Sluggish Economy Good for United Online?

The company said it is making progress migrating its free users to a billable service, but profitability would not be attained until late next year.

by Thor Olavsrud of internetnews.com [November 1, 2001]

United Online Inc. (NASDAQ:UNTD), the result of the Sept. 25 merger of NetZero and Juno Online, is looking on the current economic slowdown as a potential opportunity to bring users of more expensive ISPs into its fold.

"We believe that United Online, with two of the leading ISP value brands—NetZero and Juno—now under its umbrella, is particularly well-positioned to grow its billable subscriber base in these challenging economic times," Mark R. Goldston, chairman, chief executive officer and president of UOL said Wednesday. "A weaker economy, in combination with the recent price increases at several other major ISPs, may spur additional demand for the value-priced services offered by NetZero and Juno. We believe that the growth we have seen in our pay services is evidence that offering limited free Internet access provides a fertile, cost-effective platform to acquire paying subscribers. Our growth prospects should be enhanced by the fact that tens of millions of Americans paying over $20 per month for dialup Internet access are beginning to realize that they can get comparable, high-quality service for less than half that price."

As of its fiscal first quarter, which ended Sept. 30, UOL reported subscribers of its billable services numbering 1.25 million. That's up 14 percent from the 1.10 million billable subscribers it reported in the June quarter. It's total active subscriber base, including users of its free service, was more than 6.1 million in the September quarter.

Free to fee
But the company said it is making progress migrating its free users to a billable service, aided in part by new restrictions on the free service. In October, the company further restricted the free service to 10 hours per month per household, and eliminated the service completely from "certain outlying areas where high telecommunications costs make the free offering cost prohibitive."

While the company works to add customers to its billable services in an effort to boost revenue, it has also been striving to slash costs in other areas. The company cut a number of NetZero employees in August, and laid-off more at its Juno subsidiary following the merger. To date the company has cut its head count by about 20 percent, bringing the total number of employees to less than 500, including 114 employees in the company's technical and customer service unit in Hyderabad, India.

"We believe that the efficient infrastructure we have built at United Online, with significantly fewer employees than some of our competitors, will be key to helping us achieve our near-term financial goals and, ultimately, create a profitable value-priced ISP business," Goldston said.

Profitability may have to wait for a while—probably a little more than a year, UOL officials said Wednesday. The company said it expects to generate positive EBITDA no later than the December 2002 quarter.

However, to do that, the company will need to continue to aggressively grow its billable subscriber base, transition its free users into billable subscribers, and cut operating costs. Chief Financial Officer and Executive Vice President Charles S. Hilliard said the company is well on its way.

"We have experienced early success in shifting our business model to focus on billable services, with 78 percent of our pro forma revenue in the September 2001 quarter coming from paying subscribers. We currently expect billable services to comprise 80 to 90 percent of total revenues over the next few quarters as we continue to heavily market pay services to our free users. The company's free user base is proving to be an effective source of new billable subscribers, with current customer acquisition costs that are well below the industry average. Importantly, we believe there are opportunities to further reduce operating costs as we begin to realize the benefits of the merger."

By the numbers
For the quarter, UOL reported pro forma revenues of $42 million, compared to $41.3 million in the June 2001 quarter. Billable services revenue accounted for $32.6 million, 78 percent of total revenues, as compared to $29 million, or 70 percent of total revenues, in the June 2001 quarter. The company reported a pro forma net loss (before amortization, restructuring and merger-related charges) of $16.4 million, 42 cents per share, a 59 percent improvement over a loss of $39.7 million, $1.03 per share, in the previous quarter.

UOL expects those numbers to improve in the December 2001 quarter. It anticipates its billable subscriber base growing to between 1.41 million to 1.43 million over the quarter, driving revenues up by about 6 percent to between $43.5 million to $44.5 million. It also expects its net loss (before amortization, restructuring and merger-related charges) to improve as much as 24 percent, to between $12.5 million and $14.5 million.

UOL ended the September quarter with cash, cash equivalents, short-term investments and restricted cash balances of $144.5 million. It said that it believes that amount "will be more than adequate to fund its operations until it generates positive cash flow."

—End