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United Online, Inc. (NASDAQ:UNTD)

Q3 2006 Earnings Call

November 2, 2006 5:00 pm ET

Executives

Elizabeth Gengl - SVP of Corporate Communications

Mark Goldston - Chairman and CEO

Charles Hilliard - President and CFO

Analysts

Naved Khan - Jefferies

Jim Friedland - Cowen and Company

Robert Newick - Aragon Global

Nat Schindler - Piper Jaffray

Presentation

Operator

Good afternoon. My name is Holly and I will be your conference operator today. At this time I would like to welcome everyone to the United Online Third Quarter Earnings Release Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. (Operator Instructions). Thank you.

I would now like to introduce, Elizabeth Gengl, Senior Vice President of Corporate Communications. Thank you. Ms. Gengl, you may begin your conference.

Elizabeth Gengl

Hello and welcome to United Online's conference call to discuss the results of our third quarter ended September 30, 2006. With me today is Mark Goldston, our Chairman and CEO; and Charles Hilliard, President and CFO.

In today's press release, the company refers to adjusted operating income before depreciation and amortization or OIBDA, adjusted net income and free cash flow, all of which management believes are useful in evaluating the company's operating performance. These numbers are not determined in accordance with generally accepted accounting principles or GAAP and should not be considered as an alternative to or superior to historical financial results presented in accordance with GAAP. Definitions of these numbers are provided in the press release along with reconciliations to the most comparable GAAP financial measures.

Before we get started, I need to point out that the company does apply the safe harbor provisions as outlined in the press release to any forward-looking statements that may be made on this call. Statements regarding our current expectations about our future operations, our financial condition, our performance, our pay accounts, future services, and the industry in which we operate are forward-looking statements that are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. More information about potential risk factors 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. Projections provided by management in the press release and in today's call are based on information available to us at this time, and management expects that internal projections and expectations may change over time. However, the company does not intend to update these projections.

We are experiencing today unavoidable technical difficulties with our webcast provider, and therefore participants logging onto United Online website to listen to the audio webcast may experience some delays. As a backup, we've arranged for the call to also be webcast at www.earnings.com. Any person replaying this webcast after November 2nd, 2006 should recognize that any non-historical information discussed in the call might not be current or valid after that date, because the circumstances and assumptions underlying such information may have changed.

And with that, we're going to start out with a few comments from Mark and Charles, and then we're going to open it up for questions. So I will now give the floor to our Chairman and CEO, Mark Goldston.

Mark Goldston

Thank you, Liz. Thank you everybody for joining us today for the United Online's September quarter 2006 earnings call. With another strong quarter for the company with increases in net income and adjusted OIBDA versus the year-ago quarter, our overall improvements in our cost structure were very strong particularly in our communications segment, and Charles will talk about that.

Revenues came in at $129.6 million and they were in line with our expectations. Our overall diversification strategy continues to develop as content and media pay accounts now represent 44% of all pay accounts and they increased by 54,000 in the quarter to 2.2 million pay accounts. Content and media is now 29% of total revenue versus 18% in the September '05 quarter. The access business decline rates improved during the quarter coming in at 131,000 declines versus 195,000 declines in the previous quarter. We continue to look at opportunities for growth through acquisition and put our large cash balance to work for us, and we have several opportunities that are in the system right now that we are looking at and we'll see where that goes. Today we've really transformed this company from a pure access provider 2 years ago into a diversified internet company today.

In terms of looking at the future and what opportunities lie in the horizon, probably the number one for us at this point to talk about would be broadband. Broadband, as you know, is a big category, there's over 84 million Americans on broadband today. Previously the economics of broadband dictated that you had to spend literally hundreds of millions of dollars on infrastructure in order to become a provider, and I've talked about that on previous calls, and that's just not something we were ever willing to do as a company. We said on the sidelines of United Online and we said that when the networks were built out, the owners of those networks would look for [pipefill] and may be prepare to offer more attractive economic terms like the dial-up network has done for all these years. In fact, you recall the analogy I used was that United Online would wait for the hotels to build out all the hotel rooms and when they were looking to fill all the rooms they'd look to the large tour groups, figure of speech, and well, we are a large tour group in the internet access space. So, we're at the point today where the analogy has actually become a reality. We've done a deep dive analysis on the broadband segment, and we've determined that now is the right time to enter the broadband field. Within the universe of NetZero and Juno dial-up members who churn off our service each month, many of those go directly to broadband. Our goal is to be able to offer at least a portion of those members a broadband option while still remaining true to our positioning as the premier provider of value-priced internet access to the USA.

I'm pleased to report that we recently completed a deal with Verizon for us to be able to provide DSL under the NetZero DSL and Juno DSL brand names. Verizon's DSL footprint covers portions of approximately 26 states. We intend to try and have a full scale launch of the NetZero DSL service during the next 60 days, and we're continuing to negotiate with other providers with the goal of expanding the footprint of our proposed service. We will offer two DSL products; DSL saver with an initial 6-month price point of $14.95 for 768 kilobits speed, and the second product will be DSL Pro with an initial price point of $19.95 for 6 months for 1.5 megabits speed. NetZero and Juno have long stood for high-quality, low-priced internet access. We've got strong customer satisfaction levels and our brand names are among the best known in the USA. Therefore, it stands to reason that both existing members and former members of the NetZero and Juno services who are interested in moving the broadband would find this to be a compelling offering from a brand, quality and ease-of-use perspective. In fact our dial-up users would not need to change their e-mail addresses, and they could expect the same level of high quality service and great value proposition that's been the hallmark of our company for the past 7 years.

Please note that we aren't limiting our new DSL service to our existing dial-up members alone. In fact it's our hope that anyone seeking a high quality value-price broadband service would be attractive -- attracted to our new NetZero and Juno DSL offering. However at this point, we don't intend to engage in an unnecessary marketing spending war to acquire broadband customers, and we're going to try to acquire these customers in as efficient a manner possible. This is a potential major step for our company, and while we're certainly being conservative in our estimates of take rates, we believe that this broadband initiative provides us with the first possible solution we have seen to enter the broadband field and hopefully extend the lifecycle of the NetZero and Juno dial-up user base with a seamless migration path for those interested in going to broadband.

Now I'd like to look at our social networking opportunities as that is a very large internet category, a lot of buzz around it, and we're very fortunate to have some very strong assets in that category. Let's talk about that category and Classmates specifically. We're undertaking several new initiatives on the Classmates business that could help us increase the frequency of usage, and perhaps even enhance the migration path to the paid subscription service; we call the Classmates Gold by the way. The first major initiative in the social networking area for us on Classmate is called Google Maps. And that's a feature that will allow our 40 plus million members to actually see where their classmates and other acquaintances are located on a map of the USA indicated through people icons. Free members will be able to see what zip codes anonymous members from their various affiliations in school, military or work reside in. In order to actually see the names of those specific individuals represented by the icon, a user has to become gold or what we call a pay member and then they can determine who lives in their area and whether or not they want to contact them. In fact, we think this can be a very compelling feature for people who've just lost touch over 10 to 40 years with people they used to have an affiliation with, and it could be a true facilitator of social networking. We intend to try and launch this feature to the Classmates user base this quarter.

Next, the next new feature that we hope to introduce this quarter on Classmates is called [My Visitors 2] and what it is, is it's a digital guest book that's created each time someone visits one of the profiles of our 40 plus million users. With this new feature, visitors automatically leave their name on a virtual guest book when they view someone's profile. The fact that they are leaving their name is clearly disclosed to the visitor. The member whose profile is being viewed would then receive a notice that said someone has viewed your profile. If the member wants to see who visited their profile, they need to become a pay or a gold member to find out. This feature has the potential to stimulate even more peer-to-peer contact and potential conversions to pay membership. Next on Classmates we are looking to enhance the user experience for the free members that we have as well as trying to increase the frequency of usage and make the site more fun, more interesting and more relevant. In order to do that, we need to significantly increase the one element that is central for the success of just about everyone in the global social networking space, that is user generated content, sometimes referred to as UGC. Along that line, we intend to introduce a new product called Classmates Silver membership this quarter. You know that our current paid product is called Classmates Gold. The new product, Classmates Silver will give users the opportunity to earn member points through our MyPoints unit that we purchased several months ago just for registering with Classmates, and they will get additional points for adding a photo, filling out a bio, inviting friends into Classmates or adding in additional school, work, or military affiliations. This will mark our first major effort in integrating our MyPoints product with Classmates and directly addresses a real need in the Classmates business. That need is gaining additional user-generated content and encouraging increased frequency of visits. We hope to have this feature launched by the end of this quarter.

To further enhance user-generated content in Classmates, we will be introducing a new messageboard feature that will highlight all messages in a given thread and also allow members to add a photo next to their name while they are participating on a class, work, or military messageboard. This could further drive traffic because Classmates will send out notifications to our users when a new message is posted in any of their affiliation messageboards. Free members will be able to read all of the messageboard posts, which will give free users a lot more to do on the sites than they have today, but they have to upgrade to the Gold pay service if they actually want to post a message or send a reply. So it's free to read and pay to post. We hope to have this ready to launch by the end of this quarter.

Now I want to move to the other element, very important element of our content and media segment, and that's the MyPoints business that we purchased over a month ago. We are very pleased with our MyPoints acquisition, and those folks continue to execute at a very high level. You know, one of the reasons that we purchased MyPoints back in April of 2006 was because of our belief that we could integrate the rewards concept across our entire universe of more than 55 million registered domestic accounts. That's a huge user base. The concept of integrating MyPoints rewards into our other services to promote loyalty, to reduce churn, and to generate increased frequency of visits for our other services was really an important consideration in our purchase of MyPoints. We're pleased to report that we're making some headway in realizing this opportunity. In fact, beginning this month and over the next 90 days, we intend to integrate MyPoints registrations with all of our new ISP signups and all of our brands. We also intend to provide each of our existing NetZero and Juno ISP members with a MyPoints account. Our goal is to try to encourage our members who intend to purchase online anyway to use a MyPoints account. We'll also be looking at ways to incent and reward existing ISP users for their loyalty each month when they pay for our service.

Classmates, the silver membership, that I talked about a little while ago is really a major activity at integrating MyPoints into Classmates. And we're looking at options for also integrating a MyPoints account to all of the new Classmates registrants who sign up everyday. We also have integrated MyPoints into the Classmates member rewards program and ultimately our goal is to have every one of the existing 40 plus million Classmates members presented with the opportunity to easily sign up and acquire points with a MyPoints membership. Ultimately the goal is to make content as currency and to give our users the opportunity to earn MyPoints rewards every time they put content up on the Classmates website.

The last area I would like to talk about in the content and media segments is actually media, and that's our advertising sales area. Our ad sales area has been a very underdeveloped area for United Online over the past few years, and we've taken major steps over the last few months to change that. We've hired several new senior sales executives in the past 90 days to work under our new Executive Vice President and Chief Sales Officer, Jeremy Helfand who joined us several months ago, previously at Advertising.com. We are increasing our focus on the top 100 internet advertisers and the top 50 advertising agencies, and we've started to see some real progress in this sales unit. Going forward I hope that we see this increased focus that can prove our overall quality of the advertisers we present to our users and also help us to achieve better monetization through the addition of rich media and improved targeting capabilities, something we did not previously offer in any depth at United Online. We also see opportunities in the search area, and presently we are exploring them with a number of different parties. We don't have a formal search program at either Classmates or MyPoints, which is really amazing considering the huge size of those combined assets and the opportunity exists to integrate search as part of the overall product mix at both Classmates and MyPoints and to realize some meaningful incremental revenue.

We're proud of the fact that in their October 2, 2006 edition, Advertising Age Magazine named United Online as the fifth largest internet media company in the United States behind Time Warner, Google, Yahoo! and MSN based on revenues. This number five overall internet media ranking is a direct reflection of the major transformation we've conducted in the United Online business over the past 24 months where we have moved from a pure 100% access provider to a diversified internet company with strong communications, content, and media businesses. With 44% of all our pay accounts in the content and media segment, we've shown that we can effectively deploy our capital towards acquiring meaningful businesses that help to broaden our scope. With the approximately $161 million in cash on this balance sheet and great cash flow in the core business, we continue to look for companies to acquire primarily on the content and media side of the business.

In addition, we're really excited about the prospects for entering broadband in a manner in which we will be allowed to be true to the two driving tenets of our company -- products and services which are value priced and profitable.

With that, I'm going to turn the mic over to Charles Hilliard to give you a detailed look at our financial performance. Charles?

Charles Hilliard

Thank you, Mark. Good morning -- or good afternoon everybody. As a quick refresher, since Q1 of this year we've been reporting our results by two segments. First is communications which is primarily internet access. The second is content and media which is primarily software networking and online loyalty marketing. Strategically we're managing our communications segment primarily to generate adjusted OIBDA while managing our content and media segment for growth. For Q3, our consolidated revenue mix was 71% communications, 29% content and media versus 82%-18% in the year ago quarter.

Now let's discuss our third quarter results. Consolidated revenues were $129.6 million, down 2% year-over-year. Total revenues were just above the mid-point of our guidance this quarter, with top-line performance in both segments inline with our expectations. I will discuss segment performance in more detail later in the call.

Our consolidated gross margin which we calculate is 1 minus cost of revenues divided by revenues was 77.6% and that was down 190 basis points versus 79.5% in the year ago quarter, however was up 70 basis points sequentially. Our Voice-Over IP product, which is one of our communication segment's initiatives, decreased our gross margin by 80 basis points in Q3 of this year. Our consolidated adjusted OIBDA was $36.8 million and it was up 7% year-over-year, and it was above the high end of our guidance. Our communications adjusted OIBDA was better then expected and one of the strongest ever in the segment.

Free cash flows was $24.6 million versus $33.9 million in the year-ago quarter. Our year-over-year free cash flow comparison was negatively impacted by an additional $9.5 million in income taxes, and that's due to the nature of our utilization of NOLs. Pay accounts on a consolidated basis decreased by net 84,000 during the quarter. Communications pay accounts were down 138,000. This decline was partially offset by growth in content and media pay accounts of 54,000 net. Consolidated churn during Q3 was 4.9%.

Now let's discuss segment results. Communications revenues were $92.2 million, which was 71.1% of consolidated revenue, that was down 15% from $108.3 million in the year-ago quarter. 89% of segment revenues were from billable services and 11% from advertising. I'd like to point out, however, that communications advertising revenues in Q3 actually grew 11% year-over-year and sequentially. Communications the average monthly revenue per pay account or ARPU was $9.71, down 3% from $9.96 in the year-ago quarter and nearly flat to the $9.75 we reported in Q2 of this year. Communications adjusted OIBDA was $36.1 million; that was up 3% year-over-year. While gross margin of the segment declined by 30 basis points year-over-year to 77.9%, due primarily to the negative impact of voice, it was up 110 basis points sequentially. OIBDA margin increased 690 basis points year-over-year to 39.1% in the segment. Average hourly telecom costs decreased by 13% sequentially to $0.054 based on new telecom agreement. Our average hourly usage per active access account was down about 1% sequentially. As expected the decline in our communications pay accounts actually improved in Q3. Communications pay account decline of 138,000 in Q3 was driven by a net 131,000 decline in pay access accounts. For point of reference, pay access accounts were down 98,000 in the year-ago quarter and down 195,000 in Q2 of this year.

Customer acquisition costs. Communications gross customer acquisition costs in Q3 was $98, down 8% from $107 in the year-ago quarter and down 23% from $127 sequentially. The decrease reflects a reduction in VoIP marketing expenses and actually improving customer acquisition costs for Access. Our CAC computation is total segment sales and marketing divided by gross pay account additions in the segment. With decelerating pay access -- pay account declines, higher advertising revenues, lower operating costs and a declining customer acquisition cost, we are very pleased with the Q3 performance of our communications segment, particularly in line of our strategy to manage it primarily for adjusted OIBDA.

Alright. Now let's move to content and media. Our content and media revenues were $37.5 million, up 53% from $24.4 million in the year-ago quarter. Adjusting for the impact of acquisitions, Q3 segment organic growth on the topline was 14%. As we discussed last quarter, at the beginning of June of this year, we made a decision to reduce ad placements on our social networking business, which contributed to a sequential and year-over-year decline in ad revenue for that business in both Q2 and Q3. We are now actually beginning to see an improvement in CPMs on that business which was our best at the time, and we anticipate advertising revenues on that property returning to sequential growth in Q4. Strategically, we are shifting our focus and investments towards advertising-related initiatives versus just subscription revenues. 59.1% of our segment revenues were from billable services this quarter and 40.9% were from advertising.

Content and media average monthly revenue per pay account or ARPU was $3.45, down from $3.58 in the year-ago quarter and down slightly from $3.50 in Q2 due to the contribution of lower ARPU international pay accounts. Content and media adjusted OIBDA was a little under $5 million in this quarter, up 16% from $4.3 million a year ago. Gross margins in this segment decreased by 820 basis points to 77.2%, due to the impact of the MyPoints acquisition. Sales and marketing as a percent of segment revenues decreased to 45.9% from 50.8% in the year-ago quarter. Content pay accounts grew by a net 54,000 versus 89,000 in the year-ago quarter with virtually all growth in both quarters coming from social networking.

Total cash balances, as Mark mentioned, were approximately $161 million at the end of the quarter, which includes restricted cash, and during the quarter we distributed $13.5 million to our shareholders in the form of dividend.

Now let's discuss business outlook. We're providing guidance for Q4 revenues of approximately $128 million to approximately $131 million and adjusted OIBDA for Q4 of between $34.6 and $36.6 million. Our revenue guidance for Q4 reflects our expectations for continued declines in communications revenue and growth in content and media revenues driven partially by Q4 being seasonally strong for our loyalty marketing business. For all of 2006, we are increasing our adjusted OIBDA guidance to between $144 to $146 million, which is at the low end from previous guidance of between $142 and $146 million. At the midpoint, our 2006 adjusted OIBDA guidance reflects 8% year-over-year growth.

Our current estimate for 2006 capital expenditures is between $24 and $27 million, which is down about $1 million from previous guidance. We are reducing our 2006 cash tax estimate to between $34 and $36 million and that's down from the previous estimate of between $35 and $40 million. So those last few items should help improve our free cash flow for 2006.

With that, I'll hand things back to Mark Goldston and open up the Q&A.

Mark Goldston

Thanks, Charles. I also would like to announce importantly that today our Board of Directors has declared the regularly quarterly cash dividend of $0.20 per share. The record date for the dividend is November 13 of 2006, and the dividend is payable on November 30 of 2006. I might add that this marks the seventh consecutive quarter that United Online will have paid a $0.20 per share dividend -- cash dividend to our shareholders.

So, in summary a lot of good stuff going on. It was a strong quarter for us. You've seen there's a lot of new opportunities in front of us for the fourth quarter and beyond, spearheaded by our initial entry into the broadband segment, some very interesting new programs we're going to be trying in our social networking business and some very, very strong integration programs that we'll be executing on our MyPoints business, so that the balance of our United Online users can take advantage of that compelling property.

So with that, I would like to open it up to Q&A. Operator, if you could explain to people how they can get into the queue and then Charles and I will be happy to answer those questions in order.

Question-and-Answer Session

Operator

(Operator Instructions). And your first question today comes from Youssef Squali with Jefferies.

Naved Khan - Jefferies

Hi Mark, hi Charles, this is Naved Khan for Youssef.

Mark Goldston

Hi.

Naved Khan - Jefferies

I had a question on the DSL offering to Verizon. Can you go into details of this and tell us what kind of margins you expect there?

Mark Goldston

Can I go into what?

Naved Khan - Jefferies

Can you talk a little bit about the margins that you expect there?

Mark Goldston

Charles, you want to take that?

Charles Hilliard

Naved, we've not launched the service yet. I can tell you that our models show both a reasonably positive gross margin and estimated operating margin. However, both would be below the margins we generate today on our communications business. I'd say pre-launch that that's as far as we are willing to go.

Naved Khan - Jefferies

Okay. And then what kind of impact are you seeing from AOL strategy of moving away from dial-up?

Mark Goldston

Well, I think initially the newsworthiness of the AOL announcement was very prominent. It was in the financial community and the business community. I think the -- it's just now starting actually to trickle out into the consuming public, you know they didn't go broadcast it on the front page of their website. I think more and more people are starting to realize but I do think that AOL's announcements that they were pulling back on $1 billion in marketing spend and it appears that they've actually taken the ISP off of television totally, I do think they are going through the holiday season in some of the retail distribution deals as they used to do, and then going into the first quarter and second quarter of 2007, I do believe that if there is a positive benefit to be derived from $1 billion reduction in annual marketing spend, etc. then that's probably when you will start to see more of it because as I said, the business community, financial community, competitive community, very aware of what AOL did. But they didn't go out to all 17 million members and say guess what, you don't have to pay us anymore. Keep your e-mail address. So I do think overtime there will be a benefit from it, and I am looking more towards the first and the second quarter of '07 for that.

Naved Khan - Jefferies

Thank you.

Charles Hilliard

Thank you.

Mark Goldston

Next question, operator.

Operator

Your next question is from Jim Friedland with Cowen and Company.

Jim Friedland - Cowen and Company

Thanks. Hi, guys. A question on the advertising campaign or how you are thinking about marketing broadband since you've said you are going to make sure you keep down the marketing costs, does that mean that you will market dial-up less and start -- we'll start seeing NetZero broadband ads on TV, at least in Verizon territories? And then the second question is, with the MyPoints acquisition, it's -- and just some other investments, product development growth and G&A have been growing as a percentage of total revenues, when do you anticipate getting some leverage there? Thanks.

Mark Goldston

Yeah, well in terms of our plans if you can -- Jim you have been covering us for a long time, we're not going to share our marketing plans with anybody as to what we plan to do on DSL. My comment about not engaging in a marketing war was a function of the fact that over the past year we have diligently tried to reduce our overall marketing expenses in the spirit of creating a harvest mode on the access business. So within that construct of that amount of money that we intend to spend, you know with Matt Wisk in our marketing team, we will sit down and figure out the best possible way to allocate that against dial-up or broadband but at least initially, our primary focus is going to be against our established existing ISP members, a large portion of whom when they do decide to churn to broadband, so what we will attempt to do is to make them aware of the fact that the same great reliable service they get from NetZero and Juno, they can now get over broadband if that's what they would like and they can keep their e-mail address, and then we'll see how that goes and if we get a bunch of traction on that, then we may in fact try to shift our goal externally more to look at the sort of the virgin switcher market. So that's number one, and Charles do you want to take the second question?

Charles Hilliard

Certainly, Jim you're right, we have been investing relatively heavily in product development in content and media. Our G&A [let go, I mean] you will see this quarter also investment in a seasonally soft quarter for MyPoints heavier investment as a percentage of revenue on sales and marketing [especially to] acquire members going into their seasonally strong quarter. So, in terms of what we're looking for on operating leverage, I'm expecting to see some this quarter within that segment. And we've talked historically that margin in this business, both particularly at the OIBDA level will bounce around quite a bit as we see investment opportunities. But we're looking for a seasonally up quarter in content and media, and we've actually provided guidance for the first time in a long time where the midpoint we're looking as organic flat revenue which would mean that the decline in communications would be equally offset by growth in content and media, and it's been a long time since we've looked at that.

Jim Friedland - Cowen and Company

Okay, got it. Thanks.

Mark Goldston

Thank you, Jim.

Operator

(Operator Instructions). And your next question today is from Robert [Newick] with [Aragon Global].

Robert Newick - Aragon Global

Good afternoon, guys. One more question on DSL, which is pricing. You've got $14.95 in the low tier for 6 months, Verizon's got that for $12, and then goes up to $17.99, what are you going to do after 6 months?

Mark Goldston

As it stands today, our pricing plan is those will be in place for 6 months, and then the snapback pricing on the $14.95 product will go to $19.95, and the $19.95, which is the 1.5 megabit product will go to $29.95, which if you look at the competitive pricing metrics of all basic DSL and cable carriers will make us a very aggressively priced value offering.

Robert Newick - Aragon Global

Got it. Thanks.

Mark Goldston

Thank you.

Robert Newick - Aragon Global

And, you've already commented some on the marketing -- do I hear correctly, that means that you're solely going to focus internally for at least the first few months?

Mark Goldston

No, I would just say that for the first couple of months our major focus will be internally. We will never turn down a new user who is not part of the United Online family, but I would say realistically without spending a ton of money on this that we want to make sure we got it right, we want to make sure the transition that we've created for our existing users is seamless and that's where our initial focus will be, but it won't be 100% of our focus but it will be the majority of it.

Robert Newick - Aragon Global

Okay, sure. Why not keep the guys if you can. Thank you.

Operator

Your next question is from Safa Rashtchy with Piper Jaffray.

Nat Schindler - Piper Jaffray

Hi, this is Nat Schindler asking the question for Safa Rashtchy. Just want to know how much of your current geographically distributed customers are covered by -- the Access customers are covered by the new Verizon deal for DSL and how much -- so how many -- can you -- what percentage can you mine directly?

Mark Goldston

Yeah, it's a good question. I really don't know if we can share that with you because some of that involves sharing Verizon's coverage ratio with you and I am not sure if Verizon would necessarily want us to do that. They are a major provider. They are available, I believe, it's in 26 states and that's very attractive to us. But just to be candid with you although I do know the number I'm reluctant to share it with you because it's a Verizon number and I'm really not sure if they'd want me to do that.

Nat Schindler - Piper Jaffray

Could you give a very broad range since no one actually knows where all of your customers are, I don't know if it affects --

Mark Goldston

I would say just -- a safe thing would be obviously south of 50% of our national user base but it's certainly meaningful enough and important enough that we put a lot of effort, internal manpower and the like against it. So they give us enough coverage so that we can see our NetZero and then ultimately a Juno DSL product into play.

Nat Schindler - Piper Jaffray

Okay and just want to know if there is any further -- if you have seen any possibility for further DSL price war. There is some talk of AT&T going to $10 for 6 months, is -- any new developments on that side?

Mark Goldston

No, I mean at the end of day, I think, what's starting to happen in the DSL category, which is something we had surmised would happen on some previous calls is, there's been a lot of money spent in building these networks out and the utilization on some of those networks is not necessarily what those folks would like it to be, which makes sense, and so now it's a [pipefill] situation as well. I mean, it's not unlike in a vertically integrated manufacturing business where people have excess capacity in a plant and decide to become a subcontract filler in addition to being a primary manufacturer. That's a lot of what's going on right now. I don't foresee major price wars ensuing because I think the price points frankly on DSL have become very attractive. Now naked DSL, obviously a little bit different from bundled DSL, but I don't foresee that -- in terms of the AT&T announcement, I think, that part of what they are trying to put forth in terms of features that they would be willing to provide if their merger were approved etc., but I think pricing thus far has been very aggressive and we'll have to see what the other provider is doing. Some point, this has to be a business that everybody looks at and says we need to make money. Certainly, the dial-up business has proven that it's been a fantastic business for making money, and ultimately all the dollars that have been spent in infrastructure capital and the like we're now at the point where people have to say okay, I'll spend billions of dollars building this out, is this a business worth being in. We would suggest that with the pricing that we are getting which allows us to be a reseller of this product that we can be a value-price player and make a good profit and have a really good potential lifetime value of the customers. So for us it makes sense and I got to believe that other people are now starting to look at their businesses in that manner as well.

Nat Schindler - Piper Jaffray

Okay. Thank you. One last question is just if you could give us a consolidated trend, is there a possibility for some discussion on churn on Classmates?

Charles Hilliard

We are not breaking out individual properties or segments.

Nat Schindler - Piper Jaffray

Understandable. Sorry about, and thank you.

Mark Goldston

Thank you.

Operator

Okay. (Operator Instructions).

Mark Goldston

Okay, operator, I think that, well, sums it up. We'll encourage everybody that if they have any follow-on questions to please contact the company as they always have in the past. And we thank everybody for attending our earnings call. Have a great day, everyone.

Operator

Thanking you for participating in today's United Online conference call. That does conclude today's conference. You may now disconnect.

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Source: United Online Q3 2006 Earnings Call Transcript
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