter, and I want to reiterate, is if we saw the marketing expense go up that will mean that Phase 3 was working better than we thought. And in fact, you did see it go up and the Phase 3 did work better than we thought. So we're going to continue it. And at this point, the Communications guys have sat down with us and are fully expecting 2014 to be a profitable business. So the margin on the business, obviously, the gross margin will be lower than it is on the dial-up business. Almost every business on the planet is lower than a dial-up business, but this is a really good business. And we are real confident that given what we've been able to do -- by the way, we have dramatically lowered the customer acquisition cost. Today, I can't give you the exact number, but it's roughly 1/3 of what it was in the first quarter that we launched, which is a major improvement, largely driven by the success of our direct response television ads and this promotion that we're running. And so we're very confident that this is going to be a really good, viable, profitable, long-term business for the NetZero brand and that the year 2014 is going to be profitable year for it. That's absolutely the plan.

Neil P. Edwards

And Mike, as the churn comes down on the dial-up business and with the wireless business gaining traction, this business is looking a lot more attractive going forward.

Michael Crawford - B. Riley & Co., LLC, Research Division

Okay. And then just regarding margin to the extent you can comment, that's great that you had a "excellent" Valentine's Day in terms of demand and orders delivered and revenues created. What can you comment regarding the competitive environment, discounting, rational behavior or lack thereof?

Mark R. Goldston

Yes. It was crazy, Mike. I mean, it's -- I think the competitive environment at Valentine's Day -- well, you saw it on television, right? I mean, there were people really just breaking all kinds of price barriers. We saw people, competitors of ours, promoting free service fees -- no service fees, free shipping all through up to and including the holiday, which we had never seen before. But all that being said, if it's raining outside, use an umbrella. We did not jump into that pool. We, true to form at FTD, we differentiate ourselves by having clearly the best website. If you look at this new web design we did, it is spectacular. It performed really well. Our AOVs were very strong at Valentine's Day. Our profitability was really good. And I mean, frankly, given what's going on with the economy and the competitive environment, I was extremely pleased with what we were able to manage. What we've done, Mike, it's interesting, this is going on our fifth year. When we bought FTD, it was pretty much the same as all the other companies. They all looked the same. They all priced similarly. It was a big commodity category. And we have spent the past 4 years trying to build this really unique, competitive advantage of a point of difference in the category. And we believe, based on our AOVs, that we've carved out a niche that's sort of the class player in the category from a pricing and inventory standpoint. And so we don't really feel the need to drop down in the pricing gutter and play that game because that's not really the customer that we're after. It's not to suggest that we don't have value-priced items on our site because we do. But as a percentage of our total sales, it's actually very low and we like it that way, which is why we're such a profitable flower and gift company. So they stayed true to their mission. They executed it fantastically in this holiday, and we're really happy with the results.

Michael Crawford - B. Riley & Co., LLC, Research Division

Okay. And then last question. So the Form 10 filing is expected in April. And when do you expect to hear from the IRS regarding the tax-free nature of the spinoff ruling?

Mark R. Goldston

Usually they're telling us the IRS is a 4- to 6-month process. I mean, that's for everybody. That's what we've been told. And as you know, Mike, we sort of have our 5-year anniversary on the FTD asset August 26, 27. And so rather than trying to make this complex, we figured we'd make this a very simple, clean, tax-free spin without putting another asset inside of FTD to get 5-year trading status. FTD will have it on its own at the end of August. So we don't anticipate this being complex at all. So sometime in the third quarter, we think we're having this thing done.

Operator

And we'll go next to Dan Kurnos with The Benchmark Company.

Daniel L. Kurnos - The Benchmark Company, LLC, Research Division

Let me just follow up on one of Mike's questions there. It did look to me at least, that you did stay a little bit aggressive on the marketing spend in FTD, and I was just curious, how much of it was to support your new business -- your new businesses or if you're maybe pressing a little bit in the daily deals channel more heavily? And then looking out to 2013, do we think that we should see margin expansion at FTD?

Mark R. Goldston

First of all, Dan, I would say a couple of things. One, we did spend, obviously, in the holiday to help drive the business. We tested a direct response television program for FTD, ad campaign, which turned out to be successful for us. And we had other things that we did do. We did do a Groupon offer this year as well, which turned out to be very successful for us. Absolutely met or exceeded our expectations, which was great. And so obviously, we need to promote during the holiday seasons. What we tend to do though is we tend to promote in such a way where we're trying to bring in brand-new customers as opposed to trying to condition existing customers that if they wait long enough, they'll get a screaming deal from FTD as they get close to the holiday. That's not a good strategy and that's not what we employ. So we're trying to fish in new ponds by using some of these techniques, whether it be direct response or group buying, trying to bring people in who, if they follow the normal purchase path that an average FTD flower customer will follow, would get us a 12-month payback on our investment. And that, as you know, were ROI fanatics all across United Online and that's how we look at it. In terms of margins going forward, can't make a projection on that, but we are not feeling any undue margin pressure because of the way we've positioned the brand. Now in the overall numbers, you see we now have these 2 brands in the U.K., which we're thrilled that we own, which are value-priced brands. So just by definition, that's going to put some pressure on margins because those are our lower-priced product lines. But by and large across the board, we've done a real good job of segmenting FTD where it is in the marketplace and not having to make it "a price brand."

Daniel L. Kurnos - The Benchmark Company, LLC, Research Division

Yes, yes, that's very helpful. And just to quickly follow up on that, maybe some more clarity from you then. You guys definitely didn't see any impact on repeat rates from your customers. It was -- you were just fishing more in the new customer pond. Is that a fair way to look at it?

Mark R. Goldston

Yes. The way we look at it is, there's a couple of ways to go after this marketplace. But what we found is when value people come into a franchise on a promoted basis, the yield on those people because of the multitude of holidays and birthdays and anniversaries and the like is such that they will then make another purchase or another 2 purchases in a non-promoted period. In other words, if it was your wife's birthday and you needed to buy her flowers and it wasn't during Valentine's Day, Mother's Day, et cetera, it is most likely that, that repeat purchase that you would make would be in a non-promoted period. So we look at the total continuum of revenue that we bring in against the investment or advertising that we made or the discount and then what is that total take that we get over that 18-, 24-month period. And that's the ROI that we run. And so all of these efforts are designed to bring people in during a promoted period or a holiday and then convert them to an additional purchase or 2 in non-holiday periods where the margin would be very attractive.

Daniel L. Kurnos - The Benchmark Company, LLC, Research Division

All right. That's helpful. So let me shift over to the Content & Media segment. Small piece, but products sales were down year-over-year and sequentially. Just maybe your thoughts on the longer-term outlook for that piece of the business. And is it a growth segment or sort of a stable revenue-type business?

Mark R. Goldston

I mean, I'm actually -- I'm a little surprised that people might not be more focused on some of these results that we had at Classmates, which, I have to tell you, in my opinion, are almost stunning in terms of what they've been able to do. I have been sitting on earnings calls with Classmates for, this is like over 8 years now. And we have been historically unable to significantly improve the amount of photos that we have on the site, the amount of profiles that people fill out, the frequency with which people visit the site and the frequency with which people view profiles. Those are -- and the email response rate. Those are the 5 key determining metrics that you want to watch on any social network but specifically for this one. And we've finally, through a lot of hard work and a lot of programs and schoolFeed integration and all kinds of things, we are able to put up numbers in the fourth quarter where the amount of photos and profiles we generated were exponential -- I mean, hundreds of times greater than we've ever added before. So we added millions versus single-digit or double-digit thousands, millions of photos and profiles, which is making this a much richer content site. It's resulted in us having a higher frequency of visits. It's resulted in getting a doubling year-over-year of the amount of profiles that have been viewed by our members. So we've been able to do what we frankly thought we might never be able to do on our social networking business. And so now going forward, I think we're starting to prove that the Classmates business, as it stands today, is -- got a much richer content environment than it probably has ever had. It's a more prolific social network than it's ever been and so now we have more opportunities going forward to figure out what else we're going to do to try to monetize these people. But in the past, as you remember, even when we put up tremendous paid subscription numbers and really strong profit numbers, the comeback always was, yes, but you guys don't have enough content, there's not enough to do, there's not enough engagement -- all of which, by the way, was absolutely true. And we said we needed to devote our time and effort to trying to make this thing a more vital, content-rich social network and that's exactly what they've accomplished. So I'm really proud of what they've done up there and I like where it's sitting right now. In terms of the MyPoints business, the other part of the segment, I mean, it's had its challenges there and, to be quite frank with you, those things have been starting to show themselves over the past couple of quarters. And we just got to a point where we've had a couple of key people leave that sales organization, which has affected its sales level. We've had a really strong competitive environment with people like the daily deals folks, et cetera, out there. And so that business is -- look, it's a small business. It's clearly the smallest part of United Online, but it's a challenge. And so we are now sitting down, saying we need to make some changes in how we're operating there and what we're doing, and we need to fortify that sales organization and get them the help that they need. And we need to figure out how we're going to more viably compete in a market that, quite frankly, looking at daily deals and things of that nature, has not really had attractive economics. It's a low margin business in terms of a category, and we don't find that particularly appealing, to be candid with you. And so we're trying to come up with some other solutions. Like I said, it's a small part of the company, but nonetheless, it's something that we're going to be focused on in 2013.

Daniel L. Kurnos - The Benchmark Company, LLC, Research Division

Right. I guess, maybe I'll follow up with you on the product side a little bit later, but obviously you gave very good color during the call on the other stuff, which is probably why I didn't ask for it. So maybe in terms of the schoolFeed, which you did bring up, I mean, could maybe you give us a little bit more color there on the implementation of schoolFeed and the integration into the subscriber base as to how that's helping you?

Mark R. Goldston

Yes. The -- well, the integration is in process. It's not been completed yet. We still have a bunch to go because there are so many millions of people on schoolFeed that you just can't dump all of them into the Classmates environment at one time. We couldn't absorb them and the user base wouldn't be able to process them. So it's ongoing. But it certainly has been great in terms of an injection of content into the Classmates site. And the other thing that's been fantastic about the schoolFeed acquisition is it has helped us to increase the population within every school class. So that we now have a much higher percentage of people that were in your graduating class now represented on classmates.com and that's really important because that's the #1 thing our users tell us, is that they want as high a representation as possible of the graduates from the class. So we've also -- we're trying to do some things on schoolFeed that we do on Classmates and also vice versa. So we have a lot of cross-pollination going on, and we're very happy with the asset.

Daniel L. Kurnos - The Benchmark Company, LLC, Research Division

Okay, great. Could we get maybe a little bit more color on how you're investing in mobile and content media and how you intend to monetize your investments there?

Mark R. Goldston

Yes. So mobile, 15, 18 months ago was a tiny piece of the Classmates business. Today, it is a very important piece and they have a major initiative going on. We do have Classmates for mobile. It's a much better experience now than it ever was. We have a higher percentage of people now accessing over mobile than we ever had before. That's the good news. The challenge for all people who are in purchase or subscription-based businesses as it relates to mobile, is what you find is the rate at which people will subscribe and go through a subscription process is much higher on a laptop or a desktop computer than it is on a small-screen mobile device. So we, as an industry, are trying to figure out better ways to address conversion and payment processing to make it so that the gap is closed more between what mobile gets and what laptop and desktop get. So -- and we also have a mobile application that's been developed for MyPoints as well and that will become a much bigger part of that business going forward especially as it competes within the daily deals and the coupons and the offers business. So mobile is, by anybody's account, probably going to be between 20% and 35% of anybody's business in terms of their overall traffic and engagement and I don't see that abating at all. In fact, it's ironic that we now seem to have gone to larger screen mobile devices. For a while, the mobile industry was going to the smallest form factor they could find and now it's actually -- you have mini tablets. And if you look at great products like the Samsung Galaxy line and you look at the size of these 4.5-inch screens, it's actually -- they're actually being optimized because of the awareness of the fact that so many people are now using mobile as their primary means for accessing the web.

Daniel L. Kurnos - The Benchmark Company, LLC, Research Division

All right. That's very helpful. Not to monopolize your time, but if I could just ask you one more question on the Communications segment. Your ad business was -- I know it's seasonally strong in Q4. You still showed some healthy growth year-over-year. You did have the success with your tests. I'm just wondering, I know you had an easier comparison. It was still your strongest quarter for ad revenues since the fourth quarter of '10. Could you just give us some color there and how we should think about ad revenues in the segment going forward?

Mark R. Goldston

Hard to give you color on that. I mean, the fourth quarter is always the strongest. We just happened to have had a really great quarter. Our ad sales team did a fantastic job. Our engagement levels, our traffic levels were such that they yielded the opportunity from an inventory standpoint for them to do that. We had a dramatic increase in ad impressions, which obviously helps to generate the greater revenues, and Rusty and his team are really focused on this on a go-forward basis. And as we get more and more people who are continuing to use this thing at a healthy rate, our impressions will follow accordingly. So we're real happy with it. I mean, we can't make a projection as to what it will be going forward, but we seem to have come upon a good formula for where this business is and how to optimize its ad monetization. It's taken us a while to do that. As you know, we transitioned from a direct sales force to a wholesale force to a network approach. We've -- I think we've now really figured it out. They're doing an outstanding job.

Operator

[Operator Instructions] And we'll go next to George Sutton with Craig-Hallum.

George F. Sutton - Craig-Hallum Capital Group LLC, Research Division

Mark, you mentioned that you are continuing to look at strategic alternatives for several of your businesses. Could you give us an update there in terms of the scope? Is it still as broad as it was before given the amount of time that has elapsed? Have you started to narrow the potential candidates for sale? And then on the same vein, could you give us an update on the patent piece of the opportunity?

Mark R. Goldston

Well, George, so a couple of things. I mean, it's not a concerted program. Basically, when we announced that we were going to spin FTD off as a separate publicly traded company, we also said we felt we had a duty to also evaluate any and all strategic options that were there. And obviously, by making such a notification, you have the potential for people to inbound call you as well. And so being that our job is to maximize shareholder value, we, of course, if someone's a bona fide candidate, would tell anyone who wanted to do an inbound to us that we or the Moelis folks would screen them and we would obviously potentially talk to them. And so that's just an ongoing process up until the date at which we actually effect the spin which is what, if I was shareholder, I would hope and expect the management of the company would do and that's exactly what we are doing. And so I can't really comment on that process other than to say we are, as a board, completely open to anyone who has a bona fide interest in any asset that we have and we would entertain that. And so that's number one. In terms of the patent process, as you know, we hired Evercore Partners. They have a lot of experience in this area. They are the people who sold the AOL patent portfolio. And it's a much more elaborate process, I think, than anybody even imagined going into it because you have to analyze every single patent, put together a presentation that people can read through and then go through a process of trying to determine whether or not if you're going to sell the patent portfolio, are you going to sell the entire portfolio? Are you going to sell components of the portfolio? Are you going to sell it to an operating company? Are you going to sell it to what they call an NPE or a non-practicing entity or patent troll? And so it's a very different economic platform when you sell it to -- outright to other companies. A lot of times, the deal that you do is a cash deal for the sale of your patents. When you deal with these NPEs or trolls, et cetera, a lot of times they're aggregators. What you'll have is they will pay you a certain amount of money up front and then you will get a percentage of the back end that they get out of prosecuting these patents against people. So that process is ongoing. It's been very complicated. It's been a great learning experience for all of us. And we're kind of working with Evercore and using their advice and guidance as to what's the best way to get an outcome here. And so that process is ongoing, and they're running it.

George F. Sutton - Craig-Hallum Capital Group LLC, Research Division

Okay. Relative to the timing, the end of the third quarter as you'd mentioned, it sounds like it is now really hinging upon this 5-year ownership of FTD. Is that correct?

Mark R. Goldston

It is correct, George. It is -- originally, I will tell you, originally, when we first started talking about the possibility of doing this spin, one of the things that we were considering as a board was should we take one of our other assets or et cetera, et cetera and should we potentially put something together, which made it an immediate 5-year trading asset. And then in looking at that, we said, look, come August, FTD is a 5-year trading asset on its own so why do that? Let's keep remain co, [ph] United Online, clean as to how people will understand it and how they've understood it before and let's leave FTD as a very clear story that's not complicated to the investor. And so in order to do that, we have to wait up to and through the anniversary date of the purchase, which is this August 27 date. We bought it on the 26th so the 27th, effectively, you're a 5-year trading asset. And that makes it completely clean and completely easy to understand. So that's the way we're looking at it. Look, you know, George, better than anybody, we've had these discussions. The Street wants clarity on these assets and clarity would basically say to us why put another asset that is not related to the flower and gift business inside of FTD to achieve 5-year trading status when by just waiting till the end of August, you can have a clear, focused floral and gift company that qualifies on its own. And that's exactly what the thinking is.

George F. Sutton - Craig-Hallum Capital Group LLC, Research Division

Okay. No, I appreciate that. Lastly, relative to FTD, you did say it went very well during the Valentine's period and it was excellent. And we have modeled 4.5% growth for Q1 in FTD. That's not a number I would consider excellent, but I was wondering if our definitions are similar.

Mark R. Goldston

I think I once had that discussion with a teacher of mine on a report card as well. But look, nonetheless, I can comment is Valentine's Day for us, for anybody in the flower business is a key linchpin and we had a good Valentine's Day. And we're very pleased with the results. And I've given you the color that I can give you. Obviously, that's what the Q1 call will be heavily focused upon. I was pleased that we had both a good domestic and international Valentine's Day because, as you know, that U.K. economy is much tougher than the U.S. economy is even now. So that's all I can really tell you on that. There are no more major newsworthy events that -- to come in Q1. So it is what it is and we'll talk about it more later. But I can't give any more color than that. In fact, the guys were like, do you really want to talk about the Valentine's Day holiday at all in this particular call? And my feeling was part of the reason why we have a February 20 earnings call is because it is after the Valentine's holiday and I'm sure everyone who's invested in this company would want to know, at least, qualitatively, how did it go. And so that's why we've kind of felt compelled to provide the information we have, but we can't get any more granular than that.

George F. Sutton - Craig-Hallum Capital Group LLC, Research Division

Okay. One other thing, if I could, relative to Net G -- I'm sorry, the NetZero 4G. Are we over what you would call the transom in terms of determining whether or not you're going to go forward with this site? I think I sensed a quarter or 2 ago maybe it was still in very much of a test mode. Are you beyond that point in your view now?

Mark R. Goldston

Yes, George, that's actually a great question because I'll tell you -- and I think I tried to communicate this on the calls. The way it was going in the first quarter that we did this, those customer acquisition costs were not -- did not lead to a viable business. It was several hundred dollars. It was too expensive. We said, boy, if this is what it's going to take to be in the 4G wireless broadband business, this is just not a business we're going to be in. Then in the second quarter, we went into Phase 2. We started some other marketing tactics and we saw it start to come down, not dramatically, but the costs came down. The costs came down dramatically in this Phase 3 such that, at these economics, it's a real good business. And so we're now convinced that we can sustain this business with these economics and these tactics and so we now believe that the NetZero 4G is here to stay. We said we'd make that conclusion by the end of December. We absolutely have made it. And we have a plan in place that they're operating in the Communications segment so that, that business will be profitable in 2014, which is what we told them. In order for this to be viable, your customer acquisition costs had to come down to a certain level. It had to happen by the end of December of 2012. And if it did, you should be profitable in 2014 and, frankly, all of those things came right in line.

Neil P. Edwards

And George, if you look at the transcript and what I said, the $3 million to $4 million OIBDA loss in the first quarter and then $6 million to $7 million for the full year. So you can see that you're going to have continuous improvement throughout the year with a goal to that business being profitable in 2014.

Mark R. Goldston

And George, you know us, we're not going to just hit the pedal -- on the gas pedal as hard as we can. It's just not what we do. We're going to be smart about how we do this. But it's fascinating to me that when we started out, our customer acquisition cost was exorbitant and we had more people going free than going pay. Now our customer acquisition cost is very attractive and we have way more people going pay than going free. So it's done exactly what we wanted to do.

Operator, I can see we are now out of time. We said we'd go to 3:00. So if anybody has any further questions, please feel free to contact David Bigelow, our VP of IR, or Neil or myself and we'd be happy to answer them. So I want to thank everybody for attending the call today.

Operator

This does conclude today's call. Have a wonderful day.

Mark R. Goldston

Thank you, operator.

Operator

My pleasure.

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