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United Online Inc. (NASDAQ:UNTD)

Q4 2007 Earnings Call

February 7, 2008 4:30 pm ET

Executives

Erik Randerson - VP of IR

Mark Goldston - Chairman, President, and CEO

Scott Ray - EVP and CFO

Analysts

Ali Mogharabi - B. Riley & Co.

Sandeep - Jefferies & Co.

Operator

Good evening. My name is Tisa and I will be your conference operator today. At this time, I would like to welcome everyone to the fourth quarter earnings release call. 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) Thank you.

Mr. Randerson, you may begin your conference.

Erik Randerson

Hello and welcome to United Online's conference call to discuss our financial results for the fourth quarter and year ended December 31, 2007. With me today is Mark Goldston, our Chairman, President, and Chief Executive Officer and Scott Ray, our Executive Vice President and Chief Financial Officer.

Our comments this afternoon will reference United Online's new financial reporting structure that we introduced in today's earnings announcement. Our new reporting structure now includes Classmates Media as an operating segment and we provide all historical periods to confirm to the current presentation. Historical financial results reflecting the new segment reporting structure are available on our website within a file called Financial Data that is located right next to our earnings press release.

In addition, on today's call and in the accompanying slides that are available within the investor relations section of our website, we will refer to adjusted operating income before depreciation and amortization or OIBDA, segment-adjusted OIBDA, adjusted net income, adjusted net income per share and free cash flow. Management believes that each of these measures is useful in evaluating the company's operating performance. These measures are not determined in accordance with accounting principles generally accepted in the US or GAAP and should be considered in addition to but not as a substitute for or superior to financial measures determined in accordance with GAAP. Definitions of these non-GAAP financial measures are provided in today's press release and in the accompanying slides on our website along with reconciliations to our most comparable GAAP financial measures.

Before we get started I also need to point out that the company does apply the Safe Harbor provisions as outlined in the press release, any forward-looking statements that may be made on this call. Statements regarding our current expectations about our future operations, financial condition, performance, pay accounts, 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 revise or update this information and may not provide this type of information in the future.

Any persons replaying this broadcast after February 7, 2008, should recognize that any non-historical information discussed in today's call might not be current or valid after this date because the circumstances and assumptions underlying such information may have changed.

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

Mark Goldston

Thank you Erik and welcome everyone. Actually, I just completed my 9th year with the Company in my 36th core and this is my 34th consecutive public earnings call. Well, a couple of more and I think we're going to get this down pat. So anyway, I'd like to welcome everybody for listening to our call today. I am going to give you a strategic overview for what went on the business during in the past quarter in the year and then Scott Ray, our Chief Financial Officer will take you through a detailed look at the numbers.

So with that, I'd like to also mention that we've created a PowerPoint presentation that summarizes our fourth quarter financial results and the operating metric and you could download a copy of the presentation on our internet homepage at www.unitedonline.com and go into the investor relations section right next to the earnings press release and I'd encourage you to do that.

So let's take a look at Q4 2007 and the full year of 2007 from a financial overview. I'd like to start by saying I am very pleased with the fourth quarter and full year results that our team did a great job here at United Online. We achieved our 6th consecutive record year of adjusted OIBDA in 2007 with an all-time record $148.2 million and we achieved all-time quarterly adjusted OIBDA record of $40.3 million in the fourth quarter. That is the first time we have ever exceeded $40 million in adjusted OIBDA in a quarter. I am particularly proud of this accomplishment, especially in light of all the steps we've taken to deliver this strong financial performance while we've been diversifying United Online.

Before I discuss the performance of the individual segments, I want to elaborate on what Eric mentioned regarding our segment reporting. We've modified the segments to more accurately reflect how we're now operating the business. The segments we call Classmates Media are effectively the same operations that are part of Classmates Media Corporation, which was the company we filed to take public.

The new segment differs from our Content & Media segment and that doesn't include the web hosting and photo sharing businesses which are now part of our communication segment. In addition, a new segment includes costs that are formerly part of corporate unallocated and as such, that old segments should not be compared to the new segment. However, for those who that are looking at the financial performance of Classmates Media Corp, in connection with our proposed IPO, you'll find our new segment reporting is consistent with those.

Before we get into the specific accomplishments and initiatives of the communications of the Classmates segment, I want to mention that earlier this week United declared our 12th consecutive quarterly cash dividend of $0.20 a share, which, in today's valuation (inaudible). That dividend was declared. When we pay on February 29th, we will have returned more than $160 million in cash to shareholders during the past three years.

Let's look at Classmates Media. The overall strategy within the media segment, Classmates Media covers four key areas, enhance the number of experience, engagement on our websites, expand our member base, increase the monetization of our websites and pursue strategic acquisitions and international expansion opportunities.

Classmates Media is a business with great scale, impressive monetization, and strong momentum. The two brands within Classmates Media are Classmates and Mypoints, which together have over 58 million numbers with virtually identical demographic characteristics. That's roughly 65% female, 85% over 35 years old, more than 75% attended college and their average annual income is approximately $75,000. With big opportunity between these two brands, is that at this point, there is minimal overlap in their respective user base, but that is a backdrop, lets look at the results.

Classmates Media delivered another strong quarter with significant growth in revenue and a record adjusted OIBDA. The Classmates Media segment now represents 42% of total revenue, 60% of total pay accounts at United Online. That's up from just 32% of revenues and 45% of pay account a year ago.

In our social networking business, I continue to be highly encouraged by our pay account growth, which is one of our most important metrics considering our business model. By any ones measure, 2007 was a year of outstanding growth in our social networking pay accounts and we're pleased with respect to both where we're positioned as well with our paid account growth to date in 2008.

Our Q4 2007 was another great quarter with 216,000 net paid subscriber additions versus the 90,000 net paid additions we achieved in Q4 of 2006, quite a dramatic increase. In fact, the paid subscriber growth of 1 million paid accounts during all of 2007 was more than 40% greater than the combined annual total of 2000 and 2006 combined, where we achieved paid subscriber growth of 300,000 and 345,000 users respectively.

So in effect, we achieve 2.5 years worth of paid subscriber additions in the year 2007 alone. People often ask me, how will Classmates fair in a world where free social networking becomes ever more popular; I get that question all the time. My answer is always based upon the fact and I reference with just saying this happens within a social networking category in 2007. In the face of the largest increased in free social networking subscribers in history from the like of Facebook, MySpace and others, our social networking sites were able to achieve all-time record growth in new paid subscribers.

So huge free growth from Facebook, MySpace, and others; huge paid growth during that time period from Classmates Media. If that doesn't point to the vitality of sustainability of our paid subscriber model, then I really don't know what would. You must remember that in order for someone to become a paid subscriber at our social network, they have to first become a free subscriber. And we have over 50 million free subscribers globally as of 12/31/07 on our social networking business. Thus, we've got a huge free member base that we monetize in the exact same manner as the other major free social networks do, through the sale of advertising. And we'll continue to do so while we attempt to integrate more targeted techniques for our sales force to present to our ad client.

Remember, we've got tremendous data on our users relating to their age, gender, geography et cetera that can be extremely valuable to advertisers given the huge size of our member base. The difference between our social networks and the other major social networks we referenced like Facebook and Myspace is that we have 3.2 million paid subscribers, up 1 million versus 2006 and 100% of our 3.2 million paid subscribers converted from our free member base.

Remember, that when we bought Classmates in November 2004, the Company only had 1.4 million paid subscribers. So today at 3.2 million paid subscribers as of December 31, 2007, you can see a dramatic increase has occurred and with an average of our pool of $3.26 per month globally and exceptionally high margins. This is a very attractive business.

You might recall that when we begin to roll up the new Classmates website, last August and September, we told investors that the most existing new functionality will be faced in a over a 12 to 18 month horizon. But we continue to believe that 2008 will be a very active year, a new feature in Classmates and I'm really excited about the roadmap we've got ahead of us. Our team at Classmates which is headed by Steve McArthur, who joined us six months ago, had developed a feature roadmap that we think is the most compelling collection of programs and feature enhancements that we've developed since acquiring Classmates three and a half years ago.

We've previously discussed our major site redesign that we've been refining for over nearly a year and it's continuing to rollout over the next 12 months. And our goal throughout 2008 is to continually freshen up the Classmates site with new compelling features designed to encourage more user-generated content, more frequent site visits and a higher level of overall engagement from our free and paid members.

So going forward, our goal is to evolve Classmates from a comprehensive directory of affiliations in schools, work and the military to a full fledged developed social networking site that enables over 40 million domestic members the opportunity to view content, find people with common interests, communicate directly with one or several members, interact with people from the community in which they currently live, or frankly, just to plan events or reunions relating to their specific schools.

The Classmates business model is really quite simple. Basically, the affiliations, whether they are school, military employers, local communities, interest groups et cetera, they translate into more member connection and more user generated content. At the end of the day, it's the fresh content and the notifications that Classmates send out highlighting what new content has been posted gets relevant to that particular member that brings people back to Classmates. That in turn provides us with the opportunity to monetize those people through advertising and page subscription.

So while our Classmates continued to expand its horizon and become a full-fledged adult social network, remember that more than 80% of our members by the way are over 35 years old. It's important to note, that the unique selling proposition of the company is a factor that it is one of the premier places for adults to go to reconnect with people from past affiliations.

Those affiliations will always be relevant and compelling to our members of Classmates and there will be a constant source of traffic and new member signups. You know, anecdotally, it might of interest you to know that according to the US census Bureau in 2006, there are 186.2 million Americans who graduated high school. Given our 40 plus million domestic user base on Classmates, that data would suggest that our addressable audience within our primary target audience still has a potential of 146.2 million Americans for us to try and signup that we don't already have and that's just in the high school market.

Clearly Classmates has a huge potential audience and just continuing to promote the court reconnect with your past message that would be compelling in and itself. When you add on the myriad features that we discussed, that this team is working on, it goes way beyond the core promise; you can see the tremendous potential for the Company.

As a final note on Classmates, I'm pleased to report what we believe to be an impressive growth of our international social networking websites that are located in Germany, France and Sweden and are marketed under the StayFriends and Trombi brand names. These sites operate a business model that is similar to Classmates with a focus on reconnecting school acquaintances.

Q4 2007 revenues generated by our international websites more than doubled compared to 2006, on what is essentially a small base. For all of 2007 international revenues increased 185% or $7.3 million.

We consider international be an attractive growth opportunity for our future in part because the European markets remains an early stage of development within our target demographics. The further expanding and growth opportunities are abroad. We recently launched our fourth international market in Europe, in Austria just a few weeks ago.

You know the great thing about our international business is that there are European websites showing the same underlying operating platform and leadership team and that means that our business model is highly scalable because when we do launch in a new country, like we did with Austria, we can cost effectively leverage much of the existing infrastructure that we've got in place. So that is a real advantage we've got on our European or international operations.

Now, let's move on to the discussion of MyPoints, our online loyalty marketing service which represents the other major property within the Classmates Media segments. MyPoints delivered another solid quarter in quarter in Q4 2007, remaining with the major driver behind our growth in ad revenues during the quarter and in the full year of 2007.

We launched our new MyPoints website design in late Q3 2007 and the results to-date have been outstanding. Our users enjoy the easiness of navigation on the new site and the variety of partner offers, redemption opportunities et cetera. They're all present in a much more compelling manner than the previous MyPoints site, which you can by the way see if you go to MyPoints.com

The number of MyPoints is a premier online loyalty rewards company and we basically connect advertisers with our members by allowing the members to earn reward point for engaging in Online activities very simply. MyPoints is a very effective tool for advertisers which allows in the reach of large online audiences who targeted marketing campaigns.

Each of our advertisers work with MyPoints to create a tailored marketing campaign designed to meet their specific needs and we utilize things like personal interest and purchasing behavior, we use demographic profiles from our millions of users to help these marketers achieve their goal. The three major buckets of revenue on the MyPoints business comes from our media services which will be things like our bonus mail and newsletter et cetera. Our shopping portal which has over 400 retail and services partners, and the third bucket is our market research and survey business which are targeted and provide users with a point for providing information.

One of the interesting developments in MyPoints members is acceptance of product extensions. This is some additional background. There they set a core MyPoints members who are extremely active on our service because they see value and the reward. With this in mind, we've leveraged member's desire for MyPoints by expanding the ways our members can earn points beyond just our traditional shopping platform.

We've particularly focused on products like MyPoints game, MyPoints search toolbar and MyPoints market research and surveys that allow members to earn points for performing everyday activities on the internet. MyPoints is launching a variety of new initiatives throughout 2008 that are designed to further enhance the targeting aspect of the business and they will also give consumers even more compelling reasons to engage with MyPoints and build their points balances.

I want to talk a little about the Classmates and MyPoints integration, which was certainly a topic that we talked about a lot in relation to the IPO. Clearly, the potential integration of MyPoints in Classmates over the 2008-2009 periods is an existing endeavor that could potentially prove transformational for the MyPoints business. There's a combined 58 million members within Classmate Media segment. They have virtually identical user demographics and there is very little overlap between the Classmates and MyPoints members. So the opportunities are substantial and very exciting to us.

Those two businesses combined can deliver demographic, geographic, contextual, behavioral, and demand-based targeting to advertisers who are looking to reach our 58 million combined members. As the year 2008 progresses, I hope to be able to update you on our plans to capitalize on those opportunities for both 2008 and also for 2009. Well, that's the Classmate Media segment.

Now let's turn to our communications segment and review our businesses there primarily NetZero and Juno ISP. This segment again delivered impressive results against our objective which we stated in time and again for the last several years which is managing the communications business for profitability and cash flow. While segment revenues continue to decrease, the adjusted OIBDA contributions declined at a much slower rate. Consequently segment adjusted OIBDA, as a percentage of segment revenues increased to all-time record levels in the communications segment in the fourth quarter of 2007, an all-time record level in the communication segment for the full year of 2007. So as those results would demonstrate, we have been quite effective in reducing our cost structure as the dial up market has matured and as subscriber counts have declined over time.

I'd like to move more towards the discussion now on some of the key metrics, to show you what's going on with that business. Communications pay account declined by 106,000 during the fourth quarter. By the way, that included 6,000 pay accounts related to our decision to exit the VoIP business. So when you do the math, we lost approximately a 100,000 communications pay accounts during the quarter, representing the smallest number of pay account losses in seven quarters back since early 2006, which is something we are quite proud of on our ISP businesses.

Pay account churned in the communications segment also declined during the quarter to 4.4%, which was its lowest level in 10 quarters dating back to the middle of 2005. Now, investors have been asking me for the last nine years while I have been at the helm of this Company, Mark, how long is the dial-up market going to be around. I believe this is the number one question that I've gotten every year for the past five years. Well we continue to believe that people will be on dial-up in the United States for an extended period of time.

Let me explain why. First, access to a portable broadband connection remains elusive in many parts of the country outside of major metropolitan areas. I've been saying this for the past couple of years and the data suggest that that's still the case. In fact if you look at the most recently released Q internet report which think was released in June of 2007, which was very recent, they stated that broadband penetration in less populated areas, what we called C&D counties is significantly lower than average with the rural market at just 31% broadband adoption compared to 52% broadband penetration in urban areas. I don't see the gap closing any time soon.

In my opinion the smart people on Wall Street just aren't going to reward telecom and cable companies for spending hundreds and millions of dollars to reach small towns with DSL or cable, the ROI is just not there. The math doesn't work while there may be literally a hundred thousand people within 2.5 miles of the DSL station in a major US city, which is the maximum distance required to get at DSL connections, the amount of people within 2.5 miles of the DSL station in C&D counties across America or what we'll call rural or non-urban counties could be as little as a 100 people or a 1000 people, which would kill the ROI for building a DSL station that costs the exact same thing in Bessemer, Alabama that it cost to build in New York City.

The same rational applies to digging cable lines. We said that numerous times that we also didn't see Municipal Wi-Fi as a viable economic business, and that statement is also proven to be true with the major pull back by those who previously extolled its potential because the business model of Municipal Wi-Fi doesn't make sense. And in fact, for lower income families, new entrance to the internet and people who reside outside of nature metropolitan market; dial-up is their logical solution and it's here to stay.

Another aspect to the dial-up market that we'll continue to develop is in a subset of consumers who retain their dial connection even after they make the move to broadband. These are people who are willing to pay a few extra dollars a month for a dial-up service as an emergency backup means to access the internet just in a case the broadband provider goes down or for use when they are traveling and that's staying in expensive major metropolitan hotels, many of them provide high-speed broadband connection at a price that's almost as much for a single day as NetZero and Juno charge for an entire month.

There are some competitors of ours, who actually advertise dial-up as an emergency backup service. You know our experience proves that there is some degree of overlap between dial-up and broadband households and probably will be for quite sometime. I said it consistently for the last several years and I am going to say it again today. The facts suggest that the dialup is here to stay for many years to come. I would like to now close with the comment on the Classmates Media Corporation IPO and just give you a status update on that.

Nine months ago, we began considering a subsidiary IPO of Classmates Media Corporation, which is Classmates and MyPoints, which we believe was a great way to unlock value for United Online shareholders. We evaluated the operating units within United Online and we saw Classmates Media business that was growing rapidly but had not gotten much recognition from the investment community in terms of valuing it appropriately. In fact, we concluded that we could realize greater value for these assets if growth investors had the opportunity to purchase shares of Classmates Media directly, which would establish a true market value for the Company.

So the logic behind the subsidiary IPO was to unlock value for United Online shareholders. United Online would continue to own a majority of Classmates Media after the IPO under the structure we had proposed. Unfortunately, we launched the IPO road show within a tumultuous market environment in early December, which obviously turned out to be the precursor to what every one is seeing today in the stock market and in the leverage market. So by the time we concluded the road show in mid-December, many investors lost their appetite for technology IPOs after observing dismal aftermarket performance from IPOs that had priced while we were on our road show.

With only two weeks left in the year 2007 investors were highly reluctant, frankly, to accept any new risks that could impact their portfolio performance in the previous 50 weeks of the year. At the end of the day, we concluded that it was in the best interest of shareholders to withdraw the S-1 registration statement and our board supported this decision 100%.

However, that does not mean that we've changed our strategy. We still fully believe that the right strategy is to have Classmates Media Corporation be a separate publicly-traded company. With our new Classmates Media reporting segment, you, the public will be able to see the progress of that operating unit. We intend to continue to review the business as well as the market conditions to determine when the appropriate time might be for us to further implement our strategy of doing an IPO Classmates Media Corporation.

With that, I'm pleased to turn the table over to Scott Ray, our Chief Financial Officer who will take you through a review of our financial results. Scott?

Scott Ray

Thank you very much, Mark and good afternoon, everybody. Let me first begin with a few financial highlights for the full year 2007 and then I'll get into more specific kinds of quarterly results, including segments as well to discuss guidance going forward. Please remember that as Eric and Mark had both mentioned earlier and as set out in our press release, we have modified our segment reporting structure to establish Classmates Media as a separate operating segment in place of the former contents in Media segment that is no longer reported.

The new Classmates Media segment includes the Company's online social networking and online loyalty marketing operation, which had formerly been part of the Content & Media segments. Web hosting and photo sharing which also had formerly been part of the Content & Media segment have been moved to the communication segment. In addition, the Company has eliminated its historical practices separately reporting certain unallocated corporate expenses.

Under the new reporting structure, all corporate expenses will be allocated to the operating segments. Our prior periods have been adjusted to conform to the current presentation. Consistent with some of what Mark was just talking about, our objectives remain consistent with those outlined for the investment community in recent periods. We managed the Classmates Media segment for subscriber growth, revenue growth, and adjusted OIBDA contribution. In the communication segment, we continue to focus on successfully managing a mature dial-up internet access business, primarily for profitability and cash flow, which has been our long standing stated objective.

Now, starting with our full year 2007 consolidated financial highlights. Consolidated pay accounts increased by a net 495,000 in 2007 compared to a net decrease of 155,000 in 2006 and the Company ended 2007 with an excess of 5.3 million pay accounts. This growth in 2007 was driven by an increase in just of over 1 million Classmates Media pay accounts in 2007 compared to an increase in pay accounts of 403,000 in 2006.

Our consolidated revenues declined by $9.2 million from $522.7 million in 2006 to $513.5 million in 2007 within our guidance range of $513 million to $517 million for the year. During 2007 growth in Classmates Media revenues was more an offset by the decline in communications revenues. Classmates Media revenues increased by $54 million or 39% in 2007 compared to 2006. It should be noted the Company's acquisition of MyPoints occurred in April 2006 and as such approximately nine months of MyPoints revenues are included in the 2006 consolidated results.

And as Mark has allude into earlier, although our consolidated revenues decreased by $9.2 million in 2007, consolidated or adjusted OBIDA increased by $2.2 million to a record $148.2 million in 2007, compared to $146 million in 2006 marking our sixth straight year of increased adjusted OBIDA and exceeding the high-end of our guidance range of $145 million to $147 million for the year.

In addition, adjusted OBIDA as a percentage of consolidated revenues expanded from 27.9% in 2006 to 28.9% in 2007, reflecting operating leverage associated with the increased revenues in the Classmates Media segments and disciplined expense management in the Company's communication segment. In 2007, the Company generated free cash flow of $18.1 million up $26 million or 32% from $82.1 million in 2006.

Turning to the fourth quarter consolidated results. In the fourth quarter consolidated pay accounts increased by a net $110,000, Classmates Media net pay accounts rose at $216,000 and was offset by a net decrease of $106,000 pay accounts in the communication segment. The $106,000 net decreased in communication pay accounts for lowest net decline in seven quarters as Mark alluded to you.

Consolidated revenues in the fourth quarter came in within our guidance range at $125.4 million and were down 4% versus the year ago fourth quarter. Classmates Media revenues increased 27% to $53.3 million in the fourth quarter compared to $42 million in the year ago quarter. Fourth quarter revenues for Classmates Media were 42.5% of consolidated revenues, up strongly from 32.1% in the year ago quarter.

Our consolidated gross margin in the fourth quarter decreased slightly to 76.3% from 77.1% in the year ago quarter as a decline within the communications segment was partially offset by gross margin expansion at Classmates Media. We previously spoke about this, but in the fourth quarter we reduced the number of employees in the communications segment to better align the segments cost structure within the matured dial-up internet access business.

We eliminated 69 employees which resulted in a restructuring charge of $3 million during the fourth quarter. This expense was $0.5 million lower than our previously provided estimate of approximately $3.5 million of such restructuring charges. Consolidated adjusted OBIDA was a record $40.3 million in the fourth quarter as Mark said, up $3.7 million or 10% from $36.6 million in the year ago quarter and exceeded the high-end of our guidance range by $1.2 million.

Consolidated free cash flow was $28.1 million in the fourth quarter, an increase of $12.1 million or 76% versus $16 million in the prior year comparable quarter. The fourth quarter of 2006 was negatively impacted by changes in working capital, higher income tax payments in the fourth quarter of 2006 compared to 2007 and cash paid for restructuring charges in the fourth quarter of 2007, which is added back in the computation of free cash flow. Consolidated pay account churn during the fourth quarter was 4.6%, down from 4.8% in the third quarter and below the 4.7% churn rate in a year ago quarter.

Now, let's turn to the fourth quarter 2007 segment results. First, with respect to our Classmates Media segment, as previously noted, pay accounts increased by a net 216,000 during the fourth quarter versus net growth of 90,000 in the year ago quarter. Classmates Media pay accounts at December 31, 2007 represented 59.8% of total pay account compared to 44.7% at December 31, 2006.

At year end the Classmates Media segment had over 3.2 million pay accounts, a 48% increase from December 31, 2006. Pay account churn for the Classmates Media segment was 4.7% in the fourth quarter, up slightly from 4.6% in the third quarter and down from 4.8% in the year ago quarter. Active accounts increased to $12.6 million in the fourth quarter from $11.2 million in the year ago quarter. Segment churn and active accounts are new metrics that we began disclosing during the Classmates Media Corporation IPO process.

Also as previously noted, Classmate Media revenues increased to $53.3 million in the fourth quarter, up $11.3 million or 27% from $42 million in the year ago quarter. This increase was largely attributable to growth and billable services revenues from subscriptions, which increased $9.1 million or 43% versus the year ago quarter.

Fourth quarter advertising revenues increased $2.2 million or 10% compared to the year ago quarter, despite being negatively impacted by the exploration of the post transaction advertising sales agreement in October. This agreement was replaced by another agreement with a different advertiser late in the fourth quarter, but we don't believe we will be generating the same amount of revenue from this channel as we did during the first three quarters of 2007.

Average monthly revenue for pay accounts or ARPU in the fourth quarter was $3.26, down 2% from $3.31 in the year ago quarter and also down 2% sequentially from $3.33 in the third quarter. The decline in ARPU primarily reflects the growth in our European business which generates a lower ARPU than that of our domestic business. Segment adjusted OIBDA increased 58% during the fourth quarter to $13.5 million from 8.5 million in the year ago quarter, despite our incurring of $0.5 million expenses related to the proposed IPO Classmates Media Corporation.

Certain of the costs that we had previously capitalized in connection with the IPO, we ended up writing off in the fourth quarter as those costs were deemed not to have future benefits. At the end of 2007, we have on our balance sheet in other assets $3.6 million of costs that still relate to that proposed IPO that Mark spoke about earlier. Segment adjusted OIBDA in the fourth quarter represented 25.3% of segment revenues, its highest percentage in eight quarters and up from 20.3% of segment revenues in the year ago quarter, as a result of the operating leverage associated with higher segment revenues.

With respect to our communications segment, communications segment revenues in the fourth quarter were $72.1 million, a decrease of $16.7 million or 19% from 88.8 million in the year ago quarter. This decrease was explained by a $17 million or 22% decline in billable services revenue from the year ago quarter, offset by a $0.3 million or 3% increase in advertising revenues compared to the prior year fourth quarter.

ARPU in the fourth quarter was $9.28, down 2% from $9.46 in the year ago quarter and also down 2% sequentially from $9.45 in the third quarter. Pay accounts churn was $4.4% during the fourth quarter and as Mark said our lowest level in 10 quarters. This compares sequentially to $4.9% in the third quarter and to 4.6% in the year ago quarter, excluding the impact of the Company's decisions to accept the photo sharing and VoIP businesses the churn rate would have been 4.3% in the quarter and 4.7% in the third quarter.

Although, as previously noted, segment revenues declined by $16.7 million in the fourth quarter compared to the year ago quarter, segment adjusted OBIDA was $26.8 million down only $1.3 million or 5% from $28.1 million in the year ago quarter. This is attributable to the Company's continuing efforts in expense management in connection with our focus on driving the business segment for profitability and cash flow.

Communication segment adjusted OBIDA, as a percentage of segment revenues increased to a record 37.2% in the fourth quarter, up from 31.6% of segment revenues in the year ago quarter, again, as a result of our concerted expense management efforts.

Subscriber acquisition cost or SAC in the fourth quarter was $98, down 16% versus the year ago quarter and essentially flat with the third quarter. As a reminder, our SAC computation is equal to total segment sales and marketing expenses divided by gross pay account additions for the period.

With respect to our balance sheet and dividend, total cash in short-term investment balances increased by a net $12.9 million in the fourth quarter to $218.3 million at December 31, 2007 from $205.4 million at September 30, 2007 and increased by a net $55.9 million from December 31, 2006. During the fourth quarter and full year 2007, we paid $14.6 million and $57.1 million in dividend respectively. Our cash balances include cash, cash equivalent and short-term investments and our balance sheet remains free of long-term debt.

Moving onto guidance, this afternoon we are initiating guidance for the first quarter and full year 2008. Starting with the 2008 first quarter, the Company expects to achieve continued year-over-year growth in Classmates Media segments revenues during 2008 that will be more than offset by our continued decline in communication segment revenue. As a result, we are establishing first quarter guidance for consolidated revenues in the range of $116 million to $120 million. Our 2008 first quarter guidance for consolidated adjusted OBIDA is in the range of $30 million to $34 million.

Moving on to the guidance for the full year 2008. We currently anticipate that total consolidated revenues will decline in 2008 when compared to 2007. We expect a continued decline in communications segment revenues that will be partially offset by an increase in Classmates Media segments revenue during the year. We are establishing 2008 adjusted OBIDA guidance in the range of $143 million to $149 million. We expect capital expenditure in 2008 in the range of $18 million to $23 million. This compares to actual capital expenditures of $25.5 million in 2007. We also expect to pay cash taxes in 2008 of between $30 million to $35 million, which compares to $35 million of cash taxes paid in 2007.

That concludes my prepared remarks. Thank you and back to you Mark.

Mark Goldston

Thank you, Scott. So, just in summary before we take the questions, it was a phenomenal quarter for the Company all-time record in terms of our adjusted OIBDA, strong performance on the Communications side of the business, in terms of dial and outstanding, continued outstanding performance for the quarter and the year on the Classmate Media segment of the business.

So with that, I'd like to open it up to questions. Operator, if you can put people into the queue. And then as time permits, we will take the questions as they come through.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Ali Mogharabi with B. Riley & Company.

Ali Mogharabi - B. Riley & Co.

Hi guys. A couple of questions, first off on the advertising revenues for Classmates Media. Are we to assume that we're going to see a year-over-year decline and that in '08 we are we talking about the growth rate not being as impressive as it was in '07?

Mark Goldston

At this point of time I don't think we have enough evidence to be certain that we would see a year-over-year decline, certainly we would all recognize that if, from an economic perspective, a challenging market environment right now, but we don't have any indications at the present time that we would see a down year.

Ali Mogharabi - B. Riley & Co.

Okay. And then on the communication side, the churn was low, net subscriber loss was low, but ARPU and at same time ARPU was down. Can you give us an idea why that is?

Scott Ray

Well some of that Ali, some of that is we've got the annual program. We have been progressively promoting our 12-month commitment, because our belief is well one, obviously that's got good churn characteristics and two, as long we keep somebody on the system the more chance you have keeping them for a long period of time, because you well know the biggest churn you experience in dial-up is in the first 60 to 75 days.

And we have such a high call completion rate, which is like in the 99.96% range but our feeling is if we can keep you committed to a long term plan and that after a couple of months your satisfaction level with our service would be exceptionally high and your propensity to churn, as the numbers would suggest would be a lot lower.

So it's worth it to us to give up a little a ARPU in return for getting people on committed plan, because than our service starts to take over and speaks for itself and every time we let the service do that we end up seeing the kind of results that we just reported in the Q4 period.

Ali Mogharabi - B. Riley & Co.

I see so with those efforts and I would like some more detail if possible, the additional efforts to try to at least maintain the trend later or may be potentially lower it, are we to assume that ARPU would also slightly decrease?

Mark Goldston

I would say it’s very hard for us to project that because being a marketing company we're constantly in a mode of trying to figure out what to promote, when to promote it and as you know promotions have a lives to them, sometimes they have very long life, sometimes the life is shorter.

So as a marketing company we will continue to look at ways in which we ought to be promoting our dial-up business in a mature to declining category, I would not look for ARPU to increase. I think if you manage to maintain ARPU that would be wonderful in a business that is now got about a 37% plus EBIDA margin. So if we can maintain ARPU that would be fantastic, that certainly is the goal, but as a marketing company you know everything we do Ali is not so for a long time, it’s all ROI based.

So while the ARPU is a calculated number we've made a decision on what we ought to be spending our money on and what kind of return we're going to get on that invested capital and every time we end up looking at something that's got a positive ROI that's something we strongly consider doing.

Scott Ray

Also keep in mind that in connection with be the segment changes that we spoke about earlier right now you've got both web hosting and e-mail that are sitting in the communication segment, both of those are lower ARPU related activities and both of those are becoming more prominent overall relative to the total, so they could put some pressure on the ARPU as well. But again, if and everything else Mark, otherwise.

Mark Goldston

Good point.

Ali Mogharabi - B. Riley & Co.

Got you. Also regarding the -- I am sure you've heard the Time Warner News that these guys may actually breakup AOL into content and advertising and dial-up. Any comments on that? And: would you be looking to acquire some of those subscribers?

Mark Goldston

Well, at the first I have heard of that. No, I am just kidding. Phone has been ringing off the hook. Look I think in the end of the day it's the largest telegraph punch since, Joe Louis. Those of you don't know who he was, he was an old heavyweight. But either way I look at it is that company had long ago decided when they flash their market spend that they were not going to do much try to build the dial-up business and they said that to their credit.

So I think all they're doing now is memorializing that decision and I am sure Jeff as the CEO of that business is full agreement on that strategy and trying to proceed on it. They are very different companies then we are Time Warner is a very far grown company with lots of different division that have nothing to do with internet access or the internet for that matter, that's not our case.

We're in this business for the long-term. We would like it a lot. The AOL business is an intriguing business, because it's a strong brand name as you know, that's the plus, the minus is they are a business that has predominately been in the premium segment of dialup, which is on the road to becoming an oxymoron and so there are challenges there.

We've stated several years ago that our goal primarily united is the harvest of the dial-up business or cash flow to allow us to generate enough cash that we can then use possibly in conjunction with some debt or some equity to acquire additional non access related properties.

Now, clearly, the $156 million that we spent collectively on MyPoints and Classmates has gotten us a “many ex-return” and that's what we're continuing to look to do. So I am not telling you that under any other circumstances we would not look to do something in the dial-up business, I am just saying that our number one priority as a company is to manage that business for cash flow in a harvesting mode and to put our additional capital sort at the lower our beta if you will into different business that can maximize our overall portfolio, that's really what we're looking at.

Ali Mogharabi - B. Riley & Co.

Got you.

Mark Goldston

That's not a line in the sand, but that's the pieces that we've been operating under its been very successful for us and absence some real aberrant events that's where we're going to be going.

Ali Mogharabi - B. Riley & Co.

Got you. Also one more question here. The top line guidance was a little bit lower than what I had and I think probably what the street had, but the EBITDA guidance certainly online, so I think that's positive. So with that in mind I am assuming that you guys are going to continue to distribute dividend to shareholders. Am I thinking about this correctly?

Scott Ray

Well I am going to make the same comments that I make every quarter which people love to take the wrong way because (inaudible) things into my General Counsel Fred Randall sitting about a 11 inches to my left and would tackle me if I didn't say this. I am going to say it exactly as I should, which is that the Board of Directors meets every quarter to review the financial position of the company and determine whether or not to declare dividend.

The good news is they have continued to do that for 12 consecutive quarters and then a company that has $218 million of cash on its balance sheet and just put up $148 plus million of EBITDA and has given you guidance for the coming year of $143 million to $149 million of EBITDA and ever more cash on its balance sheet, I really don't think that ability to uphold the dividend discussion is one that anybody could get off of the balance sheet as the income statement of the company. Would you agree with that?

Ali Mogharabi - B. Riley & Co.

I agree with that.

Scott Ray

That's, unfortunately, all I'm allowed to say, please don't read anything more into that, other than that I have to say that, because that's the rule. So that all being said, in answer to the first part of your comments or question about the revenue guidance, look we all know what's going on in world out there today. You can't read one article and one periodical about the consumer market and not talking about its challenges.

Having said that, I want to reiterate to people: “We do not run our communications business based on revenue projection. We run it based on profit and cash flow”. That's what the goal of that business is. That's how we've been running it for three years. That's why it just achieved record EBITDA margins and that's how we're going forward.

On the other side of the house we are extremely pleased with the Classmate Media business, not only where we finished up in '07, but if we look at the subscribers even to-date in 2008 we are extremely pleased with where we are and we think that business will continue to be a major growth business, both on the topline and the bottomline. So that over all guidance should not be constrained in anyway, say, perform to really be applying in the Classmates Media side of the house, which has been and continues to be our growth engine.

And you should just understand that when we are forced to make a decision to either maximize revenue or maximize cash flow in EBIDA as relates to the communications business, we will virtually every time go towards the cash flow and EBIDA decisions. And you're seeing some of that staked into the fact that the revenue guidance is what it is, but the EBIDA guidance is what is as well. That makes sense?

Ali Mogharabi - B. Riley & Co.

Yeah. Got you. Thanks

Mark Goldston

Okay. Thank you.

Scott Ray

Thank, Ali.

Operator

(Operator Instructions) Your next question is from the line of Youssef Squali with Jefferies & Co.

Sandeep - Jefferies & Co.

Good afternoon everyone. This is [Sandeep] for Youssef. Just two quick questions. On the contest side on the Classmates and MyPoints: how is the redesign coming along? And: have seen any pickup in terms of sub acquisitions or add revenues? And: what are you expecting moving forward in terms of the topline guidance?

Mark Goldston

Yeah. I'm glad someone asked that question. Actually, we launched the new MyPoints site as you know right sort of the beginning of September. The response has been tremendous. It's got great traffic dynamics. It's got great levels of engagement versus the previous site.

So the guys at MyPoints have told me they couldn't be happier with the way that part of their business is performing and what the new redesign has done. So the good news is that all the testing that we did prior to launching turned out to be virtually 100% accurate. All of the feedback we got turned out to be exactly how people behave once you put it out there which is great.

On the Classmates side, as you know, we said we were going have between three and six waves of the updated website. The first one happened in the August-September period really got up the speed late September like, say, early October. And that was the masthead redesign of the front page and that looks great and it did well.

And then we just hear recently on, say, a couple of weeks ago, launch the brand new profile launch and that was a really big thing. For instance, if you go to classmates.com right now, you'll see it and that has been very well received. And as I said, we are very happy. I can't give you any hard numbers but we're very happy as we sit here on February 7th with how that business is performing and where it is.

Now, I will tell you that there are at least and maybe more waves of additional redesign work that was done in the master redesign that will be coming out during 2008. Good news is this business was performing so strongly we did not need to do a massive redesign at one-time.

We wanted to work it in on a moderate basis so our users could get used to it and they were very happy with were it exist -- and like I said, I think if you go there and look at it yourself, you can see a dramatic difference versus where this was before. The previous site was sort of Web 1.0, this is very Web 2.0 and the feature said that's coming that you're going see in the next 12 months is really pretty phenomenal in terms of what's going to happen to that business.

Sandeep - Jefferies & Co.

It's definitely cool. But: should we then think about the second half differently in terms of the uptick when the second and third waves hits? How should we be thinking about this in terms of '08?

Mark Goldston

That's a projection that -- I am not prepared to make one and two, I have no way of knowing. All I can tell you is that we as a company have done a lot of testing and continued to do testing and when stuff is ready for prime-time it gets rolled off the door and knock wood, what we launched to-date, on MyPoints and Classmates, as relates to the re-positioning and re-designing those businesses, have all been fabulously successful. And we have no reason to believe that what we are going to continuing to do nicely, but we have a dynamic environment such that if we ever did do something that didn't work we can easily rectify it.

But you were talking about major top-line growth in that business in 2008 and major adjusted EBITDA growth. And in fact, if you just go back to the date of that was put out during the IPO road show that we did in terms of top-line growth and EBITDA grow to that business. We put some pretty verified error in terms of the balance of the internet. So we're very strong in that area and we remain very bullish about it.

Sandeep - Jefferies & Co.

Great! One last question: how should we or how are you thinking about the access business moving forward? For example, in terms of long-term margins, I know you are managing and that's the possibility, but: what are your assumptions? And: what are you baking into the guidance in terms of long-term margin expectation?

Mark Goldston

Our long-term margins, at the end of the day, if you think about the communications business with where it is today…

Sandeep - Jefferies & Co.

Yeah.

Mark Goldston

Telecommunications cost are incredibly low and our margins both our billable services margin and our EBITDA margins are record high. And so we are not looking for a lot of margin enhancement in that business as relates to the major core cost of the business. Our goal is to continue to manage it, in its very high gross margin state and its very high EBITDA margin state and to be a smart as we can in terms of customer acquisition so that we don’t end up getting to a place where our ROI formulas don’t work for us anymore.

And as you know, because you have been following us for a long time, we’re pretty fanatical about managing ROI, as relates to the dial-up business and after 10 years of doing this we got it pretty nailed down.

Sandeep - Jefferies & Co.

So, it's good to assume, then, that any cost whether it's to outsourcing or telco that you could have squeezed out it's already up?

Mark Goldston

No, I would tell you that if we had a need to try to take more cost out of the business, reactionary mode, we could do it, but I don’t think right now there is a need to do that, but…

Sandeep - Jefferies & Co.

You are not guiding according to that?

Mark Goldston

You are asking me: “have we pulled every lever?” The answer is: “no, we have not”. We've pulled the levers where the business and its lifecycle today we’re comfortable. I am going to tell you this is clearly not a projection, this is nothing more than an anecdote comments. But in dial-up market that still has tens of millions of people in it and with what you just heard announced today, by AOL and the fact that most of the major competitors have either left the market or sanity has started to prevail in how they spend their money.

We with a very major brand name both in NetZero and Juno position, we believe that there is a chance not a projection, there is a chance of a next two plus three years that we could be a even larger factor in this dial-up market, because it is a business that we’re going to be in and that we’re the pioneer of value priced dial-up internet access, that’s where the market is going.

So just as in a challenging and declining airline industry, South West continued to grow as people move towards discount fairs, we believe there is a possibility for that phenomenon over the next 24 or 36 months to occur. If somebody says the dial-up market is going from 20 million to 13 million, I am making the number up.

So what, at the end of the day with the fact that we're running a business with the size we have today, we are so far off from having 12 to 15 to 18 million numbers that we should only be concerned about how we are going to get more of them. Does that make sense?

Sandeep - Jefferies & Co.

Yeah fair enough. Thank you so much

Mark Goldston

Okay

Operator

And there are no further questions at this time. Do you have any closing remarks?

Mark Goldston

No. I would say thank you to everybody for attending the call and as always, if you have any question please feel free to first call Scott Ray and Erik Randerson and then obviously I'm always available as well. So thank you very much everybody. Have a good night.

Operator

This concludes today's conference call. You may now disconnect.

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