United Online's CEO Discusses Q4 2013 Results - Earnings Call Transcript

| About: United Online, (UNTD)

United Online, Inc. (NASDAQ:UNTD)

Q4 2013 Results Earnings Conference Call

February 19, 2014, 05:00 PM ET


David Bigelow - Vice President, Investor Relations

Howard G. Phanstiel - Chairman

Francis Lobo - President and Chief Executive Officer

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


Daniel L. Kurnos - The Benchmark Company, LLC

George Sutton - Craig-Hallum Capital

Michael Crawford - B. Riley & Co.


Good day, everyone and welcome to the United Online Fourth Quarter and Year-ended December 31, 2013 Earnings Call. Today's conference is being recorded. At this time I would like to turn the conference over to Mr. David Bigelow, Vice President, Investor Relations. Please go ahead, sir.

David Bigelow

Thank you, Rebecca. Hello and welcome to United Online's conference call to discuss our financial results for the fourth quarter and full year ended December 31, 2013.

Joining me on the call today will be Howard Phanstiel, our Chairman of the Board; Francis Lobo, our President and Chief Executive Officer; and Neil Edwards, our Executive Vice President and Chief Financial Officer.

Before I get started I'd like to mention that we've created a PowerPoint presentation that summarizes our fourth quarter and full year 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 at the top and going to the quarterly earnings section.

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

Definitions of these non-GAAP financial measures are provided in today's press release and the accompanying slides on our website, along with certain reconciliations to the 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, priorities and investments, financial performance and results, amortization, share numbers, capital expenditures, taxes, operating metrics, new or planned initiatives, products, services and features, application and functionality, marketing programs and strategies among others are forward-looking statements that are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from those described or implied in the forward-looking statements.

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

Guidance, projections and other non-historical 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 I will now turn it over to our Chairman of Board, Howard Phanstiel. Howard, please go ahead.

Howard G. Phanstiel

Thank you, David, and good afternoon everyone. As David mentioned the Board of Directors of United Online elected me as non-executive chairman effective November 1, 2013, following the spin of FTD. I expect that this will be my first and last participation on the company’s quarterly earnings call and as much as my job today is to introduce you to our new President and CEO, Francis Lobo.

United Online Board has worked closely with our executive team and our financial advisors over the last couple of years to explore strategic alternatives to enhance long term shareholder value and to pursue those strategies that are most likely to fulfill that objective. We are pleased with the results of the tax-free FTD spin and believe that it unlocked significant value in both FTD and United Online.

It’s a strategic imperative that United Online optimize its remaining businesses through the continued introduction of new products and product enhancements that pivot from our existing product platforms, expertise and strengthening all users. Recent example includes NetZero’s agreement with Sprint which nearly doubles the reach of our mobile broadband services and new product features and social integration in Classmates, MyPoints and StayFriends that extend our reach and user engagement.

Further new product development as well as other growth initiatives will be required for United Online to achieve its long term growth goals. The Board has sought to provide the company financial flexibility to support its anticipated long term growth initiatives. This led us to the decision to discontinue the United Online dividend. We believe that this decision is an important step in positioning the company to create shareholder value over the long term which is our ultimate objective.

When it became clear that Mark Goldston would no longer be serving as our CEO the Board retained an executive search firm to help us find a CEO who possessed communications and Internet domain knowledge and experience, strong operating skills, demonstrated consumer product development and success with product roll-out and finally a strong sense of current and future industry trends. In addition to these criteria we selected Francis Lobo because of his understanding of our business, including its strength and weaknesses, his vision and a strong belief in the future possibilities for United Online.

Francis joined United Online from AOL where he spent nearly 10 years in a variety of leadership roles, most recently as President of AOL Services. We are excited about his joining the company and I believe you will enjoy meeting him in the near future.

With that I will turn over the call to Francis.

Francis Lobo

Thank you, Howard. Welcome to United Online's earnings call for the fourth quarter and full year-ended December 31, 2013. I am pleased to have the opportunity to speak to you in my first earnings call as CEO. It’s been a fantastic and educational first three months. Although I am still getting up to speed in many ways I am excited to share my early observations with you all.

Here’s an overview of the topics we will cover today. I will start with my background and experiences and how these are relevant to United Online. Next, I will talk about how I have approached the job over the first three months, what I have learned and my preliminary assessment of United Online and it’s businesses; then I will give a brief overview of our results for the fourth quarter before turning it to our CFO, Neil Edwards for a more detailed review of the numbers in our guidance; and then before opening it up for Q&A I will conclude with some preliminary thoughts on the company’s future direction and the approach we are taking as we move forward to support innovation and growth.

I will start with my background. I came to United Online from AOL where I spent almost 10 years, most recently as President of AOL Services and a member of AOL’s Global Operating Committee. I oversaw a variety of AOL’s businesses including AOL.com, AOL Mail, AOL Search, AIM and MapQuest. Through my experiences at AOL I learned to both optimize existing products and also to leverage existing assets to develop new business opportunities and revenue streams. These strategies are relevant to the opportunities and challenges faced by United Online.

And I'm encouraged to see United Online has many of the right ingredients already in our products, our users, our technology, our data and our people, and those ingredients combined with my experiences would help us to stabilize and grow United Online's businesses going forward.

On a personal note I am firm believer that life is about change, growth and continuous learning. This new role at United Online is certainly a big change for me and it provides an outstanding opportunity to grow and learn. In addition I have the privilege of fulfilling one of my long-standing goals to be a public company CEO.

Next, I'll share what I have learned in the first three months in my primarily assessment of our businesses. I have spent most of the time learning as much as I can about United Online. I've traveled to a number of offices and met of hundreds of employees at all levels and across all functional areas. I will be traveling to India tomorrow to meet with our team there and in the next six to eight weeks I will visit our StayFriends business in Germany as well. Meeting one-on-one with our teams has helped me understand the company's culture, people, strength and weaknesses.

I have also taken a close look at all of our products and through conversations with users and testing I have sought to understand the value they deliver, their strengths, areas for improvement, why users have remained loyal and why others have left. It's clear to me that United Online has many opportunities. We have a large user base, substantial amount of relevant data and a good team. It's also clear that converting United Online's potential to sustainable long-term growth will require great deal of work and a willingness to invest.

Now I move on to our fourth quarter performance which Neil will discuss in more detail in a few minutes. As a reminder the financial results of FTD have been excluded as they have been presented as discontinued operations in our financial results. At the consolidated level, United Online delivered a solid fourth quarter. Consolidated revenues were $62.6 million, exceeding the high end of our guidance range.

Consolidated adjusted OIBDA was $12.6 million, an increase of 22% from the year-over-year ago quarter and near the high end of our guidance range. And keep in mind, that these results were delivered during a time when United Online worked through an extraordinary amount of change. Over the last few months the company completed the FTD spin-off, experienced CEO and other executives changes, rolled out NetZero broadband on to the Sprint network and began to make a fundamental strategic and cultural shift towards long-term growth oriented strategies. I believe our team has excelled through these changes.

Now let's take a look at our segment, starting with Content & Media which includes Classmates as well as Classmates International and MyPoints businesses. In the fourth quarter, Content & Media segment revenues declined 9% from the year-ago period. Quarterly segment adjusted OIBDA was flat year-over-year and segment adjusted OIBDA margin increased 200 basis points from the year-ago quarter to 20.7%.

While substantially better than the year ago quarter pay accounts decreased by a net 58,000 in the fourth quarter compared to a net decrease of 30,000 in the third quarter of 2013, and a net decrease of 123,000 in the year ago quarter. This sequential quarterly decline increased primarily due to the system stability issues that had a negative impact on the new pay account upgrades.

Historically, United Online has looked at pay accounts and ARPU as its primary metrics. Going forward, you will hear me discuss other metrics related to three buckets; users, engagement and monetization. A key component of user metrics will input data on how users accessing our products. Mobile usage and adoption are key examples of metrics that we track to measure progress against our long term plans.

Now let's take a quick look at each of the businesses in the Content & Media segment. We will start with our Classmates business. Two of our top priorities in this business are improving accessibility and enhancing the user experience. I believe being everywhere our users are on the Internet is crucial. Hence our goal is to enable all of our members to easily access Classmates from all devices. In 2013 mobile accounted for 27% of domestic basic members returning to the site, up from 18% in 2012. We want to continue to increase this metric overtime.

Secondly, improving our user experience will remain a top priority. We will continue to listen to user feedback and test new features. One example is Classmates Photos, a feature launched in 2013 that was an important catalyst in our 42% year-over-year increase in domestic basic members returning to the site in the fourth quarter. Other enhancements in 2013 include Birthdays and I Remember You notifications which also helps drive increased user engagement.

Now let's turn to our Classmates International business which operates in Europe under the StayFriends and Trombi brand names. Like our domestic business Classmates International has room to improve in mobile accessibility. In 2013 mobile devices accounted for 11% of international basic members returning to the site, up from 7% in 2012. This has to get much higher.

Another priority for Classmates International is managing churn. We made some progress in 2013, reducing churn from 2.6% in the fourth quarter of 2012 to 2.3% in the fourth quarter of 2013. We also continued to grow revenues for [inaudible] which offers a Germany version of Yearbooks to high school graduates. Although small this business expanded by 50% in 2013.

Rounding out the Content & Media segment is MyPoints, our loyalty marketing business. MyPoints has compelling strengths including loyal users and approximately 1,700 merchant relationships. The business faced management and operational challenges until Rusty Taragan took it over on an interim basis in early 2013. He has transitioned the business and we now have a strong team in place and a sharp strategy.

Let me tell you about three areas we are starting to make some headway with. First let's start with product development. MyPoints has developed browser extensions across IE, Firefox and Chrome which allow our members to easily shop and earn points without first having to visit our website. These applications are already showing very positive signs of user engagement. Specifically users of our new extension are nine times as likely to shop through MyPoints as compared to our overall member base.

Next, moving to user experience. We are testing enhancements in program award offers and are working towards a shift from physical gift cards to e-certificates which will allow members to redeem points instantly instead of waiting for a card to arrive by mail.

Finally with regards to accessibility we are making a priority to increase our focus on mobile, including the development of our new mobile app, mobile specific earning opportunities and the implementation of mobile friendly redemption options. We believe MyPoints represents a significant opportunity for growth in e-commerce and loyalty space.

Now let's turn to our communications segment which includes NetZero, Juno and NetZero mobile broadband business. The communications segment showed both revenue and adjusted OIBDA growth in the fourth quarter of 2013 versus the year ago quarter. This is the first time in eight years that we have seen year-over-year revenue growth in a quarter and the first time in seven years that we have seen year-over-year adjusted OIBDA growth in a quarter.

The results can fluctuate from quarter-to-quarter depending on expenses and seasonality but it's absolutely clear that we have begun to make real progress in our overall strategy to bring back sustained growth to the communication segment. Our key strategic priority is driving growth in our NetZero Mobile Broadband business. As of December 31, 2013 we had 49,000 subscribers up 53% year-over-year. Our recent rollout on the Sprint 3G network gives us an opportunity to offer our service to more users as our covered area now encompasses a population of approximately 276 million, more than doubling our earlier footprint. Our service will further be enhanced later this year when we roll out on Sprint 4G LTE network.

As compared to the larger dial-up business mobile broadband is characterized by 2X the ARPU but with lower margins and higher churn. As this service continues to grow the communication segment results will increasingly reflect these characteristics.

At this point I am going to turn it over to Neil Edwards who will go through our performance for the fourth quarter and full year 2013 and discuss our guidance. After that I’ll have some concluding remarks on the efforts moving forward before we go to Q&A. Neil?

Neil P. Edwards

Thank you, Francis. Following the spinoff of FTD on November 1st the results of FTD for the fourth quarter of 2013 and all other periods are reported as discontinued operations. I’ll discuss the results of continuing operations which reflect the Content & Media segment, the communication segments and unallocated corporate expenses.

Let me begin with highlights of the fourth quarter 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 results for the fourth quarter.

Revenues were $62.6 million exceeding the high end of our guidance range and a decrease of 5%. Adjusted OIBDA was $12.6 million at the high end of our guidance range and an increase of 22%. GAAP operating loss was $7.9 million compared to a loss of $25.7 million. GAAP operating loss in the fourth quarter of 2013 included $7.8 million in transaction related costs related to the FTD spin off an estimated $2.7 million impairment charge which is the true-up of the classmates goodwill impairment charge recorded in the third quarter of 2013 and $1.5 million reserve for legal settlement.

Any changes to the estimated impairment charge throughout would be reflected in the company’s Form 10-K . GAAP operating loss in the year ago quarter included a $26.9 million goodwill and intangible asset impairment charge and $1.3 million in transaction related costs. The income tax provision was $42.5 million compared to an income tax benefit of $6.4 million in the prior year quarter. The income tax provision in the fourth quarter of 2013 includes a preliminary estimated 43 million valuation allowance primarily against the company’s domestic net operating loss carry forwards.

Valuation allowance reflects the expectation that the company may not be able to utilize all of its domestic deferred tax assets as the result of the FTD spin off. The 43 valuation allowance reflects the company’s current estimate and any changes to such estimates will be reflected in the company’s Form 10-K. Diluted net loss to common share from continuing operations was $3.74 compared to a net loss of a $1.50. Adjusted diluted net income per common share from continuing operations was $32 compared to net income for common share of $12.

Cash flow from operating activities were $0.5 million compared to $9.6 million primarily due to 7.6 million in higher payments and transactional related costs and unfavorable changes in networking capital. Free cash flow for the quarter was $4 million, compared to $11 million primarily due to unfavorable net working capital changes which were partially offset by higher adjusted OIBDA.

Cash and cash equivalents at December 31 were $68.3 million, compared to $72.4 million at September 30, 2013. On January 31, 2014 United Online announced that its Board of Directors determined to discontinue cash dividend payments in order to provide financial flexibility to support anticipated long-term growth objectives.

Now on to the Content & Media segment. Segment revenues were $35.9 million, a decrease of 9%. Segment adjusted OIBDA was $7.4 million, flat year-over-year. Segment adjusted OIBDA margin was 20.7% compared to 18.7% in the year ago quarter.

In terms of key metrics, pay accounts decreased by a net 58,000 in the fourth quarter, compared to a net decrease of 30,000 in the third quarter of 2013 and a net decrease of 123,000 in the year-ago quarter. Active accounts were 10.3 million, unchanged sequentially and a decrease of 10%. Churn was 3%, up slightly from the record low level reported in the third quarter of 2013 and a decrease of 50 basis points from the year ago quarter. Average monthly revenues per pay account or ARPU was $2.54, up 1% both sequentially and year-over-year.

And now the Communication segment, segment revenues were $26.9 million, an increase of 1%. Segment adjusted OIBDA was $9.7 million, an increase of 22% and segment adjusted OIBDA margin was 36.1% compared to 30% in the year-ago quarter. The investment in our NetZero mobile broadband business resulted in negative adjusted OIBDA impact of approximately $2.5 million during the fourth quarter of 2013 versus a negative adjusted OIBDA impact of approximately $4.6 million in the year-ago quarter.

As Francis said, this is the third time in eight years that we've seen year-over-year revenue growth in a quarter and the first time in seven years that we've seen year-over-year adjusted OIBDA growth in the quarter. The key drivers of the higher revenue, adjusted OIBDA and adjusted OIBDA margin were the growth in NetZero mobile broadband business and the 27% growth in advertising revenue due to our optimization efforts and a very strong advertising market.

In January 2014, NetZero mobile broadband expanded its coverage across Sprint's nationwide 3G network making it available to more than 276 million people which more than doubled our coverage area. The improved geographic coverage is having a positive impact on our sign-ups with not incremental advertising spend and we expect growth to accelerate in Q1, 2014 due to the addition of the Sprint network and due to seasonality.

We expect the mobile broadband business to be profitable starting in the second quarter of 2014. In terms of key metrics, segment pay accounts decreased by a net 20,000 in the fourth quarter versus a net decrease of 22,000 in the third quarter of 2013 and a net decrease of 25,000 in the year-ago quarter. NetZero mobile broadband pay amounts increased to 49,000 compared to 44,000 at the end of the third quarter and 32,000 at the end of the year-ago quarter.

ARPU was $9.62, a 2% increase compared to third quarter of 2013 and a 6% increase compared to the year-ago quarter. These increases were primarily driven by higher percentage of mobile broadband pay accounts which have higher ARPU.

Churn was 2.7%, unchanged from the record low in the third quarter of 2013 and down 20 basis points compared to the year-ago quarter.

Now on to corporate expenses, for the quarter ended December 31, 2013 the impact of unallocated corporate expenses on consolidated adjusted OIBDA was $4.6 million, a 10% improvement primarily due to the treatment of bonus expense for the former CEO was a transaction related cost in our non-GAAP measures.

Now onto our business outlook and our guidance for the first quarter of 2014, consolidated revenues are estimated in the range of $52.5 million to $55 million. Consolidated adjusted EBITDA is estimated in the range of $2 million to $3.5 million. Amortization of intangible assets is estimated at $1.7 million. Weighted average diluted common shares are estimated to be 13.9 million on a GAAP basis and 14 million on an adjusted basis. For the full year 2014 we estimate our cash taxes to be between $3.5 million and $4.5 million primarily related to our international businesses. For the full year 2014 capital expenditures are estimated to range from $10.5 million to $12.5 million.

Consistent with fiscal 2013 the first quarter of 2014 is expected to have the highest amount of marketing spend in the year due to seasonality. In addition we will incur a loss on our mobile broadband service as the increased number of new subscribers that we add in the quarter will take time to turn profitable.

Finally, although we have begun the process of reducing corporate expenses this had little impacts on our first quarter guidance because most of the benefit from cost reductions will be fully realized in the fourth quarter of 2014. As a result consolidated adjusted OIBDA of $2 million to $3.5 million is expected to be lower from the remaining quarters in the year. In order to set appropriate expectations for the full year today we are providing consolidated adjusted OIBDA guidance for the full year which we estimate to be in the range of $28 million to $34 million.

That concludes my prepared remarks and now I’ll turn it back over to Francis for his final remarks. Francis?

Francis Lobo

Thank you, Neil. Let me conclude with some preliminary thoughts on our plans for the future, a description of the efforts we are taking as we move forward and a preview of some of the changes we need to make along the way. All of the opportunities, priorities and initiatives I’ve discussed today are intended to generate sustained long term growth by shifting our mindset towards a longer term view and returning to our entrepreneurial roots. We take a three pronged approach to stabilize and grow our businesses.

First we will optimize our current businesses; second, we will leverage our strength and assets to develop new and complementary products and services. Third we will pursue strategic alliances or possible acquisitions to expand our scope and reach. For existing businesses the mantra is stabilization, optimization, improved efficiencies and growth. And many of our businesses, though profitable, have not grown as we would like. So we focus on improved accessibility new and creative ways of user acquisition, enhanced user experiences and churn managements. We will also identify potential shared services and other efficiencies of scales across our businesses.

Next let's talk about new product development. This will be critical for achieving growth in users and engagement. We won’t be starting from scratch here as we fortunate to have many key ingredients in our existing businesses. Take Classmates, domestic and international, which combined have approximately 100 million registered accounts or MyPoints which has approximately 1,700 merchant relationships and the communication segment which recently increased its geographic footprint to encompass 276 million people.

How can we combine these assets along with the strength and expertise of each of our businesses with new and complementary strategies and products? We use a process for servicing and evaluating product opportunities called demand discovery. We are using this process to identify, assess and refine multiple opportunities which I’ll share more in the coming quarters.

Finally we look for opportunities to expand our scope and reach by entering complementary or related spaces. Some of these opportunities may require assets or expertise that we don’t currently possess and we may look to acquire these missing ingredients through alliances, partnerships or possibly acquisitions. To engage in these growth-oriented strategic initiatives we have recently decided to discontinue the quarterly dividend to maintain financial flexibility to make investments for the long-term. While still being evaluated these investments may take different forms, including new product development, investment in people, increased marketing expenditures and potential acquisitions.

Let me wrap up by thanking you all for joining today's call, and I hope you'll continue to follow us and listen to our future earnings calls. I am looking forward to getting to know each of you and I hope to have a change to meet you sometime soon at a conference or on future marketing trips. But just -- and one more item before we go to Q&A. This will be the last earnings call for Neil Edwards, United Online's Executive Vice President and Chief Financial Officer whose last day will be sometime in March. Neil has been the company's CFO from 2011 but he has also served as interim CFO on two occasions and also once as Interim CEO.

Neil joined the company before it was United Online, starting out as Vice President of Finance for NetZero in 1999. He has had a deep, positive impact on the company and as such the lives of many of its employees. His inputs will still felt and he leaves a proud legacy behind him in the form of outstanding accounting and finance team that he has assembled and trained. Neil, on behalf of the entire United Online family, I thank you for your many contributions over the years and I wish you all the very best.

That concludes my prepared remarks today. I would like to ask the operator now to provide instructions for our listeners to queue up and then we'll open it up for questions. Operator?

Question-and-Answer Session


And your first question will come from Dan Kurnos.

Daniel L. Kurnos - The Benchmark Company, LLC

Yeah, great. Good evening. Thanks for taking my questions. Francis welcome officially. You gave a lot of really great color on the call about sort of your vision for the company going forward and I guess the obvious question and certainly maybe this isn't fair to ask since you have been -- you're really still just getting up to speed but with all the initiatives you have planned and you sort of laid out combination of organic versus possible acquisitive strategy in building out content, what kind of timeframe would be fair to think about in terms of some of the initiatives that you are planning on implementing and how different will the company look over say the next 12 months versus next three years?

Francis Lobo

So I discussed the approach in three prongs, right? So the fundamental core business that we have today, optimizing it, stabilizing it there's a tremendous amount of opportunity. Now we are already down the road of looking at some of those solutions and improving many of those metrics. In terms of timeframe, in terms of pivoting the business, complementary businesses I have been here for three months and it's a tough question to answer so quickly but I really hope to share more with you guys in the next one or two quarters and hope to nail the story and direction hopefully in that same timeframe as well.

To answer your question as to where do I see the business 12 months from now, hopefully in a very positive and exciting place. But I will share more on that in next quarter or two.

Daniel L. Kurnos - The Benchmark Company, LLC

So let me drill down a little more than just on the segment basis, as you go, you look to optimize the Content & Media segment I think we kind of have a pretty clear plan on what's going on in Communications. May be you can share a little bit more with us, a little more granularity on how you plan, what kind of content adds are you planning on bringing forward and may be some of the additional monetization paths as you see in that particular segment?

Francis Lobo

So during my script I talked about three things and I really believe that a healthy Internet company, company on the Internet today has to focus on three things users, engagement and monetization. Now in terms of users, we addressed churn and so on. I intend to spend a lot of time addressing our user needs so we attract more users. When we attract more users and we allow them to come to our products from wherever they are on the Internet, whether from their desktop or mobile or tablet I want to create user experiences that gets them to use our product more, to improve engagement. If we can do those two things right monetization will follow.

Now currently we are subscription-based business which is a difficult business model unless you provide substantial value for users that they are subscribing for, that's the high level overarching goal for that business.

Talking about MyPoints specifically, the space MyPoints is in is extremely hot. We all know what the e-commerce and loyalty space is like. I know I have got loyalty, I am a bunch of -- I am a member of many loyalty programs and we all know about e-commerce and the amount of growth that it's seen. I am especially excited about MyPoints because of the assets it has, the accessibility it has to products that are out there and the business model behind it.

So we can improve, again, users, engagement and monetization if we can take our loyal users, get more users, improve the engagement, the browser extensions that I mentioned is a fantastic example. Just by being part of a browser and not having a user have to sign into a website and then click to another website, our early tests are showing a 9X improvement in shopper rate and improving those metrics as well. And if we can do that the MyPoints business model will automatically take a life of its own and grow from there.

So we fundamentally have to improve the quality of the product, the design of the product, be where our users are and then hopefully the rest will follow. Now we are testing many strategies already in both of these businesses but we need to take a really thorough detailed data oriented approach that will allow us to -- when we then double down on the strategies we want to we will know for sure they are the right ones.

Daniel L. Kurnos - The Benchmark Company, LLC

Yeah I guess that's more in line with what I was trying to get at. The company prior to you made a pretty aggressive investment in going towards Memory Lane and a real content-driven website. And I was just curious more along that line, what your thoughts are and that kind of additional content you might be looking at?

Francis Lobo

Specifically Memory Lane didn't work that's fine. But the whole space, there are adjacent spaces and the strength that we have in the Classmates business we can leverage. I mean the member base and the email capabilities we have, I think -- let me take a step back. You asked me about content specifically. Outside of improving the user experience there are no additional new types of content that we are evaluating right now but there are parallel and complementary products that we are looking at and testing.

So one good example I can share though of what has worked fairly well is the Yearbooks and the amount of data and the amount of value we have seen through Yearbooks.

Daniel L. Kurnos - The Benchmark Company, LLC

Got it, that's very helpful Francis. Let me just ask you one last one and then quickly I will step aside. On the investment front you have got a lot of initiatives and I know that Q1 is going to be seasonally high for you guys. Your guidance was very reasonable for the year. Do you think that if you find the right strategies working you might increase your investment spend over the balance of the year more than forecast, is that already assumed in your guidance?

Francis Lobo

So let me put it this way. My fundamental belief is long term growth and making the right decisions to support long term sustained growth and shareholder return. So to whatever extent and opportunity comes in front of us that helps us accomplish those two goals, yes we will make the investments at that time. So our guidance that we have today is for the current course and speed of our business that we feel good about and if something changes in the course of the year as our strategies develop, yes that might change.

Daniel L. Kurnos - The Benchmark Company, LLC

All right, great. Thanks for all the color and congratulations, good start to the year guys.

Francis Lobo

Thank you.


And moving on, next we will hear from George Sutton from Craig-Hallum.

George Sutton - Craig-Hallum Capital

Thank you. There was a lot more discussion on the call around pivoting relative to the existing businesses than what I think I would have hoped would be more of a discussion of some of the new areas you might enter in and some sort of asking questions on behalf of folks who aren't big fans of the Classmates and NetZero type brands. Am I hearing that correctly in that there will be more pivoting than investments in new areas going forward?

Francis Lobo

Well I mentioned three areas. The first one is our current businesses and getting them to be as optimized as possible. That might include a number of things from let's say lowering cost for acquisition to lowering churn to getting more efficient and new ways of spending marketing dollars and so on. The second bucket which I think addresses your point is we are going to expand in adjacent areas. I’ll use a simple example we have almost I mentioned we are close to approximately a 100 million members in our Classmates business or I think the number's around 67 million in the U.S.

We have their contact information, their profiles information can we create and build new products and services that these members would appreciate or would like to use but related to the sphere of the business that we are in. So we are actually looking and taking a deep dive into a couple of areas but I’d rather not share detail on those areas because I shared at a time what I am confident we were going to move forward, gang busters with them.

In terms of pivoting, pivoting into completely new spaces I can’t rule it out but unless something truly valuable comes along my gut tells that we are going to pivot if we do into complementary and adjacent spaces before going into a completely new space that we are not familiar with or we don’t have a strength today that will help us to be successful in that change. I hope that answers your questions.

George Sutton - Craig-Hallum Capital

Okay, I appreciate the clarity. Now the thing that I did find very interesting that you brought up relative to product development for the MyPoints business is the ability to have you sort of automatically tagged into that. Can you just give us a sense of the timeline of when that might have begun and what sort of impacts you have seen thus far?

Francis Lobo

So I am not 100% sure what you are referring to when you said tag, into that I just talk about the overall.

George Sutton - Craig-Hallum Capital

Oh, the Firefox the Chrome the ability to…

Francis Lobo

Oh yeah, so we basically have been testing that for the last couple of month. Now this is an area that we are hoping to spend more time personally because I know this space really, really well. And to whatever extent you can provide value to a user make their life a little bit better but be where there are in fact you are going to get value make it as seamless as possible. That’s what browser extensions do, you don’t have to do anything new so we have over the last quarter we built the browser extension for all three main browsers i.e. Firefox and Chrome and we are still in testing more. Because you have to be really careful I put the user first in every decision that you make.

You have to be extremely careful that yes you are providing value but it's long term sustained value. So we are still in testing mode and without going into too much detail we’ve got thousands of downloads and we are watching those users, their interaction how frequently they use their browsers very, very closely so we make sure the long term sustained impacts. So if all goes well I can see us ramping that up in the coming quarters, but right now it's still in test mode and our tests are showing very positive sides. Now that’s just one area to look at. I think my point, to the space, if you look at all the ingredients we have at MyPoints and the merchant relationships and so on.

We hope to test more areas in these browser extensions going forward, build a new mobile app, get users to be more familiar and more accessible to the product that at all times.

George Sutton - Craig-Hallum Capital

Understand okay and our best to Neil.

Neil P. Edwards

Thank you, George.


And next we’ll hear from Mike Robert with B. Riley & Company.

Francis Lobo

Hey Mike.

Michael Crawford - B. Riley & Co.

Thank you, sticking with the content media side, right now you have this large porphyry of brands including some like Memory Land and did it work so well. Do you anticipate some cleaning up of that whole [morass]?

Francis Lobo

Yeah so there is up that many there is Classmates, there is StayFriends that is MyPoints, those are the main brands, Memory Lane is no more we are not using it anymore and Memory Lane is done. And so to the extent that we can leverage these individual brands yes we’ve got StayFriends and Trombi in Europe, nothing's changing there, we’ve got Classmates in the U.S., right now nothing is changing there and then we’ve got MyPoints which is similar, and sorry part of the contract media segment which is not changing there. But those are the four brands, main brands we have right now. schoolFeed, as well, like Memory Lane is also done.

Michael Crawford - B. Riley & Co.

Okay, thank you and then further regarding Classmates, if you look at the history of that I think users initially engaged directly to the Classmates side and then increasingly through ramps such as Facebook. Do you see that trend continuing and what percent of users are engaging Classmates via mobile today?

Francis Lobo

So you hit on a really, really key point. It's about how users come to products on the Internet, and that has drastically changed over the last three years. So even for Classmates today I think it's 27% of users have come from mobile which is up from 17% the previous year but that number has to be substantially higher and we are working on that. Users don't seek products out. You have to be where users are. And today we all know the trends of how much Internet on mobile is going up, tablet is going up, desktop is kind of plateauing it.

We have to follow those trends and build products to match that. So Classmates you are right, historically they went directly to the site and then as with the Internet the Classmates team has embraced social, they get a lot of traffic and usage via Facebook. Of course they have to embrace all devices. We have to do a better job there but I talked about mobile and it's about being where the user is. I mean that is one of the key recurring themes in my entire script about being accessible to user, so that he can chose to come to you in as easy a manner as possible.

Michael Crawford - B. Riley & Co.

Okay. Thank you. And then just switching gears to Communication side. So with 49,000 mobile broadband users, the twice the EBITDA sounds like that's getting close to about $3 million in quarterly revenue and I think you said that is a $2.5 million net investment in the quarter.

Neil P. Edwards

Mike, we said two times the revenue. I guess it's actually higher than that but it's not twice the EBITDA.

Michael Crawford - B. Riley & Co.

I am sorry. ARPU, twice the ARPU you said?

Francis Lobo

Yes. That's correct. We said two times the ARPU. So, a little bit higher than that.

Michael Crawford - B. Riley & Co.

Right, so if am doing my math right, that was around a few million dollars worth of revenue and around $6.5 million of cost, just something I am sorry %5.5 million of cost?

Neil P. Edwards

I mean we provide the metrics Mike so that you can calculate the numbers.

Michael Crawford - B. Riley & Co.

And when do you expect to have Sprint's 4G network accessible?

Francis Lobo

That's going to be later in the year, probably end of June. So late second quarter or early third quarter.

Michael Crawford - B. Riley & Co.

Okay. That pushed a little bit from the expectations a few months ago?

Francis Lobo

No, that's right on track.

Michael Crawford - B. Riley & Co.

Okay, great. Thank you.

Francis Lobo

Thanks Mike.

Neil P. Edwards

Thank you, Mike.


Ladies and gentlemen, that does conclude today's presentation. We do thank everyone for your participation.

Francis Lobo

Thank you everyone. Thank you.

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