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United Online, Inc. (NASDAQ:UNTD)

Q1 2007 Earnings Call

May 1, 2007 5:00 pm ET

Executives

Erik Randerson - VP of IR

Mark Goldston - Chairman and CEO

Charles Hilliard - President and CFO

Analysts

Ali Mogharabi - B. Riley & Co

Youssef Squali - Jefferies

Jim Friedland - Cowen and Company

Presentation

Operator

Good afternoon. My name is Chris and I will be your conference operator. At this time, I would like to welcome everyone to the First Quarter 2007 Earnings Release tele-conference. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. (Operator Instructions)

I would now like to introduce Mr. Erik Randerson, Vice-President of Investor Relation. Please go ahead sir.

Erik Randerson

Thank you. Hello, and welcome to United Online's conference call to discuss our financial results for the first quarter ended March 31, 2007. With me today is Mark Goldston, our Chairman and Chief Executive Officer and Charles Hilliard, President and Chief Financial Officer. On today's call and in the accompanying slides that are available on our investor relations website, we refer to adjusted Operating Income Before Depreciation and Amortization or OIBDA, adjusted net income and free cash flow, all of which management believes are useful in evaluating the company's operating performance.

These and certain other numbers are not determined in accordance which Generally Accepted Accounting Principals in the US or GAAP, and should not be considered as an alternative to, or superior to, historical financial results presented in accordance with GAAP. Definitions of these non-GAAP financial metrics are provided in today's press release and the slides along with reconciliations to the most comparable GAAP financial measures.

Before we get started, I need to point out that the company does apply the Safe Harbor provisions as outlined in the press release any forward-looking statements that maybe made on this call. Statements regarding our current expectations about our future operations, financial condition, our performance, our pay accounts, future services, and the industry in which we operate are forward-looking statements that are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.

More information about potential risk factors that could affect the company's business and its financial results is included in today's press release under the caption, Cautionary Information Regarding Forward-Looking Statements and in United Online's most recent filings with the Securities and Exchange Commission.

Projections provided by management in the press release and in today's call are based on information available to us at this time. And management expects that internal projections and expectations may change over time. However, the company does not intend to update those projections. Any persons replaying this broadcast after May 1, 2007 should recognize that any non-historical information discussed in the call might not be current or valid after that date, because the circumstances and assumptions underlying such information may have changed.

With that, we are going to start out with a few comments from Mark and Charles, and then we're going to open it up for questions. So, I'll now give the floor to our Chairman and Chief Executive Officer, Mark Goldston.

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Mark Goldston

Thank you, Eric and welcome everyone to the United Online's March 2007 quarter earnings call. I will take you through a high level of view of what's happening in United Online and then Charles Hilliard, our President and CFO will give you a close look at the numbers for the quarter and guidance going forward.

Before I get started, I would like to mention, we’ve created a PowerPoint presentation that summarizes our first quarter financial result and operating metrics. You can download a copy of this presentation on our internet homepage at www.unitedonline.com within the investor relations section right next to the earnings press release, and I would encourage you to do so.

The March 2007 quarter for United Online was quite an impressive one as our diversification strategy continues to unfold. As we have discussed previously, we are employing a cash flow and OIBDA driven strategy with our communications segment, anchored by the NetZero and Juno ISP businesses, and a growth strategy with our Content and Media segment anchored by Classmates Online and MyPoints.com.

I am pleased to announce that for the first time ever our Content and Media segment exceeded over half of our total pay accounts of United Online. They registered a 51% of total pay account at the end of the March 2007 quarter. The Content and Media segment also accounted for a robust 34% of our total revenues for the March 2007 quarter. The passing of 50% threshold in our pay account mix due to strong growth in Content and Media is a major accomplishment for our company. And it's been tested into the success of a major diversification strategy that we embarked upon back in November 2004 when we purchased Classmates Online.

And our strategy of redeploying our cash flow is to growth initiative and is working well also. During the nine quarters, since we purchased Classmates, our communications segment has generated more than $300 million in adjusted OIBDA, which has enabled us to significantly invest in the Content and Media segment, while we continue to return an impressive amount of cash back to the shareholders.

We announced our ninth consecutive $0.20 per share quarterly dividend in connection with today's conference call, and when we pay the dividend on May 31, 2007 we will cumulatively return just under $120 million of cash to our shareholders since the dividend was first declared.

We are also quiet pleased with the progress being made in our advertising sales area, where revenues are up a 107% versus the March quarter last year, an increase by 7% sequentially versus the seasonally strong December 2006 quarter. Our ad sales teams at the United Online Media Group and our MyPoint unit have done an outstanding job in securing additional high quality ad placements since we really look forward to their continued improvement during the remainder of 2007.

In addition, we announced a new multiyear search agreement with Yahoo, our long- time partner, and we now bring the benefit of the new Yahoo search systems to our ISP users.

I am going to start out with a look at the strong growth performance of our Content and Media segment. The March 2007 quarter for Content and Media was exceptional. We saw pay accounts in this segment increase by an unprecedented 265,000 net ad versus 91,000 in the fourth quarter of 2006 period, and all of the 20,000 to 65,000 net ads were organic growth. Virtually all of this dramatic growth came for my social networking business. We are headed by Classmates and 100% of the 265,000 pay account additions were organic growth. This was an all time record performance for the business, and is reflective of the programs and marketing initiatives we started implementing in November and December of 2006, a little less than six months ago.

Our Classmates social networking business is unique in several respects. It’s got more than 40 million registered members, largely over 25 years old, who are drawn to the fact, the Classmates provide an ongoing linkage to their School, work, military and past. Classmates is also unique in that it derives the majority of its revenue from recurring subscription. While it has a healthy advertising business, the recent increasing members deciding to go for the gold pay membership and start paying us between $2.46 and $5 per month demonstrate that the payee services are very powerful and profitable part of the Classmates business model.

We spent a significant amount of 2005 and 2006 re-architecting the Classmates platform. We fortified the infrastructure of the company as well. This activity helped to streamline our processes and left us well positioned at the end of 2006 to begin launching new features.

Two features that we launched at the end of 2006, the digital guestbook and Classmates Maps, were designed to provide our free members with the compelling reason to become pay members. Our digital guestbook has been a spectacular success and drove the lion share of the 265,000 new pay accounts in the March 2007 quarter. Classmate Maps has also shown to be a compelling new feature as well, and we think the map’s feature has a number of applications that will use, as our site continues to evolve.

Finally, near the end of the first quarter, we begin testing whether allowing our members to view other member's profile for free, now they previously had to pay to look at another’s information, whether letting them look at profiles for free would increase the attractiveness of the Classmates site.

Well, the text showed that the program, which we called free UGC or free User Generated Content, not only increased page use, but it also resulted in more users posting pictures and more users upgrading to our pay service.

We are really excited about the trends of the Classmates business and the result of these initiatives; to put the first quarter’s respective social networking pay account growth in the first quarter of 2007 alone exceeded 75% of the entire organic growth achieved during all of 2006.

Our experience at Classmates confirms that we have the potential to drive a much larger number of free users to our pay service. That's our core competency we have in United Online, and we've exhibited that strength in other businesses in the past.

We are seeing continued success of the programs we launched in late 2006, but we anticipate that our Classmates dating service, which we hope will be live during the third quarter of 2007 will attempt to get millions of single people in our mass of registered user base, the opportunity to meet and date people with the unique perspective on who they are and where they are from. The casual dating approach will be much more affordable than conventional dating services today, and with our huge installed base of members, we believe, we can enter the dating segment very efficiently without the high customer acquisition cost typically associated with the dating industry.

In the second half of 2007, we intend to begin selectively launching our new Classmates website. We’ve spoken about this previously, and we have been working on this project for many months with our outside design firm, and the new website design is really compelling and has tested exceptionally well.

Our goal is to begin rolling this out later this year with the central objective of creating more user-generated content and giving our free and paid users more to do and a greater reason to come back to Classmates more frequently.

Looking at the other major part of our Content and Media segment, MyPoints, which we acquired a little over a year ago, we saw our continuation of the impressive result that unit has posted during the past three quarters. MyPoints continues to perform at a very high level for its advertising clients, and it experiences outstanding renewal rates as a result.

As with Classmates, we made a commitment when we purchased MyPoints that we would dramatically improve the look and feel of the website. The website redesign has been in process for several months at MyPoints, and the new design is exciting and it has performed very well in user testing, just like the new design in Classmates has performed in user testing.

Our goal is to have the new MyPoints website launched in the second half of 2007 with the objective of making MyPoints a more appealing shopping destination for the now more than 5 million members and the new potential members, who land on the MyPoints.com web home page.

Now that we looked at the growth engine at United Online, which is the Content & Media segment, let's take look at our powerful cash flow in OIBDA focused communication segment.

Communications now represents approximately 66% of revenue, and we continue to focus on harvesting the dial-up ISP business under the NetZero, Juno and BlueLight brand names. These businesses continue to generate impressive cash flow and adjusted OIBDA, and that enables us to invest more heavily in our growth businesses in Content and Media in which you saw strong evidence of in the first quarter of 2007. We undertook a value engineering program within the communications segment as part of our 2007 budgeting process back in mid 2006.

Today, we are realizing the significant benefits of those cost savings across the wide range of areas including telecom, CRMs, marketing, software and some other areas. We've actually seen a declaration in our year-over-year revenue decline of our dial-up access business for the first time since communications segment revenue decline began in Q3 of 2005. For effectively managing that business against our stated objective, we continue to look for creative and innovative ways to value engineer that business.

On the broadband front, we launched the NetZero DSL business at the very end of 2006 to our new partner at Verizon, and we follow that up with an agreement with Covad that launched in the first quarter of 2007. In fact we just launched a couple a weeks ago the Juno DSL service as well, giving us a broadband solution for our dial-up numbers at a competitive price point across nearly 30% of our paid dial-up user footprint.

Remember, we view our DSL offerings primarily as a save tool to try to reduce the churn and elongate the life cycle of our dial-up users. Over half of them tell us when they decide to churn off a dial-up that they are going to broadband. We have not engaged an external marketing of the NetZero and Juno DSL services at this point, and frankly we don't have current plans to do so.

We ended the March 2007 quarter with 14,000 DSL paid subscribers which was an 11,000 increase over the 3,000 paid subs we had at the end of the December 2006 quarter when we had just launched. We are focused on securing additional broadband provider relationships as well, and agreements with those folks in an effort to expand our coverage footprint above the roughly 30% that we've got today.

Needless to say, we are proud of the performance of both the Communications and the Content and Media segments. And looking forward, I am pleased to touch on something which frankly could be an exciting opportunity for our company and for our shareholders and I am going to share that with you now.

We believe we've created significant value in our Contact and Media segment with the improvements made in the Classmates business in the two plus years we've owned it, and the MyPoint business over the past 12 months since we've owned that asset.

The strong performance we had in these segments along with our visibility and belief in the growth prospects for these businesses, combined with our constant pursuit of maximizing value to our shareholders has let our board and management to begin the process of exploring a possible subsidiary initial public offering or IPO of the Content and Media segment.

Now given the nature of the process, we can't offer any details at this time, but we are very excited about the prospects for our Content and Media business, and to create additional shareholder value.

And with that, I am going to turn the mic over to Charles for a detailed look at our financial performance.

Charles Hilliard

Thank you, Mark and good afternoon everybody. Let me begin with a few financial highlights for the first quarter.

United Online's revenues and adjusted OIBDA came in above the high end of our guidance, due to stronger than anticipated revenues in both segments. Our Content & Media segment achieved sequential revenue growth despite Q1 being a seasonally slower period for advertising sales relative to the busy fourth quarter holiday period. As Mark mentioned, consolidated advertising revenues increased by a healthy 7% sequentially, and they are up 107% versus a year-ago quarter.

Free cash flow, I would like you to know, more than doubled from a year ago, surpassing $20 million in Q1. And finally, we are raising our 2007 guidance for operating income and adjusted OIBDA, and we are initiating formal revenue guidance for the year. Now let's get into a more detailed review of the quarterly financials.

Consolidating revenues were $129.9 million, which was up 2% from $127.3 million in the year ago quarter. Stronger than expected advertising revenues from both segments and accelerated Content & Media pay account growth let us to exceed the high end of our guidance range by nearly $4 million. Content & Media now accounts for 34% of revenues, which is up from 21% a year ago.

Consolidated gross margin was 77.5%, up a 100 basis points from 76.5% a year ago, and up 40 basis points sequentially. The increase versus the year-ago quarter reflects a higher gross margin in communication, which was partially offset by a reduction in Content & Media gross margin, which is due to the shift in our business mix, following our acquisition of MyPoints. Sequentially, Content & Media's gross margin expanded 300 basis points to 77.1%.

Consolidated adjusted OIBDA was $34.4 million in the quarter down 1% compared with the year-ago quarter, due primarily to our increased spending and investment on sales and marketing initiative, aimed at continuing to grow our Content & Media segment. Free cash flow, as I mentioned, was $20.3 million, up 136% from the year-ago quarter, and it benefits from the comparison to a year ago when changes in working capital reduced free cash flow by more than $13 million.

Pay accounts increased by a 130,000 during Q1 with Content & Media being the growth catalyst. As Mark mentioned, 265,000 net ads in Content & Media represents about 75% of the organic growth for all of 2006.

By comparison communication pay accounts were down a 135,000 in the first quarter. Consolidated churn during Q1was 4.7%, now is flat versus the fourth quarter of last year. Now we'll get into our segment results a little bit.

Content & Media revenues were $44.2 million, up 64% from the year-ago quarter. Content & Media revenues also increased 1% sequentially despite a typical seasonal downturn that we discussed on our last quarter's conference call. Our sequential growth reflects nearly 5% growth in billable services revenues from increased pay accounts, and healthy advertising revenues that declined just 2% from the seasonally strong fourth quarter.

Excluding the impact of acquisitions, Q1 segment organic growth was 14% year-over-year, and that's the comparison that continues to be impacted by our decision last June to reduce the number of ad places per page on Classmates in an effort to improve the user experience. 53% of segment revenues this quarter were from billable services revenues and 47% were from advertising.

Content & Media adjusted OIBDA was $5.8 million, which represented 13.1% of segment revenue, now was down from $6.3 million or 23.3% of segment revenues a year-ago. The decline in segment OIBDA reflects significantly higher investments in sales and marketing dollars in 2007 recruits us towards customer acquisition and social networking where growth is clearly accelerated. In fact, we invested 46.5% of our total sales in marketing dollars in Content & Media segment during the first quarter, up from 28.6% a year ago.

For all of 2007, we are targeting Content & Media adjusted OIBDA percent of segment revenues to approach 20%. That's up from 18.2% achieved in 2006. We also anticipate Q4 to represent the strongest quarter seasonally for Content & Media.

I also want to point out that MyPoints, which we didn't know in the year-ago period, does carry relatively lower margins, which impacts our Q1 year-over-year comparison. We continue to anticipate quarterly fluctuations in Content & Media margins primarily due to seasonality in our ad revenues, which we believe will continue with the fourth quarter being strong and our third quarter being weaker. Also, we intend to significantly re-invest in customer acquisition particularly during less competitive periods such as Q1, when return on investment is more attractive.

Content & Media pay account, as I mentioned, grew by a net 265,000, which is up from 91,000 in Q4. In the year-ago quarter, we added a 122,000 pay accounts in the segment organically. Also, as you recall in the year ago quarter, we acquired Names Database with 58,000 pay accounts.

Virtually all of our pay account additions come from social networking. Content & Media average revenue for pay accounts per month or ARPU is $3.26, down 8% from $3.54 in the year-ago quarter, and down 3% sequentially. The decrease in ARPU primarily reflects the accelerated pay account growth in Q1, and a year-over-year growth in international pay accounts material relatively lower ARPU.

Now coming to Communications segment. Communication’s revenues were $85.7 million, down 15% from a $100.3 million or 79% of consolidated revenues in the year ago quarter. Importantly as Mark mentioned, the year-over-year revenue decline decelerated by a 160 basis points sequentially. This is the first deceleration, we have experienced since year-over-year segment revenues declined again in Q3 of 2005.

85% of segment revenues were from billable services and 15% were from advertising. Once again, segment advertising revenues grew year-over-year increasing 31%; that's all organic. Segment Ad revenues were bolstered in Q1 by our recently renewed research agreement with Yahoo, as well as upsides from our upgraded Media sales team and systems.

Our Communications ARPU was $9.61, down 1% from year-ago quarter and flat sequentially with Q4. Our Communications adjusted OIBDA was $32.8 million, down 2% year-over-year. Our OIBDA margin, which is adjusted OIBDA as a percent of segment revenue increased 490 basis points year-over-year to 38.3% due to these improved advertising revenues, reduced marketing expenses and lower telecom cost.

Year-over-year telecom costs to support dial users decreased by 38%. The flexibility of our business models that emphases variable costs and sourcing enables us to reduce our cost structure, as the dial-up business continues to mature.

A net decline in Communications pay account narrowed sequentially to 135,000 in Q1, compared to a 149,000 in Q4. This compares to the net decline of 96,000 in the year-ago quarter.

Performance on this metric was driven by a decline of 124,000 pay access accounts. It represents a deceleration from a decline of a 143,000 access accounts in Q4. Pay access accounts declined by a 104,000 in a year- ago quarter, which brings us to our Communications subscriber Acquisition Cost or SAC.

Communications gross subscriber acquisitions cost from Q1 was $100, down 11% from $113 in Q4, and up 14% from the year-ago quarter. The sequential decline reflects improved seasonality for our access sign up and reduced VoIP spending in Q1. An increase in our computed SAC from the year-ago quarter reflects higher allocated selling expenses associated with the build up of our advertising sales force and increased sales commission resulting from the 31% growth in segment ad revenues.

Our SAC computation is total segment sales and marketing divided by gross pay account addition. I'll talk about our balance sheet and the dividend. Total cash balances increased by $5.6 million to approximately $168 million at quarter end. During the quarter, we paid $13.7 million in dividend and repurchased $2.7 million in common shares to satisfy tax withholding on vested restricted stock units.

We also announced today that our Board of Directors has approved the payment of $0.20 per share quarterly dividend during this current quarter. As Mark mentioned, this represents our ninth consecutive quarterly dividend payment of $0.20 per share dating back to early 2005.

Now let's wrap up with our business outlook. Today we are providing guidance for Q2 revenues of between a $128 million and a $132 million, an adjusted OIBDA for Q2 of between $34 million and $36 million. Our revenue guidance for Q2 reflects our expectations for continued sequential decline in communications revenues, and at the mid-point we expect it to be offset at sequential revenue growth in the Content & Media segment, takes us to guidance for all of 2007.

We are marginally increasing our guidance for adjusted OIBDA to a new range of between $143 million and $147 million, up from prior OIBDA guidance of between $141 million and $146 million. We are also formally introducing revenue guidance for all of 2007. We expect revenues for the year to be in a range between $510 million and $520 million. This compares to revenues of $522.7 million in 2006.

Our estimates for 2007 capital expenditures remains unchanged of between $22 million and $27 million, and in terms of cash taxes which we keep a close eye on, we now expect to pay between $38 million and $41 million in 2007 for cash taxes, which is up slightly from the $35 million to $40 million range we provided last quarter. That concludes my prepared remarks. Back to you Mark.

Mark Goldston

Thanks Charles. In closing before we open up for questions I just want to reiterate the fact that the communications business is performing well and the year-over-year revenue decline decelerated by 160 bits sequentially which we are very happy about. The Content & Media business is doing phenomenally well evidenced by the huge organic growth that we've had and as I said earlier that our board and management begun the process of exploring a possible subsidiary IPO of the Content & Media segment. So with that we feel a little good about the business and I will like to open up to any questions that you may have.

Operator, if you can explain to the people on the line how to get into the queue, then Charles and I would field the questions?

Question-and-Answer Session

Operator

Absolutely sir. (Operator Instructions) Your first question is from Ali Mogharabi.

Ali Mogharabi - B. Riley & Co

Hi, guys. Great quarter.

Charles Hilliard

Thank you

Ali Mogharabi - B. Riley & Co

On the Content and Media segment you certainly added 265,000 pay accounts, give an idea, do you think that a big chunk of these new subscribers or new accounts will stay on, and how long do they actually, how long do they usually remain as paying members?

Charles Hilliard

Hi, Ali its Charles. We disclosed a consolidated churn rate at 4.7%, and I can tell you that both segments are not too far apart from that, and we've seen improving renewal rates at Classmates which we have been pleased with.

Ali Mogharabi - B. Riley & Co

Okay. And then on the advertising side, I think you touched on it little bit now it is, it was expected to be a seasonally weaker one. I am assuming that we should expect the regular seasonal behavior throughout the year. So, am I right in basically considering the Q1 performance as the base, as the seasonally weakest quarter?

Charles Hilliard

Without business, Ali, particularly I from my point, we tend to look for Q3 to be seasonally the weakest for ad revenues, particularly in Content & Media, and Q4 to be by far and away the strongest with Q1 and Q2 being somewhere in the middle.

Ali Mogharabi - B. Riley & Co

Got you. Alright, great, thanks.

Charles Hilliard

Thank you, Ali

Operator

Your next question is from Youssef Squali

Youssef Squali - Jefferies

Yes hi, Youssef Squali. Hi, Mark and Charles.

Charles Hilliard

Hey Youssef, how are you?

Youssef Squali - Jefferies

Excellent. Thanks, Mark, now let's start with Charles. Charles, I was wondering if you could direct consult something for me, the outperformance came from advertising revenues within the communications division, which basically is access e-mails, VoIP etcetera. Even if I look at the business, that business saw, as we expected, about a 135,000 sequential licensed subscribers. Was there anything on the advertising side this quarter that wasn’t non-recurrent in nature; I know you are in a new your relationship with Yahoo, was there an upfront payment there or was there a changed dramatic change in terms that you can speak to? Then I have a follow up.

Charles Hilliard

Youssef, with respect to your first question, there is nothing that I would point to as being non-recurring in nature, and yeah, the improvement was driven by renewal of that agreement during the quarter. So I think that speaks for itself, and we are very pleased with the extension of that relationship. And we did see our performance there, but I won't emphasis the output of our performance in Content & Media with the sequential growth overall, our ad revenues being within 2%, a very strong Q4 as well as this acceleration not only in paid subscriber edition, but also the 5% sequential acceleration of revenue growth in billable services on Content & Media, we kind of look at both our kids and say hey relative to what we expected, we are really happy with them.

Youssef Squali - Jefferies

That’s pretty impressive but there was no -- just to be clear, there was no upfront payment from Yahoo?

Charles Hilliard

That’s correct, no there was not, no there was not, Youssef.

Youssef Squali - Jefferies

Okay, and Mark your talked about the deceleration in the rid of loss on the dial upside, can you speak to that, why do you think we are seeing that?

Mark Goldston

I think that industry, as we talked about before, I think that industry, although it’s certainly not a growth industry, I think it’s kind of stabilizing. There is a good portion of the country, Youssef, which we've talked about numerous times, -- they can’t get broadband even if they want it, even when we start to offer broadband. Now there is still a meaningful chunk of our user base that take a broadband, and there are other people using other dial-up services in those areas as well, so when they look to switch, you know, we have with our brands, we have a pretty top-of-mind presence. So we really like the industry, as I said, we are not looking for pure growth that doesn’t how we are running it. I mean considering while running that business and has been for year and half in a harvested mode for cash flow and OIBDA, the fact that it preformed the way it did is really makes us feel good about it. You said that Charles was right, what I want to point out is we saw a year-over-year deceleration, and the revenue decline on a percentage basis and that improved sequentially by a 160 basis points. That was assisted by the growth in ad revenue that we pointed out, as well as, the stability in the ARPU sequentially.

Youssef Squali - Jefferies

And on the guidance, I guess, your OIBDA guidance implies about a $1.5 million increase from prior guidance at the mid point. Your outperformance in Q1 was about $3 million, why the conservatism?

Mark Goldston

We are excited about the investment opportunity in Content & Media. So, our mandate is to ship the top-line well providing a relatively stable bottom-line. We have been fortunate to be able to grow that bottom-line over a long period of time, but right now our straight objective is the Return on Investment is attractive, we are going to continue to invest in Content & Media.

Charles Hilliard

And Youssef, if you look at the stunning number that 265,000, which literally is three quarters of what we gained all last year, you know, what you want to do as a marketer, is if you are fortunate enough to have some features on your site -- new features that you have launched that are getting more of that free people to go to pay, you also then want to go spend your marketing dollars to try to bring more people through the front door so that they can experience these new features, and hopefully exhibit better conversion rates as well.

It's sort of like you want to keep investing while the getting is good in these programs they are sustainably good. We brought them out in November and December, and they've performed in each and every month, and because in front of us we got some other terrific new programs coming out. We want to continue to invest in these businesses.

Youssef Squali - Jefferies

Okay, fair enough, and my last question. On the Classmates Dating Service, can you speak little about the model that you will be going for there, is it as ad driven, and is it subscription?

Mark Goldston

It's a little bit of both and it's a whole new take on the dating industry. The dating industry, as you know, has been typified by a very high monthly service fee which we are not going to do. Ours is going to be very attractively priced; our product for our free members don't have to pay, and our gold members will largely get this thing as part of their gold package.

And, so it will be a tremendous value ad for people who are paying, and by the way another intensive for someone to become a Classmate Gold member because just on the value of being part of the dating service alone is a massive value compared to what you would have to pay in a conventional dating service, one, and two because of the information we've got on people in terms of who they are, where they want to went to school, other people who know them etcetera, it really gives you an entirely different kind of experience and our angle is much more casual dating and getting to meet new people who may have common interest.

So, while dating is certainly going to be essential core component of it, it will also be a service for people who just want to meet other people because we have got more than 40 million people on this service, Youssef, and up to this point we sort of confine them to their silo of their own schools, their own work history and their own military. They haven’t really been in an environment where they can intermingle with the remaining 40 plus million people. So our marketing folks have come up with a way to say have you satisfied your nostalgia aspects, now you can start looking for people with common interests, geography etcetera. And that we think it's a really cool idea, and the beauty of it is that the dating industry has been sort of hamstrung by exceptionally high customer acquisition class, which is part of the reason why they had to be charge so much per month.

With 40 plus million people, our hope is that we can enter a business that's registry based with little and no customer acquisition cost, and with a much more attractive monthly fee, which to our pay members will be 0. And yes, there will be an ad component to it. So, we think there are a lot of prospects there. We are going to stake it slow, but if it works, it could be an absolute homerun for us, because from an investment standpoint, we can pretty much mine the current base.

Youssef Squali - Jefferies

Okay, thank you very much.

Mark Goldston

Thank you, Youssef.

Operator

Your next question is from Jim Friedland.

Jim Friedland - Cowen and Company

So, good afternoon. Question on the Media business, so, for the last couple of years, on a before corporate overhead basis, it's been doing quite up of about 18%, and so you are reinvesting some marketing dollars right now. If you look out a few years, what kind of, what target do you have for them on a margin basis, to say sort of, Match.com type business, which got 25% before corporate overhead. And then you have, what's the dynamic of MyPoints?

And then the second question is, on G&A and product development really at the consolidated level, product development seems to be flattish now and G&A have been picked out in the quarter, so, as we go forward, is it safe to assume that those two line items are not really going to grow, and its basically your decision of how much you want to spend to reinvest in the new business and that's basically going to be the big driver in either direction of the OIBDA. Thanks?

Charles Hilliard

Okay, thanks Jim. On Content & Media margins, in terms of a formal outlook, we definitely intend on managing that business to modestly expand the margin this year to somewhere in the range of 20% and the way we look at taking that margin is very much a function of the Return on Investments of where we can put back and do it. So it will, that margin will definitely be a function of related growth going forward, but we will look at taking that up.

Your second question with respect to product development and G&A, we have seen some stability there, and you saw the decline in G&A year-over-year. I would say that right now our expectation is that is down the modestly year-over-year, and we expect to take product development up marginally year-over-year, but once again we will move around the P&L to get to where we thing the reinvestment opportunities are grated as we go for our stated objective which is returning to consolidated organic growth on a sustainable basis, and driving to the majority of the P&L and the revenue line being from Content & Media.

Jim Friedland - Cowen and Company

Thanks. A quick follow-up, if I could, on the organic point, so you grew 14% in the Content business this year, did you anniversary the scale back in ads, on the Classmate's side, do you have any sense of how that might accelerate once you have anniversaried that change?

Charles Hilliard

We do, I think you can do some math with the implied guidance and you will see some real acceleration going in the Q2. A portion of that visibility obviously is because of the large number of pay accounts we added in Content & Media organically in Q1. There were, as Mark talked about the contemplation of subsidiary IPO where the combination of our visibility and our enthusiasm with respect to those growth cost tax, has driven us to examine that.

Jim Friedland - Cowen and Company

Okay, great. Thank you.

Charles Hilliard

Thank you very much, Jim. Any other questions operator?

Operator

There are no further questions in the queue at this time sir.

Mark Goldston

Well thank you very much and I want to thank everyone for attending our earnings call today, and as usual, if you have any questions, please don't hesitate to contact the company and now that we are please to have Erik Randerson as our Vice-President in Investor Relations. Please feel free to contact Erik directly and or Charles or myself. Thank you very much everybody, and again you can replay this on our website at unitedonline.com, where you'll also find the PowerPoint presentation supporting some of the data that you we talked today. Thank you.

Operator

That concludes today's conference. You may disconnect at this time.

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Source: United Online Q1 2007 Earnings Call Transcript
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