United Online Posts Gain
Discount Internet provider United Online Inc. said Monday that its third-quarter profit vaulted 42%, but the company signed up far fewer subscribers for its pay services in the face of competition from Time Warner Inc.’s America Online and Earthlink Inc.’s PeoplePC.
Woodland Hills-based United Online, best known for its NetZero and Juno offerings, said it gained 9,000 new customers for its core dial-up Internet access service in the quarter -- compared with 173,000 last year.
With its growth slowing, United Online said it would use $100 million of its $202.6 million in cash to buy Classmates Online Inc., a privately held Renton, Wash., company that uses the Internet to connect long-lost friends from school, work or the military.
It took in $54 million in revenue during the first nine months of the year -- mostly subscription fees from customers who search for profiles and e-mail addresses of former acquaintances -- and had operating income of $3.7 million.
United Online Chief Executive Mark Goldston said the acquisition would allow United Online to “expand our network of affordable, high-quality consumer Internet subscription services.”
The acquisition, which is expected to close by the end of the year pending antitrust reviews, will add 1.4 million paid subscribers to United Online’s base of 3.2 million.
But analyst Peter Mirsky of Oppenheimer & Co. in New York said that buying Classmates was unlikely to do much to help United Online reverse its slowing growth, at least in the short run: “Given what United’s earnings were, it’s hard to say that acquisition did not appear defensive.”
Investors were skeptical as well. United Online shares fell 52 cents, or 5%, to $9.51 in Nasdaq trading Monday.
Youssef Squali an analyst with Jefferies & Co. in New York, said the price United Online was paying for the company seemed excessive. But, he added, “If they can grow 30% or better, the price will seem cheap.”
United Online needs a growth area. It has added new services, including a faster dial-up offering, premium e-mail, Web hosting and domain name registration, but its customer growth still has failed to impress analysts. Goldston blamed the fall-off in new subscribers on “the impact of an intense competitive environment,” with rivals offering sign-up incentives. For example, AOL offers free two-month trial subscriptions and PeoplePC cuts prices for new subscribers in half for the first three months.
In the quarter ended Sept. 30, United Online’s profit climbed to $12.6 million, or 19 cents a share, from $8.9 million, or 13 cents a share, a year earlier. Revenue rose 25% to $110.7 million.
To some extent, United Online’s troubles are due to its early success, analyst Squali said: “United was seen as doing a pretty good job of luring customers of established Internet providers. They struck back.”
