United Online's (UNTD) CEO Francis Lobo on Q2 2014 Results - Earnings Call Transcript

| About: United Online, (UNTD)

United Online, Inc. (NASDAQ:UNTD)

Q2 2014 Earnings Conference Call

August 11, 2014 5:00 p.m. ET


Francis Lobo – President and Chief Executive Officer

Edward Zinser – Executive Vice President and Chief Financial Officer.

David Bigelow – Vice President, Investor Relations


Josh Nichols – B. Riley & Company

Daniel Kurnos – Benchmark Company

Mike Crawford – B. Riley& Company


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

David Bigelow

Thank you. Hello and welcome to United Online’s conference call to discuss our financial results for the second quarter ended June 30, 2014. On the call today will be Francis Lobo, our President and Chief Executive Officer; and Ed Zinser, our Executive Vice President Chief Financial Officer.

As discussed in our press release issued earlier this afternoon, the company is working to finalize its accounting for income taxes and accordingly, will be providing limited financial information on the call today. The financial information for Q2 2014 and Q2 2013 as presented herein is correct. In connection with the preparation of the Company’s provision for income taxes for the quarter ended June 30, 2014, the Company determined that the accounting for income taxes in prior periods was not correct. In addition, the change in the accounting for income taxes negatively impacts the goodwill impairment charge reported by its Classmates reporting unit during the quarter ended September 30, 2013.The company is determined that the provision for income taxes and the goodwill impairment charge for the Classmates reporting unit for the year ended December 31, 2013 were understated by approximately $3.3 million and $2.5 million respectively.

The company is currently evaluating whether the error is one, change management’s assessments of the effectiveness of the company’s internal control over financial reporting as of December 31, 2013; or two, cause any previously issued quarterly or annual financial statements for the periods from January 1, 2011 through March 31, 2014 to be materially misstated. In the event ay prior period is materially misstated, the financial statement for such period and those of subsequent periods will be required to be restated in an amendment through our annual report on form 10-K for the year ended December 31, 2013 and our quarterly report on Form 10-Q for the quarter ended March 31, 2014. If the prior period financials statements were materially correct, the company will revise historically presented amounts when presented in the future.

On today’s call and in today’ press release, we will refer to certain financial measures that are not determined in accordance with accounting principles generally accepted in the US or GAAP. It 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 along with certain reconciliations to the most comparable GAAP financial measures.

In addition the company applies the Safe Harbor Provision as outlined in today’s press release, any forward looking statements to that may be made on the call. 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 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 Chief Executive Officer, Francis Lobo. Francis, go ahead please.

Francis Lobo

Thank you, Dave. Good afternoon everyone. Welcome to United Online’s earnings call for the second quarter ended June 30, 2014. This was a formative quarter for United Online. We made significant progress in defining our strategy to return the company to long term growth. This strategy involves two key parts which we are working on at the same time. Through the first part our improvement plan we aim to stabilize and optimize our existing businesses. Through the second part our transformation plan, we aim to expand into adjacent and new products that resonate with our users that are part of a targeted growth market and that leverage our existing strengths. When combined, these two plans have the potential to move United Online from a declining company with improving prospects to a growth company with exciting prospects.

We are executing against a two part strategy and I’ll provide an update on key actions we’ve taken and early positive results we are seeing. First I’ll provide an overview of our results for the second quarter. I’ll then elaborate on our improvement plan, sharing operation highlights and progress made in each of our businesses. Next I’ll provide additional color on our transformation plan. I’ll then turn it over to our Chief Financial Officer, Ed Zinser, who will provide greater detail on our second quarter financial results. He will also provide guidance for Q3 and full year 2014. I will then make my closing remarks before we go to Q&A.

Q2 was an extremely productive quarter. In addition to the progress we’ve made with our strategy, we made multiple key hires to our management team, including our new CFO, Ed Zinser and our new head of HR, Kesa Tsuda. While we spend a god deal of time building for the future, I am pleased to share that United Online’s second quarter and year to date financial results were solid and that they met or exceeded our guidance.

On a consolidated basis, revenues were $54.6 million, near the high end of our guidance range and down 5% from $57.6 million in the second quarter of 2013. Consolidated adjusted OIBDA was $10.2 million which exceeded our guidance and was essentially flat from the year ago quarter. We generated $5.9 million of operating cash flow which brought our cash balance to $70 million or approximately $5 per diluted share.

Each of our businesses within our operating segments made solid progress against our objectives and performed in line with our expectations. In addition to the numbers, as it relates to our improvement plan, each business took definite steps to enhance its value proposition, its user experience and outreach efforts. We introduced new product features, developed new mobile experiences and tested new email and marketing tactics, which helped improve the user engagement and monetization of our products. We believe continued progress in these areas will help us acquire new users, stem user churn and return our businesses to growth.

Now to segment details. In the second quarter, our communication business delivered strong results and continued to make progress in expanding its offering and reach. Revenues and adjusted OIBDA grew over the previous year. Revenues were $26.2 million, up 5% from the year ago quarter, driven by growth in all three revenue categories which include services, products and advertising. This was the third consecutive quarter of year-over-year revenue growth to the communication segment after eight years of decline. The communication segment adjusted OIBDA was $8.8 million, up slightly from the year ago quarter. The communication segment’s growth was primarily driven by the continued strength of our NetZero mobile broadband business.

In Q2, Mobile broadband pay accounts grew to 66,000 at quarter end compared to 41,000 a year ago and 64,000 last quarter. As discussed in the last call, Mobile broadband signups tend to be seasonal, with the highest growth taking place in the first quarter. So sequential growth was modest as expected.

As mentioned on the last call, we entered into an agreement with Volante Mobile in May to sale prepaid NetZero mobile and Home Wireless broadband products and services through stores in California, Florida and Texas. Since then, we expanded the relationship to include retail locations in New York and Philadelphia metropolitan areas, and we continue to look for ways to expand our retail presence. Through the retail channel, we’ve also introduced new plans and product offerings to meet the needs of Mobile broadband customers. On our website, we offer subscription plans. In retail stores, we now offer three levels of prepaid data plans. This means no recurring monthly contracts for data. This broadens our audience to include the pay-as-you-go customer who might not have the credit or cash flow to sign to sign up for a long term contract.

Now to the content and media segment which includes Classmates, Classmates International, and MyPoints. Segment revenues were $28.6 million, down 13% from the second quarter of 2013 while segment adjusted OIBDA was $6.5 million, down 1% to the year ago quarter. This drop in revenue was primarily driven by the reduction of advertising revenues generated by MyPoints, and the reduction of low margin, low value revenue streams which was part of the MyPoints restructuring that took place in April of this year. This action had limited impact on adjusted OIBDA and has allowed us to deliver incremental value to our users as we position MyPoints for the long-term growth.

In our Classmates and Classmates International businesses, we focus on improving user experience with the end goal of driving increased member engagement and monetization. We tested new email campaigns, new product features and multiple new mobile experiences. These initiatives help stabilize churn and also contribute to growth in member visits and upgrades. First with our Classmates business, we saw a significant improvement in user engagement with a 22% increase in member traffic and a 13% increase in member-to-member interactions compared to the second quarter of 2013. This jump in user engagement has started to contribute to increased monetization through growth in paid upgrades and advertising revenue. We primarily attribute this improvement to three recent product efforts. First, as it relates to email, we introduced new campaigns, continued to optimize for mobile devices and took advantage of a large influx of new members to drive an 18% improvement in our email click through rate compared to the a year ago quarter.

Second, we continued to leverage year book content to drive user engagement on our website. As of Q2, Classmates has more than a quarter million digital year books which we believe is the largest collection on the web. Third, we made solid progress in optimizing our Classmates mobile experience, introducing a redesigned mobile school home and various other mobile specific features. This has contributed to increased member interactions and signups through mobile devices which accounted for 40%, of new basic member signups in Q2, up from 28% in the year ago quarter.

Now let’s turn to our Classmates International business which operates in Europe under the StayFriends and Trombi brand names. In the last quarter Classmates International introduced various new product features and partnerships that have improved member engagement and helped reduce churn to 2.2% from 2.4% in the year ago quarter. Some of those initiatives included a new turn based social game which has helped boost member return visits to StayFriends since its introduction in June. We’re therefore moving quickly to develop a native mobile application for StayFriends members so that they can continue to play games with their Classmates when on their mobile devices. We also continue to grow our Germany Yearbook business (inaudible), securing 236 additional schools as Yearbook printers. These signups drove a 25% year over year growth for that business.

Now, to my points, which is well positioned at the intersection of two high growth spaces; e-commerce and loyalty. Q2 was a strong quarter from my points, with progress in multiple areas. Three examples include our restructuring, our browser extension and our mobile expansion. As you recall, we restructured MyPoints with the goal of strengthening our USP and positioning the business for long term growth. This meant doubling down on high value user activities and eliminating low value promotion and revenue streams. In Q2 we began to see positive impact from these changes. For example we improved the quality of our email program, reducing and customizing the email sent to our members, which increased revenue per piece of email and improved the click-through rate as compared to the year ago quarter.

On our February call, I also described a browser extension we were testing that enables MyPoints members to easily shop and earn points without first visiting out website. We have now moved from a soft launch in the second quarter and rolled out the browser extension to all of our members. This increased our extension download by 53% over the first quarter. This will help drive partner revenue and user engagement.

Lastly, changes to the mobile web product have improved clicks and revenue. We have also begun to work on a new native mobile app, which we hope to launch in October. This app will allow our members to engage in the full spectrum of point earning opportunities on their mobile devices. It has the potential to drive considerable engagement and monetization of our highest value members, the MyPoints shoppers. .

To summarize, in Q2 we made good progress on advancing our improvement plan. We introduced new product features, developed new mobile experiences, and tested new email and marketing tactics, all of which meaningfully improved our metrics. In the second half of the year we will continue to execute again these and other initiatives with the goal of moving our businesses back to growth. In tandem, we also execute against our transformation plan aimed at expanding United Online’s reach into adjacent products that would help transform our opportunity set and create consumer and shareholder value over the long term.

The management team has spent the last nine months evaluating our strengths as a company, assessing industry trends and identifying where the heat is in the market. We have identified two key growth areas for United Online. They are, one, value based communications; and two, Ecommerce with and eventual focus on mobile commerce. With both opportunities, we have a head start given our large engaged user base, product and technology assets and valuable partners.

Let me share a little more color or detail around these opportunities. First, we believe that a value based communications product and service offering which expand beyond our current internet connectivity focus to include voice and other home services, can become a real growth engine for United Online. The plan is to leverage our third party relationships, our operations expertize, our CRM and marketing expertize while expanding our product offering and services to areas that are in high demand with our consumers.

As you know, mobile communications and connected homes are both on the rise. Smartphone penetration in the U.S reached a record 69% in the first quarter of 2014. That’s up 58% in the same period year ago. Low to moderate income Americans have the fewest smartphones and the greatest appetite to upgrade to full service mobile voice and data. These Americans will also participate in the connected home revolution. To date, what has been lacking in the market is a right value priced offering that combines quality, affordability and easy access. United Online is well positioned to address that need.

Second, we are also reinventing our loyalty marketing business MyPoints. Our goal is to become a truly differentiated E-commerce platform which will connect millions of active MyPoints members and online shoppers with the best price deals from our more than $1,700 merchant partners. Why do this? Because Ecommerce and mobile commerce are rapidly growing. In 2013 1 in 20 retail dollars were already spent online. Ecommerce is driving nearly all retail growth in the US as physical stores sales drop. And roughly 25% of E-commerce traffic comes from mobile devices. MyPoints members are at the center of this growth opportunity. Therein lies a huge opportunity for United Online given our millions of members and other shoppers like them. We are already on the way with the development of our new Ecommerce platform and are targeting a Q4 beta launch. And in 2015 we intend to expand upon the platform, introducing multiple mobile commerce applications.

To deliver on both our improvement and transformation plans, employee led innovation will be critical. In Q2 we hosted our first companywide hackathon. This two month innovation program provided an outlet for more than 500 employees to team up and work on breakthrough product ideas in support of existing businesses and more. Through the competition, more than 100 ideas were conceived, prototyped and tested and over the coming quarters we intend to implement a number of these ideas in support of our improvement and transformation plans. We are excited about the progress made to date and steps we have taken to return United online to a path of growth and improved shareholder value.

That concludes my prepared remarks today and I’ll now turn it over to Ed Zinser to go through the second quarter of 2014 financials and discuss our guidance moving forward. Ed?

Edward Zinser

Thank you, Francis. Today I’ll begin by reviewing our financial results for the second quarter ended June 30, 2014 and then I will provide guidance for the third quarter and full year 2014. All comparisons represent year over year quarterly comparisons unless I clarify otherwise. Please note that the comparative results for the quarter ended June 30, 2013 exclude the financial results from FTD Companies Inc. and its subsidiaries.

Turning first to our consolidated results for the second quarter of 2014, revenues were $54.6 million, near the high end of our guidance range and a decrease of 5% versus the prior year quarter. The decline was due to the content in media segment primarily due to the MyPoints restructuring done in April and also due to the pay account declines in Classmates and Classmates International.

GAAP operating loss was $0.4 million, near the high end of the guidance range and was a decrease compared to operating income of $0.9 million in the prior year quarter. The GAAP operating income decline was due to an increase in our reserve for legal settlement of $2.8 million and the margin impact of the $3 million decline in revenue in the quarter. These declines were partially offset by expense reductions particularly in MyPoints.

Adjusted OIBDA was $10.2 million which exceeded guidance and was essentially flat to the year ago quarter.

Cash flows from operating activities were $5.9 million compared to $10.5 million. Free cash flow for the quarter was $4.9 million compared to $8.8 million. The decline in free cash flow was driven primarily by lower operating income and appreciation and amortization.

Cash and cash equivalents at June 30, 2014 were $70.4 million or $4.98 per diluted share compared to $67.3 million or $4.84 per diluted share at March 31, 2014.

Now turning to a review of our communication segment financial results for the second quarter of 2014. Segment revenues were $26.2 million, an increase of 5% due primarily to growth on our mobile broadband pay accounts to $66,000 from $41,000 in the year ago quarter and to a $0.4 million increase in advertising revenue. As Francis mentioned, this is the third quarter – the third consecutive quarter of year-over-year revenue growth after eight years of declines.

Gross margin was 62%, down from 66% due primarily to the greater mix of lower margin mobile broadband paying accounts and a decline in higher margin dial up pay accounts.

Sales and marketing spending a $3.4 million was favorable by $0.6 million due primarily to more efficient brand marketing spending in our mobile broadband business as a result of expansion of coverage from the Sprint nationwide network.

Technology and development expenses of $2.5 million were up $0.2 million or 10% due to higher personnel and overhead related costs.

General and administrative expenses were $2.5 million, a decrease of $0.3 million or 12% due primarily to lower professional services and consulting fees. As a result, our segment income from operations was $8.4 million, up slightly from the prior year quarter.

Segment adjusted OIBDA was $8.8 million, up 1% from the prior year quarter, and adjusted OIBDA margin of 34% was down 150 basis points from the prior year quarter. In terms of key metrics, pay accounts were $525,000, a decrease of $20,000 versus the first quarter of 2014 due primarily to decline in dial up accounts.

ARPU was $10.72 compared to $10.42 last quarter, and $9.34 in the year ago quarter. These increases were driven primarily by a greater percentage of higher ARPU mobile broadband paying accounts. The year-over-year increase in ARPU was also driven by the increase in mobile broadband ARPU. Churn was 3%, down 10 basis points compared to the prior quarter, and flat compared to the year ago quarter.

Now turning to a review of our content and media segment financial results for the second quarter of 2014. Segment revenues were $28.6 million, a decrease of 13% due primarily to the MyPoints restructuring in April of this year which lowered advertising revenues, and a 7% reduction in paid accounts in our Classmates businesses.

Gross margin was 75%, up from 68% due primarily to the reduction in lower margin gift card sales and lower loyalty marketing costs.

Sales and marketing spending of $9.8 million was favorable by $0.4 million due to lower personnel and overhead related costs primarily driven by the MyPoints business restructuring.

Technology and development expenses of $4.4 million were down $1.7 million or 28% due to lower personnel and overhead related costs.

General administrative expenses were $7.4 million, an increase of $2.5 million or 51% due to a $2.8 million increase in legal reserves, partially offset by lower professional services and consulting fees. Restructuring and other exit costs of $0.2 million consisted of employee termination costs. As a result, our segment income from operations was $2.7 million, a decrease of $3.1 million.

Segment adjusted OIBDA was $6.5 million, down 1% to the prior year quarter. The adjusted OIBDA margin was 23%, up from 20% in the prior year quarter. In terms of key metrics, pay accounts of $2.5 million decreased by $55,000 during the quarter, an improvement compared to a decrease of $58,000 during the prior quarter and a decrease of $66,000 during the year ago quarter.

Active accounts were $9.8 million, a decrease of 9% sequentially and a decrease of 7% from the year ago quarter. Churn was 3%, down 20 basis points from the prior quarter and down 10 basis points from the year ago quarter. Average monthly revenue per pay account or ARPU was $2.49 essentially flat to the prior quarter and to the year ago quarter.

For the quarter ended June 30, 2014 the impact of unallocated corporate expenses on consolidated adjusted OIBDA, was $5.2 million, essentially flat to the prior year quarter. We expect unallocated corporate expenses to decline year over year in each of the next two quarters despite incremental spending of more than $0.5 million per quarter on growth initiatives.

Now turning to our financial guidance for the third quarter and for the full year of 2014. For the third quarter of 2014, we expect the following. Consolidated revenues to be in the range of $51.5 million to $54 million; consolidated operating income to be in the range of $1 million to $2.5 million; and consolidated adjusted OIBDA to be in the range of $8.5 million to $10 million; weighted average diluted common shares to be $14.2 million; capital expenditures to be in the range of $5 million to $ 6 million. For the full year of 2014, we expect the following. Consolidated adjusted OIBDA to be in the range of $31 million to 35 million; weighted average diluted common shares to be $14.1 million; capital expenditures to be in the range of $12.5 million to $14 million.

In summary, our existing businesses are generating solid cash flow. We will continue to exercise strong fiscal discipline to maximize profitability and future cash flows. And we have a strong balance sheet to support investments and the growth initiatives that Francis has discussed.

That concludes my prepared remarks and now I’ll turn it back over to Francis for closing remarks. Francis,

Francis Lobo

Thank you, Ed. In just a moment I’ll turn it back over to the operator to begin the Q&A portion of the call. But first let me reiterate today’s key takeaways. In order to return United Online to long term sustainable growth, we have defined and are executing against our plans. First is our improvement plan, which involves stabilizing and optimizing our existing businesses with the goal of returning them to growth. The second quarter and year-to-date financial results met or exceeded our guidance and are a testament to the impact that this plan will continue to have on getting us closer to returning our businesses to growth.

Second is our transformation plan, which involves complimentary and new product opportunities that have the potential to create considerable consumer and shareholder value over the long term. As mentioned, we have now identified two growth areas where the market is hot and where we are going to focus; in value based communications and in Ecommerce with an eventual focus on mobile commerce. The good news is that we have a head start in both areas. As stated earlier we believe that our improvement plan and transformation plans have the potential to move United Online from a declining company with improving prospects to a growth company with exciting prospects. I look forward to further discussing our business result and accomplishments on our third quarter call with you all.

Thank you all for joining us today. Operator let’s put a Q&A.

Question-and-Answer Session


Thank you (Operator Instructions) we’ll hear first from Josh Nichols of B. Riley.

Josh Nichols – B. Riley & Company

Real quickly just a couple of things I wanted to go over. Do you have any details on the nature of the mobile application that’s expected to be launched in October?

Francis Lobo

The two mobile applications -- the only one that I said we are going to launch in October is the MyPoints. It’s a mobile application for the current MyPoints business that will allow those users, those MyPoints shoppers to also transact on their mobile devices. The second main mobile initiative that I talked to was what will come out of the new Ecommerce platform, but that will come in early next year.

Josh Nichols – B. Riley & Company

Okay. And then do you have any information on the demographics of some of the new users specifically? Are they younger, older or what are you seeing there?

Francis Lobo

Are you talking about where we want to go or are you talking about our existing users?

Josh Nichols – B. Riley & Company

Existing, whenever you’ve seen new signups?

Francis Lobo

Yes. So let me give you an example, on MyPoints. The gen-x] shoppers who are essentially aged 35 to 44 right now are overrepresented in online shopping population. They spent anywhere in the range of $2000 a year or annually. Then you have boomers and seniors, basically those who are older than 45 who have also taken to mobile commerce, and for example, they’re spending in excess of $2000 annually. Now both of these user groups are a very big part of our existing MyPoints user base. They’re essentially the active shoppers that we have today. So when you look at the opportunity that we’re going after and you take the fact that these are the areas that are hot in the market where users are growing, where users are actually transacting and spending the money, and you look at the overlap with our users, it becomes that much more attractive and that’s why -- one of the reasons why we want to get there.

Josh Nichols – B. Riley & Company

Real quick, last question from me is, I was looking at the active accounts in content and media and it seems like it’s been pretty stable around 2.5 million, but it looks like there was about $1 million drop this quarter to 9.8 for active accounts. Any color on that?

Edward Zinser

Yeah. That was primarily coming from our Classmates International business and it’s largely due to seasonality. If you were to go back and look at the same results a year ago quarter to quarter, we saw similar sequential decline, and then it built back over subsequent quarters. So the drop that we saw in Q2 we expect there to be an increase in the next quarter consistent with what we’ve seen historically.


We’ll hear next from Dan Kurnos with Benchmark Company.

Daniel Kurnos – Benchmark Company

Good afternoon. Thanks for taking my questions. Thanks, Francis for starting to outline some of your plans here. I do want to just touch on the last question a little bit more. I know there’s seasonality in the business, but maybe if you could give us some color in terms of on both pay accounts which were -- from a year to year basis flat -- down sequentially and the active accounts, just what you’re doing until you can get some of these initiatives rolled out, what you’re doing to further engage users and try to tap into the large user base that you have to prevent bleed until you can get a better product rolled out.

Francis Lobo

It’s a twofold plan. I’ll be the first one to admit that our products have not completely kept themselves up to date. That’s why we have to be where the user is. We have to go to mobile for example. So you take the Classmates business, you take the MyPoints business, you take the StayFriends business, all our business in content and Media, yes you’re right. We’ve got a large engaged user base, but we also have been slow to keep up with the space of the industry and the market by getting into mobile and doing other things. We’re focusing on all of those areas. We’re doing two things in parallel. We’re trying to play catch up so we can be where the user is. When they check their email on a link of who’s searching for them on Classmates, if they happen to be on their mobile phone, we want them to get every singular answer that they can possibly get on their mobile. So we’re playing a little bit of catch up in that regard. But we’re also working on new features like I mentioned with StayFriends and the new mobile gaming application that we hope to get out that will add to not only just play catch up, but also lead to growth in those areas. But yes, you‘re right, besides adding a little bit of seasonality, we have work to do there.

Dan Kurnos – Benchmark Company

Okay, that’s helpful and I think I’ll probably pick your brain a little bit more later on from the technology perspective. But for the sake of time, let me shift over to MyPoints. Two questions here, can you give us an update of how many partners if you’ve actually broken that out you have and how aggressive you expect to get on expanding those partnerships, since I would assume you’d want the largest possible platform as you switch to a possible mobile commerce arm. And then secondarily within my point, are you still aiming for that call it $15 million bogey in revenue reduction? And if you’re to exclude the restructuring this quarter, it seems like MyPoints actually grew organically. Can you confirm that and give us some insight there?

Francis Lobo

So let me address the first part of your question around partners. We currently have about 1,700 affiliate partners of MyPoints. That’s who we’re currently leveraging through our existing businesses, and that’s pretty much what we have today ,we’re putting all our energy into building this new platform so once we have it, if it works the way we believe it has the potential to work, if it materializes and our existing and hopefully new members grasp on it, we will then focus into expanding that partnership as needed. In terms of the restructuring, you mentioned about the revenue reduction bogey. You’re right. I think last quarter we said that there would be an annual impact somewhere between $12 million to $15 million. I think we are in line with those expectations. And even if you don’t talk – we don’t normally break out MyPoints revenue, but I'll give you a little bit of insight into it.

I don’t think that we have grown revenues sequentially outside of that, but we’re making all the right moves to get the businesses back into a very, very strong place where hopefully we will have sustained growth for a very long period of time. So the restructuring was essential so we could bring focus into what we were doing. And we’re seeing really positive signs from that restructuring, both from a point of view of focus as well as from the point of view of metrics that are working out, but it will be a little bit more time I think before we can take that business to sustain the growth.

Dan Kurnos – Benchmark Company

Okay. That’s helpful. I guess it's also possible that the traffic improvements that you saw could have driven a little bit upside relative to our expectations on the advertising front. And then just shifting over to communications, I know it's really early, but just any color on traction with the Sprint 4G rollout and how that may or may not be able to drive an uptick in accounts over the back half of the year?

Francis Lobo

The Sprint 4G rollout is still on schedule for the second half of the year. We are not sharing information on what kind of an impact we can see it from that rollout at this time. But we are on track with regards to our plans to roll that out. It will most likely be early Q4 to be as specific as possible.

Edward Zinser

So we’ll see some effect this year, but obviously we’d expect to see a greater impact in 2015.

Dan Kurnos – Benchmark Company

All right. Yeah. No, I knew it was second half. I didn’t realize it was Q4 now. And then just – I think Francis you talked about the new product, a prepaid data plans. Could you just go a little bit into more detail and talk about how that possibly expands your market opportunity and what you think the market size is there?

Francis Lobo

Absolutely. So basically when a consumer comes to our website or goes into most places today to get a data plan, you sign a contract and you pay a certain amount of money for a certain amount of data. But through our agreement with Volante, what we are selling through those stores, we have what we call a pay-as-you-go consumer. So they can buy a certain amount of data as and when they go. They are not limited to sign a contract. They can say I need 1GB of data or 2GB of data this month and they can just pay for that. And that opens up a huge, huge market for us. If you guys don’t – it's basically the cash customer. If you don’t mind I'm going to give you a couple of statistics as to why you hit upon a reality question. When you look at the overall smartphone market in the U.S, in the first quarter of 2014, 69% of Americans now have smartphones, right? Big carriers are facing real headwinds because essentially the smartphone market for people who can sign large contracts is saturated.

So when is the growth for these guys? The growth is for the MVNO customer where there is this exact type of flexibility. It's the value-based customer, the cash customer, that’s the remaining 31% of people. And going after them whether it's for voice or whether it's for data, is a huge, huge opportunity. And where that worked well for u, when you leverage our brand, our partnerships, our distribution channels and so on, and you take the fact that we have the ability to offer these plans which are flexible, which are cash-based, which a customer can avail of when he needs to and not when he doesn’t or when he has cash crunch, it gives us an advantage in this case.

Dan Kurnos – Benchmark Company

Great. And then just last one so as not to take up all the time here. Ed, I think you mentioned a quarter-over-quarter increase in spend. I just didn’t hear the number when you were talking about the unallocated expense and where broadly, Francis you did actually get some surprising I guess leverage in the quarter in certain categories. I know some of that was attributable to MyPoints, although it sounds like it was really more – just revenue for cost straight swaps. So just your thoughts on how much you have to invest in the business now versus areas where you still see some potential cost cutting? Thank you.

Edward Zinser

Sure. What I talked about in my prepared remarks was about our corporate unallocated costs were basically for the quarter was essentially flat on a year over year basis. What we are expecting in Q3 and Q4 is to see a decline in each of those quarters versus the prior year. And that’s going to be on more than covering about $0.5 million per quarter in growth initiatives, spending on things like product and market research and product design, things like that. So in spite of that we are still looking for a decline in year over year. I think you’ll start to see improvement in those corporate allocated costs.

Dan Kurnos – Benchmark Company

And generically on my question about leverage and the model this quarter, it looks like you’ve got some versus what I think we were expecting and how we should think about spending on the new platforms versus other potential areas of cost cutting within the business at these levels.

Edward Zinser

I think we are looking at all costs aggressively outside of the corporate unallocated. I think if you look at G&A in our individual business segments as well as the other items, I think we’re looking at all those hard to try to get as much profitability as we can and generate the cash we need to spend on future investments. I think it’s safe to say that we are looking at everything and I think as you see expenses in upcoming quarters, you’ll see the impact of that realizing of course that there are going to be some offsets where we are going to spend on other things. But the benefit of the MyPoints restructuring has obviously been an important component so far. You’ll see some fluctuation in savings in the future. Our upcoming lease in our corporate offices is obviously a good guide for us with respect to spending and you’ll see some savings and one time things like consulting and professional fees as well.


We’ll go next to Mike Crawford with B. Riley.

Mike Crawford – B. Riley& Company

Thank you for taking our follow up questions. One you didn’t show a balance sheet. You can’t because you are not entirely sure of the tax position, but could you share a couple of other key accounts like maybe payables or receivables?

Edward Zinser

Really at this point, until we finalize everything, what we really can talk to which we know are accurate are the things we discussed on the calls. Certainly revenue, EBITDA, operating income and cash flow, but the individual accounts on the balance sheet themselves you may see some fluctuation in between accounts for basically no net effect on cash flow. So with respect to specificity there, we are not providing much more color than that. Obviously we know what our cash balance is which we’ve communicated. It’s up from $67 million last quarter to a little over $70 million this quarter. And really that’s much color as we can provide at this point.

Mike Crawford – B. Riley& Company

Okay, great and we expect the Q to be filed in time?

Edward Zinser

Yeah. We are targeting to get our Q filed by the 18th of August which will include the automatic five day extension that we are allowed.

Mike Crawford – B. Riley& Company

Okay, great. Thank you. And then one question on the business. Francis, you talked about expanding the value based communications business to include other and services by connecting home. Specifically you mentioned voice. If you are going to introduce some VOIP offering, is that something where you are going to take something out the box in someone else or is this something you plan on developing in house?

Francis Lobo

I’m not saying too many specifics but yes, you are right there. There could be elements of voice as an MVNO. There could be elements of VOIP and then beyond that down the road, based on how we work, there could be elements where we even leverage internet of things. We all know how that’s working and connected homes. We’ve got a step by step plan that we want to execute against. But the second step will be determined by the first step and so on and so forth. The immediate focus to start getting traction is leverage what we currently know best where we can leverage the Sprint relationship, where we can leverage the retail deal we have and expand those two areas as well.


And with no other questions at this time, that will conclude todays’ conference and we do thank you all for joining us.

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