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United Online (NASDAQ:UNTD)

Q3 2012 Earnings Call

November 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

Erik Randerson - Vice President of Investor Relations

Analysts

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

Jason Kreyer - Craig-Hallum Capital Group LLC, Research Division

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

Operator

Good day, and welcome to the United Online Third Quarter Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. David Bigelow. Please go ahead, sir.

David Bigelow

I just want to say thank you, Elise. Hello, and welcome to United Online's conference call to discuss our financial results for the third quarter ended September 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 that we've created a PowerPoint presentation that summarizes our third 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 clicking on Investor Relations at the top and going into 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 in addition to, and not as a substitute for or superior to, the financial measures determined in accordance with GAAP. The 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 our other businesses, a review of monetization opportunities for our patent portfolio, new or planned marketing or business initiatives or monetization techniques and the expected benefits of our acquisitions, strategies and marketing programs, among others, are forward-looking statements that are subject to a number of risks and uncertainties that could cause 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 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 nonhistorical 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, then we'll open it 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 Third Quarter ended September 30, 2012. I'm going to provide an overview of the results for the third quarter and an update on our progress toward our planned spinoff of FTD. Then Neil Edwards, our CFO, will conclude our prepared remarks with a look at the numbers for the quarter and our guidance going forward.

Let's talk about the highlights of the third quarter of 2012. Number one, both consolidated and adjusted OIBDA of $26.8 million and consolidated revenues of $177.8 million were near the high end of our guidance range. Number 2, our FTD segment continued to deliver positive results despite aggressive competition in the U.S. and the challenging consumer spending environment in the U.S. and to an even greater extent, in the U.K. During the quarter, the FTD segment achieved its seventh consecutive quarter of year-over-year revenue growth when prior periods are adjusted for the timing of the U.K. Mother's Day in 2011.

FTD revenues increased 7% from the year-ago quarter, driven by consumer order growth across all of our businesses both domestically and internationally. Number 3, Content & Media segment pay accounts declined by 133,000 during the quarter, the smallest net decrease since the second quarter of 2010. The quarterly net decrease and segment pay accounts has now improved in 3 consecutive quarters from a high of $296,000 -- 296,000 loss in the fourth quarter of 2011, to the 133,000 during this most recent quarter.

Number 4, in our Communications segment, we are growing the customer base in our NetZero 4G mobile broadband business, as we continue to test marketing strategies, including discounted pricing on some of the devices, as a means to improve conversion rates.

Now I'm going to take a look at the individual operating segments, and I'll start with a review of FTD. First, the financial summary. Our FTD segment includes both the domestic results of FTD in the U.S. and Canada, and the results for our Interflora business in the U.K. and Ireland. After you adjust for the negative impact of foreign currency exchange rates, the FTD segment revenues increased 8% compared to the year-ago quarter, with consumer order growth across all of the businesses. The FTD segment has now achieved year-over-year revenue growth in every quarter since the beginning of 2011, after adjusting for the timing of the 2011 U.K. Mother's Day. Consumer orders increased 12% year-over-year, driven in part by increased marketing spend in our promotions and investment and design to drive an increased consumer order volume and revenue growth in both the U.S. and the U.K.

It should be noted that the Flying Flowers and Flowers Direct U.K. businesses, which we acquired back in April of 2012, those businesses helped to contribute to the order growth in the quarter. And the Flying Flowers is the larger of those 2 businesses, and it's positioned as more of a value-priced brand with lower AOVs, or what we call average order value, than the core Interflora business would have. These marketing, promotions and investments in both the U.S. and in the U.K. impacted segment-adjusted OIBDA, which declined 8% from the year-ago quarter, but the adjusted OIBDA remained over 13% as a percentage of FTD's revenues, so still very strong.

Now I would like to do is move over to the Content & Media segment review, and first I'm going to look at the financial results. And in that segment, our revenues were $36.6 million, down 17% compared to the year-ago quarter and segment-adjusted OIBDA was $7.3 million, down 44% year-over-year. By the way, this segment includes Classmates, which schoolFeed is now a part, as well as the StayFriends and the MyPoints businesses, so let's look at the Classmates' update first. Classmates saw a continued sequential improvement in the net decline of pay accounts and an improvement in their churn rate. Segment pay accounts had a net decline of $133,000 in the most recent quarter. This was a 23% improvement from $173,000 loss in the second quarter of 2012, and a 41% improvement from the $227,000 subscriber loss in the third quarter of 2011. What makes this significant is that it represents a 55% improvement from the high of $296,000 subscriber loss in the fourth quarter of 2011. Our churn improved to 3.4%, which is the lowest level of churn we've achieved in the last 9 quarters, so over 2 years. This compares to 3.6% in the second quarter of 2012 and 3.9% in the year-ago quarter. The improvement in these key metrics is primarily due to our investment in new member acquisition.

In addition, we're excited about our enhancements to the Yearbook experience, the launch of our mobile-optimized website and our growing presence on Facebook. We've also continued to invest in new yearbooks, our total library of yearbooks now contains over 160,000 individual digitized yearbooks. Some of them date back to the 1940s, actually.

Our approach continues to focus on delivering to our users a compelling and complete experience of revisiting their high school years. We intend to continue to expand our distribution of key features, now this would be both free and paid, onto the Facebook platform and across mobile devices and certainly, within our core websites. We believe the integration of schoolFeed will help with these strategies. The schoolFeed app has now climbed to the #5-ranked Facebook app, according to AppData as of October 31, 2012, which is a dramatic increase from the top 25 ranking that it had when we bought it.

The key opportunity with schoolFeed is that we will be able to introduce millions of existing and future schoolFeed users to the Classmates experience. And the daily installs of schoolFeed over the past few months have been exceptionally high. One of the primary challenges schoolFeed's team faces, as is the case with any Facebook app, is keeping abreast of, and being able to react to, the latest Facebook app partnership rules and changes that are made while keeping the virality component optimized.

As of August 26, 2012, domestic installers of the schoolFeed app are now registered as Classmates members, if they were not already a Classmates member prior to that. While the opportunity to convert schoolFeed app users to Classmates paid member status is still an important goal, and adding millions of new members to the Classmates base is exciting, we are also exploring additional monetization techniques for optimizing the revenue potential of the schoolFeed user base. These techniques may also be utilized on the Classmates website as well. And we hope to update you that with some more specifics on our progress in this area over the next 2 quarters.

Internationally, our social networking business under the StayFriends and Trombi brand name continues to face competitive challenges from free social networking, which contributed to the increased subscriber decline. As I discussed in previous quarters, we've rolled out new initiatives at StayFriends and Trombi, designed to enhance our potential to attract new subscribers and importantly, to better retain the existing pay accounts and this included -- this is including the expansion of the German school information page, which has school-specific nostalgia and photos of the school, and we also added social games to the StayFriends experience as well.

In terms of our other part of our content media division, which is our key MyPoints business, we continue at MyPoints to focus on new initiatives such as daily deals and direct sales, which now actually accounts for roughly 14% of MyPoints' total revenue, as well as leveraging the social media graph. The majority of offers in the MyPoints program are now able to be shared using Facebook and Twitter.

Let's talk about the Content & Media member base, so we can give you some clarity here. The largely subscription-based revenue model for the Content & Media segment relies on our ability to convert registered free accounts to pay accounts. In the Content & Media segment, as of September 30, 2012, we had an estimated 116 million registered accounts, that's 116 million, which include approximately 57 million Classmates domestic accounts, 28 million StayFriends and Trombi international accounts, 22 million schoolFeed accounts, now that includes legacy domestic accounts net of the estimated number of accounts on schoolFeed who are also Classmates domestic accounts, as well as international accounts. So it's sort of been deduped, and then 9 million MyPoints accounts. So if you add up the 57 million in Classmates, 28 million on StayFriends and Trombi, 22 million non-duplicated on schoolFeed and 9 million on MyPoints, you get to the 116 million registered accounts. Now that huge member base is a fertile source of potential future revenue generation. And we believe that this represents one of United Online's most valuable assets. There are not many companies with 116 million registered accounts.

Now let's wrap up with a review of our Communications segment, consisting principally of our NetZero and Juno brands. I'm also going to give you an update on the NetZero 4G mobile broadband service. So in the third quarter of 2012, the Communications segment's adjusted OIBDA margin was 36.9%, which was up from 33.6% last quarter and down from the 50.8% in the year-ago quarter. Now bear in mind, the 4G mobile broadband service had a negative impact on segment-adjusted OIBDA of about $2.7 million in the third quarter of 2012, which is due to our investment in the launch of this business. So absent the investment in the 4G, our segment-adjusted OIBDA margin would have exceeded 50%.

We're still in the early stages of the launch, and we continue to make progress. As mentioned on the last earnings call, our focus continues to be on executing our testing plan of various marketing approaches while we build our customer base. So at the launch in Q1, early Q2, we used traditional television spots and direct-mail marketing to targeted zip codes. Now this proved to be very successful in terms of generating traffic to our website and our 1 (800) NetZero phone number. But our conversion rates were below what we needed them to be to achieve our ROI goals. We talked about this last quarter.

Our research indicated that consumers were balking at the cost of the devices, which was $49.95 for the stick, and $99.95 for the MiFi hotspot. So even though those are attractive prices for those devices competitively, the consumers were still balking at having to buy devices for those kinds of prices. And this caused low conversion rates, which then gave us an unacceptable subscriber acquisition cost. So in response to that, we moved into marketing test Phase II, which shifted our focus to direct response television, or DR TV, which featured a very specific message and an offer. And a promotional price test that reduced the price of the stick and the MiFi hotspot by 50% to anyone who signed up for one of our free or paid plans. The results were a dramatic increase in sign-up conversion rates, while still maintaining our high traffic rates to the site and to the 800 number in response to the DIRECTV -- direct response TV ads. The good news was that this test Phase II yielded a highly efficient customer acquisition cost that was virtually 50% of the costs we were paying in test Phase I.

We're about to move into test Phase 3 later this week, where we plan to test promotional pricing only on those people who are signing up for one of the paid plans. Test Phase II gave promotional pricing on the devices to anyone, free or paid.

At the end of 2012, as we've stated earlier, we will review the results of these 3 test phases in order to determine the most effective technique to use in our 2013 marketing plan. We will share that information with you on the next earnings call.

Finally, I want to give you an update on the spinoff. We've made and continue to make great progress in our plan to spinoff FTD as a separate, independent publicly-traded company. It remains our goal to complete the spinoff by August of 2013, as we said previously. And our targeted timeframe is the first half of 2013, which we've also previously stated. We are also continuing to review strategic alternatives for our other businesses as well. We believe the spinoff will highlight FTD as a focused, growth-oriented business that should demand a strong valuation.

We believe United Online's other businesses, with the approximately 116 million registered accounts, should also stand out as valuable assets, given their profitability and the strategies that we have in place and which we've articulated to you. In addition, as we mentioned last quarter, we're seeking to further enhance shareholder value through the monetization of our extensive portfolio of patents and patent apps. And we've retained the services of Evercore Partners as the company's financial adviser with regard to those monetization efforts of our patent portfolios. They have great experience and success in that area.

With that, I'm going to turn the presentation over to our Executive VP and CFO, Neil Edwards. He'll take you through a review of our financial results and provide guidance. Neil?

Neil P. Edwards

Thank you, Mark. Let me begin with highlights of the third quarter and then I'll provide the guidance going forward. All comparisons represent year-over-year quarterly comparisons, unless I clarify otherwise. And I'll start with the consolidated financial highlights.

Consolidated revenues were $177.8 million, a 3% decrease and at the high end of our guidance range. Adjusting for the unfavorable impact of foreign currency exchange rates, consolidated revenues in the third quarter of 2012 decreased by 2%. Consolidated adjusted OIBDA was $26.8 million, also approached the high end of our guidance range and was down 33% year-over-year. Adjusting for the unfavorable impact of foreign currency exchange rates, consolidated adjusted OIBDA in the third quarter of 2012 decreased by 31%.

Diluted net income per common share was $0.05 and adjusted diluted net income per common share was $0.14, declines of 62% and 39%, respectively. Cash flows from operating activities and free cash flow for the quarter were $10.6 million and $7.9 million, respectively, each representing a decrease of 51%. These decreases were primarily due to lower adjusted OIBDA.

Cash and cash equivalents at September 30, 2012 were $108.1 million, compared to $111.4 million at June 30, 2012. Net debt at September 30, 2012, was $135.8 million compared to $132.4 million at June 30, 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 $116.4 million, an increase of 7%, driven by consumer order growth, both domestically and internationally. Adjusting for the unfavorable impact of foreign currency exchange rates, segment revenues in the third quarter of 2012 increased by 8%.

Segment adjusted OIBDA was $15.2 million, a decrease of 8%. While our segment revenues grew 7% year-over-year, adjusted OIBDA declined, primarily due to an increase in marketing expenses, including investments in promotions and programs designed to drive order and revenue growth. In addition, higher discounts on consumer orders contributed to the decline. Adjusted OIBDA margin was 13.1% compared to 15.3% in the year-ago quarter.

In terms of key metrics, consumer orders were $1.2 million, up 12%. This was driven by the increased marketing spend and in part by the consumer orders from the Flying Flowers and Flowers Direct businesses in the U.K., which were acquired in the second quarter of 2012. Average order value or AOV was $61.06, down 4% from $63.46. Adjusting for the unfavorable impact of foreign currency exchange rates, AOV decreased 3%. AOV declined primarily as a result of consumer orders from the recently acquired Flying Flowers and Flowers Direct businesses, which have lower AOVs.

Now on to Content & Media segment. Segment revenues were $36.6 million, a decrease of 17%. Adjusting for the unfavorable impact of foreign currency exchange rates, segment revenues decreased 15%. Segment-adjusted OIBDA was $7.3 million, a decrease of 44%. Adjusting for the unfavorable impact of foreign currency exchange rates, segment-adjusted OIBDA decreased 40%.

In terms of key metrics, pay accounts decreased by a net 133,000 in the third quarter compared to a net decrease of 173,000 in the same quarter of 2012 and a net decrease of 227,000 in the year-ago quarter. The net decline in pay accounts improved 55% from a high of 296,000 in the fourth quarter of 2011.

Active accounts were 10.9 million, an increase of 6% sequentially and a decrease of 8% year-over-year. Churn was 3.4%, a decrease of 20 basis points sequentially and a decrease of 50 basis points year-over-year. ARPU was $2.50, flat sequentially and down 5% year-over-year. Adjusting for the unfavorable impact of foreign currency exchange rates, ARPU was down 1%.

Now on to the Communications segment. Segment revenues were $25.2 million, a decrease of 17%. Segment-adjusted OIBDA was $9.3 million, a decrease of 39% year-over-year with a 3% increase sequentially. Investment in our NetZero 4G mobile broadband business resulted in a negative adjusted OIBDA impact of approximately $2.7 million during the third quarter of 2012. Adjusted OIBDA margin was 36.9% compared to 50.8% in the 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 34,000 in the third quarter versus a net decrease of 38,000 in the second quarter of 2012 and a net decrease of 51,000 in the year-ago quarter. ARPU was $8.97, unchanged from the second quarter of 2012 and down from $9.14 in the year-ago quarter. Churn was 3.1%, down 10 basis points from the second quarter of 2012 and down 30 basis points from the year-ago quarter.

Unallocated corporate expenses. For the quarter ended September 30, 2012, the impact of unallocated corporate expenses on consolidated adjusted OIBDA was $5.1 million, compared to $5.3 million in the year-ago quarter.

Now on to the business outlook and our guidance on the fourth quarter. Consolidated revenues are estimated in the range of $218 million to $224 million. Consolidated adjusted OIBDA is estimated in the range of $29 million to $34 million. Net interest expense is estimated at $3.1 million. Amortization of intangible assets is estimated at $8.3 million. Weighted average diluted common shares are estimated to be 91.1 million on a GAAP basis and 91.3 million on an adjusted basis.

For the full year 2012, our annual effective income tax rate is estimated to be 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 $20 million to $23 million. As Mark mentioned in his comments, we are moving into marketing test Phase III of our NetZero 4G mobile broadband initiative in the Communications segment, and we will continue to incur significantly higher marketing and other expenses than the revenues currently generated. We believe the adjusted OIBDA loss from our NetZero 4G mobile broadband initiative will reduce Communications segment adjusted OIBDA by approximately $4 million to $5 million in the fourth quarter of 2012 and by approximately $13 million to $14 million for the full year.

That concludes my prepared remarks, so back to you Mark.

Mark R. Goldston

Thank you, Neil. Dave, if you can work with the operator to see if we can process some Q&A?

Erik Randerson

Yes, let's go ahead and start with our first question.

Question-and-Answer Session

Operator

Our first question comes from Daniel Kurnos.

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

Just, Mark, big question, the big picture question for you, I know that you mentioned the macro environment is still challenging, but we have seen some positive trends in terms of consumer spend and then consumer confidence, and it does look like the number of retail florists are stabilizing, so just your thoughts going forward here on the FTD business?

Mark R. Goldston

Nice to hear you, buddy. I would say we're feeling really good about the FTD business. I mean, we all know how this economy is. And in spite of that, it's -- FTD is doing really well, both here and internationally. With the kind of the order growth that we've gotten is impressive, as you can see, it's still a really profitable business. We've gotten some really interesting new initiatives that we put out there, that have been very successful. New promotional ideas. We've gotten a great response from the florist network on the increased focus we've had on fortifying the florist network, our partners seem to be exceptionally happy, not only with our breadth of product offering, but quite frankly, with our delivery standards, our customer service levels, et cetera. So, I mean, that business, we're now 4 years plus into it, and I think it's hitting on all cylinders. It's doing really, really well. So we feel good about it. I mean, would we love the economy here and in Europe to be better? Of course, we would. But we're not sitting around waiting for that to happen, we can only imagine how this business would be doing if we had a good consumer market. But it's hard to sneeze at the kind of impressive growth rates we're getting on consumer orders and expansion in that business. So I feel really good about it, Dan.

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

So just digging a little bit further into the consumer orders number. I was just wondering and maybe this is a question for Neil as well, just -- if you were to strip out your recent investments, what would revenue growth look like, both in this quarter and maybe the impact on your guidance?

Mark R. Goldston

Recent investments, meaning some of the marketing spend, you mean?

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

The Flying Brands, and the benefits you've had in some of the marketing expenses, yes, [indiscernible] I mean at growth rate.[ph]

Mark R. Goldston

If you took out the Flying Brands, we obviously, we would still have ordered -- a good order growth. We're not going to break that up specifically, because we don't intend to do it going forward. But the growth was not solely at all because of the Flying Brands. That certainly had part of it, but it's a relatively small company, as you know. So there was organic growth within FTD worldwide, even absent the Flying Brands business.

Mark R. Goldston

Both domestically and internationally.

Mark R. Goldston

Basically every one of our divisions -- our businesses within FTD, which you would define consumer, the florist part, international, [indiscernible] they all grew.

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

Okay. And I mean, I guess I'll follow-up a little bit with you on that later. Just on the EBITDA part or the adjusted OIBDA part, as you guys put it. I would just ask, then, it looks like you have to deleverage in this quarter from the investments, but your guidance is still pretty strong on the bottom line even though you're investing in NetZero. So it looks like you're probably going to get some pretty strong leverage going into Q4. Is that the way to think about it, and then are we sort of past the initial investment phase here and we should continue to see maybe modest margin expansion going forward?

Mark R. Goldston

You want to take that, Neil?

Neil P. Edwards

I think, we're going to continue to make some investments on the sales and marketing side going into Q4. And then obviously, you'll see the results of Q4 when we report our year-end numbers. And then, we'll see what the guidance is beyond that going forward.

Mark R. Goldston

The good thing is, you've got to remember, that Q4, certainly from my point, that's always been its best quarter, and also for FTD. Yet Q3 is a quarter with no holidays, which makes these performance numbers frankly even more impressive, considering you had no benefit of a holiday to help you. This was organic running of the business, and then Flying Brands. But in the fourth quarter, obviously, you've got holidays in there. You've got Halloween, you've got Thanksgiving, you got the Christmas holidays, et cetera, and then some MyPoints benefits from that as with FTD.

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

Okay. And then just switching quickly to the Content & Media segment, you did mention some Yearbook enhancements beyond the inventory that you added. Maybe give us more color there, and if you are seeing improvements to the metrics, like site traffic and time on-site?

Mark R. Goldston

Basically, what's happening is, we've realized the features that we can add onto this Yearbook initiative is really quite a broad set. And what we're attempting to do now is make it so that people who sign up for schoolFeed and Classmates can actually go into these yearbooks and send out these pictures and tags to people outside of the family -- outside of the member base to try to enlist people. And we're working on some techniques right now, which we hope will launch either this quarter or soon thereafter, where we can actually excerpt portions of the Yearbook to the member base without them having to go flip through all 200 pages. So we have the entire yearbook digitized. But some people may be a little reticent to flip through 200 pages of the yearbook, so we're working on techniques, which, for lack of a better term, I would say it's like what an iPod shuffle do, instead of picking specific music, you can get random shuffling of music. So we are looking at ways to prevent -- to present random shuffle content that we can present to our members to get them engaged, teased, if you will, as to what else lies in the tremendous content we have to get them in. So it's really pretty fascinating and I think it's going to be something that would be quite a positive to the people from the schoolFeed member base as well. Because what schoolFeed is fabulous at doing is getting existing graphic content, largely from people's Facebook pages. But what we have with the yearbooks, obviously, is the historical content for those people. So the merging of the current content, largely through Facebook, with the historical content we've got from 160,000 yearbooks which cover tens of millions of people, can create a very compelling confluence of visual content. So got a lot of ideas and we continue to move down the pike on that. And as I said in my speech, Dan, we are also looking at additional monetization techniques beyond just the classic Classmates gold membership, for monetizing both the schoolFeed part of the house and Classmates part of the house. When you've got this many people, I mean, you're talking about 116 million accounts. If you take MyPoints out, you're talking about 107 million accounts, that's a lot of people. And our ability to find ways to monetize those people beyond just a paid subscription model is a tremendous opportunity for us.

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

So thanks for giving me a quick segue into my final question which if you could just give us any update on improvements in mobile monetization, or if we're still really early stages of that game?

Mark R. Goldston

We are still early stages, but I will tell you that whereas as a year ago, our mobile initiative was de minimis in the Content & Media segment ended at TV. Now they both have significant mobile initiatives. We don't have one yet on schoolFeed to speak of, but we definitely do at Classmates and it's getting engaged and we do at FTD and we do at MyPoints. So we are moving much more into the mobile arena as you know that's where the world is going, and we are definitely coming along with it.

Operator

We'll go next to George Sutton.

Jason Kreyer - Craig-Hallum Capital Group LLC, Research Division

Jason on for George. Say, Mark, in the prepared remarks you seem to suggest that on the FTD side, you're seeing a little bit more competition. Can you elaborate on that at all?

Mark R. Goldston

Yes, I mean, certainly I don't think this is something that just happened in the last 90 days, but we have seen an increase in competitive spending in the category. And this pretty much started at valve [ph] , it really picked up at Mother's Day, I mean, we saw a tremendous amount of increases in direct response television, in promotional activities, et cetera, I don't know if it was in response to those people having less sales than they thought they are going to have. I don't know what the reasons was, some of them kind of defy economic logic, at least as we define it. But then again, FTD has always been far and away the most profitable company in that segment. So our benchmark, in terms of what we consider to be acceptable profitability and what they may is different. But we have seen an increase in that. One and 2, we've seen the, sort of the advent of group buying in a category where it didn't exist 2 years ago, and it's now several hundred thousand orders a year or more. And as you know, group buying is largely discounted merchandise. And that's just become part of the vernacular. And there's many, many people who do it, people like Groupon, LivingSocial, Amazon, you know the list. So I just think the category has become more competitive. People have become more aggressive with the way they're promoting and discounting. We've added some of that to our arsenal, as you can see, while maintaining our vigilance against superior profitability. But having said that, and I don't mean this to be anything other than the joke I am attempting to say, is that we don't have a head of sales prevention, meaning we've got to respond to the market, we can't just sit there and say, we will not be promotional in a highly promotional market. That being said, we can be prudent about it, pick our spots and do it smartly. And that's what we've been doing. And that's why in the face of the bad economy and increased competition, FTD continues to put up impressive order growth and profitability, so we're actually very proud of that.

Jason Kreyer - Craig-Hallum Capital Group LLC, Research Division

Okay. That's very helpful. And then any comments all on how the conversion rates are on the Content & Media? Or I guess, specifically on Classmates now that you have schoolFeed integrated?

Mark R. Goldston

That's a very good question. We didn't even attempt to start integration, one until August 26, and that was sort of in the very early post-data integration. So we really have only been doing it in earnest or -- probably a couple of weeks with any kind of scale, so we just recently went to the full schoolFeed member base. Back in the early phase, we were just doing new signups. And so we're still figuring it out. Because you know what happens is, or maybe you don't know, but if you are a Classmates member, you would get an email, for example, normally that would say, Mark, 4 new people signed up for your class, or 4 new people posted new content or whatever the case may be. And the way the Classmates, flywheel as we call it, works is you will then respond to that email and say, "Oh, I wonder who joined my class," or, "I wonder who posted a new picture." And you'd come back to the site, you look at it, and if you're paid member, you see it right away. If you're free member, you may be encouraged to become a paid member to find out who's checked you out, who's left you messages, et cetera. With schoolFeed, because there's so many members, we're basically dumping 100-plus new people or 200-plus new people into a particular high school at one point versus the couple a day that we would normally get organically. And so at some level, it's a little overwhelming to a Classmates member to get an announcement that says, Mark, 145 new people showed up yesterday, and that you're just going to go "I'll go immediately peruse 145 profiles." And so, we are still figuring out the right way to meter the transition of the schoolFeed existing member base into the Classmates' base, so that the Classmates member base can digest it and respond to it versus just dumping everybody in and hoping for the best, that makes sense. And so we're trying not to jam too much into the top of a funnel that has a relatively fixed aperture at the bottom. So that's a work in process, and the folks at schoolFeed and at Classmates are working great together, and we're all really excited about the number of people we've got and we are going to figure it out.

Jason Kreyer - Craig-Hallum Capital Group LLC, Research Division

Okay. And then, just one last question here. You've talked a couple of times now about additional monetization strategies in Content & Media, can you give us anymore on that?

Mark R. Goldston

Well, what I can tell you is, when you sit down and you look at 116 million members, registered members. And you look at that in the universe of everybody in the Internet, you are in rarefied air with that number of members. And by the way, most of whom are, call it people who are 28, 30-plus. So we look at our business model and say, it has always been -- we're going to bring in free members and we'd do some very modest level of advertising monetization against those people, not enough to make that your entire business. That's frosting on the cake. But the cake has been the conversion of those people to paid member status. And if you look at our number of paid subscribers, while it is impressive in the absolute -- while the revenue's impressive in the absolute, as a percentage of total, 90%-plus of all the people we have are not paid subscribers. And so we look at this and say, if we were starting from scratch, and we had 116 million adults with credit cards in their wallets and high purchase indices across multiple categories, what could you or would you do to make their experience richer and drive them to monetize? And so we're looking at a whole variety of -- I mean, I'll give you an example, not that we're saying we're going into this, but if you'd consider the people out there who are spending $50, $60, $70, $80 to acquire a customer like people in the ancestry business or people in the dating category, where they may be spending $50 to $80 to acquire an adult customer. And here, we have 116 million of them. So we're trying to find different ways to engage these people where they feel the need to come back more often and spend some money beyond just becoming a paid subscriber. And that's a pretty broad berth, we got a lot of folks working on it, and we're going to figure it out. It's a nice -- I mean you think about it, if you were a private company and you were in a -- going into the venture capital community and said, I've got this compelling business that's got 116 million registered adults, how valuable a platform that is. And so we're looking at it as a platform, it's got a core asset, but what else can we do within that? I mean, it's a fun project.

Jason Kreyer - Craig-Hallum Capital Group LLC, Research Division

We will look forward to hearing more on that.

Operator

We'll go next to Mike Crawford.

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

Maybe we could turn the line of questioning to the 4G mobile marketing. So did you notice much of a distinct change in response when you started offering the half-off on the hardware, and was that before or after FreedomPop launched giving hardware away for free, and did you see any impact once that happened?

Mark R. Goldston

First of all, we saw a dramatic improvement, dramatic, when we announced this. So let me give you a little bit background so you understand why. It was always part of our plan to do, as we said, 3 phases of marketing testing, always. Our marketing that we did at launch, which was largely television and some direct mail, generated between, I think, 2x and 3x the response that we thought we would get. So the marketing was hugely successful in generating people to our website and to our 800 NetZero number, way beyond what we thought it would do. So that's the good news. The not-so-good news, because I don't like the word bad, the not-so-good news was when they were then presented with the fact that, oh, you mean I have to buy a device to make the 4G work? They were like, well, I don't want to buy a device. Well, how did you think you are going to get 4G broadband? Oh, I don't know, but I'm happy to pay the monthly fee, but I don't want to buy a device. So without a device, it doesn't work. Now our device prices were very competitive and below what the competitive device prices were, which by the way is probably why there's only 7 million people in America in the 4G mobile broadband market, because device prices are high, and most of their monthly fees are high. We had attractive device prices and low monthly fees, and we still got not good conversion. So we said, Phase II was, what if we cut the price of the devices in half? And what would happen to the traffic, a, and, b, what would happen to conversion and what is your hurdle rate whereby you have to get this many more people to sign up to recover the cut in cost. This has 0 to do what FreedomPop, FreedomPop's a small company, they sell a device, I think, that clips on an iPhone only, it's completely different. We're selling an agnostic device that works with anything you have, a tablet, a computer, whatever, they've got a very specific device, I think which clips on to a phone, it's completely different. So we have nothing to do with what they're doing, they've got their own plan, bless them, I -- maybe they'll figure it out, maybe they won't. We always said, we got to find out if the device price is the problem. So we cut the device price in half, and we saw a skyrocket in our conversion rates, virtually immediately. So the good news for us, we're still generating great traffic and now we've got higher conversion. So now we're offering the half-priced device to people who signed for either the free or to pay programs. The next test phase was to only offer that 50% off the device price to people who signed up for a pay program and not offer it to the free member and see what that does to subscriber signers. So we actually have a fourth phase we may actually squeeze in the last 3 weeks of the year, which as yet another promotion. But I will tell you this, our customer acquisition cost in Phase I was unacceptable. We weren't signing up enough people, and the customer acquisition cost was too high. And if that was what the business was going to be, that was not going to be appealing to us. And Mike, you know how vigilant we are about things like ROI. We had a hurdle rate for Phase II. We have exceeded the hurdle rate in a positive way, meaning our customer acquisition cost in Phase II was virtually 1/2 of what it was in Phase I, and well within our acceptable ROI range. Now we're going to see what it does in Phase III, and then we have this stub Phase IV. So by the time we get to the next earnings call, we will have our 2013 plan put to bed, and we will have determined what direction we're pursuing of all these things we've tested. That's it.

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

So to get back to the first part of my question is, when exactly did that Phase II start, when you started offering the half-off?

Mark R. Goldston

I think it started about, I want to say 6 weeks ago, maybe 6, 8 weeks ago. And then the next phase --

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

Right before the end of the quarter?

Mark R. Goldston

Yes. And then the next -- so basically, the product came out March 19, they did the first phase was, let's call it, April through August. And then early September, we started this Phase II, which is a 50% off. And this week, we're starting the 50% off only to people who sign up for pay. And then possibly at the very end of December, we're going to try the fourth phase, and then we'll be done, and we'll know exactly what works and what the numbers are going to look like.

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

And the products revenues in the Communications segment were down from the June quarter, but that wasn't -- it sounds like from, so much from discounting since you only at the end of the quarter, I'm sure that's some effect if in the last few weeks of the quarter, but that wouldn't be the primary reason those were down?

Neil P. Edwards

It's down, Mike, because there is a certain amount of revenue in that period, which is at the 50% discount.

Mark R. Goldston

Yes. We had pretty much on a month -- Mike, think about it like this, we're about a month, I think, and I get -- I didn't think it is, we're about a month of the 50% cash in the quarter. That being said, virtually the date it started, Mike, when we were getting 2x to 3x the sign-ups that we were getting in Phase I. So even though there was only one month of the quarter where this was involved, because you were getting 2 to 3x the sign-ups, your product revenue impact was significant because it was against a group of people that in one month, you signed up pretty much what you signed up in 2.5 to 3 months on the former plan.

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

Okay. And then on FTD, the consumer order numbers was up nicely, the AOV was down fairly significantly, year-over-year. Is that a trend that'll be difficult to reverse on a year-over-year basis in 2013, given the increased competitiveness from Liberty Media and 1 800?

Mark R. Goldston

I only think -- I think if you really -- if you dig into the AOV, I mean, part of the reason, so it went down, call it, $2.35, $2.40. So from $63.46 or whatever it was last year, to $61.06 this year, I think that's what the number was off the top of my head. So if you think about it, that $2 in change drop in AOV, part of that was the recently acquired Flying Flowers business and Flowers Direct, which was not there, obviously last year. So that's #1. And Flying Flowers is a direct shift box business which sells at a lower price. It sells at about GBP 10 to GBP 15 cheaper than a typical interfloral would be, one, 2 you had foreign exchange in there, which obviously is going to affect you. And then, 3, you had some of the group buying promotion that we did in the quarter with Groupon, which would not have been there last year. So that's really what affected the AOV. So on a go-forward basis, I mean, we are getting obviously, incremental volume out of Flying Brands, so we're happy about that. Group buying will probably continue to be there. We don't know what's going to happen with exchange rates, but we've got other things that we have planned in the holiday periods, which can help to offset that. Remember in Q3, you had no benefit of holidays, we had none of -- some of that beautiful, high-priced stuff that people buy in holiday periods. So you pretty much have the organic walk-in traffic, which is usually not a quarter where you're going to get a lot of fortification of AOV, compounded with a year-over-year comparison that's got a lower-priced Flying Flowers in it. That wasn't there a year ago, and FX and group buying, which you didn't have a year ago, Shake well that's where you get your jailhouse[ph] in $0.30 and change, don't think that necessarily is indicative of what happens going forward.

Neil P. Edwards

And, Mike, it's Neil. Just to put some numbers around it, of the 4% decline, 1% of it was FX and 2% of it was the U.K. acquisitions, so the rest of the business is combined on filling [ph] the 1%.

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

Okay. And then, final question is on FTD. So it sounds like you're really targeting Q2 to complete that spend, maybe it goes into Q3. It likely would not happen as early as Q1, are you going -- do you anticipate being able to provide us with some more color on potential capital structure of that business at your next conference call or otherwise?

Mark R. Goldston

I mean, that would be a hope. But then obviously, we'll be filing a Form-10 as well which is at -- in terms of the capital structure, specifically what are you asking?

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

Well, if you have the nonrecourse debt, not to sub now, you -- clearly, give them some cash for working capital purposes, but just to have a better sense of what the 2 companies might look like on a stand-alone basis.

Mark R. Goldston

Yes, I mean, we obviously -- we will give you more color on that. One thing I can give you, just in case you want to start doing some of your own thought work is, the cash that is resident in FTD by and large, is embargoed to FTD. I mean, you know we have that $15 million a year, that we are allowed, our credit agreement upstream to the parent. But absent that, all of that cash, the tens of millions of dollars that is at FTD is at FTD, and cannot be moved out of it. That is their cash, so that's #1. Number 2, as you said, the debt, which we have, is basically FTD debt, and it is nonrecourse to the parent. So when FTD is spun off, it will have that debt or debt, but hopefully that debt on it with the associated costs that are built into it right now. So in terms of fundamental changes, might there would be some pro rata allocation or corporate cash et cetera, we'll deal with all of that. But if you want to understand the fundamental construct of what that business could and would look like, just understand it's a business that currently has sort of non-movable tens of millions of dollars of cash, and a business that's got nonrecourse debt on it, and it's carrying it. And so, that is the fundamental construct to think about going forward. And we will give you specific color as we move closer to it. But you shouldn't be that surprised by where we are and where we're going.

Neil P. Edwards

Mike, at the end of September, FTD had just under $50 million of cash on its balance sheet. And as Mark said, there's restrictions on what we can upstream from that.

Mark R. Goldston

Operator, that -- I'm seeing we have run out of time. So I want to thank everyone for attending today. As always, if you have any follow-up questions, please direct them either to myself or Neil, but we'd prefer you to go in through Dave Bigelow, our VP of Investor Relations, and we'd be happy you -- get back to you as soon as we can. So thank you, everybody, and have a great day.

Operator

This does conclude today's program, we do appreciate your participation. You may disconnect at anytime and have a great day.

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