United Online Inc. (NASDAQ:UNTD) Q4 2008 Earnings Call February 19, 2009 5:00 PM ET
Mark Goldston - Chairman, President, and CEO
Neil Edwards - acting CFO (for Scott Ray - CFO)
Erik Randerson - Vice President, Investor Relations
Youssef Squali - Jefferies & Co.
Mike Crawford - Reilly and Co.
James Cakmak - Sidoti
Yun Kim - Pacific Growth Equities
Kevin Copeland (in for Jim Friedland) - Cowen & Co.
Tom Kerr - Reed Conner
Ali Mogharabi - B. Riley & Co.
Sandeep - Jefferies & Co.
Lance Ettus - Mortar Rock Capital Management
Ladies and gentlemen, thank you very much for standing by and welcome to the United Online fourth quarter year end conference call. Today's conference is being recorded and at this time I would like to turn things over to Erik Randerson. Please go ahead, sir.
Thank you. Hello and welcome to the United Online's conference call to discuss our financial results for the fourth quarter and year ended December 31, 2008. With me today is Mark Goldston, our Chairman, President and Chief Executive Officer; and Neil Edwards, our acting Chief Financial Officer. Also joining today is Becky Sheehan, Executive Vice President and CFO of our FTD subsidiary.
In addition, on today’s call and on the accompanying slides that are available within the Investor Relations section of our website, we will refer to adjusted operating income before depreciation and amortization or OIBIDA, segment adjusted OIBIDA, adjusted net income, adjusted net income per share, and free cash flow. Management believes that each of these measures are useful in evaluating the company's operating performance.
These measures are not determined in accordance with accounting principles generally accepted in US or GAAP and should be considered in addition to, not as a substitute for or superior to, financial measures determined in accordance with GAAP. Definitions of these non-GAAP financial measures are provided in today's press release and in the accompanying slides on our website along with reconciliations to the most comparable GAAP financial measures.
Before we get started, I also need to point out that the company does apply the safe harbor provisions as outlined in the press release to any forward-looking statements that may be made on this call. Statements regarding our current expectations about our future operations, financial conditions, performance, pay accounts, services, and the industry in which we operate are forward-looking statements that are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.
More information about potential risk factors that could affect the company's business and its financial results is included in today's press release under the caption Cautionary Information Regarding Forward-Looking Statements and in United Online's most recent filings with the Securities and Exchange Commission.
Projections provided by management in the press release and in today's call are based on information available to us at this time and management expects that internal projections and expectations may change over time; however, the company does not intend to revise or update this information and may not provide this type of information in the future.
Any persons replaying this broadcast after February 19 of 2009 should recognize that any non-historical information discussed in today's call might not be current or valid after this date, because the circumstances and assumptions underlying such information may have changed.
And with that, we're going to start out with a few comments from Mark and Neil, and then we're going to open it up for questions. So I'll now give the floor to our Chairman, President and Chief Executive Officer, Mark Goldston.
Thanks, Erik, and welcome everyone to the United Online’s earnings call for the fourth 2008 quarter and the full year ended December 31, 2008.
I’ll begin with a high level view of our operating highlights for the fourth quarter and then review the performance of our individual operating segments. Neil Edwards, our Chief Accounting Officer and now our acting CFO, will conclude our prepared remarks with a look at the numbers for the quarter and guidance going forward. Neil is assuming the responsibilities of Scott Ray, who’s taken a medical leave of absence for the next up to two months to recovery from major back surgery that he had earlier this week on Tuesday. We wish Scott a speedy recovery and we’re fortunate to have someone as talented as Neil, who spent almost ten years working with me at United Online, to step in for Scott while he is recuperating.
Before I get started, I'd like to mention a PowerPoint presentation that summarizes the fourth quarter and full year 2008 financial results and operating metrics and you can download a copy of this presentation on our internet homepage at www.unitedonline.com within the Investor Relation’s section right next to the earnings press release and I would encourage you to do so. It’s a very comprehensive looking company.
Let’s talk about the Q408 quarterly highlights. I’m really pleased with the fourth quarter performance that we achieved in a very much deteriorating economic environment in the U.S. and in Europe. United Online is clearly non immune from the economic uncertainty, but our results demonstrate that we managed our business very well relative to the economic environment and the competitive set in everyone of our operating segments.
There’s four key highlights I hope you’ll take away from this call today on our Q408 results. One, we delivered another record in the fourth quarter and in the full year 2008 for adjusted OIBIDA, excluding the FTD acquisition to give you a valid comparison. We’ve now achieved seven consecutive years on increased adjusted OIBIDA dating all the way back to 2001.
The strong operating executives on my leadership team deserve credit for their focus on achieving efficiencies throughout our businesses.
When comparing 2008 to 2007, our Classmates Media segment delivered a 790 basis point increase in adjusted OIBIDA margins while our communications segment delivered a 430 basis point increase in adjusted OIBIDA margins and this is in one of the worst economies in the last 50 years. As you know, it is very difficult to expand margins in a declining revenue business like dialup internet access, but we have managed to do so.
Number two, our Classmates Media business delivered another exceptional quarter further demonstrating the attractiveness of our subscription revenue model. We’ve heard quite a bit of skepticism over the years about our approach to monetization of social network through the use of paid subscriptions. In fact, many have suggested that we should focus more on advertising revenue. I’m glad we didn’t succumb to conventional wisdom, because our Classmates results seem to indicate that our subscription model has proven to be the right strategy in the current environment. While another well known household in online social networking, a company that focuses solely on advertising revenues, reported flat revenues in the fourth quarter, despite a significant growth in users. Our Classmate Media segment, which is driven by our social networking business, had its best fourth quarter ever in terms of revenue and profitability. During the seasonally slow fourth quarter, we added a fourth quarter record 232,000 pay accounts, which helped us cap a record year in 2008 in which we added 1.1 million pay accounts, the highest level in the history of Classmates.
Number three, while our FTD segments felt pressure on the top line, our operating discipline helped and held up well and we continue to execute on our key initiatives. It’s no secret that the consumer and retail business is across the board, we’re softer on the top line in Q4 than anyone had anticipated coming of the quarter. Notwithstanding, we achieved a 15.1% adjusted OIBIDA margins for the FTD segment of the quarter, which we’re really pleased with in light of the unanticipated drop in revenue.
We also significantly dialed up FTD’s pace of innovation with new marketing and branding campaigns in the quarter and I’ll talk about that in a minute.
Fourthly, I think our communication segment performed exceptionally well, particularly when you compare us to the competitive set who have publicly reported. In the fourth quarter, we lost only 86,000 subscribers. This represents our lowest subscriber decline in more than three years and importantly, we achieved an all time record low subscriber turn rate on our communications business of just 4.3%. These results indicate that our value priced services are well positioned in this current economic environment and once again the communication segment continues to deliver strong adjusted OIBIDA contributions that increased as a percentage of segment revenues in Q408 at 37.9% versus the Q407 margin of 37.2%.
I’d also ask you to compare our results with the competitors. I think you’ll note that our subscriber decline on a percentage basis is less than our competitors and in our financial results and operating efficiencies, they speak for themselves.
Now let’s look at our operating segments, and I want to talk first about Classmates Media, and then we’ll talk about it in more detail. The Classmates Media is comprised of the online social networking business and the online loyalty marketing business, which we market under the name MyPoints. Led by our flagship Classmates website here in the U.S. and our Stay Friends and Charm websites in Europe, our social networking delivered another stellar quarter. Segment pay accounts as of December 31, 2008 grew 35% versus December 31, 2007. What’s really important is that pay accounts increased by a net 232,000 for the Q408. This was the best all time performance in a fourth quarter in the 13 year history of Classmates.
We’ve long maintained the benefits of our online social networking business model with the majority of our revenues coming from modestly priced subscription fees with advertising revenue playing a smaller part of the overall revenue mix.
Many have stated repeatedly that we could not achieve and sustain the level of growth and profitability we’ve realized in an increasingly competitive free social networking world. The fact is we’ve had record paid subscriber growth in each of the past two years adding more than one million net new paid subscribers in each of the last two years, while dramatically increasing profitability.
We’d be happy to compare our results with a business model against the high profile social networking businesses, which rely exclusively on advertising and in this challenging environment to generate revenues and I’m sure you would see that the Classmate social networking business will clearly come on top in any comparative.
In fact, our international social networking business continues to be a catalyst and for the second year in a row they registered triple digit revenue growth in Q4 compared to Q407.
In recent quarters, we’ve had slightly increased marketing expenses overseas and they’ve met with great success. Our European leadership team has proven incredibly capable of delivering attractive returns on their member acquisition campaign. In December, we also launched the first mobile version of our Stay Friends social networking site, which many of our German subscribers have actually embraced in the early going.
So aside from continuing growth in pay accounts, there’s a lot to be encouraged about in our social networking business, especially in the underlying metrics that can help grow subscriber growth in future quarters.
First and foremost, remember that everyone of our social networking pay accounts initially signs up with us as a free account. We established a primary goal of entering 2008 of increasing the amount and frequency of website visits from three accounts, largely because free member visits are what we call prospects for pay account conversion and we’ve delivered strong results against this objective, which is best demonstrated by the consistent growth in Classmates Media active accounts throughout 2008. From 12.6 million in Q407 to a record high 16 million active accounts in the Q408. Not only do we attract more monthly visitors from our social networking numbers throughout all of 2008, but the frequency of website visits also increased across the board, both for free and pay members in U.S. and in Europe. In addition, our members are also creating an increasing amount of user generated content, which was our other critical goal for 2008.
Simply, if you look at it, photos, bios, message board posts, and other forms of user generated content create substantial interest and that’s what drives member activity.
So looking ahead, we’ve got an exciting set of website enhancements planned for 2009 and we believe will enable members to offer new forms of expression and create user generated content more easily than ever before.
We’ll continue to build around our brand equity in helping facilitate connections across time, satisfying members’ natural curiosity and interest about relationships that they’ve had from their past.
Now let me shift the discussion within Classmates Media to the other property, MyPoints. During the fourth quarter, we experienced our first year-over-year revenue decline at MyPoints since we acquired the company three years ago. MyPoints, based on advertising revenues, and there’s little debate that we’re in a tough advertising environment today, tougher than even three months ago. Many advertisers cut back their spending in the fourth quarter due to sharply curtailed marketing budgets and reduced expectations regarding the holiday season and a whole host of other factors. Fortunately, throughout 2008, we developed valid concerns about the direction of the advertising market in total and in particularly about what might happen to advertiser’s budgets in a deeper recession.
As a result, despite achieving solid revenue growth for the first three quarters in 2008, the MyPoints team deliberately underspent its 2008 operating expense budget by a considerable margin. Deferring filling most non-critical open recs for headcount and they became much more efficient in the marketing spend than member acquisition. These preventative actions underscore the focus on expense management to protect our bottom line, which is a hallmark of the United Online business.
I’m really glad we took these actions, because they helped us achieve record adjusted OIBIDA in the Classmates Media segment during Q4 and they provide a prudently lean operating expense structure entering 2009 in what is likely to remain a very challenging global advertising market.
During the fourth quarter, we promoted Matt Wisk for the role of President of MyPoints. For the previous three and a half years, Matt did a great job serving as my Chief Marketing Officer at United Online and during 2008, he assumed additional responsibility as co-head of the communication segment. Since he became the President of MyPoints, Matt has worked closely with Stephen McArthur, who he reports to as the President of Classmates Media segment to develop some great ideas for further enhancing the MyPoints value propositions for both consumers and advertiser.
One of the strategies that we expect Matt and his team to pursue further is to go beyond where we are and further expand the product offerings such as internet search, market research, and the gains that leverage the strong demand for the MyPoints currency, which is points, and this is across all of our active members.
Since these offerings aren’t directly reliant on advertising budgets, the revenues associated with these new initiatives actually increased at an attractive rate in the fourth quarter albeit off a small base.
Now let me shift to review of the communications segment, which is primarily comprised of our ISP brands, NetZero, and Juno. The segment again delivered strong results against our objective of managing this communications business for profitability and cash flow contribution. During the fourth quarter, I’m really proud to announce that we also achieved an all time record low monthly turn rate of 4.3% and our net pay subscriber loss was only 86,000 accounts. This was the best performance in net subscriber loss that we’ve achieved in more than three years and our turn rate was the lowest level we’ve achieved since the day we introduced pay internet access. My belief is that the dialup category might actually be helped by today’s weakened economic climate, because there’s a lot of evidence that consumers are trading down for lower price points. That’s exactly why I launched the new NetZero ad campaign in the fourth quarter to encourage customers who may be conserving cash to save $300 dollars a year by switching to dialup for their internet access needs. As I state in my television commercial, if every broadband household in America were to switch to NetZero for just $9.95 a month, the 56 million American households on broadband would save $16 billion dollars per year after taxes.
Our ad campaign lays out the cost savings of using our dialup internet service very clearly and asks the question as to whether the need for speed is greater than your need to save money? Which is a very pointed message in today’s troubled economy with unemployment at roughly 8% in the U.S. and at a 16-year high, the NetZero TV campaign is timely and has been really resonating with many Americans who are looking to save money any way they can.
Our analysis of the recent earnings report from our two largest dialup competitors leads me to believe that we are gaining market share as our year-over-year percentage decline rate in pay accounts during the 2008 fourth quarter was much lower than any of our competitors.
During the quarter, we promoted Rusty Taragan to the newly created role as President of the communications segment. For the previous eight years, he had served in several leadership roles at United Online, most recently as Executive Vice President of Operations and co-head of the communication segment with Matt Wisk.
Rusty is uniquely qualified for the role, considering that he previously maintained operating responsibility for most of the functional areas within the communications segment, including technology, operations, CRM, and market research. In these extremely challenging economic times, we’ve continued to post impressive results through the outstanding leadership that we’ve got in our operating units.
The fact that we were able to promote three separate individuals to the title of President within the past quarter alone speaks volumes to what we’ve been able to create in United Online. The promotion of Stephen McArthur, the President of Classmates Media, Matt Wisk, the President of MyPoints, and Rusty Taragan, the President of the Communications segment, are examples of how we groom and reward our executives who consistently deliver outstanding results.
Adding the highly talented Rob Apatoff to the mix of the President of FTD group gives United Online a deep and talented executive team and I am very proud of these individuals.
Now let me shift into a discussion of our FTD segment. You’ll note in our earnings release that we reported a non-cash impairment charge of $176.2 million dollars, primarily related to FTD, which we acquired in August 2008 for $754 million dollars. You’re seeing quite a large number of public companies incur non-cash impairment charges as a result of the deterioration of the macro economic environment. The determination of the impairment is based upon the amount by which the carrying value of the goodwill and certain intangible assets exceed their estimated fair market values.
As we reported in the press release, excluding the impact of foreign currency exchange, fourth quarter revenues for the FTD segment decreased 7% versus the Q407 results reported by FTD prior to the acquisition by United Online.
Revenues came in below our expectations due to the unprecedented economic climate, which as you know has impacted retailers in all industries. In such a competitive and difficult economic market, I’ve got to give credit to FTD’s President, Rob Apatoff, and the CFO Becky Sheehan and their team for their operating discipline. Despite considerable pressure on the top line from the stronger U.S. dollar and weaker consumer demand, we achieved an impressive adjusted OIBIDA margin on FTD of 15.1% during the fourth quarter. We were able to do this while building many of the programs you see today and those introduced in the coming months.
Having just experienced Valentine’s Day, I can confirm that the economic climate continues to deteriorate, but we’re continuing to experience pressures on the top line. While it’s difficult to control the top line in this environment, as we’ve done with all of our businesses at United Online for the past ten years, we intend to focus on expenses and profitability while building our brands and positioning ourselves for the future.
Despite the current environment, I’d like to point out a couple of points that lead me to be confident about the future prospects of the FTD business. First, we’ve got a world class brand in FTD and another world class brand in Interflora; however, it’s our belief that these brands have not been nurtured and we really intend to enhance these brands through a wide variety of marketing initiatives. For example, during Q408, we launched our first campaign to revitalize the FTD brand for consumers and florists across all channels. We brought back FTD’s signature bold black and gold colors, we contemporized the iconic mercury man logo in new dramatic ways across FTD’s advertising, packaging, promotions and in store fronts all across the world.
This new look is visible now on our new website at FTD.com and on our new floral packaging for those orders shipped directly to consumers by common carrier. In fact, the new packaging debuted in December of 2008 and was awarded the American package design award by Graphic Design USA. We also launched the first series of cross marketing initiatives designed to promote FTD’s products to the United Online members of Classmates, MyPoints, NetZero, and Juno.
Of the initiatives I’m most excited about, the one that launched in late fourth quarter bears some talking about. We unveiled a new merchandising strategy on the FTD website called the customer choice program, which dynamically displays the floral images and pricing information related to larger upgraded version of the FTD floral bouquets that you select.
While we’ve rolled the program out just to a limited number of our SKUs to date, the results have been very encouraging and I believe it’s an industry first.
Finally, we’ve made considerable progress towards increasing our level of support for the thousands of FTD and Interflora member florists who are the life blood of this business. We’ve created new vehicles to promote florist fulfilled products through direct mail, print advertising campaigns, and there will be more to come in the next several months for that florist community.
We also enhanced the FTD.com website to include very clear differentiation between florist fulfilled and direct ship items and we prominently feature the florist fulfilled products in the first set of offerings pictured on the site. There’s nothing like a beautifully arranged display of flowers delivered to your door by one of our tremendous FTD member florists.
One of the most exciting initiatives we’ve got planned in 2009 is our local district program. The new program will provide a variety of benefits to the thousands of FTD florist members and their geographic regions, including FTD support for local marketing, local branding, FTD sponsored educational programs, sharing best practices on design and technology, and FTD sponsored networking opportunities so that regional florists can speak to each other. This district program was actually started by FTD back in 1916 and it was eliminated when the coop model was disbanded several years ago and FTD became an operating company. Well Rob Apatoff and I are firmly committed to the florists and we want to bring back some of the most effective tools from the coop days into the new FTD by giving the member florist a platform and the ability to interact with each other and with FTD and that can only make their businesses stronger and certainly will make ours stronger over the long term.
Another unique aspect of FTD’s business model that I really want to point out is that in general, we don’t carry any customer consumer product inventory. That’s kind of unique in this industry. The majority of our product orders are hand delivered by florists with the balance fulfilled by other third parties. In fact, it’s really this predominantly inventory free business model that leverages work in capital and generates strong cash flow and that helps enhance our adjusted OIBIDA margins.
In summary, it’s a tough environment in the retail world; however, we believe that our brands, market initiatives, and disciplined operational and financial management will get us through these difficult times.
I’ve always believed that difficult times create opportunities and I believe that when the macro economic chaos subsides that FTD will emerge as an even stronger competitor in the massive consumer flower segment.
Now let me talk a little bit about guidance going forward. In this challenging economic environment, many companies are cutting back on the level of guidance they’re providing and in fact some companies are no longer giving guidance. So while our Classmates Media and communications businesses are easier to forecast, our FTD and MyPoints businesses have suffered some economic slowdown and a reduction in consumer spending; so therefore, we are also finding it challenging to look out 12 months and provide with confidence revenue and adjusted OIBIDA guidance.
In addition, we’ve had difficulty in forecasting FTD’s revenues even in the short term. So with that said, we’ve always done a good job in managing expenses and a great job at delivering on our OIBIDA guidance. So at this time, the only specific guidance that we’ll be providing is adjusted OIBIDA guidance for the first quarter of 2009; however, to give you some indication directionally to where we think our businesses are heading in the near term, certainly from a top line standpoint, I can state the following. In the first quarter, we expect a decline in FTD revenues in the low to mid teens without taking into account the clients associated with the change in the foreign currency exchange rate, principally the British pound.
The weaknesses of the pound of the dollar will have a significant impact on the translation of revenues and expenses compound into dollars. As such, as you take that into account, the year-over-year revenue decrease will be much greater. On the positive side, we also expect to see healthy growth in the revenues in our Classmates Media segment and we expect continue declines in our communications revenues, although at a lower dollar level than we experienced in 2008.
We hope this is helpful to you and as the economy stabilizes and hopefully recovers, we will be back to you in hopefully our ability to see beyond the next quarter will have improved, and at that point we would expect to provide investors with more forward-looking information.
With that, I’m pleased to turn the mike over to our acting Chief Financial Officer, Neil Edwards, who will take you through a review of our financial results. Neil?
Thank you, Mark. Let me first begin with a brief highlights of our fourth quarter and fiscal year and then I’ll get into the specifics of our operating segments and provide our guidance.
Please bear in mind that FTD’s results are included in our fourth quarter 2008 results for the entire quarter and in our full year 2008 results from August 26, 2008 we made the acquisition. Although they are not included in our 2007 results, I will compare some comparative data based on the [inaudible] results when I discuss FTD.
The consolidated revenues in the quarter, [inaudible] million, which was slightly below the low end of our guidance range, largely due to weaker consumer demand in the FTD segment. Excluding the FTD segment in comparison to the prior year, revenue for the quarter were $122.7 million, a decrease of 2%, representing the lowest year-over-year decrease in five quarters.
FTD represents a 52.2% in consolidated revenues, Classmates Media 24.4%, and communications 23.5%.
Our consolidated gross margin for the quarter was 58.9% down from 76.3% in the year ago quarter, due to FTD lower gross margin. Excluding the FTD segment of comparability in the prior year, gross margins increased by 240 basis points from the year ago quarter.
Consolidated adjusted OIBIDA was $65 million and [inaudible] in the fourth quarter and full year respectively, up 61% and 28% comparable period.
The fourth quarter included a $3.3 million net [inaudible] in the second month of the [inaudible]. Excluding these FTD segment comparable to the prior quarter, adjusted OIBIDA was a record $44.8 million in the fourth quarter and a record $153 million for the full year, up 11% and 9% respectively for the prior year period.
Again, the fourth quarter and full year included a $3.3 million [inaudible].
We recorded a non-cash impairment charge of approximately $176 million in the quarter. [inaudible] Net worth per share on a GAAP basis, which includes the impairment charges [inaudible] year-over-year quarter.
Consolidated free cash flow was $65 million, an increase of 95% over the prior year quarter. The Q408 included the FTD’s operating cash flow [inaudible].
For the full year, we generated $145 million in free cash flow, an increase of $36.9 million over the prior year.
With such strong cash flow, we remain confident that we will be pay our debt [inaudible] as well as pay dividends in 2009.
Now onto the FTD segment. I will review the fourth quarter revenue and key metrics of our FTD segment against the Q407 revenues metrics as reported by the previous [inaudible]. Segment revenues were $133.7 million, but declined 14%. Excluding any type of foreign exchange, the decrease would have been [inaudible]. Segment adjusted OIBIDA was $20.2 million in the quarter representing 15.1% of segment revenue.
In terms of key metrics, consumers orders totaled $1,467,000 in the quarter, a five percent decline and [inaudible].
The average order value was $58.90, down from $65.48 in the year ago quarter.
Now onto the Classmates Media segment, Classmate Media segment of revenues increased to a record $62.6 million in the quarter. This increase was principally attributable to growth in both services and advertising revenues of Classmates online, partially offset by year-over-year decline in revenues of MyPoints.
Segment gross margin was 81.1% in the quarter, up 390 basis points from the year ago quarter.
Segment adjusted OIBIDA increased 63% to a record $[inaudible] million, which included the $3.3 million net benefit. [inaudible]
Segment adjusted OIBIDA in the fourth quarter represented a record 35.2% of segment revenue, up from 25.3% in the year ago quarter. Excluding the [inaudible], segment adjusted OIBIDA represented 30% of revenue, up 470 basis points, year-over-year.
Segment pay accounts increased by $232,000 in the quarter. For the full year, segment pay accounts grew by a record $1.1 million or 35% to $4.3 million [inaudible].
Pay account churn was 4.4 % during the quarter, down 30 basis points from 4.7% in the year ago quarter and up 30 basis points from 4.1% in the third quarter.
Active accounts for the segment increased to a record [inaudible].
Now onto the communications segment. Communication segment revenues for the quarter was $60.1 million, a year-over-year decrease of 17%, primarily due to the [inaudible]. Segment gross margin was 76.2%, an increase of 50 basis points from the 75.7% in the year ago quarter.
Segment adjusted OIBIDA was $22.8 million, a decrease of 15% from the year ago quarter. Segment adjusted OIBIDA increased 37.9% up 70 basis points from 37.2% in the year ago quarter.
Segment pay accounts decreased by a net $86,000 during the quarter, our lowest quarterly decline in more than three years. Segment pay accounts totaled $1.7 million compared to $2.2 million on December 31, 2007.
Now to balance sheet and dividends. With respect to our balance sheet and dividends, our total cash and cash equivalent increased by $34.8 million in the quarter to $104.5 million at December 31, 2008. The increase was driven by strong cash flow from operations.
Total debt, net discount, increased by $9.6 million during the quarter to $413.5 million on December 31, 2008. The company paid $8.7 million in cash dividends in the quarter and that dividend represents an attractive yield of over 8.5% at today’s closing stock price. We paid $53.1 million in dividend royalties 2008 and has now returned over $200 million dollars to shareholders.
Now for the outlook, as Mark articulated, it’s currently very challenging and we decided that today we will only provide adjusted OIBIDA guidance for the quarter. Within the Classmates Media segment, experienced its lowest revenues of the year in the first quarter. On the other hand, Valentine’s Day in the U.S. and Mother’s Day in the U.K., first quarter revenues of [inaudible].
Q1 2009 net interest expense is estimated at $8.1 million and intangible assets is estimated at $8.7 million.
We are providing guidance for the [inaudible] capital expenditures in the range of $27 million to $33 million. Guidance for 2009 [inaudible] tax is in the range of $45 million to $55 million.
That concludes my prepared remarks. It’s back to you, Mark.
I just wanted to clarify one point. The FTD mid teens revenue decline I was referring to before the effective foreign exchange rate is a comparison of projected Q109 revenues to FTD’s revenues for Q108. So you can look at the press release and you’ll see that we provided revenue and some other key metrics for FTD going all the way back to December 31, 2007, which is well before our August 26, 2008 acquisition date. So I just wanted to make sure that I was crystal clear about that.
In closing, I just want to mention that United Online will be presenting at the Jeffries Internet Conference in New York next Wednesday, February 25, and then again at the Golden Sacs Internet & Tech Conference in San Francisco on Thursday, February 26.
So with that, operator, if you can put people into the question queue, we’d be happy to entertain some questions.
(Operator instructions) First up, we have a question from Youssef Squali at Jeffries.
Youssef Squali - Jefferies
Mark, can you go back and just basically restate what you said in terms of Q1 top line? I get the FTD part, but what did you say again about the healthy growth here. You said something to the effect although at a lower dollar level. Can you clarify that and the question, the second part, is to one part of the issue I guess is FTD now and the stock trading where it is. Is there any conversation within the board or at the board level about maybe considering a potential stock buyback versus the dividend, because clearly you’re not getting much credit for the dividend you’re doing and then using the excess cash to maybe retire more to that.
We expected to see healthy growth in revenues in the Classmates Media segment and we expected to experience continued decline in the communications revenue, but at a lower dollar level than we experienced in ’08. So communications is obviously doing better than it did in ’08 and Classmates Media continues to be a terrific business that’s performing at a terrific level. So what I wanted to be clear about is it’s a legacy URL that you know and investors know, which is the Classmates Media business, and communications business are two businesses that a) we are very familiar with. We’ve been running for many years and we think we have a very good handle on being able to project them even in tough economic times, because we’ve got this beautiful business model of subscription revenues, which allows us to project our business, which is why we like that business so much.
Clearly we do have some exposure to the advertising industry with MyPoints and some of our other ad sales, but that’s obviously a much smaller portion of our overall company.
So I just wanted to be clear in terms of the guidance that we were giving, because we’re not giving specific revenue guidance, but I wanted to provide you with some color so that you understand that while there are challenges in the retail community, strictly as relates to FTD, and there are challenges in the advertising market, the Classmates Media business is doing great and we expect it to continue to do so. The communications business had a quarter in the fourth quarter of ’08, it was the best quarter we had in many years, and we’re seeing the first quarter of 2009 to be a good quarter as well.
In terms of the stock price, I cannot figure out the stock price to save my life, especially considering that we’ve got in excess of $100 million in cash and if we look at the EBITDA of the company, but that said, I’m an operator not a stock picker and I’ll never understand the dynamics of why these things go up and down.
We as a dividend payers, certainly we have several investors who are dividend fund, who are invested in our stock because we have a dividend, and we believe that we’ve been able to be one of the few companies to spend our cash smartly on buying other companies and also remitting cash back to shareholders. We have historically bought back about $149 million dollars worth of stock. So we have done it in the past and it’s not suggesting it’s not something we would do in the future, but we’ve got several things that we can do with excess cash and by that I mean above and beyond the dividend payment. We can buy back debt. We can buy back stock. We can buy companies. And so, if you think about it, while buying back stock is certainly not an idea that’s off the table and one we consider all the time, rarely can any company because of its purchase volume limitation and your inability to hit the bid, you couldn’t go into the market, for example, and buy up $100 million dollars of your own stock in the available window. So people ask me that all the time, why wouldn’t you just take $100 million dollars and go buy back…because you couldn’t do it. So it sounds great, but in practical methods, you can’t accomplish that.
So buying back your stock is certainly something you keep on the table, but it’s not separate from the dividend. We have a great cash flow business that allows us to pay a 7 to 8% dividend, buy companies for cash, pay back debt, and also have enough money left over that if want to we could buy back stock.
Youssef Squali - Jefferies
On the FTD, so your margins were up nicely 15.1%. Considering the environment you’re looking at for the rest of the year, how much higher can those margins get?
No, Youssef, it’s a great question. We are an anomaly as you know in the internet floral business. Very few of those businesses, based on our analysis, are as profitable on a margin basis as FTD. A lot of it is because they resort to what I will call ridiculous tactics during the holiday seasons. We have competitors who offer free shipping and no service fees during the holidays. In the flower business, a big part of your profitability comes from what you get from service fees and shipping. So to offer on a continuous basis free shipping and no service fees is basically just like giving flowers away. You’ve known me for ten years, we will not be giving products away. We are in business to make money and to run a profitable business and if that means sacrificing some revenue that you wouldn’t make a dime on, then we will do that.
So the team at FTD is very much in line with that strategy. We’re going to approach this business as an innovator. We’re going to be smart. We’re going to do new creative things. We’re going to drive some price points higher with better products and we’re going to enhance the member florist, but our plan is not to go chase people down the hall of going product away at no margins.
So over time, I would hope to be able to improve the margins at FTD through a migration in price points through selling better products at higher price points with better margins and that’s our long-term goal.
Next up, we have a question from Mike Crawford – Reilly and Co.
Mike Crawford – Reilly and Co.
Could you remind us of your interest rate step-down provisions and any prepay penalties that might be associated with the Wells Fargo and Silicone Valley Bank debt?
Well basically we have the Wells Fargo debt I think is a non-call too, so there is a modest prepayment penalty in there, but it is a non-call too. Our interest rates are term loan A, term loan B, basically libel plus 350 or libor plus 450 and a libor floor of three. So very attractive rates, as you can see, and our total interest expense against those notes of approximately $28 million dollars.
Mike Crawford – Reilly and Co.
I thought you had some step-down provisions if you had less leverage?
Yes, we do. I don’t have them in front of me, but we do. I’d be happy if you want to, Mike, a separate phone call. I don’t have them sitting in front of me.
Mike Crawford – Reilly and Co.
On the communications side, yes, we’ve noticed your turn is superior to closest competitors, one of whom has now decided to compete a little on price in an attempt to attract some accounts. Have you noticed any change in the dynamics of your business in the past week or two that that strategy has been in place.
One, yes we seem to have the lowest turn rate in the category and that’s something we’re very proud of. Two, you know we broke a new ad campaign in the middle of December. The results of which are very strong. So we’re very pleased with where we are. The competitor that you’re referring to, which is Earthlink, and I believe they are running a promotion where they market I think for $7.95 and they call it some special choice.
Just to be clear, for the past three to four years, not only did People PC spend tend tens of millions of dollars on television, but you pick up a People PC CD and it’s selling you $5.47 a month ISP service for the first three months. They’ve been promoting it at a price point down in the mid $5 range for going on three years. So not really new news. They have memorialized a $7.50 price plan on our website, but all of their promotional materials and all the CDs they’ve been distributing for years are at a price point far below that.
So I would just point to how have we performed in the marketplace with our brand awareness and our marketing message against the People PC brand that’s been all over America in distribution for years for a price point below that which is advertised on their site.
So I don’t know if we’re going to do a promotion or a permanent thing. From a competitive standpoint, certainly you would rather not have somebody have a lower price point, but I couldn’t comment on the last week or two, because otherwise I would be giving guidance on that.
Mike Crawford – Reilly and Co.
When you decided to buy FTD, one thing you talked about was all the brainstorming you were doing to come up with new ways to promote the product. I didn’t hear too much about those efforts today. I was wondering if any of those ideas have resonated more than others?
I probably didn’t do a good enough job of presenting it, because I dedicated an entire section in the FTD portion of my speech. Talking about all the progress we’ve made on the new initiatives that we’ve launched. So what have we done? The thing that you’re referring to is the idea vault. The idea vault was something that we created before we bought FTD, which was about 165 page document, about 80 ideas, that have all been plucked out and will be launched over the three years.
The first of those was a new packaging that we launched into the marketplace in December of 2008 featuring the new black and gold mercury man packaging. I had mentioned that that packaging after just being in the market for a couple of weeks won the American Graphic Package Design award, very impressive. We also created a program called the customer choice program, which is good better best, which I believe is an industry first and allows people to pick a bouquet and then decide if they’d like more stem. So if you like a dozen, would you like two dozen, would you like three dozen, for example, and allows you to up-charge that.
We’ve worked on numerous new graphic programs, both for the member florist community and in general advertising. We’ve launched our first new outdoor advertising campaign, which features billboards, taxi cabs, with a modified version of a stylized, I mean I could go and on. These things are all coming out literally on a weekly basis.
They started somewhere around the middle of December. We slowed a little bit down right before Valentine’s Day, a very busy period. Between now and the end of Mother’s Day, you’re going to see a lot of marketing activity coming out.
We’re cross promoting FTD on Classmates.com. It is all over the website. It’s been on the home page of NetZero a great portion of that quarter and in MyPoints every single person who redeems a MyPoints gift card is getting a free $15 gift card to FTD.
So these are long-term benefit programs. This is not an ideal climate. It’s like value in a beach house in the middle of a hurricane. In the end of the day, the hurricane will not be here forever and we think we’re making great progress at FTD and we’re going to advance the ball in this industry.
Next up from Sidodi, this is James Cakmak.
James Cakmak - Sidoti
On the dividend, I just want to be perfectly clear. There is no intention whatsoever to either cut or eliminate the dividend.
No, there is no intention to do that.
James Cakmak - Sidoti
On the FTD, did you guys mention exactly what percentage of the business in Q4 was international?
No we didn’t, because that’s not a separate segment of the business. We treat FTD itself as an entire segment. We don’t break it out separately.
James Cakmak - Sidoti
Did you provide an overall international as a percentage?
No, because if we were to do that and talk about it like that, then in fact that would be a separate operating segment, so no we don’t.
James Cakmak - Sidoti
I didn’t see the cost of revenue breakdown for each segment. Can you provide some color on that?
You mean in terms of like the billable service margins and communications?
James Cakmak - Sidoti
Yeah, basically, just the cogs for each segment. I know you guys used to report it.
Right. We no longer break them out separately.
James Cakmak - Sidoti
It was $9 million lower on the cost of revenue line than expected. In total.
I can just tell you anecdotally the way our dialup business and our communications business, our margins there continue to improve. Our guys are doing a magnificent job on that business. It has improved in the dialup business and I think that’s helped us to achieve our record for the margin and our margins as well in the Classmates in terms of our social networking margins and the like. Those are obviously always going to be impacted by the mix between international and domestic subscriptions.
James Cakmak - Sidoti
Is it fair to assume that the FTD margins as a combined entity with United is lower or is higher than they were on a standalone basis?
I did say in my prepared remarks that it was much lower margin. We actually did give out the segment gross margins, Classmates Media for the quarter, that margin was 81.1%, and that was not [inaudible].
I would say without getting into granule detail, it’s fairly consistent to where it was before this. No major change in pricing, no major change in the cost of what we do acquire, etc. So I would say, James, if you went back and looked at FTD pre United and had those margins, you should you use that as a fairly consistent measure.
James Cakmak - Sidoti
A lot of attention was planned for eliminating customer acquisition costs by targeting Classmate members and so forth, how is that going?
We’re very pleased. I mean we started launching some of these new programs in November and December and they’ve continued on and we’re very pleased at the way it’s going. We’re getting some really good traction on our cross-marketing initiatives and actually we have many more coming out between now and Mother’s Day. If you’re a Classmates member, if you go to Classmates and you will see FTD all over that site. You go to MyPoints, you’ll see the same thing. In the pre-holiday period, they actually do a takeover of the NetZero home page with a huge mercury man ad promoting FTD.
So we’re pretty pleased with that. Rob Apatoff and his team at FTD, they’ve got some really unique marketing programs that they’re working on for the next four to six months period outside of the United Online cross-marketing and I think we’re real excited about them.
James Cakmak - Sidoti
On the G&A line. That was also a million shy of what I had expected. Should we think about that $25-$26 million as a baseline?
For the G&A, I had intentionally combined the pro forma numbers for the Q408 with FTD’s G&A expense, but that is your expense is $25.5, a couple million shy of where I was or lower. Should we assume that that’s the baseline going forward? Is that where your first quarter guidance GAAP operating income implies?
Well again, James, you can imagine without getting a specific answer to that, because then I would be giving guidance on that specific line, but you know from United Online’s history that we’re pretty that managing our expense structure, especially in these tough economic times and so you saw it tighten the G&A line, which is something that we’ve had a history of doing when the external climate gets tough.
So depending on what kind of a storm we’re flying into, macro storm, that the entire industry is flying into, we still got some levers that we can pull within this business if we have to to further draw back G&A. But obviously, we think where we are now is a good level and a good level to be operating at.
The last question we have is from Yun Kim with Pacific Growth Equities.
Yun Kim -Pacific Growth Equities
So Mark, it seems like FTD is already leveraging the ad inventory and website. Is there more of this going forward or has this already peaked? Also, FTD and MyPoints, is there room for more synergies there?
No I think there is more opportunity. Listen, this was our first batch out of the gate of doing cross-marketing with FTD. So no matter how good you are, whatever you do on your first try, it’s probably not going to be ultimately where you end up. It’s a work in process and we’re getting a lot of great learning over which display ads that we’re putting up work the best.
The MyPoints program is very effective, because what about a free $15 gift card. So anybody on MyPoints redeems gifts a free gift card there, but we had some other ideas that we’re looking at, including the inclusion down the road of a reminder service where we can integrate a reminder service on Classmates, MyPoints, and the ISP so that you could actually plug in the birthdays, anniversaries, special occasions of your family and friends and we would then prompt you, not only with the fact that the occasion has come up, but we would give you some killer discounts in the form of a $15 gift certificate or 15 and 20% off your purchase to try to stimulate you to do that.
There’s a lot more ideas that we’ve got in terms of the cost pollination marketing and this was just the first out of the gate to try to get as much as we could up pre-Valentine’s Day and I think you’ll see even more between now and Mother’s Day and as we go on.
We have programs that we’re even looking at, for example, where every single person who signs up for free on any one of our services would get a free offer from FTD.com.
So there’s a lot coming down the pipe. We’re being very careful not to try to overload the folks at FTD with too much too soon. We plan on owning this company for a long time. There’s a lot of great things underway and we want to be measured in how we do it so that we have flawless execution and I will say to date we have had flawless execution within the family of United Online companies executing the cross-marketing.
Yun Kim - Pacific Growth Equities
Those efforts will help out on the margins for FTD. Right?
They certainly should. If attractions maintain where it is and even hopefully improves, yes, it certainly should.
Yun Kim - Pacific Growth Equities
In terms of dividend yield, which I believe is providing an incredible rate of 8 to 9% range, has there been any discussion about changing the dividend amounts?
Less of a dividend?
Yun Kim - Pacific Growth Equities
In terms of an absolute amount, yes.
Basically we calculate our dividends based on our cash flow. We don’t target it based on some subjected yield. You know, six months ago, our stock was $11, for example. So, it is ironic though that we’ve cut the dividend in half when we purchased FTD and our yield is the same, because of what happened in the stock market, which is not something we’re happy about, but that said, we determine our dividends based on our cash flow and how much we want to remit back to the shareholder, not based on some imputed percentage rate.
Yun Kim - Pacific Growth Equities
Classmates Media, real quick. I know there’s strong performance there, but the advertising revenue, that business saw fairly strong sequential growth in a very soft advertising environment in Q4. Can you tell us whether our dollar is more on a display adjuvant or is that MyPoints driven, and whether this positive trend is sustainable or not?
A lot of the strength you saw there was attributable to some of the purchase transactions promotions that we run, if you recall. That was a good part of the Classmates ad budget at the Classmates unit, not at MyPoints, and that’s been performing very well.
Look at the outstanding subscriber members that you’re seeing at Classmates. Their rate of free signup is fantastic and we had the best fourth quarter in the 13-year history at Classmates. We had the highest number of net paid subscriptions in the 13-year history at Classmates. So I would think, when you start growing your subscriber base to that level, and you’ve got a feature promotion that occurs post signing up, then that part of your business should increase.
Ladies and gentlemen, thanks very much for your participation in the question-and-session. With that, I’ll turn things back over to Mr. Mark Goldston for any additional or closing remarks.
Thank you very much. As always, if anybody has any additional questions, please feel free to call in to Erik Randerson, our Vice President of Investor Relations or myself or Neil would be happy to answer any question that you have.
So have a great day, everyone, and don’t forget to buy FTD flowers at Mother’s Day.
Thanks again for joining, everyone. That will conclude the conference call. Once more, have a good day.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: firstname.lastname@example.org. Thank you!