Q1 2004 United Online Inc. Earnings Conference Call

 At this time, I would like to welcome everyone to the United Online first-quarter conference call. (OPERATOR INSTRUCTIONS). I will now turn the call over to Mr. Brent Zimmerman, Vice President of Investor Relations. Sir, you may begin.

 Hello, and welcome to the United Online conference call to discuss the results of our first quarter ended March 31, 2004. With me today is Mark Goldston, our Chairman, CEO and President and Charles Hilliard, EVP and Chief Financial Officer.

In today's press release, the Company refers to adjusted operating income before depreciation and amortization or OIBDA, adjusted net income and free cash flow, all of which management believes are useful in evaluating the Company's operating performance. These numbers were not determined in accordance with Generally Accepted Accounting Principles or GAAP and should not be considered as an alternative to or superior to historical financial results presented in accordance with GAAP. Definitions of these numbers are provided in the press release along with reconciliations to the most comparable GAAP financial measures. We're also providing slides to accompany today's call that are available now on our website along with the Webcast, and I would encourage you to pull them up during the call.

Before we get started, I 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, our financial condition, our performance or the industry in which we operate are all forward-looking statements that are subject to a number of risks and uncertainties that could cause the actual results to differ materially from those described in the forward-looking statements. For 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 update these projections. Any persons re-playing this broadcast after May 3, 2004 should recognize that any non-historical information discussed on the call might not be current or valid after that date because of circumstances and assumptions underlying such information may have changed.

And with that, we are going to start out with a few comments from Mark Goldston and Charles Hilliard, and then we are going to open it up for questions. So I am now going to give the floor to our Chairman, CEO and President, Mr. Mark Goldston.

 Good morning, everyone, and welcome to our March 2004 quarterly earnings call. I am going to give you an overview of the quarter, provide some insight into our strategy going forward, our recent acquisition of a consumer Web hosting business from About (ph) Inc. and the competitive environment, and then I am going to turn the mike over to Charles Hilliard, our EVP and CFO; he will give you a more detailed look at the financials and provide some updated guidance.

The March quarter was another record quarter for United Online in terms of revenue, total paid subscribers and operating income and adjusted OIBDA. Total revenues for the quarter were up 46 percent year-over-year and total paid subscribers grew to a record 3.1 million. Passing 3 million paid subscribers was clearly a milestone for the Company and something we are very product. This means that we've now more than doubled the United Online paid subscriber base in the 2.5 years since the merger of NetZero and Juno. It's clearly an impressive performance.

Let's take a look at our strategy. On the June, 2003 earnings call, we articulated a revised mission statement for United Online after having clearly achieved our former mission statement of becoming the leading provider of value priced Internet access in the USA. The new mission statement was for United Online to evolve its successful business platform into becoming a leading provider of consumer Internet subscription services in the USA. We embarked upon strategies to deliver on that revised mission statement and clearly the NetZero high-speed and Juno SpeedBand add on Accelerator services were the first salvos (ph). Our accelerated services, which celebrated their one-year anniversary almost March 31 to the date, have been hugely successful and today account for 29 percent of all paid subscribers at United Online, increasing by a record 258,000 in the March 2004 quarter alone and reaching a total after twelve months of 896,000 subscribers.

Our next strategic move within the Internet services arena was to launch an expanded e-mail storage product. We created and introduced MegaMail during December 2003, offering two storage products, a 25 mg and a 100 mg at price point that were priced far below competitive products from the likes of Yahoo!, Microsoft and others. We currently offer MegaMail to only our own ISP users and later this summer, we intend to offer this service to nonusers of the United Online ISP services as well. Within a short time frame, we have already gotten 28,000 MegaMail subscribers, which is a terrific start. In an effort to further expand upon the strategy, we just recently announced the acquisition of consumer Web hosting services from About, Inc. a subsidiary of Prime Media. This business has roughly 35 employees and is based in Oran, Utah and it features both free and pay subscriptions to their personal Web site, hosting and domain registration services. They hosted more than 3 million free ad-supported Web sites and had approximately 53,000 paid subscribers at the date of our acquisition. We have created a new unit within United Online, we call it Megaweb Services, and this unit will be responsible for both the MegaMail product, and the web site services hosting and domain registration services we acquired in the acquisition. The key challenge for us will be to create compelling products within these add-on service categories that will appeal to both existing United Online ISP users, as well as those individuals who might utilize another ISP for their Internet access. The task at hand is to help create an incentive for the free Web hosting users to switch to the paid service product and that's a marketing challenge we know a little something about at United Online, how to get free users to convert to becoming pay users. We were one of the few major ISPs that did not previously offer Web site, hosting or domain registration services, and we feel that they are a natural extension of our mission statement to become a leading provider of Internet subscription services above and beyond Internet access. We have got a lot of work to do at Megaweb Services in terms of enhancing the software and the hardware infrastructure. Before we can embark upon our growth plan, we are going to spend the next several months preparing that unit for the anticipated future growth and working on integration strategies that will enable users who sign up for our Internet access services to have the option of also signing of for one of the Megaweb Service offerings at the same time. Between Megaweb Services and our three ISPs, we sign up over 15,000 new users every single day; and we currently maintain over 8.4 million pay and free accounts between our ISP and our other services.

Let's take a look at the competition. As you recall back in September 2003, AOL announced it was coming out with the Netscape 9.95 product to launch in January 2004. In fact, that single announcement dominated many discussions we had with investors, analysts, the press, you name it, for the better part of five months regarding the potential impact that AOL's Netscape product would have upon our business. Despite this increased competition, we had a phenomenal quarter across the board in terms of paid subscriber growth, at 203,000, revenue generating units or RGUs, growth of 472,000; and we reached record levels of billable services margin, operating income, adjusted OIBDA and accelerated subscriber growth. Clearly, United Online helped to drive the creation of the accelerated dial-up market with our dynamic, creative marketing campaign featuring the NetZero high-speed challenge. Today, virtually all of the dial-up companies have followed suit and offer accelerated dial-up services. This has dramatically raised the overall speed of the consumer dial-up experience; and we believe it will help to elongate the lifecycle of the dial-up category by increasing the relevance of the services to consumers who spend the vast majority of their online hours surfing the Web and using e-mail.

Let me elaborate on that. It's important to note that accord that according to the UCLA Internet Report published in February 2003, of the top ten most popular activities consumers perform on the Internet, only one of those activities, playing games, required a broadband connection to enhance the experience in a meaningful way. The other nine activities that were named in that report within the top ten did not require a broadband connection to enhance the experience. Therefore, the adoption rate of a faster, more expensive broadband access connection may well be slowed down by the fact that the average consumer is not performing activities today that would take advantage of the increased speed and justify the huge price premium. Forester, Jupiter and Yankee group, on average, said that at the end of 2003, there were approximately 49 million American households on dial-up. Those households have an average income level of $67,000 a year according to the U.S. Census bureau, the Department of Labor and Jupiter research data. That statistic supports the notion that to-date, the Internet has been for more affluent consumers certainly in America. The average household income in the U.S., according to those same groups, is just $42,400, against 67,000 for the Internet group. That means that the Internet penetration among the masses has still got a long way to go. Bolstering that theory is the fact that IDC, the respected market research firm, has estimated that some 15 million American households with income levels below $35,000 will be coming online during the next four years. We believe that a significant number of those lower-income families will use dial-up Internet access and choose a value ISP as their initial service provider. As the market leader in the value ISP segment, we believe United Online is very well positioned to take advantage of the anticipated influx of these new lower-income families and we believe this growth will coincide with a significant drop in the average price of a personal computer. Separately, we believe that the broadband market will continue to show strong growth, but we do not believe it will have a negative impact on the value dial-up segment. We do believe that the growth of broadband should have a negative impact upon the premium dial segment, which is exactly what we are seeing today. Look at the declines reported by the premium dial-up providers as we predicted, and look at the growth posted by United Online and the other value dial-up providers, as we predicted. All of this comes in the face of the continued growth in the broadband segment. If you look at the actual numbers reported during the December 2002 through March 2004 period, during that time frame, the top three premium dial-up providers declined by 17 percent. Broadband increased by 55 percent. Make sense so far? While the value dial-up segment, headed by United Online, grew an impressive 42 percent. So premium dial was is down 17, broadband up 55, and value dial, headed by United Online, up an impressive 42 percent. This just serves to reinforce our belief that as the broadband market continues to grow, more and more premium dial-up customers will realize that they are just spending too much money for their dial-up connection, and they will either spend a little bit more and go to broadband or save a lot of money and go to value dial-up.

Let's take a look at our marketing, which is clearly one of the key strengths of our company. We've continued to invest heavily in marketing on our brand, and have significantly increased our profile in the market over the past year. Our NetZero brand saw its unaided brand awareness jump almost twofold from 22 percent to 42 percent from November 2002 to February 2004, and the aided brand awareness on NetZero, meaning asking people have you ever heard of NetZero, aided during that period jumped to 86 percent from 60 percent back in 2002. The Juno brand also saw impressive increases, with unaided brand awareness climbing to 42 percent from 31 percent and its aided brand awareness jumping to 84 percent from 77. As you know, we spent heavily on marketing, and based upon the tremendous growth in our user base and the dramatic increases I just shared with you on brand awareness, it's obvious that the large investment that we've made in marketing has paid off handsomely in United Online. Our marketing programs continue to be among the most unique, creative and most compelling events in the market. We are the title sponsor to TV shows such as Fear Factor, Next Action Star, Dog Eat Dog and our high-profile Nextel Cup NASCAR sponsorship of the NetZero car, which by the way is car number "0" on the side, has a world-class driver in Ward Burton at the helm, and is a tremendous targeted marketing tool. We have a major presence on television and our NetZero High-speed Challenge TV ads are among the most effective spots ever run in the ISP sector, judging by the number of sign-ups that we have received in the last 12 months. Later this month, we will be leveraging our NASCAR sponsorship by running a sweepstakes on NetZero, which touts our five-times faster speed on NetZero high-speed. And to play into the five times theme, we are going to give away five red line red Chevy SSR trucks. The TV ad features Ward Burton in his NetZero race car being chased around the track at the Las Vegas Speedway by five of these incredibly cool new red Chevy SSRs. These are limited production vehicles, and they should be very highly coveted by our target audience who are really excited about the impact of this event, which we will run on television starting in late May through the month of June and into July.

Let's take a look at distribution. In addition to our conventional marketing spending, we pride ourselves on our ability to drive user growth through what I call guerilla marketing tactics. Our distribution strategy involves pinpoint analysis of various online distribution outlets and the most powerful retail channel partners. This will be critical as we reach out to new Internet households and address another key leg to our growth opportunity, which is the 15 million households we talked about that are going to be coming online over the next four years who make less than $35,000 a year. We signed our first major partnership back in October of 2003 with Best Buy, and we have been featured in Best Buy stores across the USA for the past six months. We are very happy with Best Buy as a partner, and they're doing a very effective job of promoting our NetZero and Juno Basic and accelerated products. Up until now, Best Buy and Kmart, which was a distribution deal we inherited with the BlueLight acquisition back in November, 2002, have been our only two retail partners. We continue to review potential major retail partners who can provide broad coverage against our target audience. There are a lot of exciting events going on around United online's brands and we are continuing to solidify our position to top the value ISP segment and expand the scope of our business beyond pure Internet access.

With that, I would like to turn the mike over to Charles Hilliard, who will give you a detailed look at the quarter and provide you with updated guidance. Charles.

 Our first-quarter demonstrated another very strong performance as we continued to execute and deliver results. Once again, I would like to point out three important financial trends which continued in the first quarter. Number one, impressive topline growth -- our year-over-year revenue growth for the March quarter was 46 percent and up 11 percent sequentially. Number two, expanding billable services margin -- up another 30 basis points during the March quarter and up 950 basis points versus the year-ago quarter to 73.8 percent. And number three, strong free cash flow -- during the March quarter, we generated a record $33.8 million of free cash flow and our ratio of free cash flow to adjusted OIBDA was an exceedingly strong 130 percent. That is, for every dollar of adjusted OIBDA we produced during the March quarter, we generated $1.30 of free cash flow. For the last 12 months, United Online has delivered almost $95 million of free cash flow, an achievement of which we are very proud. Our ability to generate a high ratio of free cash flow to adjusted OIBDA is due to our significant tax operating loss carryforwards and our relatively low fixed asset and working capital requirements.

The breadth of our March quarter results was very impressive across all of our key revenue drivers. Number one is pay subscribers -- as Mark mentioned, net growth of 203,000 during the quarter. Revenue generating units, or RGUs, which encompasses all subscription relationships for United Online, grew by a net 472,000 during one quarter; that's a record. At March 31, we had multiple subscription relationships with a record 29 percent of our subscriber base. And number three, advertising and commerce revenues, also an important revenue driver. Year-over-year growth, 28 percent and 12 percent, sequentially, primarily due to a 66 percent sequential increase in search fees from our new Yahoo!/Overture relationship. Also. we received a final performance bonus from General Motors during the quarter. I will give a little more detail on that in a couple of minutes. Due to the strength of each of these revenue drivers, we were able to deliver adjusted OIBDA of $26 million, which was up 90 percent year-over-year. Importantly, we were able to deliver this type of growth while continuing to invest in new long-term opportunities beyond our growing access business.

Now let's turn to our March quarter in a little more detail. Total revenues were 107.7 million, which was a record, and it was our first quarter ever to eclipse $100 million in revenue. Billable services revenues were $97.7 million, which were up 48 percent year-over-year and 11 percent sequentially. Billable services revenues were 91 percent of total revenues in the quarter versus 89 percent in the year-ago quarter. Average monthly revenue per user or ARPU was $10.88, up 13 percent from $9.61 in the year-ago quarter. ARPU continues to improve to our success in driving subscribers to our accelerated services. And commerce revenues came in at $10 million, which was a very strong quarter for this high margin and sometimes overlooked component of our business. Search was $3.5 million or 35 percent of ad and commerce revenues for the March quarter versus 2.1 million or 24 percent in the December '03 quarter. Although our four-year advertising agreement with G.M. ended on December 31, we did earn an unanticipated $2.1 million from G.M. in the March quarter. As I mentioned, most of this was associated with a final performance bonus associated with our advertising relationship.

Our billable services margin was again up due to an increase in ARPU. The margin also benefited from a decrease in average per hour telecom costs, which was about 6.75 cents in the March quarter versus about 7.25 cents in the December quarter and approximately 8.25 cents in the year-ago quarter. Some of this benefit was offset by a sequential increase in credit card processing fees from Visa and MasterCard. Sequential comparisons were also negatively impacted by a 7 percent increase in average monthly hours online per pay subscriber, a seasonal trend which we anticipated. Year-over-year, average usage per pay subscriber was down 4 percent. Cost of free services came in at $1.7 million this quarter, which was down 45 percent year-over-year and 8 percent sequentially. Our active free user base was down 2 percent sequentially and about 16 percent year-over-year. The decline in active free users and reduction in hourly telecom rates helped drive down our cost of free services year-over-year and sequentially. Our active user base grew 3 percent this quarter to a two-year high of 5.4 million.

Sales and marketing was $43 million or just under 40 percent of revenues this quarter, up 800 basis points versus 32 percent in the year-ago quarter and up 230 basis points from 37.7 percent in the December quarter. As we covered in detail during our last call, our goal this quarter was to sequentially increase sales and marketing expenses as a percent of revenue as the business wanted it. The increase this quarter restores a long-term trend which began late in 2001 and was interrupted only last quarter as we absorbed our Best Buy distribution deal. We are very pleased with our execution this quarter and believe we achieved our goals in spades. Sales and marketing as a percent of revenues going forward actually may flatten out and could even decline depending on several factors, including the pace of our increases in product development and G&A, which I will discuss later.

Okay, onto subscriber acquisition costs or SAC. For the March quarter, we estimate our gross pay subscriber acquisition costs at $58 (ph), up about 5 percent or $3 sequentially from $55 in the December quarter. Using RGUs, our subscription acquisition cost was about $36 in the March quarter, up slightly from December, which was $35. Given the increasing value of our subscribers as measured by a rising ARPU and expanding billable services margin combined with our greater cross-selling opportunities such as premium e-mail and personal Web site services, we continue to be extraordinarily pleased with our return on marketing cost. Consistent with prior periods, we calculate total subscriber and subscription acquisition costs to include total sales and marketing expenses with cost of free services less ad and commerce revenue. This total was $34.8 million in the March quarter. Free cash flow this quarter -- to provide some color there -- was positively impacted by reduced working capital requirements, including the collection of advertising-related receivables and a seasonal increase in deferred revenue from paid services. Product development expenses were up 2 percent year-over-year, primarily due to our budgeted headcount growth. We are anticipating that product development expenses will be approximately 30 percent higher in 2004 compared to 2003 as a result of our investment in headcount to help support our future growth as well as the impact of our recent acquisition. G&A expenses were down 3 percent year-over-year. But we're forecasting a mid to high-single digit growth for calendar 2004 as we expand our facilities and workforce to handle our growth and the impact of our Web hosting acquisition. Tax equivalent EPS was 18 cents this quarter versus 6 cents in the year ago quarter; it tripled. Tax equivalent adjusted EPS was 23 cents compared to 10 cents in the year ago quarter, you can see that break out on the slides we provided. Cash balances were $189 million at March 31, 2004, down 14 million during the quarter, reflecting our strong cash flows offset by the $49 million we spent on repurchasing 2.9 million shares of our common stock, bringing our total repurchases to date to 7 million shares, reaching our previously authorized $100 million limit. We're pleased to report that the Board has authorized another $100 million for potential future repurchases.

All right, let's turn to business outlook. We're projecting adjusted OIBDA for Q2 of between 26.5 and $27.5 million, and are increasing our 2004 adjusted OIBDA guidance to between 106 and $111 million, up 4 percent from the midpoint of our previous range of 100 to $108 million, reflecting our recent strong performance in the first quarter. At the midpoint, our calendar 2004 guidance implies year-over-year adjusted OIBDA growth of 48 percent. Total revenues for Q2 are estimated to be between 110 and $112 million. This result, if achieved, would result in year-over-year revenue growth of 38 to 41 percent. Once again, I want to point out that we do not expect any more advertising revenue from G.M., which to repeat myself, totaled approximately $2.1 million in Q1. We're increasing our calendar 2004 capital expenditure guidance by $1 million to 14 to $16 million, which includes our planned equipment purchases associated with our recently acquired consumer Web hosting business. About $5.5 million of the 14 to $16 million range related to our headquarters moved later this year. That's on a normal operating basis, the range would be between 8.5 to $10.5 million. Thank you, very much, everybody. I am going to pass the call back to Mark.

 Just in summary, really a great quarter for United Online across the board. We're showing some real solid growth. Competitively, the value ISP segment is continuing to be a growth segment. We have talked about the parallels that this category has to the value airline category, where Southwest was the market leader and as Jet Blue and others came in, they continued to grow at the expense of the premium carriers. And it looks like that that's what's happened in the March quarter in the dial-up ISP segment. So we are very excited about where we are. And with that, I am going to open the floor up to questions, operator, if you can tell people how they can get into the queue, and notify us of their question, we will go through it.

QUESTION AND ANSWER

 (OPERATOR INSTRUCTIONS). Richard Klugman, Jefferies & Co. what.

 Thanks a lot, great numbers.

 Thank you.

 I may have missed this, tell us how much was the advertising budget in the quarter and where you expect that going forward? And also, what was the churn on the pay subs?

 Sure, let's start with the last question, Rick. Churn on the pay subs was 4.4 percent this quarter, up from 4.3 percent in the previous quarter. And that's primarily associated with the surge in sign-ups we saw in the quarter and what we refer to as early lifecycle churn. The faster you grow in general, the faster your churn rate is, and that comes down as subscriber season. In terms of what we budget during the quarter, we tend to set our budgets early on and then update them throughout the quarter as we see the business progressing and we gain visibility. And I can just tell you that based on a close monitoring of the business and a $25 million media spend, we came in exactly on top of where we wanted to budget for this quarter.

 So it was 25 million in the first quarter, you said?

 Just pure, off-line media.

 Okay also --

 (multiple speakers) detail you're referring to.

 That's perfect. On the churn numbers, it seemed like a couple of quarters ago after you announced the accelerated plan -- it seemed like that was a factor in the churn. Has the churn come down on that as that has become more mature and you've perfected the product?

 There's still a churn differential, Rick, between the accelerated subs and the 9.95 subs. And the churn is higher on Accelerator. We are seeing though, as it seasons, on a equivalent basis, because we have seen a surge in growth recently, that yes, the churn is coming down on it.

 One final question if I could Mark, you Talk a little bit about the opportunity for MegaMail and other Web services. I was curious what you thought about the April Fools' Day announcement by Google by G-Mail and how that might impact how you approach that business?

 That is funny, the April Fools' Day announcement.

 People thought it was a joke originally.

 Yes, I can see why they would. It's hard for me to comment on it. It kind of threw us off-guard seeing somebody talk about providing a gig of storage. I can't even imagine how you would fill that up, and some of those other privacy issues that obviously were brought up around it. I don't know enough about it. It's not something we are concerned about. I am not sure, given the fire storm that came around it, what their future plans are going to be on it. But there is a market out there for providing expanded storage to people, especially now that digital photography is one of the number one activities performed on the Internet; and as you know, most ISPs, like us, provide you with about ten mgs of storage on a paid service, and if you have got a lot of digital photos, you are going to need more than that. So whether it's us or Hotmail or Yahoo! or whoever you might, use you need to have more than that if you are going to be prolific at using digital. And we priced our product so competitively, it's so much less expensive than the products from Microsoft and Yahoo! that we feel we have a compelling offering. And that alone just gives us a feeling that we are in the right place.

 Safa Rashtchy, Piper Jaffray.

 Hi, it's Aaron Kessler for Safa Rashtchy. Can you hear me?

 Yes, we can hear you.

 Okay great. A couple quick questions. One on the marketing side, I guess you had a 66 percent sequential increase. How much of that is related to the re-negotiation of the contract versus maybe better placement of the search products or enhancements to the search product on your site? And also related to that, what percentage of total marketing was related to search in the quarter?

 I don't really understand your question.

 I think he is talking about ad and commerce revenues.

 You're talking about marketing?

 Yes, sorry, advertising and commerce revenues.

 Ad and commerce revenues, okay.

 I will answer the first part of it. The answer regarding volume versus price we get on search in one word is both. Beyond that, we are not going to break out the specific terms of our long-term relationship with them. What was the second question?

 The percentage of search of overall advertising and commerce revenues, can you break that out?

 Yes, we did. It was 35 percent.

 Thirty-five percent. Do you have what that was last quarter?

 It was about I believe 24 percent.

 Yes.

 Great. And then on the billable services margin, it looks like that continues to expand. Can you give us the details on what the Telco costs were in the quarter and how much room is there for that to decline further?

 I covered it in my comments. The telecom customer in the quarter were about 6.75 cents. And down nicely year-over-year.

 Okay. And then finally, are you seeing any pricing competition on the accelerated product in the marketplace from other providers?

 The other providers you know are kind of in a bind because they are premium providers already.

 Right.

 So AOL made a lot of noise back in December that they were going to do a Super Bowl sponsorship, which they did, and promote something called AOL Top Speed, which came out for like a week or two and I have not seen anything else on it. But I think they pretty much turned their entire AOL premium dial-up product into an accelerated product, I believe. I don't know if they are still designating it as top speed or not. But their entire product is that. And EarthLink launched their accelerated product a year ago when we did. They marketed it for a quarter as an add-on product. It was not successful and they then decided to fold it into their core products. So now today, all of EarthLink's premium dial-up product (technical difficulty) they offer is accelerated all of AOL's premium dial-up product they offer is accelerated. So, and they remain two premium-priced brands with significant subscriber decline. So I think the beauty of this, Aaron, is that we not only started this segment, but we are the people who are able to sell this thing at a 50 percent premium to our core price point and still be 30 to 40 percent cheaper than the premium brands who we are including it.

 Right. Thank you and congrats on the quarter.

 Thank you, very much.

 Youssef Squali, Jefferies.

 A couple of follow-ups on Rick's. Charles, I was wondering if you could try to help us quantify the conversion of subs from the 9.95 to 14.95. And if you are not going to quantify it, just share with us some of the trends you are seeing there? Number two, what was the Best Buy contribution in the quarter? This was obviously the first true quarter of Best Buy contribution.

 On conversion of subs, standard premium, we do not discuss that. As you know, we do discuss and are happy to talk about the conversion from our free service to our pay service. And during the quarter, our free service represented 20 percent of gross pay subscriber additions. And that was down slightly, percentage terms, from 21 percent in the December quarter, but in absolute numbers, we actually saw a few more gross paid subscriber additions coming from the free base during the quarter. In Best Buy, we can qualitatively say we're pleased with the execution in the quarter from the team. We felt that way at the end of last quarter, although as we discussed, the program (technical difficulty) been running a little bit later than we expected in that quarter. Beyond that. we are not going to quantify it.

 Okay. And on the free cash flow conversion, you're talking about 130 percent. That is a mighty conversion. Obviously, there were a couple of things in the quarter that kind of eased (ph) out that number. What kind of long-term target should we be looking for?

 It was a bit higher in the quarter. I think as we talked about on the last quarter call, our conversion ratio for all of '03 was about $1.06 versus $1.30. And we were helped in the quarter as I pointed out by collecting some of these advertising receivables as well as a seasonal pick-up in deferred revenue with people renewing some of their long-term plans. Long-term, it will depend on how much we are paying in taxes. This year, we expect to pay fairly minimal taxes, given our net operating loss carryovers of around $270 million. Those carryovers, Youssef, are subject to an annual limitations. And the amount we can use in 2005 for example will step down to about 19 million, and then 12.5 million a year thereafter. So we will see how our progress is on taxes, and once that stabilizes, we will provide you an update --

 What if you just normalize it for taxes. Is it north of 70 percent, do you think?

 I don't have that calculation in front of me. (technical difficulty) offline though.

 I will be remiss if I did not ask Mark a question. Mark, on the Web hosting business that you acquired, obviously, there seems to be an opportunity there. But looking at what EarthLink has been doing with that business, that has been very, very flat. I was wondering if you could tell us what you're seeing in that business that obviously EarthLink is not capitalizing on?

 Well, just like EarthLink's dial-up business has been very flat as well and ours has been a growth business. So I think there is a fundamental difference between the two companies and how we go about marketing product. So we think there is a marketing opportunity there. One, because of the value of positioning; and two, Youssef, because with 5.4 or 4 million active users, which is what we have got now in United Online, we were not in that business. And so, from an incrementality standpoint, every dollar that we generate from Web hosting,, domain registration, web site services, every dollar is incremental because it's stuff we have not been offering before. And our users are no different than the competitive users are. And so the consumer Web hosting, domain registration business is a large business. Some people have not necessarily done it very well. I am not sure that it's a large stand-alone enterprise or something that you would want to run, but as an integrated aspect of a major consumer access provider, it makes a ton of sense. And when we can begin integrating it into our registration process, so that as you sign up for any of our ISP services, you can also sign up simultaneously for our Web hosting, domain registration and web site services, we think we can pick up an increment. We also have some pretty clever ideas that I really cannot divulge on the call here that we are working on that we think are completely unique that have not been seen in the consumer portion of this market, that you will probably be hearing from us on in the next couple of months, which I think will add some color to why it is that we were intrigued about buying this thing.

Youssef Squali Okay, that's great. Thanks a lot.

 Mark May, Kaufman Bros.

 The first question has to do with sales channels. I know you have also already told us that about a fifth of your new billable subs are coming from upgrades from free. But could you just give us a sense of what the other important channels are for acquiring customers? And then kind of related to my second question, how has that changed over time and specifically, just wondering, Mark, how you've had to change or re-addressed your marketing program with new competitors like Netscape coming online? And then the second or third question, however you see it, when I look at the advertising revenue numbers and strip out G.M. and strip out the search numbers, you actually saw an increase sequentially in advertising revenues from what I will call kind of ongoing, non-search related revenues. Can you just talk a little bit about that, and maybe give us some insight into what's going to be driving that part of the ad revenues going forward?

 In terms of distribution, you know, we have a very sophisticated matrix that we use internally on distribution. So if you notice, we are represented in tons and tons of sites, search sites and others all around the Internet that we use as tributaries, that feed into our main reservoir of users. Some of what we do in that, frankly, Mark, is a special sauce that we really don't share a lot about because we really don't want the competitors that we deal with to understand how we do it because we seem to be the guys who have figured it out. I don't say that to be flip, but that is proprietary in how we do that. We have a whole group internally that spends 100 percent of their time on nothing but that. And I think they are doing an outstanding job of that.

In terms of what's changed from a marketing standpoint in the face of the new competition, in a word, nothing. We have known about this competition since September when they announced they were coming. If you notice that between September and the end of March, we really did not change anything. We are not concerned about the competition, we are aware of it. We were ready for it. We knew it was going to happen and it did. It is interesting Mark, if you look at the category, AOL and their numbers -- I pull it right off the slide from their CFO's presentation on April 28, AOL's dial-up product went down on AOL brand in the United States by 800,000 subscribers. I think EarthLink said that their dial-up premium had gone down by 100,000. And I am not sure how much MSN went down. But you assume that the top three went down about a million people, we went up over 200,000 people. AOL said their low-cost product, which is both Netscape and Wal-Mart Connect, combined, went up 100,000. And EarthLink said their People PC went up 99,000. So if you add up AOL's multi low-cost brand plus People PC plus United Online, the value segment and the top three players in the segment went up by 400,000 in a quarter where the premium top three went down close to a million. So that just bolsters what we have been saying all along, which is that you know this rising tide, should make all value boats float; and that seems to be exactly what's happening with United Online continuing to lead the pack, but not being the only player in the pack. And I think that's a really good thing because as I said to you on the last call I believe, I never planned on AOL and EarthLink competing with themselves. In fact, one of the competitive ads that we see on TV from EarthLink's People PC unit actually asks people why are you spending you know high prices for dial-up Internet access. It's just it's a curious phenomenon that I think aids the segment. and as the market leader, probably aids us the most.

 Mark, in talking about marketing challenge, you mentioned search, online search and then you've also talked about upgrading free to pay, which I assume is mostly an online kind of upsell. But you haven't talked a lot about offline channels, direct-mail, TV response rates, can you -- how important are the offline channels to driving sub growth?

 I think they are important, Mark, but they are way less important. We are an Internet-based business. I think one of the advantages we have always had because of our two minute download, rather than us going out and trying to drill previously dry property, we pretty much go to the universe of the Internet and all the people that are currently connected and try to convince them that whatever they are connected through, they can save money and get a higher-quality experience by coming to us. And so we use the online medium for that reason. We want people who know how to use the Internet because they tend to be better customers to get. They require way less customer support because they know what they are doing, and they can appreciate the value that we are creating for them. So we view the online as being a big portion of that and our offline is primarily driven by our major television media spend.

 What I would add onto that is we've put up the performance we have today, with Mark's comments, with very little offline representation. And so we would view increasing our penetration in offline channels, to the extent we can achieve that, and that is a goal, as a big opportunity going forward.

 So, Charles, I think earlier, you talked about the 25 million number being an offline media spend. And I show that number was somewhere around 23 million in the fourth quarter. So again, that is not online marketing spend. That is offline. And you were able to increase the gross adds sequentially quite a bit without increasing the offline media spend all that much. Is that a fair representation?

 That is a reasonably fair representation.

 And on the nonsearch ad revenues?

 I forgot about that, I'm sorry. The ad market appears to have come back quite nicely. It is not a major part of our business, Mark, as you know. We still have our own direct sales force. It's not nearly what it was in the old days. But they are doing a really good job. The market has definitely gotten to the point where people understand Internet advertising and what it can do. And we are getting our fair share of that increase. So we are very happy with the performance of our advertising sales unit. And we also are very excited about the opportunities afforded by search. They've really picked up significantly. Many of you commented you know six to 12 months ago that you felt that the search category represented a large future opportunity for us above and beyond what we were doing. We shared that and you guys were right, and now we are reaping the benefits.

 From an internal forecasting prospective, how conservative are you being in terms of forecasting search and other advertising revenue going forward, given that a lot of that is being monetized by someone outside your control?

 I would say that we attempt to be reasonable and conservative in all of our forecasting, Mark, just not -- not just on this line. And I point out that given that we generated 2.1 million of revenue in the March quarter from a relationship that we will no longer have going forward, that I would still consider that line item in transition. And the inventory is becoming freed up that used to be taken up by G.M. Yes, we are putting more emphasis behind search. We have seasonality factors to take into account, including a seasonally slower June quarter. So all of that is reflected when we provide guidance to people.

 Jordan Rohan, Schwab.

 I was hoping you could take me through something. If you annualize the reported 1Q free cash flow of 33.8 million, just by multiplying it times 4, I know that's not precise, you get to over 130 million of free cash this year. So with that in mind, I was hoping you could help me understand the share repurchase authorization of only 100 million. In the discussion with the Board, was there any thought about increasing it beyond those levels? Certainly, you guys have the opportunity if you care to, to lever up and do a massive share repurchase. Could you speak to me please about the use of capital there? If your operations are throwing off so much cash today and you feel so great about the future, what can we expect in terms of share repurchases over time?

 I would say a couple of things. One, $100 million share repurchase in the absolute is a very healthy amount. We had a $100 million repurchase authorization previously, and I think it took us something around 18 months, I think to utilize it. We view that as a terrific use of our cash. But as you know, we have a broad spectrum of things that we look at in terms of what we can do with cash, talked about it before. We use cash for acquisitions, and if we can't find things to buy, then obviously, we would use it to repurchase our own stock. I mean, we use some cash on this -- About Web Services deal that we brought; granted, it turned out to be a smaller deal; but had it been a larger deal, we clearly had the liquidity to do that. You talked about that you could potentially lever up and do a massive share repurchase. Clearly, that is something that you could do. But I would say we always have the opportunity, Jordan, to go back to our Board at any point in time and increase the authorized share repurchase. So if in fact you saw that this 100 million were hypothetically to become something that you would blow through rather quickly and if you thought that that was the highest and best use of the remaining cash, then clearly we could and would go back to our Board and ask to expand that. But for right now, I think given that we just completed a $100 million share repurchase, putting a new one in place at that level is both consistent and something that we are comfortable with.

 Okay, one follow-up question for Charles. Charles, could you just give me the effective or cash tax rate for the quarter? Sorry if I missed it.

 The effective tax rate on a GAAP basis was 41.5 percent compared to about 10 percent in the year ago quarter.

 And the cash taxes paid?

 Cash taxes were de minimus.

 Jim Friedland (ph), SG Cowen.

 Most of my questions have been answered, so just a couple quick numbers questions. Charles on the tax rate, 41.5 percent, should we just assume that for the rest of the year going forward for the non-cash portion?

 Yes, on a GAAP basis, it's about 41.5 percent for the rest of the year. Something that we follow closely. And on an adjusted basis, between 40 percent and 40.5 percent.

 Great. And on the NOLs, I think -- on your last call, you said that they were estimated at 272 million at the end of 2003. Nothing's changed there?

 We utilized some of the NOLs in Q1, but substantially we are at about the same level.

 Okay so just subject out the net income. And the last question was on the marketing, you ratcheted it up in the quarter and you did address that a little bit. Did it ratchet up because you guys got that one-off G.M. payment and were able to channel that to some more marketing? Or was there any specific things that you were doing, because you said it might go down later in the year?

 If you go back to December of 2001, our marketing media spend has ratcheted up basically every single quarter since December of 2001. So that is completely consistent with what we have done every single quarter for more than two years.

 What we tend to do is, we use sales and marketing, at least a discretionary portion of it, and the flexibility associated with it, to try to manage our growth in P&L. This has been an ongoing theme, as Mark pointed out, for more than a couple of years. So any upside during the quarter to the extent we have got visibility on it, whether it's upside in pay subs, upside in ARPU, upside in margin, upside in ad revenues, etc., we will tend to channel back into sales and marketing.

 And just as a closure to that, Jim, when we answer questions all the time on these calls about the amount of money you spend on marketing, what do you get for it, blah, blah, blah, I mean as I referenced in my speech, in two years, we have more than doubled our aided and unaided brand awareness, and we still remain the only major organically growing ISP in the country. And our accelerated services you know, are in one year of marketing, are 29 percent of our total paid subscribers. And so we think we get a tremendous yield on the marketing, one because of the amount of money that we spend; and two, because we just happen to have a terrific marketing program. It's very creative. It's very unique, and it really separates us from the competition, and, therefore, it merits us continuing to fuel it at an increasing rate as long as it yields what it's been yielding. At some point if it does not yield that, then we can reassess that.

 Okay, great. And just one last question on that. So it was 25 million in the first quarter and I think you just discussed 23 million in Q4. What was it on a year-over-year basis -- sorry not -- for your media spend, as offline media?

 In the March quarter of 2003, we spent 14.5 million. And then we spent 25 million in March 2004.

 Okay, great. Thanks a lot.

 I have got time for one last question, operator.

 Ned Zachar, Thomas Weisel Partners.

 Terrific, thank you, very much. A couple of questions here. Let's start with Charles. First, the billable services -- the average monthly cost of service per billable sub was up a little bit in this quarter. I just want to make sure I understand the reasons why. I thought I heard you say usage, but I'm not sure if that was correct? That's number one. Number two, Charles, love to hear you talk a little bit about the top-end from a general perspective in terms of sales and marketing as a percent of revenues? And then the last question for Mark, I would love to hear you talk about what is different than what you thought was going to happen as you look back a year ago or 18 months, what is happening today versus what you thought was going to happen twelve or 18 months ago?

 Ned, I'll address the first two. On average monthly cost per pay sub, it was up sequentially in absolute dollar amount. The primary driver of that was usage was up 7 percent sequentially. So even though we were down on average cost per hour on telecom, the usage more than made up for that. And the --

 What was the usage, Charles?

 We will comment on usage in terms of trends year-over-year. I think it was up 4 percent year-over-year, even though it was down 7 percent sequentially. The other item in average cost per pay sub per month that went up was credit card processing fees.

 With telecom costs coming down, should we expect the general drift downwards to resume? Or should we think of it as flat? What do you think there?

 In terms of average usage?

 Sorry, in terms of the monthly cost of service per average billable sub?

 I would say that we were -- we're at levels where we expect it to roughly stabilized. The trend has been coming down. And as always, we don't know if we have reached the trough or not. We can certainly say that we don't expect it to come down at the same pace it has in the past. The only reasonable conclusion is keep the unit costs fairly stable and it will depend on seasonality.

 And then, Ned, in answer to your question to me, on what did I see differently from 12 to 18 months ago, if you go back and look at what we said, because we did, before we came in here this morning, almost exactly what we said was going to happen is what happened. We said we thought that this category value segment would grow. We expected that we would get more competition in that category. We were not sure exactly from whom, but we knew it was coming. And our thought was that we would continue to be the growth player, and that while the segment grew, we would lead that growth, and that's exactly what's happened. And when the AOL announcement came out in September and our stock took a big hit, everybody -- that's all they wanted to talk about for five months was, oh boy Netscape looks like they are going to sink your boat and all of that, and our commentary to that was, one we didn't agree. Two, we were prepared for the competition. Three, if they were successful, it might come out of their own expense and help grow the segment. And in fact, that's exactly what's happened. So we feel good about where the category is. I will tell you, candidly, we were surprised by our success level with the Accelerator. We thought it would be successful. In fact, you asked me this question, I remember, about a year ago when we (technical difficulty), what did we think it would do? We did 200,000 subscribers out of the gate in the first quarter, which I thought, and I stated on the call, I thought, was aberrant. I could not see how we could possibly repeat that. I thought that was a lot of low-hanging fruit, and I turned out to be wrong. Pleasantly surprised. This thing has gone beyond anybody's wildest expectations, at just under 30 percent of our paid subscription base. And we didn't think others would follow suit. And in fact, everybody has. So we feel good about where we are. We planned the business about what we thought was going to happen. And it turned out to have happened almost exactly as we thought.

 Terrific. These are good numbers. Charles, top-end of sales and marketing as a percent of total revenues.

 I'm sorry, Ned, I didn't cover that before. This quarter was just under 40 percent. And I've tried to give some sort of qualitative guidance that it should be flat or maybe even down depending on what is going on with these other line items like private development and G&A. However, if we see an upsurge in other parts of the business and that affords us a little more room to re-invest, we are going to do it. Our goal this quarter and this year is to continue to invest in long-term opportunities while still putting up impressive bottom-line growth rates. And we have been using the sales and marketing line to execute on just that. Also, I said earlier that our average usage year-over-year was up 4 percent. I am correcting myself, it was down 4 percent year-over-year and up 7 percent, sequentially.

 Okay, so you had those reversed?

 Yes.

 Okay. Terrific. Thanks, very much. Good numbers.

 Thank you, very much. Operator, with that, we are going to have to close the call. If anybody has any additional questions, please feel free to contact Brent Zimmerman or Charles Hilliard or myself and we would be happy to address them. So thank you, very much, everybody. Have a great day.

 This concludes today's conference call. You may now disconnect.