United Online, Inc. (NASDAQ:UNTD) Q4 2015 Earnings Conference Call February 17, 2016 4:30 PM ET
Kimberly Orlando - Investor Relations, Addo Communications
Jeff Goldstein - Interim Chief Executive Officer
Edward Zinser - Executive Vice President and Chief Financial Officer
Dan Kurnos - Benchmark
Greetings and welcome to the United Online Fourth Quarter and Full Year 2015 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kimberly Orlando of Addo Communications. Thank you. You may begin.
Hello and welcome to United Online’s conference call to discuss the company’s financial results for the fourth quarter and full year ended December 31, 2015. On the call today will be Jeff Goldstein, the company’s Interim Chief Executive Officer and Edward Zinser, the company’s Executive Vice President and Chief Financial Officer.
On today’s call and in today’s press release, the company 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. Definitions of these non-GAAP financial measures are provided in today’s press release along with certain reconciliations to their most comparable GAAP financial measures.
In addition, the company applies the Safe Harbor provisions outlined in today’s press release to any forward-looking statements that maybe made on this call. Statements regarding the company’s current expectations or estimates about its future operations, strategies, financial performance, operating metrics and new or planned business initiatives, products, services, features, applications and functionality, 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 filings with the Securities and Exchange Commission, including the company’s annual reports on Form 10-K and quarterly reports on Form 10-Q.
Guidance, projections and other non-historical information provided in the press release and in today’s call are based on information available to management at this time and management expects 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, I will now turn it over to the company’s Interim Chief Executive Officer, Jeff Goldstein.
Thank you, Kim. Welcome to United Online’s fourth quarter and full year 2015 conference call. With me today is Ed Zinser, the company’s Executive Vice President and Chief Financial Officer.
I am very pleased to have the opportunity to be here today and thank you for your participation. During my first month at the company, I have been immersed in our businesses, its financial and operating performance and prospects and our strategies in the context of the broader competitive dynamics across the industry. My prior corporate executive and strategic advisory roles have enabled me to come up to speed quickly and I look forward to leading United Online in this next chapter.
Over the past year, the company has undertaken a series of actions to streamline its operating businesses and enhance overall financial performance. As the most recent step in that effort, in late November, we initiated a process to explore a full range of strategic alternatives and to identify steps we can take to create and deliver greater shareholder value. The alternatives we have been evaluating include but are not limited to, the sale of assets or the sale of the entire company, as well as the number of other alternatives. As we said at the start of this process, the possible strategic alternatives may benefit from the utilization of the company’s substantial capital loss and net operating loss carry-forward assets resulting in additional value for our shareholders.
To help us move this process forward, we have engaged JMP Securities as our exclusive financial advisor to provide investment banking and related services. We are pleased with the interest we are seeing and with the progress of this review, but as you will understand we don’t intend to comment further on our progress until we have completed our review. And working with JMP, we have seen interest in our businesses on an individual basis as well as interest in the entire company, which has led to our active engagement with a group of interested parties. That said, given the nature of the process, we will not be speculating about any timeline or potential outcomes and will not comment further on this process until the Board approves a specific action or otherwise concludes the review of these strategic alternatives. Concurrent with the strategic review process, we are committed to preserving and optimizing the value of our operating businesses and driving value for our shareholders.
Let me give you a summary of the quarter’s highlights for each of our operating businesses. In the Commerce & Loyalty segment, we are focused on enhancing member engagement and adding new members in our MyPoints business. We have been improving the MyPoints user experience and exploring growth opportunities afforded by our Swappable and List+ products. In our Social Media segment, we are focused on continuing to optimize the core StayFriends business, as well as improving the mobile experience for users. As a reminder, last quarter it was announced that we have initiated a process to sell StayFriends, and we have engaged German-based, ACXIT Capital Management as our financial advisor to assist with the sale of this asset. We have seen interest in the StayFriends business and are actively engaged with potential buyers. And finally, in our Communications segment, we remain committed to growing our mobile broadband business, now that the transition of our subscribers to the Sprint 4G LTE network from the Clearwire WiMAX network has been completed.
That concludes my prepared remarks. I will turn it over to Ed Zinser to go through the fourth quarter and full year 2015 financials. Ed?
Yes. Thank you, Jeff. Today, I will review our financial results for the fourth quarter and full year ended December 31, 2015. Unless I clarify otherwise, all comparisons represent year-over-year comparisons.
Beginning with some key highlights on the full year, revenues of $151.1 million were within our guidance range of $149 million to $154 million, GAAP operating income of $7.1 million exceeded our guidance range of $1 million to $6 million, and adjusted OIBDA of $24.5 million also exceeded our guidance range of $19 million to $24 million.
Now, turning to the quarter, fourth quarter revenues of $40.1 million were within our guidance range and decreased 4%. The decline was due primarily to lower dial-up in mobile broadband subscribers and lower advertising revenue in the Communications segment, coupled with the negative impact of foreign currency exchange at StayFriends. GAAP operating income of $3 million was above our guidance range and compares to operating income of $3.1 million in the prior year quarter. This slight decline was primarily due to an increase of $0.2 million in restructuring costs and legal settlement charges. Adjusted OIBDA was $7.2 million, which was above our guidance range, but $1.1 million below the prior year quarter primarily due to declines in the Commerce & Loyalty, Social Media and Communication segments which were partially offset by lower unallocated corporate expenses.
Net cash provided by operating activities for the quarter was $4.5 million compared to net cash provided by operating activities of $2.9 million in the year ago quarter. Free cash flow for the quarter was $4.3 million compared to $1.4 million in the prior year quarter due primarily to the timing of working capital changes and lower capital spending. Cash and cash equivalents at December 31, 2015 were $104.8 million or $7.07 per diluted share compared to $78.6 million or $5.51 per diluted share at December 31, 2014.
Now, turning to review of our Communications segment financial results for the fourth quarter of 2015. Segment revenues were $21.3 million, a decrease of 18% due primarily to the decline in dial-up pay accounts, lower advertising revenue and also reduced mobile broadband pay accounts from the conversion of subscribers from the Clearwire network to the Sprint network. Gross margin was 61%, down slightly from 62% in the prior year quarter due to the decline in higher margin by dial-up pay accounts. Sales and marketing spend of $2.3 million was down by $1.2 million or 35% due to lower CRM costs, marketing spending and payroll-related expenses. Technology and development expenses of $1.8 million were down by $0.6 million or 24% due primarily to lower personnel-related expenses.
General and administrative expenses of $1.8 million decreased by $1.3 million or 42% due primarily to reduced personnel and overhead-related costs. There were $0.2 million in restructuring and other exit costs incurred during the quarter compared to $0.1 million in the prior year quarter. As a result, our segment income from operations was $7.9 million flat with the prior year quarter. Segment adjusted OIBDA was $8.1 million, down 13% from $9.3 million in the prior year quarter. The adjusted OIBDA margin was 38%, up 2.4 points from the prior year quarter.
In terms of key metrics, pay accounts were $403,000, a decrease of $30,000 or 7% versus the prior quarter due primarily to the decline in mobile broadband and dial-up pay accounts. Average monthly revenue per pay accounts or ARPU decreased to $10.72 from $11.30 last quarter due primarily to the lower mix of higher ARPU mobile broadband pay accounts. Churn was 3.4%, up 60 basis points from the prior quarter and year ago quarter due to the Clearwire to Sprint conversion of our mobile broadband subscribers.
Now turning to review of our Commerce & Loyalty segment financial results for the fourth quarter of 2015, segment revenues were $13.3 million, an increase of 48% due primarily to higher gift card revenue, which included $2.4 million from the Swappable desktop and mobile app. Gross margin was 31%, down from 52% in the prior year quarter due primarily to the product mix of lower margin gift cards in the current quarter. Sales and marketing spend of $2.7 million decreased by $0.3 million or 11% due to lower member acquisition spending. Technology and development expenses of $0.9 million increased by $0.1 million or 9% due to new product development efforts.
General and administrative expenses of $1 million decreased by $0.3 million or 20% due primarily to reduced personnel and overhead related costs. There were no restructuring and other exit costs incurred during the quarter. As a result, our segment income from operations was $15,000 compared to income of $0.1 million in the prior year quarter. Segment adjusted OIBDA was $0.1 million compared to $0.2 million in the prior year quarter. In terms of our key metric, gross merchandise sales for the fourth quarter were $75.8 million, an increase of 11% versus the $68.3 million in the prior year quarter.
Now turning to review of our Social Media segment financial results for the fourth quarter of 2015, segment revenues were $5.4 million, a decrease of 20% due primarily to $0.8 million foreign exchange impact and the 12% reduction in pay accounts compared to the prior year quarter. Gross margin was flat with the prior year quarter, 85%. Sales and marketing spend of $1.3 million decreased by $0.2 million or 11% primarily due to the favorable impact of foreign exchange. Technology and development expenses of $0.5 million were down $0.1 million.
General and administrative expenses were $0.8 million, a decrease of $0.2 million due primarily to the favorable impact of foreign exchange. As a result, our segment income from operations was $2.3 million, down 20% from $2.9 million compared to the prior year quarter. Segment adjusted OIBDA was $2.4 million, down 19% from $3 million in the prior year quarter due primarily to currency. The adjusted OIBDA margin was 45%, up from 44% in the prior year quarter. In terms of key metrics, pay accounts were 1 million, a decrease of 35,000 or 3% versus the prior quarter. Churn was 2.1%, up 20 basis points from the prior quarter and flat with the year ago quarter. ARPU was $1.64, down from $1.65 in the prior quarter and down 8% from the year ago quarter due to the weaker euro. For the quarter ended December 31, 2015, the impact of unallocated corporate expenses on consolidated adjusted OIBDA was $3.4 million, which was $0.8 million or 19% below the prior year quarter.
Historically, we have provided financial guidance for the upcoming quarter and full year as part of our quarterly earnings releases. We will not be providing this guidance at the current time due to the ongoing strategic alternatives process. We expect that we will provide a financial guidance for the second quarter ending June 30, 2016 and full year ending December 31, 2016, in conjunction with our first quarter earnings release in early May.
That concludes my prepared remarks. Thank you, all, for joining us today. Operator, let’s please open the call to Q&A.
Thank you. [Operator Instructions] Our first question comes from the line of Dan Kurnos from Benchmark. Please go ahead.
Great. Thanks. Good afternoon. Welcome, Jeff to the party.
Just, like I will keep my questions short, I think you guys probably addressed most of the shareholder concerns and if anything the removal of language around initially potential acquisition and focus on the sale is probably will make most of your shareholders happy, I would think. But – and I will word this carefully since I know you are not going to comment about it, maybe if you can just give us or give your investors some background specifically, as it relates to why you should be entrusted as a good steward of the remaining capital on the balance sheet and as the businesses go through this process, maybe just a little bit more obviously, we have all read about you, but just your operational history as it relates to working with either MyPoints and expanding that business and the other businesses and sort of as you have shepherd the company towards what it sounds like, it’s going to be a sale? Thanks.
Sure. So thanks for the questions. This is Jeff. Let me start with a little bit about my background. My background is a mix of transactional investing and operational experience. I have spent the better part of the last 15 years working with interactive businesses. So I am very well familiar with online subscription businesses, I am well familiar with online media businesses and I am well familiar with online commerce and loyalty businesses. For the past 3 or so years, prior to me joining United Online, I ran a company called PriceGrabber, which is an e-commerce space and operated that business through a transition from primarily a business-to-consumer online media and commerce business to a business that was pointed more directly at a business-to-business strategy. So that was a situation where we pivoted the business. We then looked at recapitalizing it, looked at a whole variety of opportunities including raising money, including M&A and ultimately, as a way to maximize shareholder value, we sold the business last year. So I feel like I have got both the depth and breadth of experience both on the operating side and the strategic side to be value added here with United Online. With respect to the process, we – as we said in our prepared remarks, we are currently exploring a full range of strategic alternatives and we are moving forward with all due haste, we are laser-focused on the process and we are driving to a definitive answer that we can deliver to our Board as quickly as possible. We have been to the timeline, but we have significant resources invested into it, both internally and externally. And our goal is to drive to some resolution. With respect to the operating businesses, one of the reasons that a business like ours hires investment bankers is to bring external resources to bear specifically in this case, on the strategic process so that the folks inside the business can largely remain focused on the operations, which is what we are doing. And so my sense five weeks or so six weeks in is that we have a very solid team here. We have very good set of outside advisors and we are driving forward as quickly as we can on the strategic process.
Great, that’s really helpful color. And I would assume pretty reassuring to investors. Just I guess, quickly I will just ask a little bit a couple of operational questions then. Just maybe even Ed you could answer this or Jeff either, just on the pay decline and access, I think I might have missed it when you are talking about it in your prepared remarks, which is just a little bit of a steeper decline in Q4, I know there is some seasonality, but anything else in there?
You are talking Dan about the mobile broadband accounts?
Yes. I know that you are expecting some churn, but in your – within communications, your pay, your access accounts stepped up the decline sequentially in Q4 and that might have just been additional, the final transition over?
Yes, that’s pretty much it, Dan. I mean, from a dial-up perspective, we have seen a fairly consistent erosion in that business slowly over time. And as you are well aware, in mobile broadband, we converted from Clearwire’s WiMAX to Sprint’s network. We obviously, turned out folks and then we signed some of those folks backup to the Sprint network. And we are pretty much are through that churn now and we sort of hit that level at 49,000 at the end of the year. As you know, we had a high of 77,000 at the end of the first quarter. And then through ‘16, we will expect to grow that number back up.
Okay, great. And then just on MyPoints, it was actually a pretty good top line quarter, a little bit better than we were expecting. You talked about adding subscribers. I know in the past we have talked about some merchant ads as well. Just sort of how you are thinking about understanding that you are going through the process again, but how you are thinking about positioning MyPoints to sort of sustain what we have seen has been kind of this improvement to double-digit growth and towards – and consistent profitability?
Ed, you want to start and I will jump in.
Yes. Obviously, Jeff will chime in. He has been working with the MyPoints folks since he has been here as well given his background and so forth. But yes, I think, as we looked at the fourth quarter, we came in probably a little better than we were expecting at MyPoints. We had pretty strong gift card sales led by Swappable. Swappable did $2.4 million in gift card sales in the quarter. So, that was up – that was obviously just in line with a little bit better than what we thought, but I think the overall business performed just a little bit better. So, I think that helped us to pretty solid growth quarter-over-quarter and year-over-year. Obviously, we would want to continue those results into ‘16. And I mean Jeff can kind of give you an update on some of the things that we are looking out there.
Yes, sure. So, with respect to MyPoints, I think the place to start in thinking about the business and its key strength is in the member base. You have got 9 million members, you have got multiple millions of active users and then you have a good core of shoppers. And as you know, we don’t disclose the shopper number. But as Ed described in his prepared remarks, from Q4 2014 to Q4 2015, we saw healthy growth both in shoppers and in gross merchandise sales, which is the best indicator of the underlying value that we are driving for our retail partners. So, we have got some good momentum with the core business. And what we are doing there right now is we were looking at the existing products and product strategy. We are looking at marketing and marketing strategy. And we are looking at where the core product evolves going forward and how we scale in terms of building the products out and growing the member base as well as what are the opportunities for us on the marketing side. So, that is the way I think about MyPoints core.
Then we have the new initiatives that we have talked about for some period, Swappable and List+. I think those are both very interesting new products. With respect to Swappable, as you know, the gift card space is a huge space, $130 billion to $140 billion of gift cards are purchased every year in the United States. It’s a big space. We have members who are redeeming points for millions of dollars worth of gift cards every quarter. And we have had some initial success with the Swappable product and getting that member base to use Swappable and to buy and swap gift cards and we have got some real momentum there. With respect to Swappable, what we are doing right now is we are looking at, hey, we have got some initial momentum, we have figured out how to market this to our existing member base, how do we really blow this out, how do we expand it, where does the product need to go, and on the marketing side, how do we really grow it, but we do have some good momentum there. With List+, what we know is that consumers like price tracking. We have had some initial success getting some adoption there. In my view, the big question with List+ is how can we drive a critical mass of people to use it? It’s a cool product and the functionality is really cool. What we are figuring out right now is how it fits with the larger picture and how we really drive it on the growth side.
Got it. Alright. I feel like I have done my due diligence on the operational side at least. So, appreciate all your guys’ comments and good luck as you guys move through this process.
Thank you. Ladies and gentlemen, there are no further questions in queue at this time, which also concludes our teleconference for today. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.
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