Dial-up firm in a race to diversify
United Online Inc. is preparing for life after dial-up.
The Woodland Hills Internet service provider still gets two-thirds of its revenue and most of its profit from providing Internet access -- mostly through the dial-up connections it helped pioneer with its low-cost NetZero and Juno brands.
Tech experts have long said that the market for dial-up Internet access is dying, but its staying power surprises even United Online’s chairman and chief executive, Mark R. Goldston.
“We have this cash-cow machine that has a much longer tail than anybody thought,” said Goldston, 52, who previously ran Faberge USA Inc., Einstein/Noah Bagel Corp. and L.A. Gear.
But it’s United Online’s shift into new kinds of online services, similar to the transformation Time Warner Inc.'s AOL is going through, that has Wall Street impressed. The company’s stock has soared 34% in the last year.
It’s a race to grow revenue from online advertising and other Web business faster than the dial-up business collapses. No one is giddy over dial-up’s future.
The business is expected to give way to broadband in five to eight years, so providers are using the cash from Internet access customers to fund ventures in growing markets.
America Online is tapping into parent company Time Warner’s stable of content to shed its Internet access customers and become an advertising-based portal. Atlanta-based EarthLink Inc. is dumping money into wireless networks, broadband partnerships and its Helio cellphone service.
United Online used acquisitions to jump-start its strategic shift. It bought popular but stagnant Classmates.com, a social networking site, and United Airlines’ MyPoints loyalty rewards program, then revitalized both to heights that few analysts had expected.
Wall Street took notice May 2 when the firm released first-quarter financial results. Its $13-million profit and revenue of $130 million exceeded expectations.
But what also caught investors’ eyes were the ramp-up in Classmates.com and MyPoints and the forecast of better things to come. The websites picked up 265,000 customers who pay for added features such as the ability to find former classmates living nearby. The number dwarfed the 91,000 added in the previous three months.
For the quarter, 51% of United Online’s paying subscribers came from Classmates.com and other non-Internet-access businesses -- the first quarter during which more people paid the company for Web services than for Internet access. Revenue from content and media grew 64% to $44.2 million.
The stock jumped 10% that day. It has gained 23% this year, closing at $16.33 on Friday, and has outperformed its rivals by rising nearly 1,300% since United Online was formed in 2001 as the parent company in the acquisition of Juno.
United Online is so happy with the progress that it’s considering creating a subsidiary out of the content and media segment, selling 20% in a public offering.
Some analysts aren’t bullish on the company.
“They have a good management team, but they’re trapped in a bad business,” said analyst Jim Friedland at Cowen & Co. “The near term may be positive, but we would not view this as a long-term investment.”
He said United Online’s hefty quarterly dividend of 20 cents a share was too high and couldn’t last into 2009. And its 2.6 million paying content and media customers, nearly all from Classmates.com, pay an average of $3.26 a month -- not enough to compensate for the loss of Internet access customers, who pay an average of $9.60 a month.
But other analysts believe United Online is on the right track to grow and improve its value.
“With a strong balance sheet and a history of solid execution, we remain confident that the company will successfully complete this transition,” said analyst Ali Mogharabi at B. Riley & Co. in Los Angeles.
Wall Street wasn’t always so confident. Nor were officials at Nasdaq, which threatened to delist the stock when it plunged as low as 39 cents a share during the tech industry’s meltdown in 2001.
Some critics laughed at NetZero’s initial plans in early 1999 to offer unlimited free Internet access, earning money from advertising on the site instead. But it was the heyday for tech companies, and NetZero still raked in $184 million in its initial public offering that September.
When the tech economy went bust two years later, critics held up the company as an example of dot-com hype. After Juno and NetZero merged in September 2001, critics panned the deal as “two skunks trying to breed a mink,” Goldston said.
But United Online had little debt and a lot of cash left over from its public offering and thus was in the odd position of being valued at $70 million on Wall Street when it had $140 million in cash on hand.
Today the company is worth nearly $1.1 billion, and Goldston’s investment of $900,000 eight years ago is now worth $55 million.
Classmates.com, the fourth-largest social networking site, has more than 40 million members, with nearly 2.6 million of them paying for unique features that help former classmates, military personnel and others create their own community groups. The company plans to roll out a dating service on the site.
Jupiter Research analyst David Card sees the company not just as a survivor but also as a successful long-term company.
“Those are smart guys who have put together a number of smart assets,” he said.