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United Online, Inc. (NASDAQ:UNTD)

Q1 2014 Results Earnings Conference Call

April 30, 2014 5:00 pm ET

Executives

David Bigelow – Vice President Investor Relations

Francis Lobo – President, Chief Executive Officer & Director

Michelle D. Stalick – Interim Chief Financial Officer & Chief Accounting Officer

Analyst

Daniel Kurnos – Benchmark Company

Josh Nichols – B. Riley & Co.

Operator

Welcome to the United Online first quarter 2014 earnings conference call. Today’s call is being recorded. At this time I’d like to turn the conference over to Mr. David Bigelow, Vice President Investor Relations. Please go ahead.

David Bigelow

Welcome to United Online’s conference call to discuss our financial results for the first quarter ended March 31, 2014. Joining me on the call today will be Francis Lobo, President and Chief Executive Officer and Michelle Stalick, our Interim Chief Financial Officer. Before I get started I’d like to mention that we created a PowerPoint presentation that summarize our first quarter 2014 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 investors at the top and going into the quarterly earnings section.

On today’s call, in today’s press release, and the accompany slides that are available within the investor’s section on 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 US or GAAP and should be considered in addition to and not 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 releases and accompanying slides that are 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, financial performance, net interest expense, amortization, share numbers, capital expenditures, taxes, operating metrics, new or planned business initiatives, products, services, future applications and functionality, the expected benefits of our acquisitions, strategies, and marketing programs among other things, 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 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 filings with the Securities & Exchange Commission including the company’s annual report on Form 10K and quarterly reports on form 10Q. Guidance, projections, and other non-historical information provided in the press release and on 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.

With that, I will now turn it over to our Chief Executive Officer Francis Lobo. Francis go ahead please.

Francis Lobo

Welcome everyone to United Online’s earnings call for the first quarter ended March 31, 2014. To summarize, it’s been a solid quarter. We have made significant progress on numerous fronts from ensuring our day-to-day operation results to moving forward with important initiatives related to our overalls strategy and long term growth objectives. I will share many of these updates with you on today’s call.

As I said last quarter, it’s clear to me that United Online has many challenges but it also has many opportunities. We have a large engaged user base, large amount of relevant data, technology assets, product assets, valuable partners in key markets and above all, committed employees focused on building a strong future for United Online. Previously I described how I traveled to offices across the US to meet with each team. Since then, I’ve taken similar trips to both India and Germany. These trips have further increased my optimism for United Online’s future.

While I’m pleased with our progress, there is still much to be done. Converting United Online’s potential into sustainable long term growth will require hard work, time, energy, and commitment. In my mind there are two standout requirements to succeed. The first requirement is good stewardship of the company’s resources by which I mean working with our biggest asset, our people and at the same time, consistently making sound investment choices and decisions. This means directing our intellectual and financial resources towards initiatives that can and will be relevant to our customers and partners and provide opportunities for higher returns on growth.

It also means making the difficult decision to deemphasize some business activities. One such example is the restructuring of MyPoints. We carried out a restructuring of that business to reduce low margin legacy activities and revenue so our team can deliver a stronger USB and new features and products, all of which are relevant to users and partners and will position us to grow. I’ll elaborate more on these efforts later on the call.

The second requirement is product innovation and execution. This quarter our businesses have been focusing on introducing various new product features. We’ve also been focusing on third-party relationships and developing marketing and distribution channels which we expect to have a positive impact on user acquisition, user engagement, and monetization. As it relates to longer term growth opportunities, we’ve taken stock of our core competencies and are evaluating various complementary product opportunities that we’re uniquely qualified to address.

With this as a backdrop, let me tell you the agenda for today’s call. First, I’ll provide an overview of our results for the first quarter. Next, I will provide an update on each of our businesses. Finally, I’ll conclude with some insight into how we are identifying and evaluating complementary and new business opportunities. Then, I’ll hand it over to our interim chief financial officer Michelle Stalick who will go through the first quarter results in more detail. We will conclude by providing our guidance for Q2 and the remainder of 2014.

Let’s start with our results for the first quarter and an update on each business. As I described on the last call, we are taking a three-pronged approach to stabilizing and growing United Online. First, stabilize and optimize our existing businesses. That means getting them to flat and then to growth. Second, leverage our strength and assets to develop new and complementary products and services. Third, pick strategic alliances or acquisitions to expand our scope and reach by entering complementary and/or related spaces.

Our first quarter 2014 results demonstrated the progress we made in the first of these three areas. I am pleased with our accomplishments in Q1. On a consolidated basis, revenues were $55.4 million above the high end of our guidance and down 3% from $57.2 million in the first quarter of 2013. By way of comparison, the year-over-year revenue decline from Q1 2012 to Q1 2013 was 13% so the 3% decline is a solid improvement.

Consolidated adjusted OIBDA was $3.2 million, near the high end of our guidance and down 39% from the year ago quarter. Our communication segment had a very strong quarter and made significant strides in terms of stabilization and optimization. Revenue was $25.7 million, up 4% from the year ago quarter. This was the second consecutive quarter of year-over-year revenue growth for the communication segment which until last quarter had gone eight years without reporting a quarter of year-over-year revenue growth.

The communications segment adjusted OIBDA was $6.3 million, down 12% from the year ago quarter. Last quarter, as you may recall, the communications segment adjusted OIBDA increased year-over-year for the first time in seven years. The segment adjusted OIBDA decrease this quarter resulted from investment in the roll out of NetZero mobile broadband onto the Sprint network. Some of these costs are front loaded. As a result, we expect to deliver the benefit of that investment in the current quarters.

Mobile broadband pay accounts grew to 64,000 at quarter end compared to 49,000 last quarter and 41,000 a year ago. That’s a 57% year-over-year growth. Much of this is attributable to the successful rollout onto the Sprint network. Seasonality also played a part. Our mobile broadband signups tend to be higher in the first quarter of each year with a slowdown in the second quarter. The communications’ team is focused on growing our product portfolio and distribution channels. One of our initiatives is a prepaid mobile broadband offering to be sold to third-party retail locations. We hope to have more news on this in the future.

Let’s move on to the content and media segment which includes Classmates, Classmates International, and MyPoints. Segment revenues were $29.8 million, a 9% decrease from the year ago quarter. Segment adjusted OIBDA was $3.2 million, a decline of 15% from the year ago quarter. The net decline in segment pay accounts were 58,000 a 26% improvement from the first quarter of 2013.

Let’s take a closer look at each of the content and media segment’s businesses beginning with Classmates. Continuing a trend I described last quarter, Classmates is experiencing growth in mobile. In Q1 2014 mobile accounted for 33% of domestic average daily basis member visitors during the quarter, up from 20% in the first quarter 2013. On our mobile website we simplified and optimized the premium upgrade process which has contributed to a bubbling of growth new paid signups from mobile devices from the year ago quarter.

As we noted last quarter, there’s some stability issues we experienced at Classmates in the fourth quarter 2013 had a negative impact on our overall ability to add new pay account upgrades and the effects carried on into the first quarter as anticipated. As we move into the second quarter, we are now seeing improved new paid account upgrades and we expect to reduce the net decline in pay accounts from this point onwards.

More than ever, we are focused on introducing new features and content that engage our users. In the first quarter product updates drove a 15% year-over-year increase in average daily basic member visitors during the quarter. Some examples of the new features include an updated mobile homepage which makes it easier for users to explore member profiles and introduction of a one click tagging feature for yearbook photos that drove a 7% increase in total members tagged. As I mentioned, our users and engagement is critical hence product innovation and enhancement will be a key focus for the business.

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 continues to see growth in mobile. In the first quarter of 2014 mobile devices accounted for 14% of international average daily basic member visitors during the quarter, up from 9% in the first quarter 2013. We are working on plans to leverage our growing mobile presence into increased member visits, interactions, and ultimately subscriptions.

Looking ahead, our primary focus in the coming quarters for Classmates International will be its mobile roadmap. Another priority for Classmates International is managing churn. We made some progress in the first quarter 2014 reducing churn to 2.5% from 2.8% in the year ago quarter. On a new product front, we continue to grow revenue for [inaudible], which offers a German version of Yearbooks to high school graduates. Although small, this business nearly doubled its orders in the current school year to-date compared to the comparable year ago period.

Let’s move on now to MyPoints. Earlier in my comments today I spoke of the need to provide good stewardship of resources which sometimes includes the difficult decision to deemphasize legacy business activities to focus on higher value opportunities. In that context I made reference to a restructuring effort we have carried out at MyPoints. MyPoints is essential to our growth plans. It has compelling strength and assets that we believe we can and will leverage moving forward. These include millions of loyal customers, approximately 1,700 merchant relationships, and a solid product road map focused on meeting our user’s needs wherever they are on the Internet including mobile experiences and new browser extensions.

Some aspects of the old MyPoints business model faced headwinds. In order to become a platform for growth MyPoints needs to adjust course. This restructuring of MyPoints will eliminate activities that are not part of the future direction and enable us to prioritize and resource growth areas. This will include removing lower margin revenue as well as promotions that no longer resonate with our users. To be more specific, from a dollar standpoint, this restructuring is expected to reduce MyPoints revenue by $12 million to $15 million for 2014. But, there will be a corresponding expense reduction such that the restructuring is expected to have a marginal impact on segment adjusted OIBDA and the new streamlined MyPoints will better enable us to explore future opportunities in complementing and new spaces and make strategic pivots as we identify the opportunities we tend to pursue.

In my remarks today I’ve already addressed the first two elements of our three-pronged approach, mainly to optimize our existing businesses and develop new products within our current business framework. In parallel with the first two prongs, we are also exploring ways to expand United’s scope and reach by entering complementary and related spaces. We are in the process of identifying emerging growth opportunities in the Internet space that we are uniquely qualified to address given our strength and assets as a company.

Take for example mobile commerce and Internet connectivity, both are creating opportunities for entirely new lines of products and services that can have a [destructive] impact and United Online user base data, third-party relationships, CRM and marketing expertise, can give us real advantages in addressing user needs. This process is still ongoing and I believe we may be able to share more details on the next earnings call.

Now, this concludes my prepared remarks for today so I’ll now turn it over to Michelle Stalick to go through the first quarter of 2014 numbers and discuss our guidance moving forward.

Michelle D. Stalick

Let me begin by going through the results for the first quarter ended March 31, 2014 and then I will provide guidance going forward. All comparisons represent year-over-year quarterly comparisons unless I clarify otherwise. Comparative results for the quarter ended March 31, 2013 exclude the financial results from FTD Companies, Inc. and its subsidiaries which are presented as discontinued operations in our financial results.

Turning to consolidated results for the first quarter of 2014, revenues were $55.4 million, exceeding the high end of our guidance range and a decrease of 3%. Adjusted OIBDA was $3.2 million near the high end of our guidance range and a decrease of 39%. GAAP operating loss was $8.7 million compared to an operating loss of $600,000. The GAAP operating loss for the first quarter of 2014 was below our guidance range due to restructuring and other exit costs primarily related to the MyPoints business. We also increased our reserve for [inaudible] during the quarter.

The income tax provision was $1.8 million compared to an income tax benefit of $1 million. The income tax rate was -21% primarily due to a provision for income taxes resulted from the deferred tax liability for certain goodwill assets as well as a provision for income taxes related to our foreign operations. Diluted net loss per common share was $0.75 compared to diluted net income per common share from continuing operations of $0.03. Adjusted diluted net loss per common share was $0.18 compared to adjusted diluted net loss per common share of $0.01.

Cash flows from operating activities were $3.3 million compared to $3.5 million. Free cash flow for the quarter was $3 million compared to $2.5 million. Higher free cash flow in the quarter was driven by favorable changes in networking capital and lower capital expenditures, partially offset by lower adjusted OIBDA. Cash and cash equivalents at March 31, 2014 were $67.3 million compared to $58.3 million at December 31, 2013.

With respect to our content and media segment, segment revenues were $29.8 million, a decrease of 9%. Segment adjusted OIBDA was $3.2 million, a decrease of 15%. Segment adjusted OIBDA margin was 10.6% compared to 11.3%. In terms of key metrics, pay accounts decreased by a net 58,000 in the first quarter, flat compared to the fourth quarter of 2013 and compared to a net decrease of 78,000 in the year ago quarter. Active accounts were 10.8 million, an increase of 5% sequentially and a decrease of 5% from the year ago quarter. Churn was 3.2%, up 20 basis points from the fourth quarter of 2013 and down 10 basis points from the year ago quarter. Average monthly revenue per pay account or ARPU was $2.49 compared to $2.54 during the fourth quarter of 2013 and $2.48 in the year ago quarter.

With respect to our communications segment, segment revenues were $25.7 million, an increase of 4%. Segment adjusted OIBDA was $6.3 million, a decrease of 12%. Segment adjusted OIBDA margin was 20.3% compared to 28.8%. As Francis mentioned, this is the second consecutive quarter that the communications segment has achieved year-over-year revenue growth in the quarter and accomplishment that, until last quarter, we had not seen in eight years. This increase was driven by the growth in the NetZero mobile broadband business and higher advertising revenues.

The expansion of the NetZero mobile broadband business across Sprint’s nationwide 3G network, contributed to the increase in our NetZero mobile broadband pay accounts to 64,000 at quarter end, up from 49,000 at December 31, 2013 and 41,000 at March 31, 2013. The growth in mobile broadband pay accounts was also a driver in the decrease in adjusted OIBDA and adjusted OIBDA margin as the company incurred upfront cost for acquiring new subscribers. We expect the mobile broadband business to be profitable starting in the second half of 2014.

In terms of key metrics, segment pay accounts decreased by a net 8,000 in the first quarter versus a net decrease of 20,000 in the fourth quarter of 2013 and a net decrease of 24,000 in the year ago quarter. ARPU was $10.19 compared to $9.62 in the fourth quarter of 2013 and $9.21 in the year ago quarter. These increases were primarily driven by a higher percentage of mobile broadband pay accounts that have higher ARPU as well as an increase in the ARPU of these accounts. Churn was 3.1%, up 40 basis points from the record low in the fourth quarter 2013, and up 10 basis points compared to the year ago quarter. These increases were primarily driven by a higher percentage of mobile broadband pay accounts which have higher churn.

With respect to our unallocated corporate expenses, for the quarter ended March 31, 2014, the impact of unallocated corporate expenses on consolidated adjusted OIBDA was $6.2 million compared to $5.6 million in the year ago quarter. The increase was primarily attributable to certain onetime professional fees.

Moving on to our business outlook for the second quarter of 2014, as Francis mentioned, we undertook a major restructuring of our MyPoints business to streamline the operations, deemphasize low margin low growth activities and prioritize the resources to high growth initiatives. This restructuring will reduce MyPoints revenue by approximately $12 million to $15 million in 2014 but will have marginal impact on the adjusted OIBDA of that business as we have reduced the expenses as well. Our guidance for the second quarter and full year 2014 includes this restructuring impact.

Consolidated revenues are estimated in the range of $52.5 million to $55 million. Consolidated OIBDA is estimated in the range of $6.5 million to $8.5 million. Amortization of intangible assets is estimated at $1.8 million. Weighted average diluted common shares are estimated to be $14.2 million on a GAAP basis and $14.3 million on an adjusted basis. For the full year 2014, we estimate our tax cashes to be between $3 million and $4 million which primarily relates to our international operations.

For the full year 2014, capital expenditures are estimated to range from $10.5 million to $12.5 million. On our earnings call for the fourth quarter 2013, we provided 2014 full year consolidated adjusted OIDBA guidance in order to set appropriate expectations. Today, we are raising the lower end of our full year 2014 consolidated adjusted OIBDA guidance. Our new guidance for full year 2014 consolidated adjusted OIBDA is $29 million to $34 million.

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

Francis Lobo

In just a moment I’ll turn it back over to the operator to begin the Q&A portion of the call but I just want to reiterate today’s key messages. The first quarter was solid with results that met or beat expectations and strong performance from our communications segment. However, we’re not just focusing on the day-to-day, we are making meaningful decisions and evaluating real opportunities and partnerships that will help us get back to growth.

I look forward to presenting more of a strategic update on our second quarter call. Thank you all for joining us today and I look forward to speaking with you in the near future. Operator, please go to Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Daniel Kurnos – Benchmark Company.

Daniel Kurnos – Benchmark Company

Francis, maybe you could give me a little more color on the Classmates segment here. Obviously, you’ve done a good job with mobile. You’re pushing both internationally and domestically and I’m wondering if, as a result of your efforts, you’re actually seeing a demographic shift? Clearly, historically there’s been the age group is skewed a little bit older and you did actually see a nice sequential uptick in active accounts. I don’t know if there’s any promotional activity there but maybe if you could speak to those two things first, that would be great?

Francis Lobo

The first point I’d like to raise is something that is really paramount for me, is the user and creating good user experience. Now, the very first thing that I’m going to say, and bear with me on this, in order to create a great user experience you’ve got to make it simple, user friendly, you’ve got to be where users are, and there’s some basic product [inaudible] you need to follow. That’s what we’ve been focusing on so far, making it easier for users to find us, making it more simple for them to upgrade, creating easy accessibility of products which they are showing more interest in, and so on and so forth.

So no, we’ve not done any special marketing, we’ve not built any really creative big [inaudible] of new products, we’re essentially taking care of low hanging fruit and working with the simple and basic engagement metrics. That is already providing us some results. We are working on other product initiatives in parallel, but the key thing is being where users are so just improving our mobile website had a big impact on that. That applies to both international and domestic. The other small point I want to bring up is there is an element of seasonality here that drives sequential growth in our active accounts.

Daniel Kurnos – Benchmark Company

In terms of MyPoints, can you just clarify exactly when you began the restructuring process?

Francis Lobo

This is something we’ve been working on for the entire first quarter. Listen, I’ve often talked about people first culture so as you can imagine the restructuring involved letting go and parting ways with some very valuable people so we take it very seriously. We’ve been working on this for the better part of Q1 and we executed a bunch of the actual separations yesterday. If that answers your questions that’s it but I’m happy to provide more color if it’s helpful.

Daniel Kurnos – Benchmark Company

I was just curious if you had seen any initial feedback from your efforts, having removed some of the partnerships but it sounds like it’s way too early to really provide any feedback on that front?

Francis Lobo

Absolutely, way too early. This was a huge decision for us and the primary objective of this decision was to position us to be good for the users, to leverage the USP, skills, and strengths we have so we can build a growing business. What I realized, what the leadership team realized, what a lot of folks at MyPoints realized is, we spend a large portion of our [mind] share, a large portion of time and effort on activities while good from a revenue standpoint, they were great from a revenue, but a short term revenue standpoint. They weren’t really contributing to greatly improving the user experience or a business that has the potential to grow multiples in the future as opposed to just maintain stabilizing revenue.

So, this has freed up a lot of time, it frees up resources. We do have a plan in place on which direction we want to take the MyPoints business in and I’ll share more on that next quarter but this now enables us to go in and execute against that as opposed to being tied to what was taking a lot of our time.

Daniel Kurnos – Benchmark Company

Then maybe just a quick one for Michelle before I switch over to the communications segment. I think you mentioned something about some professional costs, I don’t know? G&A was a little bit higher than I was expecting in the quarter in the content and media, was that where onetime costs fell?

Michelle D. Stalick

Yes, we had an increase in the legal fees within our content and media segment. That was a big part of it. Then, we had just some other professional audit and recruiting fees that were part of corporate unallocated.

Daniel Kurnos – Benchmark Company

Maybe we should expect the run rate to be more like 2Q of ’13, maybe like $1 million lower? Is that sort of like ballpark?

Michelle D. Stalick

I don’t believe that that’s unreasonable. Yes, we should see it come down and then as we’ve talked about, as we get towards the end of the year we’ll be reducing the rent and so G&A will come down from that perspective.

Daniel Kurnos – Benchmark Company

Then just shifting quickly to the communications segment, you’ve seen some nice improvement in ARPU, pretty steady improvement in ARPU, I’m wondering if you can share with us just some feedback on user metrics, the initial uptake, time of uptake, we know churn, but the value and clearly they’re going upstream and taking on plans so just any thoughts there on how that’s continuing to pace and what you’re expectations are?

Francis Lobo

The key metric I’ll share with you is a number we shared which is the number of users that have signed up for mobile broadband have gone up to 64,000. That had a strong correlation to the Sprint deal and it just goes to show that we have a valuable product and by improving the coverage users came along. Now, how did that help our costs also? When more people have coverage when they come to our website and more people are able to sign up because you had coverage in their area obviously, lowers the average cost per user.

The other point is that we are working hard driving users to higher paid plans and upselling them and that is working out because users are finding out that with better coverage and better value they’re getting the value for those dollars. The nice thing about this segment is we’ve got really good people, we’ve got a really really solid plan and we’ve got a bunch more initiatives coming in the following quarters to help all the metrics you’ve already discussed. I’m feeling good about that area.

Daniel Kurnos – Benchmark Company

Last one for me and I’ll step aside. Can you quantify a little bit more exactly what you think, and I don’t know if you can, but what you think the impact of the Sprint 3G benefit was on the numbers and what your expectations are when you roll out Sprint 4G this quarter?

Francis Lobo

On the [inaudible] numbers? I think it’s about approximately Sprint would have added on approximately 10,000 new subs give or take.

Daniel Kurnos – Benchmark Company

Your thoughts about what kind of conversion rate you might see with Sprint 4G coming online?

Francis Lobo

That would depend mostly on the coverage. The actual numbers, I’d rather not go into exactly how or what expectation we have from that but on the whole I hope it’s going to be very positive for us.

Operator

(Operator Instructions) Your next question comes from Josh Nichols – B. Riley & Co.

Josh Nichols – B. Riley & Co.

A couple of quick questions. I noticed it looked like the mobile broadband was up 30% or a little bit over quarter-over-quarter which was great. I know you mentioned there is definitely some seasonality attached to Q1 as well as the Sprint 3G. I was wondering how strong is the seasonality factor in Q1?

Francis Lobo

I think the seasonality aspect is pretty harsh. Now, I can’t go into what that really means for Q2 or how many numbers I think we’re going to get but my guess is if you look at last year’s changes from Q1 to Q2 we follow a similar trend from Q1 to Q2 in Q3 and Q4. We’re just starting on a really much better Q1 with the new Sprint deal.

Josh Nichols – B. Riley & Co.

Then a couple of other things, it looks like there’s a lot going on with MyPoints with the restructuring and moving it a little bit in a different direction, one thing is how would you think MyPoints compares to other comparable sites like Ebates or things like that have been around a while that give discounts and coupons to shoppers and things like that?

Francis Lobo

To be really honest, MyPoints in my opinion, has some fundamentals that are stronger than any of the competition but our USP is not as unique as some of the others and we haven’t innovated in the last three to four years. So, our market research products and our email products are all really really good but they’re really good from two or three years ago.

Now, if you take the assets that we have honestly, and you take some of the assets and if we were ever to leverage them with other partners, we can build a really, really solid business. Our merchant relationships and so on is actually very very strong comparatively speaking. It’s just that our product USP in my opinion, is slightly dated. That will change. I don’t think it’s appropriate for me to draw reference to some of the other companies but we’ve seen what’s happened with some of the recent IPOs when you can grow and create genuine value. That’s not too difficult for us to do, we just need to clearly pivot our USP a little bit and that’s exactly what we’re doing, we’re focusing on the future.

For example, last quarter I talked about our browser extension that had some good results. We’re evaluating and looking at many more product upgrades literally on that front for the desktop. But the user isn’t just on the desktop we’re looking at evaluating how we can build the same for mobile and be everywhere. If you ask me, MyPoints, the space it’s in, ecommerce and loyalty, both those spaces are exploding today. We have a ton of key ingredients it’s just up to us to see if we can pull off and build the right USP. If we are able to do that we have millions of users who will embrace it and then the value coming from that could be substantial.

Josh Nichols – B. Riley & Co.

My last question regarding MyPoints really briefly is, it looks like there’s about $15 million in restructuring that’s going on there but pretty much offset by lower expenses. I know you mentioned a lot of that was getting rid of some of the profitable but lower margin business that was antiquated and wasn’t fitting [inaudible] the future. Whenever you bring the revenue back up once you realign everything, are you looking or do you think it would be possible to have a significant type of increase in margins based on your focus on more higher margin products with a little bit more loyalty from customers?

Francis Lobo

Absolutely, that’s the goal. Let me add a little bit more color, the revenue we’re going to be taking out is primarily in two areas. The first area is very low margin gift cards. Now, that’s something where we get gift cards and we resell it to our user and everybody is happy but it’s low margin and it takes effort, it takes time, and it takes [mind] share so I don’t want to do that too much moving forward. The second area we’re taking out a lot of revenue is in our email advertising products. We have so many engaged users who we email very often. We email them every time we get good deals or promotions that we sell to advertisers.

Now, we can send out more emails, and even more, and even more, and sell them to advertisers and revenue will go up but at what point does it cross? At what point do we say, “This is not completely good for the user.” And, at what point does it, excuse my language, piss a user off that they don’t want to remain a member anymore because we are starting to SPAM them. Well, I want to respect our users more. The decisions we’ve taken on is we want to get back to what a good user experience is, respect our users and that’s another big chunk of revenue we are turning down.

The other aspect of this is if you look at the email industry, all the email products and so on are getting a little bit tighter due to SPAM control and so on. We want to be respected by our users that we are always in the inbox, we’re always opened, and we want to dial it back enough to take it to that place where that’s how users view us. If we can maintain that when we have a good USP, guess what? Those very users will embrace it and hopefully it will be much higher margin revenue at that time. We think we know what that is, we need to execute against it. But the first step is respecting our users and taking out that revenue. Did that answer your question?

Josh Nichols – B. Riley & Co.

Yes, it looks like pretty much you’re going with less email blasts but better deals on the products you do do so hopefully you’ll have higher conversion and higher margin, correct?

Francis Lobo

Absolutely.

Operator

Everyone that does conclude our question and answer session in our conference call. Thank you all for your participation.

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