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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

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

Michael Crawford - B. Riley Caris, Research Division

Jason Kreyer - Craig-Hallum Capital Group LLC, Research Division

United Online (UNTD) Q2 2013 Earnings Call July 31, 2013 5:00 PM ET

Operator

Good day, and welcome to the United Online Second Quarter 2013 Earnings Conference. Today's call is being recorded. At this time, I would like turn the conference over to David Bigelow, Vice President, Investor Relations. Please go ahead.

David Bigelow

Thank you, Anthony. Hello and welcome to United Online's conference call to discuss our financial results for the second quarter ended June 30, 2013. 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 we created a PowerPoint presentation that summarizes our Second Quarter 2013 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 earnings release 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 in our website, along with certain reconciliations to their most comparable GAAP financial measures.

In addition, the company applies the 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, operating expenses, net interest expenses, amortization, share numbers, capital expenditures, taxes, operating metrics, the proposed spinoff of the FTD segment, the proposed reverse stock split, the expected benefits of the new credit agreement, Verizon agreement and Sprint agreement, our review of monetization opportunities for our patent portfolio, new or planned business initiatives, products, services and features, 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 the 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'll start out with a few comments from Mark and Neil, and then we'll open up for questions. So I'll now give the floor over to our Chairman and Chief Executive Officer, Mark Goldston.

Mark R. Goldston

Thanks, Dave, and welcome to our earnings call for the second quarter ended June 30, 2013. The second quarter of 2013 represents a very important time in the company's history for a variety of reasons. First, as you all know, we're rapidly approaching our planned tax-free spinoff of FTD as an independent publicly traded company. We're currently targeting to affect the FTD spinoff before the market opens on October 1, 2013, and to effect the proposed reverse stock split if approved by our shareholders and Board of Directors, immediately prior to the spinoff. Therefore, this is our last earnings call before those key events.

On a personal note, this is also my last earnings call as the Chairman and President and CEO of United Online, a position I've held since the very beginning of a startup called NetZero, almost 15 years ago, and then with the creation of United Online in September of 2001 as a result of our merger with NetZero and Juno. I'm very proud of what my colleagues, the Board of Directors and I have accomplished in building the company. And I'm also appreciative of all the investors who've supported us over the years, especially those of you who are longtime shareholders. During my tenure we've built a company that, after recording an adjusted OIBDA loss of more than $200 million in our first 3 years, 1999 to 2001, we then proceeded to generate nearly $1.7 billion in cumulative adjusted OIBDA from 2002 to the second quarter of 2013. We've also returned $369 million in cash to shareholders in cash dividends, and we've amassed over 100 million members worldwide, which places United Online in a very select group in terms of Internet companies, who have been public since 1999. After the spinoff of FTD is completed, United Online and FTD will continue as 2 separate outstanding publicly traded companies, and I hope you'll continue to invest in both. This has been an important quarter in our history for a number of reasons, some of which you are not aware of until this release just went out today. We recently signed important agreements in the last week or 2 that have significant positive implications to United Online and our shareholders. The first 2 of these are multiyear agreements with Verizon and Sprint, that will greatly expand the NetZero mobile broadband coverage footprint via Verizon's nationwide 3G network and Sprint's 4G LTE network and its nationwide 3G network. In addition to this dramatic increase in coverage, we will be offering both 4G and 3G options under our NetZero mobile broadband service.

In the case of Sprint, we signed a 5-year agreement to offer the NetZero mobile broadband service via Sprint's 4G LTE and 3G networks. This agreement will allow us to expand our NetZero mobile broadband's coverage to a projected 200 million people in 2014 on the Sprint 4G LTE network. We've also signed a 3-year agreement with Verizon to offer the NetZero mobile broadband service and Verizon's nationwide 3G network. When that service is launched, we expect NetZero mobile broadband will be available in approximately 500 markets and cover more than 300 million of the 316 million people in the United States. In essence, NetZero mobile broadband will soon be available to provide service to approximately 95% of the U.S. population, significantly greater than our current NetZero mobile broadband service, which only covers approximately 48 -- 40%, I'm sorry, 40% of the U.S. population. Currently, a large number of calls we receive for the NetZero mobile broadband service everyday are from people outside of our Clearwire coverage area. So we're simply losing the ability to sign up many of the inbound callers we get every day because of that. In the near future, when we begin offering mobile broadband service on the Sprint, Verizon and Clearwire footprints, we'll be in a position to offer our NetZero mobile broadband service to almost everyone who calls into the 1 (800) NetZero number. At our current conversion rates, our NetZero mobile broadband sign ups could significantly increase without any additional marketing spend as a result of these 2 landmark agreements that we've signed, which in addition to Clearwire, will give us a great coverage footprint. The other major agreement we recently signed is the refinancing of all of FTD's previously outstanding debt, which resulted in a major improvement in the capital structure of FTD, as it heads towards the spinoff. This refinancing was led by the Bank of America and Wells Fargo, and it extinguished FTD's previously outstanding $235 million term loan and its $50 million revolver. And replaced it with a $350 million revolving credit facility, of which only $220 million was needed to be drawn at closing on July 17 of 2013, so just 2 weeks ago. This new credit facility accomplishes several important objectives. One, it's a significant positive step in the spinoff process. Two, it increases the amount of debt capital available to FTD, should it need it. Three, it provides financial flexibility following the spin. Four, it significantly lowers FTD's interest expense. And five, perhaps most importantly, the annual interest savings will be about $7 million a year based on today's interest rates, which will more than offset the public company costs and incremental ongoing operating expenses that FTD anticipates it will incur annually as a result of the separation once the spin is complete. This is a huge benefit for FTD and its future shareholders.

So as you can see, the FTD spinoff is not an ending. It's actually just the beginning. We're not satisfied simply with unlocking shareholder value through the spinoff transaction. We're already taking steps designed to enhance the value of both post spin companies and position them as attractive investment opportunities.

I'm now going to provide an overview of the status of the FTD spinoff and our results for the second quarter. Then Neil Edwards, our CFO, will conclude our prepared remarks with a look at the numbers for the quarter and our guidance going forward. After that, we'll wrap up with a Q&A session and our final thoughts on the quarter. So let's look at the spinoff.

The spinoff is on track. It remains subject to a number of conditions, including final approval of the transaction specifics by our Board of Directors, where we anticipate being ready to affect the spinoff before the market opens on October 1, 2013. Therefore, the 2 independent public companies, United Online and FTD Companies, will begin trading separately when the market opens on October 1, 2013. In September 2013, subject to the approval of our shareholders and Board of Directors, of the reverse stocks split, we plan to announce the reverse stock split ratio for United Online, which we anticipate affecting immediately prior to the spinoff. We also anticipate determining and disclosing what the dividend policy will be for United Online and FTD moving forward. Recent milestones in our spinoff preparations include refinancing FTD's debt, as I said, and scheduling a special meeting of stockholders on September 5, 2013 to vote on a reverse split of United Online's stock as we detailed in the recently filed proxy where we described the options for a 1 for 3, 1 for 4, 1 for 5, 1 for 6, and a 1 for 7 reverse split. We've also made further progress towards reaching operational readiness for the spinoff of both companies. Along with getting FTD ready to be a stand-alone public company, we're also preparing United Online to move forward as a smaller entity after the spin. One of our more important tasks is to address the United Online post spin cost structure, so that it's commensurate with the new smaller size of that company. We're in the process now of identifying cost reduction opportunities which will significantly lower unallocated corporate expenses following the spinoff. Also, we're actively pursuing the monetization of the patent portfolio of the remaining United Online companies. And we hope to have something to report on this effort prior to the spinoff date. If successful, this could be an attractive source of future income for United Online going forward post spin.

Now let's get to the core of the call and talk about the highlights of the second quarter 2013. Number one, consolidated revenues decreased 4% from the year ago quarter to $221.7 million, slightly below our guidance range with consolidated adjusted OIBDA of $34.7 million, which far exceeded our guidance rate by $2.2 million. Number two, FTD's year-over-year quarterly comparisons were negatively affected by the timing of the 2013 Easter holiday, which took place in the first quarter of 2013 versus the second quarter in 2012. If you adjust for this timing and exclude the impact of foreign currency exchange rates, FTD segment revenues are relatively flat and segment-adjusted OIBDA increased 2% in the quarter. Number three, Content & Media segment pay accounts declined by just 66,000 during the quarter. Now that's the smallest net decrease we've had in 3 years, or since the second quarter of 2010. The quarterly net decrease in segment pay accounts has now improved in 6 consecutive quarters from a high of a $296,000 decline in the fourth quarter of 2011 to the just $66,000 decline in Q2 2013. On a sequential quarterly basis, Content & Media segment revenues and segment adjusted OIBDA, both increased compared to the first quarter of 2013. Number four. In our Communications segment, we've reduced our revenue decline to just 7% year-over-year compared to 17% in the second quarter of 2012. The Communications segment achieved sequential quarterly increases in both segment revenue and segment adjusted OIBDA, as well, and this was primarily driven by increased ad revenues.

Now I'm going to take a look at individual operating segments and I'd like to start with a review of FTD. First, I'll look at the financial summary. Our FTD segment, which includes both domestic results of FTD in the U.S. and Canada, and the results of our Interflora business in the U.K. and Ireland. As I mentioned, FTD's second quarter segment revenues and adjusted OIBDA were negatively impacted by the timing of the 2013 Easter holiday, which shifted about $3 million in revenues and about $400,000 in segment-adjusted OIBDA from Q2 2013 to Q1 2013. Adjusting for the timing of that 2013 Easter holiday, and if you exclude the impact of foreign currency exchange rates, FTD segment revenues are relatively flat and segment-adjusted OIBDA was actually up 2%.

Consumer orders in the quarter decreased 4% year-over-year, but the decrease was 1% when adjusted for the timing of that 2013 Easter holiday shift. There were several positives in the FTD segment during the first quarter -- during this quarter, second quarter 2013. First, segment-adjusted OIBDA has now increased year-over-year in 9 of the last 10 quarters at FTD from prior periods adjusted for the timing of the U.K. Mother's Day in 2011 and the Easter holiday in 2013. And despite a very competitive pricing environment, particularly during Mother's Day holiday selling period, FTD held its ground on pricing and excluding the unfavorable impact of foreign exchange rates, FTD actually realized an increase in average order value of 2%. As a result, FTD's segment-adjusted OIBDA margin grew by 30 basis points to 14.6%. Now this marks the seventh time in the last 8 quarters that margins have exceeded 14% when prior periods are adjusted for the timing of the Easter holiday in 2013.

Now, I want to take a look at this debt refinancing I talked about because it's perhaps the biggest news for FTD in recent weeks. As I mentioned, the new credit agreement provides FTD with a $350 million 5-year secured revolving credit facility, of which only $220 million was drawn at closing in connection [ph] with paying off the old credit facility. So as I said earlier, under the new agreement, FTD's interest expense is going to be reduced by roughly $7 million a year, based on today's interest rates. Now to put that in perspective, the interest expense savings from the refinancing is expected to more than offset FTD's incremental public company costs, as well as their incremental ongoing operating expenses that FTD will anticipate it will occur annually as a result of the separation once the spin is complete. So all things considered, we're happy with the progress FTD made during the quarter, and I'm really confident that, Rob Apatoff, the President of FTD, and his management team will continue to build on the positive momentum that FTD's generated since the beginning of 2011 and be in great shape going forward.

Now I want to turn my attention to our Content & Media segment. This segment includes the Classmates business, as well as StayFriends and the MyPoints business. Segment revenues were down 13% compared to the year ago quarter. Segment adjusted OIBDA was down 12% compared to the year ago quarter. But significantly, segment revenues and adjusted OIBDA both increased sequentially versus Q1 of 2013.

Let's take a closer look at Classmates' worldwide subscribers. So in the past quarter, Classmates saw a continued sequential improvement in the net decline of pay accounts. The net decline in pay accounts was only 66,000 in Q2 compared to a 78,000 decline in Q1, and 173,000 decline in the second quarter of last year, so a major improvement. Classmates has improved its net pay account decline now in each of the last 6 quarters and in 8 of the last 10 quarters. This trend began in 2011 with our renewed focus on creating a compelling high school value prop online, and that's really what helped us start the driving force behind this improvement. Along with the increase in new members, we continued adding substantial amounts of compelling user content since late 2012. So consistent with our long-stated strategy that we're going to build the largest online high school yearbooks archive, we've added a steady stream of new digitized yearbooks and now have over 200,000 digitized yearbooks at the end of Q2 2013. Other types of compelling content we've got includes photos and stories from our members. In fact, in the last year, we've more than tripled the percentage of our members that have a photo and, thanks to a feature we launched in Q4 2012, that compiles the major milestones of our users lives, more than 15 million of our member profiles now include a personalized story. That's a major shift for this brand. Also, we should note that our schoolFeed app is no longer operational due to changes instituted by Facebook, but we do eye significant benefits in the ownership of schoolFeed, and had taken those learnings and integrated them into the Classmates business. I mean the big news coming out of Classmates over the next several months has to do with the significant expansion of free to pay monetization paths that we developed for our members, so let me talk a little bit about that. For the past several years, Classmates has had a largely singular path to monetizing people that we've called the Classmates Guestbook. So each time a member visited another member's profile, the visiting member has the option of leaving his or her name in that person's Guestbook. That would then generate an e-mail notification to that person that someone visited their profile. In order to find out who visited their profile, the recipient of the e-mail must become a paid member. Profile visits continue to be collected, but are never unveiled to the member if they choose not to become a paid subscriber. The Classmates Guestbook feature has served us extremely well and our members extremely well for many years. We have clearly identified that it is this curiosity proposition that's most attractive to our members and which causes free members to convert to becoming paid members. So to further enhance the user experience and improve Classmates' monetization, we've now developed several new content-based pathways to our paid subscription service. We're leveraging these new methods we've developed that will enable Classmates to collect millions of profile photos, millions of stories, and original high school yearbook photos. By utilizing this content as prompts, we'll create multiple paths to satisfying the curiosity proposition by revealing this information to a paid subscriber only. We believe we'll be able to convert more free members to paid members. So now in addition to prompting people with e-mails and listings regarding the fact that someone visited their profile or their Guestbook, we'll also now be sending e-mails to our members prompting them with new features such as: who looked at your photo; who checked you out in the yearbook photo; who remembered you and wrote a comment about you; and who wished you a happy birthday. Now what this means now is that Classmates, instead of having one monetization path to pay, will now have 5 separate monetization paths, where anyone who visits or posts to a member's yearbook, Classmates Guestbook, looks at a photo, looks at a profile, or writes a comment about that member, we'll generate a communication to that individual that someone was curious about them. And we think these new pathways from free to pay membership will be both compelling and also provide a great deal of value enhancement to those who become paid members, who can enjoy all the benefits that I just described. Now internationally, our social networking business under the StayFriends and CharmBee [ph] brand names continues to face competitive challenges with free social networks which just contribute to the decline in their subscriber base. We're continuing to work on new initiatives I described over the last few quarters, including the expansion of the German school information page, the addition of social games, and a new StayFriends app on Facebook in Germany. We think these strategies will enhance our potential to attract new subs and improve retention of existing paid accounts. At MyPoints, we faced a challenging operating environment over the last several quarters. We've talked about that before. We've been taking significant steps to address these challenges, and we think we've made major progress. In the second quarter, MyPoints revenue improved sequentially.

I'm going to wrap up with a review of our Communications segment, which consists primarily of our NetZero and Juno brands. I'm also going to give you an update on the NetZero mobile broadband service, which is a key component of future growth. In our Communications segment, quarterly revenues decreased 7% compared to the second quarter of 2012. Now this is our third consecutive quarter of having only single-digit decreases. In the second quarter of 2012, segment revenues declined 17%, compared to the second quarter of 2011. So the 7% year-over-year revenue decline we just posted in Q2 2013 is definitely a step in the right direction. The improving revenue trend is driven largely by increased advertising revenue and the growth of our NetZero mobile broadband business. The 17% year-over-year increase in ad revenues we experienced in 2Q 2013 is primarily attributable to the steps we've taken to maximize the monetization of our ad inventory over the last several quarters. This has allowed us to take advantage of the favorable conditions in the ad market during the second quarter.

In the second quarter of 2013, Communications segment adjusted OIBDA declined just 3% compared to the year-ago quarter. And adjusted OIBDA margin was 35.2%, which included a negative impact on segment-adjusted OIBDA of about $1.8 million in the second quarter due to our investment in the growth of the NetZero mobile broadband business. As of June 30, 2013, NetZero mobile broadband business had about 41,000 accounts, relatively flat compared to the prior quarter. As many of our free sign-ups in the first year free promotional plan launched last year have reached their one year anniversaries and churned, they have been replaced by paid subscribers. Now through a variety of marketing efforts, we've also been able to move our NetZero mobile broadband subscribers to much higher price points. In the second quarter of 2013, 89% of our sign-ups were in the $19.95 or higher price plans. Now this 89% is versus 58% in Q1 2013. That is a major improvement. Now moving into the 6 quarters since the launch of this service, we continue to make progress. But more than ever, we believe the NetZero mobile broadband business has the potential to be a viable source of incremental subs and revenue for the foreseeable future, especially now that we'll soon be a true nationwide mobile broadband provider backed by the Verizon, Sprint and Clearwire networks. Ultimately, we believe that the combination of NetZero's dial-up and it's mobile broadband business, which will ultimately be available in early Q2 2014 in virtually every market in the United States, that these businesses support a profitable, cash-generating company with the potential for real growth.

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

Neil P. Edwards

Thank you, Mark. Let me begin with the highlights of the second quarter of 2013, and then I'll provide guidance going forward. All comparisons represent year-over-year quarterly comparisons, unless I clarify otherwise. And I'll start with the consolidated financial highlights. Revenues were $221.7 million, a 4% decrease and slightly below our guidance range. Adjusted OIBDA of $34.7 million was $2.2 million above our guidance range and down 2%. The income tax rate for the quarter of 44.7% was negatively impacted by certain transaction-related costs related to the FTD spinoff, which are not deductible for income tax purposes. Diluted net income per common share was $0.06, a decline of 33%. Adjusted diluted net income per common share was $0.17, a decline of 6%. Cash flows from operating activities and pre-cash flow for the quarter were $14 million and $12.1 million, respectively, representing decreases of 13% and 10%, respectively. The declines were primarily driven by unfavorable changes in net working capital. Cash and cash equivalents at June 30, 2013, were $122.4 million compared to $132.3 million at March 31, 2013, primarily due to the paydown of $10.9 million on FTD's credit facility. Net debt at June 30, 2013, was $111 million, compared to $111.8 million at March 31, 2013. The company defines net debt as total debt, net of discounts, less cash and cash equivalents.

As Mark discussed in his comments, on July 17, 2013, we refinanced FTD's outstanding debt by entering into a new $350 million 5-year revolving credit facility of which $220 million was drawn at closing. The refinancing is expected to reduce FTD's annual interest expense by approximately $7 million based on current LIBOR rates and will also provide financial flexibility going forward.

And now onto the FTD segment. During the second quarter, FTD's results were unfavorably impacted by the timing of the Easter holiday, which occurred in the first quarter of 2013, whereas it occurred in the second quarter of 2012. As a result, approximately $3 million in segment revenues and $400,000 in segment adjusted OIBDA were recorded in the first quarter of 2013, which, in the prior year, were recorded in the second quarter. Segment revenues were $164.3 million, a decrease of 2%. Adjusting for the timing of the Easter holiday, segment revenues remained relatively flat versus the year ago quarter. Segment adjusted OIBDA was $24 million, relatively flat versus the year ago quarter. Adjusting for the timing of the Easter holiday and excluding the unfavorable impact of foreign currency exchange rates, segment adjusted OIBDA increased 2%. Segment adjusted OIBDA margin was 14.6% compared to 14.3% in the year ago quarter. And in terms of key metrics, consumer orders were 1.9 million, down 4%. Adjusting for the timing of the Easter holiday, consumer orders declined 1%. Average order value, or AOV, was $61.27, an increase of 1% compared to the year ago quarter. Excluding the unfavorable impact of foreign currency exchange rates, AOV increased 2%.

And now onto the Content & Media segment. Segment revenues were $32.9 million, a decrease of 13% year-over-year, with a slight increase sequentially. Segment adjusted OIBDA was $6.6 million, a decrease of 12% year-over-year, but a 77% increase sequentially. In terms of key metrics, pay accounts decreased by a net 66,000 in the second quarter, the smallest decrease since the second quarter of 2010, compared to a net decrease of 78,000 in the first quarter of 2013, and a net decrease of 173,000 in the year-ago quarter. Active accounts were 10.5 million, a decrease of 8% sequentially, and an increase of 2% year-over-year. Churn was 3.1%, the lowest quarterly level for the segment since we acquired Classmates back in 2004. Churn for the quarter represents a decrease of 20 basis points sequentially and a decrease of 50 basis points year-over-year. Average monthly revenue per pay account or ARPU was $2.48, flat sequentially and down 1% year-over-year.

Now onto Communications segment. Segment revenues were $24.9 million, a decrease of 7% year-over-year, but a 1% increase sequentially. Segment adjusted OIBDA was $8.8 million, a decrease of 3% year-over-year but a 24% increase sequentially.

The investment in our NetZero mobile broadband business resulted in a negative adjusted OIBDA impact of approximately $1.8 million during the second quarter of 2013 versus a negative adjusted OIBDA impact of $4 million in the year ago quarter. Segment-adjusted OIBDA margin was 35.2% compared to 33.6% in the year ago quarter. In terms of key metrics, segment pay accounts decreased by a net $31,000 in the second quarter versus a net decrease of $24,000 in the first quarter of 2013, and a net decrease of $38,000 in the year ago quarter. NetZero mobile broadband accounts were flat sequentially at $41,000 due to a significant number of accounts on the first year free promotion plans that reached their one-year anniversary and churned. These accounts have been replaced by new pay subscribers, and we're seeing a shift in new sign-ups to higher priced plans. ARPU was $9.34, up 1% sequentially and 4% year-over-year. The year-over-year increase was due to a higher percentage of NetZero mobile broadband accounts that had a higher ARPU. Churn was 3%, flat with the first quarter of 2013 and down 20 basis points from the year ago quarter. The decline in churn in our core dial-up business was offset by higher churn in our NetZero mobile broadband business. In terms of our unallocated corporate expenses for the quarter ended June 30, 2013, the impact of unallocated corporate expenses on consolidated adjusted OIBDA was $4.7 million, an 11% reduction compared to the year ago quarter.

Moving on to our business outlook for the third quarter of 2013. The third quarter guidance reflects FTD as part of United Online through the end of the third quarter. Consolidated revenues are estimated in the range of $169 million to $175 million. Consolidated adjusted OIBDA is estimated in the range of $22 million to $26 million. Net interest expense is estimated at $3.6 million, which includes the write off of debt discounts and certain financing fees in connection with the refinancing of FTD debt. Amortization of intangible assets is estimated at $7.4 million. Weighted average diluted common shares are estimated to be 92.6 million on a GAAP basis and 92.9 million on an adjusted basis. We estimate our annual effective income tax rate to be approximately 30% 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 $18 million to $21 million.

We're continuing to build our NetZero mobile broadband business in the Communications segment, and we you believe that the improved geographic coverage resulting from the new wholesale agreements with Verizon and Sprint will begin to have a noticeable positive impact on our wireless accounts starting in the first quarter of 2014, such that the mobile broadband business will turn profitable in the second quarter of 2014.

Looking ahead, post spin, United Online will consist of the Content & Media segment and the Communications segment, which together have generated $243 million in segment revenues, and $58 million in segment-adjusted OIBDA during the last 4 quarters. In addition, these segments achieved both revenue and adjusted OIBDA sequential growth in the second quarter of 2013, which is very encouraging. Currently, our unallocated corporate expenses impact adjusted OIBDA by approximately $21 million annually. This level of corporate overhead was built to support a much larger public company, and we will be targeting to reduce this amount by between $6 million to $8 million over the next 12 months as we look to position the company for future growth.

That concludes my prepared remarks. But before I hand the call back, I'd like to acknowledge Mark's enormous contribution to the company over the last 15 years. By my count, this is Mark's 56th earnings call. And during those calls, he has covered, among many other topics, the IPO of NetZero, our first mega marketing deal with General Motors, the $144 million private placement with Qualcomm, the merger with Juno, a series of financings and refinancings, a tender offer to repurchase 150 million of our common stock, the numerous acquisitions, including FTD, Classmates and MyPoints. Mark has always been front and center of all the major transactions and issues facing the company. It's been a privilege to work alongside Mark for all these years, and he will be sorely missed.

And with that, back to you, Mark.

Mark R. Goldston

Thank you, Neil. I really appreciate that. Operator, with that, I'd like to open it up to questions. If you can explain to people how to get in the queue, Neil and I will be happy to answer their questions for them.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question will come from Dan Kurnos with The Benchmark Company.

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

Mark, let me just start off by saying it's been a pleasure, quite a wild ride, and I can honestly say it will not be the same without you.

Mark R. Goldston

Thanks, Dan. I appreciate that.

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

Let me ask you a couple of questions, high level here on the spin. I know you gave a little bit of color on the patent portfolio that you're trying to sell or license. Just curious if you could give us a little bit more color on the value that you think you can achieve there, just anything generically, that would be helpful. And then secondarily, maybe an update on the management search for United Online?

Mark R. Goldston

Sure, Dan. Well, in terms of the patents, we are sort of deep in discussions on our attempt to monetize the portfolio. We are -- as we said, we've looked at a variety of avenues from outright sale to licensing of them, et cetera. And our hope is since we are very far down the path is that before we spin, our hope is that we'll actually have an announcement for you to tell you what we intend to do with those patents and how we intend to monetize them. Candidly, Dan, any statement of actual value at this point would be nothing more than conjecture, especially in that field, because patents have a value to individual companies. So what might be worth a lot of money to one company is worth less money to another. So it would be hard for me to give you a broad-brush number. All I can tell you is we have a very large patent portfolio. It's very broad. It features some landmark patents in there that have great vintage and great claims, and our hope is that United Online's remaining company, that which will be called United Online, will be the beneficiary of revenue inputs from that, hopefully, assuming we get this deal that we're looking at done, for many years to come. So I would just tell you to stay tuned. Our goal -- I can't promise this, but I feel really good about it. Our goal is to have something to talk about on this prior to the spin. That's number one. Number two, the Board of Directors has engaged a search firm, they have several months ago, to find a CEO candidate for remaining United Online. They are looking at outside candidates. They're also rightfully evaluating internal candidates. And they are deep into that process, and I can't give you a progress update on that other than that they're seeing people and are hopeful that they will find the right man or woman to lead United Online post spin.

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

Got it, great. That's helpful. Turning to the actual quarter, could you give us a little more color on how Mother's Day performance actually was in the quarter? And then FTD revenue was flat even on an adjusted basis. I don't know how you feel about the performance there, but what are you doing maybe to innovate growth going forward?

Mark R. Goldston

Good question. Just in terms of Mother's Day, I mean, the team at FTD, Rob Apatoff and that team, I mean, basically, we had long discussions as we were in the throes of Mother's Day as to whether or not we should sort of get into the big discount game, which was going on. It appeared to be going on in a major way, both through TV advertising from the competitive brands and frankly, just we were seeing in the SEM market. And we made a conscious decision, because we worked so hard over the past 5 years to elevate the brand image of FTD. I mean, think about it. In this horrible economy that we've lived in, in the past several years, I mean how many e-commerce companies can say that they basically saw an increase in their average order value virtually every quarter over the last 5 years? And that's FTD. So we just drew sort of a hard line and said we weren't going to get into heavy levels of discounting because it appeared this year that it was starting earlier and staying longer. Now the resultant effect of that was they had strong profitability and they had an increase overall in the quarter in the AOVs. But they didn't get the orders that you might have expected, but they would've been sacrificing their profitability. They didn't want to condition the consumer that if they just waited a couple of days into the Mother's Day holiday, they could pick up the same bouquet at a much discounted price. Because that's a dangerous precedent to set. So it was very tough. They had a steely resolve on it. They still financially did very well, and they kept true to the integrity and the foundation of what we've been trying to build here for the past 5 years on FTD, which was let's just don't get this thing into a quick balling somersault of discounts. Let's do those strategically where we need them, but let's don't just do this wholesale across the board. So I feel like there are some new programs that Rob and I and his team have been working on, that they're actually executing over the next several weeks, that they're going to be testing, which is alternative means to drive incremental revenue without just doing a standard 40% off site-wide kind of a sale. Anybody can do that. And I think some of these things are clever, and I think that they're also going to find a better way to mine the massive list of e-mail folks that they have who are former customers or current customers. And they're going to be much more clever in terms of how they actually prime that lift and make it work to their advantage during the holiday seasons even better than I have to this point. So I feel good about where they are. I would like to have seen a little bit more order growth. But given the alternative. Which was do deep discounting to get it, we didn't like the precedent that would've set. We didn't feel that was the right thing for FTD to do with its market leader image, so we stayed the course.

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

Got it, great. Turning to the Content & Media segment, could you just give us a quick update on MyPoints?

Mark R. Goldston

Yes. MyPoints, as you know, Rusty Taragan went in there a couple of months ago. They kind of decided to evaluate everything that was going on. They had had a couple of sales people defections, which had cost them. As you know we talked about that earlier. They've since fortified their sales organization. They've tried some new techniques. They're looking at new prospects, et cetera, and I think they're getting traction. I think that they look like they are -- some of their programs are starting to work. I think all in all, just -- they hit their targets for this particular quarter, and so I'm actually feeling good about where that business is going. We may soon have a talent infusion that we can put into that business as well. As you know, we're looking for that. And in addition to working hard with the people that we've got there now. And I think the strategy they've got in place ultimately will lead that business to grow again, and I feel good about that.

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

And then on the Communications side, maybe you could give us a little bit more color on the percent uptake of the mobile offering from free to pay. And then following up on that, you did have a nice tick up in advertising in Communications. Maybe a little more color on the driver there.

Mark R. Goldston

Yes. So in terms of mobile broadband, I mean, what we've seen is we knew that when the one-year anniversary of the product was up, there was people that were going to be on that free plan for a year, because that's what they're allowed to do. Some of them are going to convert, a bunch of them weren't going to convert. And that's fine. What we have seen is this tremendous upward migration in price plans. So our average ARPU on that business has gone up rather significantly, which is really impressive. But the biggest challenge that we've had, which we just solved by our announcement today, is the coverage, Dan. I mean we will basically get thousands of phone calls come in everyday, and at least half of those people on any given day, we can't even provide service to because we don't have coverage where they want NetZero. And the call volume would actually even be higher except that they go to the website and they look at the coverage map. And the coverage map shows, well, you don't have coverage in my area, so I'm not going to even bother calling 1 (800) NetZero. We now have, with these 2 deals we signed today, which will take effect in 2014, we're basically going to cover the entire United States. I mean, 95% of the population. So one, I think it will cause more people to call the 800 number because they'll go to the website and see a coverage map that's virtually the entire United States. And two, when the call, we'll actually be able to provision them. And three, if the trend towards higher priced $19.95 plans holds up, you're looking at a 2014 and '15 where you could start to see profitability that's meaningful in a business like that over time. So that Communications division should likely return to growth, largely as a result of a stabilization within dial-up and this growth that we're going to have in mobile broadband. So we feel good about that. So whatever you see today on mobile broadband is going to be very different in a positive sense a year from today when Sprint, Clearwire and Verizon are all up and running. So I feel good about that. In terms of advertising question, we have some new techniques and things that are folks have put it in the past several months in advertising. We had a great fourth quarter, good quarter last -- in the first quarter, and then this quarter, Q2 was great. So we feel really good about it. They've developed several, what I'll call, optimization techniques for our ad space. The efficiency yield is up, I think, pretty significantly. So they're doing a great job. The market's pretty good. I think we've also been able to improve our ad rotation, which is a good thing. And I like where those guys sit. I really like the job they're doing.

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

And then just one more, if I could sneak it in there. You talked about reducing unallocated corporate expense once you go to 2 smaller companies. But even within Content & Media and Communications this quarter, we noticed that there was a decline, from a dollar perspective, in sales and marketing in G&A in both segments. I don't know if of that was from schoolFeed in the Content and Media segment. But is that also part of the cost-cutting plan, or was there some sort of specific marketing reduction program in this quarter?

Neil P. Edwards

Dan, it's Neil. In the second quarter, there was some reduction in sales and marketing. But a lot of the expense benefit came from the restructuring in the first quarter. So if you recall back in Q1, we had a restructuring, and there's an anticipated $6 million annual cost benefit from that. So you saw a full quarter benefit of those costs in Q2.

Operator

And we'll move onto our next question from Mike Crawford in B. Riley and Company.

Michael Crawford - B. Riley Caris, Research Division

Thank you for providing some of the information regarding the unallocated corporate expenses and what's going on there. If you could provide a bit more, that would be quite helpful. Of the $21 million in annual unallocated costs trailing, which it's already a little bit less than that given some expense reductions in the last quarter, what percent do you think would've been attributed to FTD? I don't think that -- I think that number was just guessed at the last time we talked. I wonder if you had gotten further arms wrapped around that number.

Mark R. Goldston

Of the $21 million, Mike? Mike, are you asking what percentage of the $21 million?

Michael Crawford - B. Riley Caris, Research Division

Yes.

Mark R. Goldston

So just -- without going down a granularity pathway we haven't disclosed, I do want to have to level set it because Neil had it in his speech. So with the $7 million that FTD is going to save on its interest expense what we've said is that when you add in the cost to be public, which we historically have said between are $3 million and $3.5 million, and you add in the incremental costs that they may have to add to be a stand-alone public company, separate from the public company costs and manpower, that those 2 things combined are going to be less than the $7 million that they saved on their annual interest expense. Hard stop. So separately, there's $21 million in unallocated corporate overhead. And so what we're trying to say is in order to rightsize United Online post spin, the team has to find a way to get $6 million to $8 million out of that number, at least, in order to bring it in line with what we've got. So FTD, its overhead structure is what it is, plus those additions we talked about for public company costs, and a couple of million dollars of extra headcount they'll need to be public. And the remaining United Online will be taking that $21 million and significantly reducing it to put it in line the size of the company that Neil articulated.

Michael Crawford - B. Riley Caris, Research Division

I see, Mark. So what you're saying, and Neil, is that of that $21 million that's been unallocated, it's estimated that FTD maybe it's just a few million as a standalone entity.

Neil P. Edwards

As Mark said, the incremental operating costs that they're going to need to incur to bolster certain departments in the company, plus their own stand-alone public costs with no transfer from United Online will be less than $7 million. So in terms of the $21 million for United Online, included in those costs are some fairly substantial audit fees, which will go down because we don't have FTD to audit. Our D&O insurance will be reduced. There will be a lot of kind of variable expenses. And then one large expense that we have is our facilities costs. So our lease on this building, for example, is up next September, so we will be evaluating what we can do to significantly reduce our rent expense.

Mark R. Goldston

But just to be clear, Mike, Neil and the team have been working on this for several months. And they have specific plans on how to significantly reduce the cost of some of the things he just talked about and some others. So in true United Online form, we will have an overhead structure, which is commensurate with the size of the company that we're operating, as will FTD.

Michael Crawford - B. Riley Caris, Research Division

Okay. That is helpful. Switching gears back to the wholesale agreements. What minimum commitments are required of United from the 3 partners there? And are there any significant differences in economics between the 3?

Mark R. Goldston

So as you can imagine, at this point, we can't really disclose that. That's confidential. And they are -- these agreements, obviously because we're so focused on having that mobile broadband business turn profitable in '14, as Neil said, these units will allow us to do that. They are, from my perspective, really attractive deals for both parties, us and them. And it will allow us, Mike, to continue to offer the pricing plans that we have and make that business profitable. So the real advantage here is you're going from a very sort of spotty light coverage map that we've got today to virtually covering all of the United States with a mobile broadband offering that has super competitive retail pricing that will not need to be changed as a result of more than doubling the coverage map. So I feel great about that, and we've been working long and hard on this. And our Communications team has really spent a lot of time analyzing what we need and what it would have to be priced at, and these deals reflect that. So they're strong deals for us, they're strong deals for our partners. They allow us to keep our pricing structure intact, which still makes us ultra-competitive in the market, and it will help get us to profitability, as Neil described, in the time in which we laid it out.

Michael Crawford - B. Riley Caris, Research Division

Okay. And then on the content side, so schoolFeed being no longer operational, is it fair to assume that there will be no more contingent payments made in regards to that acquisition?

Neil P. Edwards

Yes. I think that's a fair assumption, Mike.

Michael Crawford - B. Riley Caris, Research Division

And what are we doing with all of the engineers and management that were acquired along with that?

Mark R. Goldston

Listen, we basically -- by the way, you're going to see in our 10-Q, that'll be filed on the schoolFeed. I think there's like an additional $3.4 million to be paid, and that's the June 30 '13 payment that needed to be made. So you'll see that in the Q, and then there isn't anything else after that. But in terms of people, the people are terrific. And we value them, just like we value all our employees. And so we absolutely will work to find ways to redeploy those folks to give us the advantage of all their skills and their knowledge on our Content & Media business. We've already frankly begun integrating a lot of the schoolFeed function and features into Classmates as we speak, and so you're seeing that. So, look, I just want to go on the record as saying, if schoolFeed for us was a great deal, they and several other Facebook apps, because of changes that have been put in my Facebook, have kind of become obsoleted. But that being said, we've got a lot of users. We've got a massive amount of content. We've got great learnings. We've got terrific people. And the amount of money that we paid for against what we received was a terrific deal. So I feel great about it, and I'd do it again tomorrow.

Michael Crawford - B. Riley Caris, Research Division

Okay. Great. And then last question comes back to more of the strategic alternatives process, would you say it's fair that the board would still -- would be actively considering selling off one or the other of the remaining businesses within the remain Co [ph] United Online or is the intent at this point more to operate those 2 on an ongoing basis?

Mark R. Goldston

Mike, all I can tell you on that -- listen, you've known us a long time. I mean, this board -- if this board has done anything, it's shown that it is singularly committed to enhancing and maximizing shareholder value. And that this spin, because the amount of work that's involved in getting to where we are with this spin has been nothing short of enormous. And the value that we've created thus far and that we expect to create going forward, is significant. So the board always keeps an eye towards maximizing value. At this point, our plan is to affect the FTD tax-free spin and, therefore, result in having 2 independent publicly shared companies, United Online, with the business as you know today and FTD itself. That said, if there were somebody who wanted to purchase any one of our assets for a bona fide value that the board thought was in the best interest of the shareholders, we absolutely would consider it. There's 0 reason for us not to consider it. And this board has been consistent on that throughout. But as we sit here today in trying to keep our focus singular, we are on a mission, to September 30, to getting this spin done in having 2 separate companies. But as I said, we, as a board, will always evaluate anything that we feel is a bona fide potential purchaser of any of those businesses. It's the right thing to do.

Operator

And our final question will come from George Sutton with Craig-Hallum.

Jason Kreyer - Craig-Hallum Capital Group LLC, Research Division

It's Jason on for George. Mark, in the past you've given us pretty good color on the incremental expenses and the investments you've made in the Communications side. And just wondering if you can give any color on the expectations for additional investments with these 2 new wholesale agreements. And then combined with that, you mentioned that the pay accounts on that new broadband initiative have been about flat since last quarter. And we don't have the same kind of metrics in that segment that we have in some of the other businesses, so I'm wondering if you can talk about some of the metrics you're seeing that reflect that growth that you're seeing in the business and in the continued investments.

Mark R. Goldston

Well, in terms of investments, I mean, one of the beauties of this mobile broadband business is for us, operationally, it's almost identical to what we did in dial-up, and which was one of the best business models ever. Because basically we're riding on someone else's network, so just like in dial-up. So they have a lot of the heavy capital expense to build out their networks. Our expense is the purchasing and inventorying of the devices required to get you connected to the network. That's really the majority of our expense. And we're meticulous about planning how much inventory we'll purchase against anticipated demand and weighing that against lead time to get new units, so that we could figure out over a 6-month period how many customers do we expect to get, how many units we need, how much safety stock we ought to carry, and when we can get back in stock. We're meticulous to the dime on doing this. But absent that, we don't really have a large investment of any kind that needs to be made from a capital standpoint in mobile broadband, which is really very attractive. Now in terms of the business itself, we have 41,000 members. We've done a really good job in bringing our customer acquisition costs down. And to be quite candid with you, our major challenge today is we just don't have enough coverage. And we do not have enough coverage in terms of signing up new people. And we have challenges sometimes from people who have a device who then will travel outside of their zone and don't have coverage. We just solved that with the wave of a magic wand today with the Sprint and Verizon deals that we announced. And so granted, they won't take effect until 2014, but that's the year when Neil articulated that business will become profitable. That's when we see a lot of the growth occurring. So right now what we've done is we've built the brand-name awareness. We've shown people we've got a mobile broadband offering that's priced very competitively. We've shown how we can migrate people from free to pay. And in effect, we're going to be able to pick up a massive number of new users in 2014 with a very low customer acquisition cost because today we're turning away half of them at the door because we don't have coverage for them that now we'll have. So I think you shake well, and say, we just signed a couple of deals that are very reminiscent on how we built the dial-up business. The CapEx on it is de minimus. The only investment we need is for the devices to get people connected. And those have a long life and we get paid for them. So I think it's a great business model, and I think it has a very rosy future for the Communications division.

Jason Kreyer - Craig-Hallum Capital Group LLC, Research Division

And just a follow-up to that. On -- we spent the most in the last year testing a number of different promotional strategies for the broadband offer, and we've had kind of the same strategy employed for the last couple of quarters. We noticed that you switched the strategy this quarter to a different promotion. I think it's like half off the device and you shifted the data plans a little bit. Just wondering if there was any details you can provide on the motivation for changing the promotion there?

Mark R. Goldston

We can't help ourselves. We keep wanting to try different promotional techniques just to find out which ones are going to work the best. And we were fortunate that we found some techniques that worked really well. And we wanted to find out from a consumer standpoint, was there sensitivity to the price of the plan? Or was there sensitivity to the price of the device? And what we found is it's some are one and some are the other. So what we try to do is mix it up a little bit and not just walk into one plan, so that if somebody had a sensitivity to the price of the device, if they did, and we were happening to be running a different type of a promo, they came back 60, 90 days later, they might see a device promotion going on and that looked attractive to them. So that kind of how we've been running this thing. We wanted to test things, and we wanted to have enough arrows in our marketing quiver, so that we knew just like Rob does at FTD, so we knew that we've got some arrows we can fire, not just one. And that's what they've been doing throughout the course of the year. Because let's face it, now that we're getting ready to massively increase our coverage universe, the time to learn what techniques you need to deploy to get new members is now, not then. And so our goal between now and the end of December is get all these techniques refined, find out what your best 3 or 4 are, and then come roaring out of the gate in 2014 when you're covering 95% of the U.S. population. Does that make sense?

Operator, I think that's going to wrap up our time for today. We ran a little bit over. But since it was our last call, we wanted to make sure we took these questions. So I want to thank everybody for listening. And as always, if you have any questions, feel free to contact either myself, Neil Edwards or Dave Bigelow, and we'll be happy to help anyway we can. Thanks, everybody. Have a great evening.

Operator

Once again, this does conclude today's conference. We thank your all for your participation.

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Source: United Online Management Discusses Q2 2013 Results - Earnings Call Transcript
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