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United Online (NASDAQ:UNTD)

Q2 2012 Earnings Call

August 01, 2012 5:00 pm ET

Executives

David Bigelow

Mark R. Goldston - Chairman, Chief Executive Officer, President and Member of Secondary Compensation Committee

Neil P. Edwards - Chief Financial Officer, Chief Accounting Officer, Executive Vice President and Treasurer

Analysts

Anil K. Gupta - Imperial Capital, LLC, Research Division

Daniel L. Kurnos - The Benchmark Company, LLC, Research Division

Michael Crawford - B. Riley & Co., LLC, Research Division

George F. Sutton - Craig-Hallum Capital Group LLC, Research Division

Operator

Good day, everyone, and welcome to the United Online Second Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn conference over to Mr. David Bigelow, Vice President, Investor Relations. Please go ahead, sir.

David Bigelow

Thanks, Jane. Hello, and welcome to United Online's Conference Call to Discuss our Financial Results for the Second Quarter ended June 30, 2012. With me today is Mark Goldston, our Chairman, President and Chief Executive Officer; and Neil Edwards, our Executive Vice President and Chief Financial Officer.

Before I get started, I'd like to mention we've created a PowerPoint presentation that summarizes our second quarter 2012 financial results and operating metrics. I would encourage you to download a copy of this presentation by going to our website, www.unitedonline.com, and click on Investor Relations at the top and going to the Earnings Release section.

On today's call, in today's press release and in the accompanying slides that are available within the Investor Relations section of our website, which can be found at www.unitedonline.com, we will refer to certain financial measures that are not determined in accordance with accounting principles generally accepted in the U.S., or GAAP, and should be considered an addition to, and not as a substitute for, in referring to the 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 certain reconciliations to their most comparable GAAP financial measures.

In addition, the company applies the Safe Harbor provisions, as outlined in today's press release, to any forward-looking statements that may be made on this call. Statements regarding our current expectations or estimates about our future operations, financial performance, net interest expense, amortization, share numbers, capital expenditures, taxes, operating metrics, the proposed spinoff of the FTD segment and the expected benefits thereof, the review of strategic alternatives for other businesses, a review of monetization opportunities for our patent portfolio, newly planned business initiatives, products, services, features, applications and functionality, expected benefits from our acquisitions, strategies and marketing programs. among other things, are forward-looking statements that are subject to a number of risks and uncertainties that could cause actual events to differ -- actual results or events to differ materially from those described or implied in the forward-looking statements. More information about potential risks that could affect the company's business and its financial results is included in today's press release under the caption Cautionary Information Regarding Forward-looking Statements and in the United Online's most recent filings with the Securities and Exchange Commission, including the company's annual reports on Form 10-K and quarterly reports on Form 10-Q.

Guidance, projections and other non-historical information provided in the press release and in today's call are based on information available to management at this time, and management expects that internal projections and expectations may change over time. However, the company does not intend to revise or update this information except as required by law and may not provide this type of information in the future.

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

Mark R. Goldston

Thank you, Dave. Welcome to United Online's Earnings Call for the Second Quarter ended June 30, 2012. I'm going to provide an overview of our results in the second quarter, and then Neil Edwards, our CFO, will conclude our prepared remarks with a look at the numbers for the quarter and our guidance going forward.

First, I wanted to start off by highlighting some exciting news. Today, United Online announced that our Board of Directors has approved the preliminary plan to separate United Online into 2 independent, publicly traded companies. As part of the separation, FTD will become an independent publicly traded company, which shall include the worldwide operations of our FTD segment. The other public company will be United Online, which will continue to operate the business of our Content & Media and Communications segment. The company also announced that it's also reviewing strategic alternatives for our Content & Media and Communications businesses, including the potential spinoff of the Content & Media segment as an additional separate independent publicly traded company.

While the breadth and strength of our businesses had served our stockholders well for many years, we believe that it's currently in the best interest of United Online and its stockholders to separate these distinct businesses. We expect the separation, not only to unlock value for the benefit of our stockholders, but also to provide significant operational and strategic flexibility for those businesses to better position and to capitalize on their well-recognized brands and enhance the long-term stockholder value. This approach also is consistent with the input we received from various stockholders over the past year, many of whom have expressed their view that the market price of our shares does not adequately reflect the inherent value of our businesses. It's our hope that the separation of these assets will add clarity to the individual investment theme and allow current and future stockholders to realize the incremental value associated each of these corporate assets.

The spinoff is expected to take the form of a tax-free pro-rata distribution to United Online's stockholders. That means if a stockholder owns 1% of United Online at the time of the FTD spinoff, then immediately following the spinoff, the stockholder would own 1% of each of FTD and United Online stocks, with the latter consisting of the businesses that make up the Content & Media and Communications segments today.

The transaction is subject to a number of conditions including final approval by the Board of Directors of the transaction specifics and is expected to be completed within the next 12 months, but we're targeting the first quarter of 2013. The company is developing detailed plans for the Board of Directors' further consideration and final approval. To execute this transaction, further work is required on structure, management, governance and other significant matters. Our goal is to have these issues resolved by the next earnings release and be able to share specifics of those plans at or prior to that time.

During the process, United Online will remain focused on delivering the best possible results for the benefit of its consumers, customers and, importantly, stockholders. We're excited about the value enhancement potential that can be realized via the separation of these assets. The transition from a single public company to separate, independent public companies will be done with a high degree of thought, planning and the type of outstanding execution that we believe our stockholders have come to expect from United Online.

Another way in which we hope to enhance stockholder value is through our patent portfolio. We have begun the process of determining the best way to monetize our portfolio of approximately 75 patents and patent applications through a possible sale, license or a combination thereof. We have many compelling patents in the area of e-mail, connectivity, search, content management, incentive award system, attention brokering, which is a buying and selling of consumer attention, targeted and untargeted advertising delivery, advertising in e-mail clients, Internet e-commerce architecture, bulk e-mail transmission, monitoring and tracking of all Internet usage to a browser, making web page recommendations based on a particular search term and some mobile applications of these proprietary technologies that we think are quite compelling. We believe that the breadth and depth of our patent portfolio should be a significant interest to any company with Internet-based products and services, particularly mobile products, as our portfolio could provide a distinct competitive advantage. We also believe that our patents should be of interest to those companies involved in current patent disputes, as several of our patents date back to the early days of the Internet. We'll attempt to find the best way to maximize the value of our patent portfolio through this exploratory process.

Now I'd like to transition ourselves to a high-level discussion of the second quarter 2012 results. And I'm going to give you 5 key points. One, consolidated adjusted OIBDA of $35.2 million exceeded the high end of our guidance range for the quarter, and consolidated revenues of $231.9 million were within our guidance range.

Number two, our FTD segment continued to deliver positive results despite aggressive competition in the U.S. and challenging consumer spending environment in both the U.S. and the U.K. After adjusting for the impact of the timing of the 2011 U.K. Mother's Day, which as you remember fell in the second quarter, where the U.K. Mother's Day was a first quarter holiday in 2012. And adjusting for the negative impact of changes in currency rates, FTD posted year-over-year revenue and adjusted OIBDA growth for the sixth consecutive quarter. For the 14-day selling period leading up to and including Mother's Day in the U.S., FTD had a modest year-over-year decline in consumer orders, while average order value was up slightly in the face of tremendous competitive pressure in the form of deep discounting, free shipping and expensive TV, radio and Internet advertising by our competitors. For the quarter, after adjusting for the impact of the timing of the 2011 U.K. Mother's Day, consumer orders for the quarter increased 4% versus the year-ago quarter. And average order value, or AOV, was relatively flat versus the year-ago quarter after adjusting for the impact of the timing of the U.K. Mother's Day holiday and the negative impact of changes in currency exchange rate.

Number three, during the quarter, we welcomed 2 new businesses to the United Online family. In June, Memory Lane acquired schoolFeed, Inc., a developer of a leading Facebook app that enables online high school social networking. We believe schoolFeed can enrich the Classmates business domestically and our StayFriends brand internationally.

In May, FTD's U.K. based subsidiary, Interflora, acquired the Gifts Division of Flying Brands Limited, including the Flying Flowers, Flowers Direct and Drake Algar businesses, which we believe will broaden Interflora's already strong presence in the U.K. by bringing new florists into the Interflora network. And it's also provides a retail corporate presence in London with Drake Algar.

Number four, in our Content & Media segment, we saw a sequential improvement in the decline rate in our subscriber base to 173,000, which is an improvement from the 191,000 decline in Q1 of 2012 and a major improvement from the 253,000 decline in Q2 of last year. Although our social networking businesses, including our StayFriends operations internationally, they continue to face competitive challenges from free social networking. This is the smallest sequential net decline in 8 quarters since the second quarter of 2010, as we continue to invest in customer acquisition and enhance that Classmates website. We're further encouraged by the fact that churn on the Content & Media segment improved to 3.6%. Now this is the lowest level of churn the segment has achieved in the last 7 quarters or almost 2 years. The 3.6% churn rate compares very favorably to the 3.9% churn rate in the first quarter of 2012 and the 3.8% churn rate in the year-ago quarter.

The acquisition of schoolFeed gives us an immediate boost within the Facebook platform from schoolFeed's success in growing its user base. Our plan is for all new members we acquire on schoolFeed through Facebook to have the opportunity to have full access to our free Classmates members in the U.S., and as appropriate, our StayFriends members and features in Europe. Of course, members signing up to schoolFeed also will have the opportunity to upgrade their membership and take advantage of our pay features. Since the acquisition, we've been working very hard on the integration of schoolFeed with our domestic Classmates and Memory Lane websites to offer an enhanced user experience to our members, and that integration is still in the process. We plan to then move the integrating elements of schoolFeed with our StayFriends business in Europe, where it's relevant. We also intend to continue to expand our distribution of key Memory Lane and Classmates features, both free and paid, onto the Facebook platform across all mobile devices and within our core website. Revitalizing the growth of Classmates and StayFriends and creating new revenue streams remain a primary objective for our team.

And Number five, in our Communications segment, our new NetZero 4G mobile broadband service completed its first full 90 days of operations after its launch in March 2012. We continue to test various marketing tactics as we build that business. Although we're in the very early stages of NetZero 4G mobile broadband, we continue to make progress by adding new subscribers to this service every day. As mentioned in our last call, our focus continues to be on testing various marketing approaches, such as conventional television, direct response television, direct mail marketing, Internet marketing, et cetera, while building our customer base. We've exceeded our expectations in terms of consumer response to our marketing initiatives as of this point, as measured by traffic to the NetZero 4G mobile broadband web site and calls to our phone centers.

However, we're learning that, given the relatively newer nature of mobile broadband and personal hotspot to the category, the need for consumers to currently spend between $49.95 and $99.95 to get the device to activate the NetZero service and the fact that many people want to learn more about just what mobile broadband is and how it fits within their Internet usage habit, we're finding the conversion rate of first-time visitors and phone callers is lower than we experienced in the dial-up business. So therefore, the horizon time between stimulating interest via marketing, making an inquiry on the part of the consumer, and ultimately, having that consumer sign up for the service is a longer-time process than we were used to and expecting. We'll continue to make changes to the marketing mix and the website and phone center messaging in our efforts to increase the rate of conversion from the large number of first-time respondents that we're getting from our marketing efforts.

So in summary, before I turn it over to Neil, 2012 is going to be a very interesting year for United Online. We -- FTD had a solid first half and continued to show year-over-year quarterly growth in revenue and adjusted OIBDA. We have promising new initiatives in our Content & Media segment and our Communications segment. We've added some new businesses to United Online in terms of schoolFeed and the Gifts Division of Flying Brands in the U.K. We're looking at ways in which we can monetize our portfolio of approximately 75 issued and pending patents, covering a broad range of e-mail, advertising, deliveries, search, content, e-commerce and connectivity processes through either a sale, a license or a combination thereof. And we just announced our intention to separate the businesses into 2 stand-alone, independent publicly traded companies by the end of Q1 2013 and to explore strategic options for separating our Content & Media and Communications businesses in order to unlock shareholder value.

I will now turn the presentation over to our EVP and CFO, Neil Edwards, who is going to take you through a review of our financial results for the quarter and provide guidance. Neil?

Neil P. Edwards

Thank you, Mark. Let me begin with highlights of the second quarter, and then I'll provide guidance going forward. All comparisons represent year-over-year quarterly comparisons, unless I clarify otherwise. So let's start with the consolidated results for the second quarter.

Comparisons to consolidated results for the second quarter were impacted by the timing of last year's U.K. Mother's Day, which fell in the second quarter of 2011 rather than in the first quarter. So consolidated revenues were $231.9 million, a 9% decrease and near the midpoint of our guidance range. Adjusting for the unfavorable impact of foreign currency exchange rates and the shift of approximately $14 million of revenues into the second quarter of 2011 related to the timing of the U.K. Mother's Day, consolidated revenues in the second quarter of 2012 decreased by $7.7 million or 3% compared to the year-ago quarter.

Consolidated adjusted OIBDA of $35.2 million exceeded the high end of our guidance range but is down 25% year-over-year. Adjusting for the unfavorable impact of foreign currency exchange rates and the shift of approximately $3 million of adjusted OIBDA into the second quarter of 2011 related to the timing of the U.K. Mother's Day, consolidated adjustable OIBDA in the second quarter of 2012 decreased by $7.9 million or 18%.

Diluted net income per common share was $0.09, and adjusted diluted net income per common share was $0.18, declines of 44% and 40%, respectively. Cash flows from operating activities and free cash flow for the quarter ended June 30, 2012, was $16 million and $13.4 million, respectively, decreases of 29% and 20%, respectively. These decreases were driven primarily by lower adjusted OIBDA and the impact of the timing of the U.K. Mother's Day, partially offset by favorable changes in working capital and lower capital expenditures.

During the quarter, we made a voluntary debt prepayment of $17 million, ahead of our next contractual payment scheduled for April 2013, which will save the company approximately $700,000 in interest expense and has eliminated all future scheduled mandatory principal payments. On June 8, 2012, Memory Lane completed the acquisition of schoolFeed, Inc. for $7.5 million in cash upon closing and a maximum $27.5 million in the form of annual earn-out payments through June 2015, which are contingent upon the achievement of certain performance objective. Also, during the quarter, Interflora British Unit acquired the assets of the Gifts Division of Flying Brands Limited for $3.9 million in cash upon closing.

Cash and cash equivalents declined by $26.2 million for March 31, 2012, to $111.4 million at June 30, 2012, primarily as a result of the debt prepayment and the acquisitions of schoolFeed and the Gift Division of Flying Brands Limited. As a result of cash paid for acquisitions, net debt at June 30, 2012, increased by $9.5 million to $132.4 million, compared to $122.9 million at March 31, 2012. The company defines net debt as total debt net of discounts less cash and cash equivalents.

Now onto the FTD segment. Segment revenues were $167.5 million, a decrease of 5% versus the year-ago quarter. Adjusting for the unfavorable impact of foreign currency exchange rates and the shift of approximately $14 million of revenues into the second quarter of 2011 related to the timing of the U.K. Mother's Day, segment revenues in the second quarter of 2012 increased by 4% compared to the year-ago quarter.

Segment adjusted OIBDA was $24 million, a decrease of 7% versus the year-ago quarter. Again, adjusting for the shift of approximately $3 million of adjusted OIBDA into the second quarter of 2011 related to the timing of the U.K. Mother's Day, segment adjusted OIBDA in the second quarter of 2012 increased by 6% compared to the year-ago quarter.

Adjusted OIBDA margin was 14.3%, up 30 basis points, after adjusting for the timing of the U.K. Mother's Day.

In terms of key metrics, consumer orders were 2 million, down 8% versus the year-ago quarter. Excluding the impact of the timing of the U.K. Mother's Day, consumer orders increased 4% compared to the year-ago quarter. Average order value, or AOV, was $60.75, a slight increase compared to an AOV of $60.45 in the year-ago quarter. Adjusting for the unfavorable impact of foreign currency exchange rates and the impact of the timing of the U.K. Mother's Day, AOV was relatively flat versus the year-ago quarter. The impact of the timing of the 2011 U.K. Mother's Day resulted in a higher percentage of international orders in the second quarter of 2011 as compared to domestic orders. And international orders generally have lower AOVs than domestic orders.

Now onto the Content & Media segment. Segment revenues were $38 million, a decrease of 20% versus the year-ago quarter. Adjusting for the unfavorable impact of foreign currency exchange rates, segment revenues decreased 18% versus the year-ago quarter. Segment adjusted OIBDA was $7.5 million, a decrease of 26% versus the year-ago quarter. Adjusting for the unfavorable impact of foreign currency exchange rates, segment adjustable OIBDA decreased 21% versus the year-ago quarter.

In terms of key metrics, pay accounts decreased by a net 173,000 in the second quarter compared to a net decrease of 191,000 in the first quarter of 2012 and a net decrease of 253,000 in the year-ago quarter. This was the Content & Media segment's lowest net decline in pay accounts since the second quarter of 2010. Active accounts were 10.3 million, a decrease of 9% sequentially and a decrease of 18% year-over-year. Churn was 3.6%, a decrease of 30 basis points sequentially and a decrease of 20 basis points year-over-year. Churn was at its lowest level since the third quarter of 2010. Average revenue per user, or ARPU, was $2.50, down 2% sequentially and down 4% year-over-year. These sequential and year-over-year decreases were primarily attributable to the unfavorable impact of foreign currency exchange rates.

Now onto the Communications segment. Segment revenues were $26.8 million, a decrease of 17%. Segment adjustable OIBDA was $9 million, a decrease of 46%. The investment in our NetZero 4G mobile broadband business resulted in a negative adjusted OIBDA impact of approximately $4 million during the second quarter of 2012. Adjusted OIBDA margin was 33.6% compared to 51.6% in year-ago quarter. Excluding the impact of the NetZero 4G mobile broadband business, adjusted OIBDA margin was about 50%.

In terms of key metrics, segment pay accounts decreased by a net 38,000 in the second quarter versus a net decrease of 47,000 in the first quarter of 2012 and a net decrease of 60,000 in the year-ago quarter. ARPU was $8.97 compared to $8.99 in the first quarter of 2012 and $9.28 in the year-ago quarter. Churn was 3.2%, down 20 basis points from the first quarter of 2012 and down 30 basis points from the year-ago quarter.

On allocated corporate expenses. For the quarter ended June 30, 2012, the impact of unallocated corporate expenses on consolidated adjusted OIBDA was $5.2 million compared to $5.7 million.

Moving on to our business outlook and guidance for the third quarter of 2012. Consolidated revenues are estimated in the range of $172 million to $178 million. Consolidated adjusted OIBDA is estimated in the range of $23 million to $27 million. Net interest expense is estimated at $3.1 million. Amortization of intangible assets is estimated at $7.9 million. Weighted average diluted common shares are estimated to be $19.8 million on a GAAP basis and $91 million on an adjusted basis.

For the full year 2012, our annual effective income tax rate is estimated at approximately 36% on a GAAP basis. We expect some variation in our effective income tax rate from quarter-to-quarter due to discrete items and other factors. For the full year 2012, capital expenditures are estimated to range from $23 million to $26 million.

As Mark mentioned in his comments, we're continuing to move forward with a number of initiatives in the Content & Media segment and our NetZero 4G mobile broadband initiative in the Communications segment. In the Content & Media segment, we will continue with the integration of schoolFeed and expect that the net decline in our pay subscribers will show further improvement in the third quarter of 2012 when compared to the second quarter of 2012. We also expect our NetZero 4G mobile broadband service will incur losses throughout 2012 as we anticipate significantly higher marketing and other expenses from the revenue we currently generate from that service.

We believe the adjusted OIBDA loss from our NetZero 4G mobile broadband initiative will reduce Communications segment adjusted OIBDA by approximately $3 million to $3.5 million in the third quarter of 2012 and by approximately $11 million to $13 million for the full year.

That concludes my prepared remarks. Back to you, Mark.

Mark R. Goldston

Thanks, Neil. Operator, if you can please direct the questions into the queue. We'll take what we have, time permitting.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Anil Gupta with Imperial Capital.

Anil K. Gupta - Imperial Capital, LLC, Research Division

I wanted to begin a couple of questions really to the transactions. One is I'm just thinking about the kind of a new co, which could be Classmates and Communications or Content & Media and Communications. I think at an LTM basis, that business has about $93 million of adjusted OIBDA. The numbers, they're continuing to deteriorate. The dividend, I think, maintained itself at about $36 million a year. Wondering if you can talk about just your broad thoughts on the sustainability of that at that new co, I think, that's still funded by NetZero.

Mark R. Goldston

Yes. Obviously, as we've said on numerous, previous earnings calls, we don't discuss any dividend policy other than the quarter in which we're in. The Board of Directors meets every quarter and has, in fact, for past 5 years, and they look at the financials of the company, the cash flows of the company, and then they determine on their own the declaration or not of a dividend. So it's done on a quarter-to-quarter basis. We never provide a dividend forecast before. Obviously, couldn't do that now. And any other details regarding the separation transaction in terms of its construct, et cetera, we said it will be forthcoming when we have more clarity around that. And that's going to be, hopefully, by the time we get to the next earnings call, we'll have more clarity around that.

Anil K. Gupta - Imperial Capital, LLC, Research Division

Okay. And then, I guess, somewhat related but not necessarily, could you give us an idea, some ballpark, how much of your cash balance is allocated to the different segments?

Mark R. Goldston

Neil?

Neil P. Edwards

We actually don't disclose that, Anil.

Anil K. Gupta - Imperial Capital, LLC, Research Division

Okay. And then the last question is, could you give us some color on the revenues associated with the 4G wireless broadband initiative in the quarter?

Mark R. Goldston

Again, that's not something we break out at this time. We've said last quarter when that business has achieved what we judge to be sufficient critical mass, we may consider, at that point, breaking it out separately. But at this point, in the 90 days in, we're not breaking it out separately.

Operator

And we'll take our next question from Dan Kurnos with The Benchmark Company.

Daniel L. Kurnos - The Benchmark Company, LLC, Research Division

Let me just follow up to some spin. I think you've already addressed this question, but let me ask it anyway. Does the spin indicate any change in operating strategy or the perceived opportunity for either of the 2 segments that you're going to be spinning off and putting up potentially for sale?

Mark R. Goldston

Well, before I interpret your question, what exactly do you mean by that?

Daniel L. Kurnos - The Benchmark Company, LLC, Research Division

It's actually -- once you spin off the Communications and Content & Media segments, is there any sort of perceived change in the outlook for either of those segments or do you plan to operate them any differently going forward?

Mark R. Goldston

Oh, good question. Well, listen, I think you can appreciate this certainly being an analyst who talks to our investors on a daily or weekly basis. But Neil and I, in the past I want to say 18 months, we've probably had between 350 and 450 individual investor meetings, between conferences, individual meetings, et cetera. And I can tell you that in probably 90% -- and that's not an exaggeration -- probably 90% of the instances, the feedback that we would get was these assets have a much greater value than you're getting credit for largely because this collection of assets doesn't have the level of clarity in today's world that investors are seeking. 4 or 5 years ago, it was considered a diversification of risk that have these different types of assets. Today, it's considered to have a -- for lack of a better term, a conglomerate discount. So we have been implored by shareholders and potential shareholders to unlock the value of the company through the increasing clarity of the messaging largely affected by separating the assets. That being said, any company, whether it's company's Content & media, Communications, FTD, should benefit from having a singular message and a single mode of operation such that they have capital allocated to those businesses that they are generating themselves and that they're accessing themselves versus getting into a priority queue of a multi-variant company. So if history is any indicator of the future and what other companies have experienced, this should add clarity, not only to the investment pieces, but also to the operating plans of the company and get clarity for their access and deployment of capital. So we feel this is our very strong move, and we feel very good about the Communications business and the Content & Media business. Look, we just made an investment in buying schoolFeed, which we're very excited about. And we did that with 2 months before we announced our intention to do a separation. We launched the 4G wireless business 90 days in advance. But those businesses have a commitment to grow if they can and certainly to improve and to make their product better for their consumers. And I think that only is going to get greater and have more intense focus in the future even than it has today.

Daniel L. Kurnos - The Benchmark Company, LLC, Research Division

Got it. Great. And then speaking of the acquisitions, I know that you guys touched on it briefly, but how should we think about the impact on the expense lines next quarter and going forward?

Mark R. Goldston

Neil?

Neil P. Edwards

I mean, we haven't broken out anything separately. But in terms of expenses for schoolFeed, it's currently a very, very small operation. It has just a handful of employees. So there isn't a tremendous amount of expense, but obviously, there is some expense associated with those handful of employees and really just rent expense, and that's it. So the expenses are fairly nominal in the context of United Online as a whole. The business in the U.K., that business was a going -- it is a going concern when we bought it. It was kind of a distressed sale, and we believe we got a great deal on that business. That's being integrated. There are some new hires there. But as I said, a going concern business that will generate both revenues and profitability.

Daniel L. Kurnos - The Benchmark Company, LLC, Research Division

Got it. It's a lot -- looks like a lot of the upside from OIBDA in the quarter came from lower spending on the Content & Media side in the sales and marketing line. And I'm just curious how you guys think about your return on investment there. I know that you had a lesser sequential decline in paid accounts, so I'm just wondering how you think about your return on investment in that category going forward.

Mark R. Goldston

In true United Online fashion, every dollar that we spend in every division has to go through a relatively rigorous ROI analysis. We've talked about this for years on these calls. Until we set a pretty firm bright red line beyond which we won't go to acquire a customer. So if we're in the midst of a quarter, we're spending money, and for whatever reason, we see an upward migration in customer acquisition cost, where there's no change in the long-term return on that capital, then we will curtail the spending at that point. So they will spend up until they hit the ceiling level that makes the ROI on that expenditure work. And once they hit that level and beyond, they have to stop spending. And so that's basically what you'll see. So we are of a very strong discipline both at FTD and in Content & Media and in Communications on that. We have a very strict sort of SAC [ph] to LTD computation of subscriber acquisition cost to long-term value. And we also know definitively what our conversion rates are, free members to pay subscribers on the case of FTD to become return purchaser, so exactly what we're willing to spend and what kind of yield we can get. Sometimes you get in the middle of a quarter, as you can appreciate, where you might spend at one quarter, and the benefit comes in the next quarter. But in this particular case, we had our folks very, very focused on the fact that when you hit that threshold ceiling, you turn the faucet off.

Daniel L. Kurnos - The Benchmark Company, LLC, Research Division

Great. And just a couple more from me, if I can.

Mark R. Goldston

Sure.

Daniel L. Kurnos - The Benchmark Company, LLC, Research Division

Can you give us a sense of whether your social media initiatives are having a positive impact on your Yearbook sales?

Mark R. Goldston

Well, we're happy with our Yearbook initiative in total. So as you can imagine, it's pretty hard to sort of earmark the sale itself to a particular activity. But in total, we're happy with where the Yearbook business is. And we're actually very excited about the fact that schoolFeed has got almost 20 million existing registrants when we bought them. They sign up a bunch every day, and we have not yet completed the integration of schoolFeed and Classmates. That's in process. But when the Classmates members can start having access to all of that great user-generated content that schoolFeed's got, and the schoolFeed members can have access to all these digitized yearbooks and the 55 million Classmates members, our "social networking effect" should be demonstrably more powerful than it was prior to owning schoolFeed. So next 90 days should be pretty exciting at getting the integration going there. And then the next step will be to go overseas in the StayFriends business and figure out what elements of schoolFeed they can integrate in their countries.

Daniel L. Kurnos - The Benchmark Company, LLC, Research Division

Got it. On the Communications side, could you share your thoughts on the impact, if any, of the new family sharing plans that Verizon and AT&T are offering on your 4G business?

Mark R. Goldston

That's a great question. And I don't mean to be facetious when I say this, but I believe Verizon might be the #1 advertiser in American, and AT&T might be #2. And literally, I'm talking about something approaching $1 billion of annual spending. And so it would be somewhat presumptuous of us to assume that we're right up there with them in competing for people. We have a micro niche of the market. That is a true NetZero United Online fashion. We staked out a brand new segment, which is this, in this some cases, free and value-priced mobile broadband. That is not what these guys are doing. They've got a different plan and a different program. And so I don't really see them as being cannibalistic to what we're doing. The biggest challenge that they've got, which is the same challenge that we have, is this probably owning a handful of single-digit million mobile broadband customers in the entire United States. They may be between 5 million and 7 million in the whole U.S., all companies combined. And so we all are on an educational path of trying to convince people of what mobile broadband is, why it's advantageous, and then you have to decide, do you want to do what we do, which is kind of the common-man mobile broadband, or do you want to go with something more elaborate? Their family programs are designed, obviously, to get more people within a given account into the fold without putting themselves in a deep discounting mode. But I don't really see that as being a direct competitive threat or anything like the NetZero 4G.

Daniel L. Kurnos - The Benchmark Company, LLC, Research Division

Great. And just one more, if I could. Mobile seems to have been a pretty big driver for some of the larger eCommerce companies out there. And I'm just wondering how it's been impacting your traffic and revenues in both the FTD and Content & Media segments.

Mark R. Goldston

Well, we have major mobile initiatives underway at all of our units. So we've got the folks up in Classmates and Memory Lane that are working diligently on continuing to develop mobile apps. And you'll see that at schoolFeed as well. The FTD folks have just launched the new mobile site and continue to develop on that. And we're working at NetZero on mobile as well. So we're pretty -- and the Interflora folks do the same thing. So we are all focused internally on trying to expand our mobile presence and optimize our sites for the mobile devices.

Operator

And we'll take our next question from Mike Crawford with B. Riley & Co.

Michael Crawford - B. Riley & Co., LLC, Research Division

Just getting back to the potential spinoffs. If you're look here on unallocated corporate expenses, that runs like $21 million, $22 million a year. Can you give a rough rule of thumb of about what buckets-- what 3 buckets those would fall into percentage-wise.

Mark R. Goldston

As I said in the announcement, we're still working on how these individual units will be structured. Board, managerially, infrastructure, whether or not there will be shared services agreements, which certainly in some cases they will need to be for some period of time. If there is shared services agreement, how will you allocate the expenses probably on a pro rata basis, but we'll have to figure that out. So all of that is what we said, over the next 90 days, we'll be adding clarity to, so we can build the plan. But it will be parsed according to some benchmark metric, which might be revenue, might be OIBDA, et cetera.

Michael Crawford - B. Riley & Co., LLC, Research Division

Okay. And then to be clear, the Communication paid subscribers, if you had paid 4G subscribers, they would be included in that 709,000 number or not?

Mark R. Goldston

That -- yes, they would be. That is correct.

Michael Crawford - B. Riley & Co., LLC, Research Division

So you might have a handful now. But when do you think you'll be able to provide more data on the efforts there other than the fact that you're -- you've invested $4 million this past quarter and $3 million to $3.5 million this quarter, and -- when do you think you'll be able to provide some more color on the traction?

Mark R. Goldston

Well, Neil, I'll let you answer a part of that. I will say -- as we said in the last call, we have 3 buckets of testing that we're doing. The first bucket was over the first call it 60 days, and that was in Chicago, Los Angeles and New York, which was conventional television advertising, which we're very happy with, and we had great results from those cities. We then moved to a more of a direct response television program, and you can actually see some of it now, just started running again. We're running 60-second commercials in various national markets, which is a pure direct response approach. We've also started some direct mail. And then we're moving into some additional testing, including Internet testing, which will happen over the next 90 days. So the plan, as we said, was to run these buckets of tests on this brand new category to figure out that would be the most efficient from a customer acquisition standpoint, one; and two, what kind of conversion rates we're getting in terms of the plan. So I would imagine that we would have more clarity on what works the best and what we'll do going forward through '13 by the middle of the fourth -- middle to end of the fourth quarter. And at that point, hopefully, we've got a critical mass, where we can sit down and talk about where we're going and what we're doing.

Michael Crawford - B. Riley & Co., LLC, Research Division

Okay. And then regarding FTD, you did mention discounting and free shipping from competitors, especially over Mother's Day. I mean, that's something that we've always seen. Would you describe -- how would you describe the magnitude of sales and marketing pressure in that segment versus expectations and how you think that's going to wind up in the future?

Mark R. Goldston

I would say -- Mike, I would say it was dramatically higher, almost to the point where it was head-scratching. We had times where we would be looking into 2 weeks leading up to Mother's Day, where the amount of direct response TV commercials that we saw from people like even ProFlowers offering, I believe, was like $19.95 flowers. And then a ton of advertising as well from 800, et cetera. It seemed that we're getting the numbers now to be much higher than it had been in previous history, in previous years. And the price points that were featured seemed to be lower than they'd ever been. So what we're especially proud of is that, one, we didn't succumb to that; and two, we actually saw average order value improvements for the sixth consecutive -- I mean, we're going up in average order value in a market where they're bombarding airwaves with $19.95 roses. So hats off to the FTD team for basically spending a lot less, a lot less than their competitors and having a very strong business and, importantly, not eroding their overall profitability by maintaining or increasing their average order value. That is really tough to do in a consumer market place at a major holiday period, and these folks managed to do it.

Neil P. Edwards

Yes, Mike, there was a significantly more group buying as well. So that put additional pressure also. As Mark said, great credit to the FTD team for maintaining their financial discipline during that period.

Mark R. Goldston

And by the way, Mike, part of the way going forward -- because you can say, "I don't know how other people do their return on investment analysis." We looked at it within the flower market and said if we spent that kind of money that they spent, there's no way you could have made money. But who knows what everybody has gotten in their own internal infrastructures. But based on how we looked at it, that just didn't look like a profitable thing to do. That being said, on a go-forward basis, we put out the challenge to our team to come up with a lot more differentiation in terms of our product and feature assortment, which they've been very good at doing in the past. So we can continue to be the innovator in the category and not play down in the gutter of pricing because that's a zero-sum game for anybody.

Michael Crawford - B. Riley & Co., LLC, Research Division

Right. On FTD, if you can go back 4 years ago to when you acquired them in a public-to-public LBO, basically, for including your shares of $10 in change, it's almost $750 million paid now. Half of that was in debt that's been nonrecourse to the parent and paid down with the free cash flow from the business. So it wasn't, certainly, in that amount of equity capital that United Online put up to acquire FTD. But at the time, looking at that purchase price, was that based on a perceived multiple of 10x or 8x EBITDA? If I look at the $80 million or so of...

Mark R. Goldston

OIBDA.

Michael Crawford - B. Riley & Co., LLC, Research Division

OIBDA that FTD is doing today, and so I'd say that EBITDA is $70 million to $75 million, depending on those.

Mark R. Goldston

Right.

Michael Crawford - B. Riley & Co., LLC, Research Division

How you're going to allocate those corporate expenses.

Mark R. Goldston

Yes.

Michael Crawford - B. Riley & Co., LLC, Research Division

So I'm wondering, what were you thinking at that time? And right now, anyone can see that 1-800-Flowers is trading at 6x. I mean, that's in front of your face. But how would you characterize FTD performance versus expectations in value when you bought it?

Mark R. Goldston

Okay. Great question. When we bought it -- by the way, we did a very deep analysis. So when we bought it, we looked at them against their benchmark public competitor, which is 800. And the history for the 7 or 8 quarters prior to our acquisition of the FTD performance versus 800 was more favorable to 800 at the time. Since we bought it, as you've seen, it's been dramatically more favorable to FTD. So one, we're proud of that. Two, when we bought the company, we absolutely attached the 10 multiple to the EBITDA. That's exactly how we looked at it. I think we even stated it at the time. But that's exactly how we looked at it. And we concluded, as an acquirer back then, that in our view, FTD was a much more preferred asset. One, it was vastly more profitable on almost the same level of revenue. They had I think it was almost 2x to 3x the EBITDA of their public competitor. So we put a major premium on what you would pay on a multiple basis for a company whose EBITDA margin and absolute EBITDA was 2x to 3x that of its major public competitor. And we felt that they had the international component, where they had a dominant position with Interflora, and that, that was a very valuable asset and a differentiator as well. And three, it was a very focused company, meaning almost all of its revenue was coming from a core business of flowers versus a bunch of other businesses. So we ascribed that at 10x multiple to it, that's how we did it. We put a premium on it versus the rest of the category because the power of brand, success of operation, profitability margin, profitability in terms of absolute penny profit and the power of an international presence. So that's what we did. We're happy that we did that. Today, we feel we have a stronger domestic business than we had been. Our average order values today are demonstrably higher, even though we have lived through a horrible economy for 4 years. We're getting more money per purchase from the consumer than we did before, we have a better purchase frequency rate, and we've enhanced the U.K. operations significantly since we bought it. So from a value standpoint, in terms of the quality of the asset that we bought, we have a much better quality asset today than we had then, and we thought it was high quality then. Now market value aside, obviously, that leads to why, in fact, we are embarking upon this path of doing a stand-alone spin of FTD. Because we believe that FTD alone has a tremendous valuation, which is not being realized within the total of United Online.

Michael Crawford - B. Riley & Co., LLC, Research Division

Okay. And then the last question relates to your IP portfolio. So I think you kind of listed off 8 or 9 different families of patents that you have in that -- of that 75 or so issued patents. Would it be -- is it -- are those held with different subsidiaries now, whereas some of those are FTD patents and some of those are NetZero patents, or is it all United Online?

Mark R. Goldston

It's all -- basically, it's all United Online. I mean, it's the corporate assets. Now we have a lot of patents. And as you know, I'm very interested in invention and IP personally, so we have a lot of patents at the core communications company level. We also have patents that we acquired when we acquired the companies at MyPoints and FTD and Classmates. But we have a lot of them that reside at -- from the original NetZero and Juno companies. And frankly, one of the things that's very advantageous is we have a very broad spectrum, way beyond the businesses. Just the businesses that we actually compete in today in terms of our technology are represented by these patents. And in the world of mobile that's going on today with the big players that you know about, and e-mail delivery over mobile, advertising delivery, tracking, et cetera, we've got, we believe, some very powerful patents that, in the right hands, could be valuable. And so our General Counsel has been charged with sort of supervising the proper mechanism for us to use. And certainly, there's been a couple of people before us who've done a really good job of monetizing their patent portfolios. So we're not only evaluating what they did, but we're actually evaluating who they did it with, and whether or not we can realize some of that as well. Because we've gotten numerous inbound calls over the past 12 months from people who are very interested in our issued patents, and so we decided to do this, instead of on an ad hoc basis, do this on a very focused and concentrated basis. And hopefully, we can be as successful in our own ways than some of these other folks have been in monetizing their patents. Certainly the -- in my opinion, even though they are a competitor, I think the AOL guys did a tremendous job of monetizing their patent portfolio. I mean, hats off to them.

Operator

[Operator Instructions] We'll go next to George Sutton with Craig-Hallum.

George F. Sutton - Craig-Hallum Capital Group LLC, Research Division

So I am curious. Mark, you mentioned you've met with a lot of investors, and of course, we've heard it for years, the whole concept of breaking up the pieces. I'm curious, is there a more specific catalyst now?

Mark R. Goldston

George, we've known each other a long time, and we respect you a great deal, and you've actually given us this feedback, not only from your own opinion, but from investors that you've spoken to about people wanting us to do this. And to be quite candid with you, we as a management team and as a board are just very frustrated by watching a stock that trades in the $4 range for a company that is as high quality as this company and has these kind of assets and this type of performance. And we just basically got to the point where we realized that we're getting so much input from our various and sundry stockholders, who will say to us, look, you are never going to realize the full value of the company in this aggregated format. And that people who are interested in investing in a flower business are not interested in a NetZero business. And people who are interested in the communications business are not interested in the social net, et cetera. And that while we implored you to diversify as dial-up was declining, and that was a really smart move, in today's world, that's just not where the investors' sentiment lies. So look, our job is to serve our shareholders. And none of us, all of whom are shareholders, none of us are happy with where the stock is traded, and we don't think it's representative of the value of the company, though it's incumbent upon us as a board to do something about it. And we're taking a bold step because we think a bold step is required to do something in order to unlock the value of these assets. With that, frankly, just got to the point where we hit the frustration button and said, look, the market is not going to recognize this value unless we do it. Other companies had tried it. It seems to have been very successful. And so that's what we're going to do.

George F. Sutton - Craig-Hallum Capital Group LLC, Research Division

All right. I appreciate the candor. Relative to the term preliminary, so you've taken a preliminary look at doing this, I'm curious, you mentioned Q1 '13 is sort of the time frame for this all to occur. But in the meantime, you may look at the patent portfolio. You could ultimately have books out to investors on the Content & Media side of the business. I'm curious, what kind of updates we will get along the way in terms of the progress?

Mark R. Goldston

Well, a couple of things. One, what the announcement says is that our intention, as you stated, is to 2 separate public companies, spinoff FTD, within 12 months try to get it done by the first quarter of '13. Hard stop on that. Everybody gets that. Secondly, we are -- obviously, because it's our job, is to explore options for any and all of our businesses in terms of what we can do to enhance value. And so all I can tell you is if anything else other than what we just described were to materialize, then obviously, we would have a duty to disclose that. But absent that -- I mean, our plan is, as stated, to create these 2 separate stand-alone public companies and to continue to evaluate other ways on a day-to-day basis, as is our job, to get incremental value out of any of the other assets that we have. But I can't sit here and prognosticate what that's going to mean and what's going to happen. I can't tell you if it's material. If anything happens that would be material, then we, obviously, have a duty to disclose that at that time. And beyond that, it's just nothing more than a bunch of hearsay.

George F. Sutton - Craig-Hallum Capital Group LLC, Research Division

Okay. Last question for me. As you thought about this move from an SG&A perspective, if you were to have 2 separate companies, there may be some incremental public company costs, for example. Could you give us a sense, as we're trying to think about the value here, what kind of costs might be borne to do that?

Mark R. Goldston

Well, we'll try to give you more color on that when we have some more firm information on what the potential structures will be. I can tell you, just for illustrative purposes, if you were to talk to the average small- to mid-cap NASDAQ company about what their embedded public company costs are versus not being a stand-alone public company. They would tell you it's roughly $3 million. That's kind of a round figure that most people would use. You might be 2.6, you might be 3.3, you're not going to be 5, and you're not going to be 1. So I would say, if you're looking for a plug figure of a NASDAQ small- to mid-cap for incremental costs to be stand-alone public, it's usually in and around the $3 million range. Absent that, we have whatever management, et cetera, has been attached to an asset, and that plan has not been developed yet. But what I can tell you, just for a rule of thumb, if you use that $3 million figure to almost any company that's got a $2 billion market cap and below, you're going to be pretty darn close on the public company cost.

Operator, I see we've exceeded our time. So I want to thank everybody for attending the call today. If you have any additional questions, as always, feel free to channel them through David Bigelow, our VP of Investor Relations. And of course, you can always contact myself and Neil Edwards directly should you so desire. So I want to thank everybody for taking the time, and take care.

Operator

And again, that does conclude today's conference. We do thank you for your participation.

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