United Online: A Balance Sheet In Search Of A Buyer

| About: United Online, (UNTD)

Summary

The company has shifted strategy from acquirer to acquiree.

Recovery in their mobile broadband business is key to valuation.

Analysis places company shares between $12.50 and $15.

United Online (NASDAQ:UNTD) continues to sell itself off piece by piece. Previously, the owner of properties such as Classmates.com, Mypoints, StayFriends, NetZero, and Juno, only the latter two of those remain. In August of last year, I wrote about the company's situation in a piece titled, United Online: A Balance Sheet in Search of a Product highlighting the fact that the company was cash rich and actively seeking acquisition targets. Clearly, management strategy deviated in the interim.

Much of this activity has been spurred by a buyout bid made in November by B. Riley Capital (NASDAQ:RILY), previously an owner of 7.9%. Offering a price of $12.50 per share, the B. Riley Capital Chief Executive Bryant Riley made his case stating, "Our proposal provides United Online shareholders immediate liquidity at a time of tremendous uncertainty, including the recent departure of the company's CEO."

At $12.50 per share, B. Riley was valuing the company at $185 million only a modest premium over the $10-$12 range that shares had occupied over the previous month. For this reason, United rejected the offer, but redoubled its commitment to evaluating all avenues to maximizing shareholder value.

Since the offer and its rejection, United has sold off StayFriends, "16.0 million euros, which includes 6.5 million euros of cash on StayFriends' balance sheet" and MyPoints, "an all-cash transaction valued at $13 million."

Taking into account these latest developments, there are three components of United: cash, a net operating loss, and its communications segment. So, with the pared down company trading around $11 per share and many fewer unknowns, does it look like the rejection of the $12.50 was a prudent decision? And what might the remaining assets be worth?

Cash is, of course, the most straightforward component of the valuation. After the MyPoints sale, the company should have around $130 million.

After cash, the company has its profitable dial-up business. As would be expected, the segment has long been declining and will continue to do so. The two models below forecast the future cash flows through 2020 forecasting the decline in one model using 2014 and 2015 total revenues to establish the trend and in the other using 2015 quarterly numbers. Margins from the segment are held constant at 30%.

Year/Quarter

Revenue

Segment Income

2014

$103,165.00

$29,194.00

2015

$90,227.00

$26,651.00

Discounted at 10%

2016

$77,289.00

$23,186.70

$21,078.82

2017

$64,351.00

$19,305.30

$15,954.79

2018

$51,413.00

$15,423.90

$11,588.20

2019

$38,475.00

$11,542.50

$7,883.68

Cumulative

2020

$25,537.00

$7,661.10

$4,756.94

$61,262.44

Click to enlarge

Year/Quarter

Revenue

Segment Income

Q1 2015

$24,264.00

$7,279.20

Q2 2015

$23,208.00

$6,962.40

Q3 2015

$21,466.00

$6,439.80

Q4 2015

$21,289.00

$6,386.70

Discounted at 10%

Q1 2016

$19,890.00

$5,967.00

$5,821.46

Q2 2016

$18,823.30

$5,646.99

$5,374.89

Q3 2016

$17,756.60

$5,326.98

$4,946.63

Q4 2016

$16,689.90

$5,006.97

$4,536.07

Q1 2017

Etc

Etc

Etc

Q3 2020

$689.40

$206.82

$129.37

Cumulative

Q4 2020

$0

$0

$49,707.26

Click to enlarge

Based on these estimates, it seems fairly safe to say that the value of the communications segment is between $50 and $65 million.

One confounding factor to this analysis is that the company also supplies mobile broadband internet services. User numbers for this service are not in an inevitable decline in the same way dial-up users are, and in fact, the Q4 conference included CEO Jeff Goldstein stating, "in our Communications segment, we remain committed to growing our mobile broadband business now that the transition of our subscribers to the Sprint 4G LTE network from the Clearwire WiMAX network has been completed."

The dropping of Clearwater is significant here because it cost the segment customers in the short run - consumers reacted to higher device and data prices - but ultimately gives United a better product. Management suspects that the mobile broadband customers have now bottomed at 49,000, having once been as high as 77,000.

All this points to a future where mobile accounts are increasing, fighting back against the eroding dial-up base. Supporting this thesis is a statement from Q3 that subscribers had increased in every quarter since the product was introduced up until the conversion to 4G was initiated. How much growth will occur and how quickly is debatable, but this at least provides a level of comfort in the above projections as they are likely to be quite conservative.

To get a sense of the change that a reemerging mobile subscriber base could have on United, the below is a forecast for revenue based on subscriber numbers and makes the assumption that although dial-up will continue its linear decline, mobile broadband will begin adding people back at five thousand per quarter.

Forecasted* Communications Income
EoQ Paid Users Change Mobile Dial-Up Segment Income
294 $7,279.20
274 -20 -7 -13 $6,962.40
256 -18 -6 -12 $6,439.80
229 -27 -15 -12 $6,386.70 Discounted at 10%
222 -7 5 -12 $5,736.49 $5,596.58
215 -7 5 -12 $5,582.67 $5,313.67
208 -7 5 -12 $5,428.86 $5,041.23
201 -7 5 -12 $5,275.04 $4,778.92
194 -7 5 -12 $5,121.22 $4,526.41
187 -7 5 -12 $4,967.40 $4,283.37
180 -7 5 -12 $4,813.58 $4,049.50
173 -7 5 -12 $4,659.76 $3,824.48
166 -7 5 -12 $4,505.94 $3,608.03
159 -7 5 -12 $4,352.12 $3,399.87
152 -7 5 -12 $4,198.30 $3,199.71
145 -7 5 -12 $4,044.48 $3,007.30
138 -7 5 -12 $3,890.66 $2,822.37
131 -7 5 -12 $3,736.84 $2,644.67
124 At this point there are no more dial-up users $3,583.03 $2,473.96
129 n/a 5 -12 $3,692.90 $2,487.63
134 n/a 5 -12 $3,802.77 $2,499.16
139 n/a 5 -12 $3,912.64 $2,508.65
144 n/a 5 -12 $4,022.51 $2,516.19
149 n/a 5 -12 $4,132.38 $2,521.87
* Forecast based on Q1-3 as Q4 lost many users but preserved income cumulative
if Q4 is included trend line drastically flattens $ 89,459.58+
Click to enlarge

This scenario creates much more value for United, so this quarter's pending results are especially significant. If the company proves that the mobile broadband user base has bottomed, it will be the first data point establishing what the rate of recovery may be.

Finally, the company has a significant net operating loss:

At December 31, 2015, the Company had federal, state and foreign net operating loss carryforwards totaling $87.5 million, $56.9 million and $4.0 million, respectively. The federal net operating loss carryforwards will begin to expire in 2019, the state net operating loss carryforwards begin to expire in 2016 and the foreign net operating loss carryforwards generally have an indefinite life.

The imminent expiration of certain pieces of the NOL plus the uncertainty of whether an acquirer will have a use for it make this piece of the company tricky to value. Given the current long-term tax exempt rate of 2.24% and a buyout price of $185 million like B. Riley expressed, the loss represents discounted savings for a company of somewhere between $0 and $10 million.

Taking the preceding three factors into account, one can make a conservative case and optimistic case for United.

Conservatively, the company's value is between $180-$190 million, which is right about what B. Riley offered. This takes into account cash and the value of the communications segment absent of any significant recovery in mobile broadband.

Optimistically, United is worth closer to $230 million, a figure that still concedes that dial-up is never coming back but has high hopes for the mobile business and assumes the acquirer will be able to make use of the NOL.

These two figures place the share price for UNTD, recently trading at $11-$12 per share, between $12.50 and $15.00.

Given the above analysis, United Online isn't the sexiest investment opportunity out there, but it does seem to be a relatively safe one. The rejected bid and its alignment with projections make a strong case that UNTD is trading slightly below its floor, and in the best case scenario, every morning brings the possibility of a sudden 30%+ appreciation in value.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.