Event Date/Time: Oct. 30. 2003 / 8:00AM PT
Event Duration: 1 hr 24 min
| CORPORATE PARTICIPANTS
Brent Zimmerman Mark Goldston Charles Hilliard |
CONFERENCE CALL PARTICIPANTS
Safar Rosky Youssef Squali Richard Corkman Darrell Smith Peter Mercy Mark Lee Jeff Goverman Bill Morrison |
PRESENTATION
Operator
Good morning my name is Heather and I will be your conference facilitator today, at this time I would like to welcome everyone to the United Online first quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time simply press star and the number 1 on your telephone keypad, if you would like to withdraw your question press the # key. At this time I will turn the conference over to Mr. Brent Zimmerman, Vice President of Investor Relations. Please go ahead sir.
Brent Zimmerman - United Online Inc. - VP, IR
Thanks Heather. Hello and welcome to United Online conference call to discuss the results of our quarter ended September 30th 2003. United Online operates on a June 30th fiscal year so this is the first quarter of our fiscal year ending June 30th, 2004. With me today is Mark Goldston our Chairman and CEO and President and Charles Hilliard, EDT and Chief Financial Officer.
And for this press release the company refers to free cash flow, adjusted cash income and adjusted operating income before depreciation and amortization or OIBDA. The management believes that these measures are useful in evaluating the company's operating performance. These measures are 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 measures are provided press release along with reconciliations to the most comparable GAAP financial measures. We are also providing slides that accompany today's call and are available now at our website along with the web cast. We think these slides also provide a very useful analysis of results and I would encourage you to pull them up during they call. They will be available along with the replay of the call for seven days.
Now before we get started I need to point out that the company does apply to 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 can cause actual results to differ materially from those described in the forward-looking statements. More information about potential risk factors that can 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 also 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 so any person replaying this broadcast after October 30th, 2003 should recognize that any non historical information that gets in 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're going to start out with a few comments from Mark and Charles and we're going to open it up for questions so I will now leave the floor to our Chairman Mark Goldston.
Mark Goldston - United Online Inc. - Chairman, CEO, & President
Thank you very much Brandon. Welcome to the call everybody for the September 2003 quarter. This was another record quarter for United Online we achieved record level the total pay sub, billable service margin, operating income before D&A, regular operating income, revenue and annualized revenue per employee all were record in the September 2003 quarter. Our total revenues for the quarter reached an all time high of $88.8m which was 53% ahead of the $58.1m in the year ago quarter. Our billable services revenues accounted for 90% of total revenues for the quarter. Our profitability was outstanding during the September quarter further evidencing the strength of our business model and our capacity for efficient and profitable growth. We generated GAAP net income of $8.9m and $19.3m of OIBDA or operating income before depreciation and amortization during this quarter which was 21.7% of revenue and 114% ahead of the year ago quarter.
This marks the fifth consecutive quarter of GAAP net income for United Online and the seventh consecutive quarter of positive OIBDA. Our operational efficiency as you know has been the hallmark of our company and it was never more evident than during this September 2003 quarter. Our average annualized revenue for employee which was the key metric that we used internally in determining efficiency and operating leverage was a record $749,000 per employee. This was a 35% increase versus the 553,000 for the September 2002 quarter a year ago. We believe United Online continues to have one of the most impressive revenue per employee metrics at any company in the internet sector and this provides graphic evidence of our unique efficiency within this very competitive internet world. We continue to operate at a fraction of the employee base of other major ISP's with 487 employees worldwide at September 30th.
Our highly automated infrastructure and our unique software allow us to do what nobody else is currently doing and that's to operate a consistently fast growing highly profitable cash flow machine in the ISP industry.
The primary driver of revenue and profitability is growth and paid subscribers. Total pay subs increased an impressive 173,000 during the September 2003 quarter bringing the total United Online pay sub bate to a record 2.7m as at September 30th. The 173,000 net additions to our pay sub base was 23% greater than the 141,000 net addition in the year ago quarter and this help to increase our pay subscriber base by 47% over the last 12 months. You know we spoke a great deal about our new product introduction net zero high speed and general speed band on the last earnings call for the June quarter. We began marketing these products during the June quarter and the results were beyond our expectations. We followed up our June quarter's tremendous performance with approximately 200,000 additional new users of the September quarter on our accelerated dial up product. That brings the total number of United Online accelerated dial up users to over $400,000 or 15% or our total pay sub at September 30th, 2003. I stated many times over the past nine months that I felt this technology pretty elongates the lifecycle of dial up and I believe that these results reinforce that view. We've been able to up charge 50% versus our 995 a month dial up service and make the 14.95 a month high speed and speed band price very profitable for the company and still maintain our claim of being almost 40% cheaper than AOL's 23.90 a month dial up service.
Interestingly in a recent research study conducted by the Cyber target research unit 12.3% of United Online accelerated dial up subs in the study stated that they came to net zero high speed and general speed band from broadband products. I repeat 12.3% of the United Online accelerated subscribers survey said they were coming from broadband that is an enlightening statistic because it says we withstand our opportunity to acquire new subscribers beyond our free base, beyond switchers from premium dial up providers and beyond just new internet households we've now included broadband in that. Our accelerated services have actually created a new target audience for the company. Existing broad band users who may feel that for the high price they are paying and the usage half as they exhibit that an accelerated dial up product for 14.95 a month would be both attractive and more than sufficient.
Net zero high speed and general speed band feature faster surfing speed than conventional dial up and attractive pricing versus much more expensive broad band services many of which I might add are just broadband like, what's more our latest versions of high speed and speed net products include a pop up locking technology and other improvements that will enhance the user experience even more. So obviously, our strategy is working. During the quarter, we introduced a dynamic new TV campaign featuring the net zero high speed challenge. These ads were shot in cities across the country like Boston, Chicago, Nashville and LA and they feature impromptu on screen testimonials from consumers viewing the speed for net zero high speed versus conventional dial up at Mall inter step station. Just like the product the results were dramatic and our sign ups for the quarter on our accelerated products were exceptional. We also continued our pension for guerilla marketing during the quarter with a host of creative vehicles, including sponsorship of hit television shows, Dog Eat Dog, and Fear Factor and our expanded presence in NASCAR Winston Cup Series, with our NetZero high speed car, which carried the number zero on it, which has been running in major races all across the country.
In addition to utilizing TV commercials, NetZero is featured in these TV shows in very unique ways such as, providing the time clock on Dog Eat Dog and Fear Factor with the NetZero brand name being on the screen for a high percentage of the actual television show. And our NetZero high speed NASCAR is featured in an upcoming Next Action Hero series.
We continually to utilize our creative abilities to accomplish what others with far larger marketing budgets have not been able to do. It's our marketing ability that's enabled us to reach the level of subscribers on NetZero high speed and Juno speed ban products in September 30th, that many thought we would not ever achieve during the entire life of the product, much less in the first two quarters.
To have ended the quarter with over 15% of our user base on our accelerated dial- up products after only six months in the market, is a statistic we are exceptionally proud of. At the core of everything we do at United Online, is the quality of the product that we provide. People may know us for the price but they appreciate us for the quality.
United Online continues to offer consumers one of the highest quality ISP services in the country, at price points that make us attractive to both the frugal and affluent consumer, who seek value as an important purchase criteria. Let me explain. A recent JD Power ISP customer satisfaction survey that they published, ranked both NetZero and Juno ahead of AOL, MSN, Prodigy (which is SBC), Compuserve, in terms of overall customer satisfaction.
In addition, we've long touted our marketing prowess as one of our key competitive advantages. And that keeps playing itself out quarter after quarter, with our outstanding user growth figures in a market that's been labeled difficult to compete in and where most of the other major players have seen declines. We've been continually out spent in the ISP market, by the bigger players. Yet for the past several quarters United Online, is the only one of the major ISPs that's recorded an increase in paid dial-up subscribers. That just goes to show you we don't have to be the biggest and have the biggest ad budget to be the most successful marketer. You need a great product at an attractive price point with compelling USP or Unique Selling Proposition, and a whole lot of creativity. That's what we've got at United Online and that's why we've been so successful at attracting users and market share from the competition.
I'd now like to turn the mike over to Charles Hilliard, our EVP and CFO, who'll give you a through review of the quarterly numbers. And he will provide you with our guidance for the December 2003 quarter and for Fiscal 2004 ending June 30th, 2004. Charles.
Charles Hilliard - United Online Inc. - EVP, Finance, & CFO
Thank you Mark and thanks to everyone tuning in to this morning's Fiscal First Quarter Call.
Our business fundamentals remain strong as demonstrated by another quarter of outstanding performance. The breadth of our results across paid subscriber growth, incremental accelerated subscription revenues and advertising revenues is particularly impressive this quarter. These results, including acceleration in year over year revenue growth at 53%, a record operating income before depreciation and amortization or OIPDA margin 21.7%. And a 124% growth in year over year quarterly free cash flow, which brings our trailing twelve months free cash flow to nearly $71m.
At September 30th our already strong cash position grew to over $217m providing us with broad financial flexibility to continue to build shareholder value through strategic and corporate financial activities including acquisitions and share repurchases.
At United Online we focused a great deal on free cash flow and we take great pride that our flows through free cash flow from adjusted OIPDA has exceeded 100% during the past twelve months. That is for every dollar of adjusted OIPDA we generated during the trailing twelve months we produced more than $1.00 or a $1.17 to be exact of free cash flow.
United Online's ability to generate an extraordinarily high flow through, free cash flow from OIPDA is due to our significant tax and operating loss carry forward and our very low fixed assets and working capital requirements.
Now let's discuss our Q1 in a little more. We talked about operating before depreciation/amortization at $19.3m. it was up 114% year over year, compared to the year ago quarter of $9m.
Global services margin, 71.3 % and 1,170 basis point improvement year over year. A 310 basis point improvement sequentially. We crossed a 70% milestone for the first time in company history, which is a major achievement for all of us. Paid subscriber growth at 173,000 put us north of 2.7m, a 47% increase in paid subs for the past twelve months, and a 23% acceleration verses our said growth in the year ago September quarter.
Accelerated dial-subs were approximately 15% of our total sub base, which was up from 8% in the June 2003 quarter.
Free cash flow $17.3m was up 124% year over year. It was down 5% sequentially which was due primarily to the attainment of our fiscal 2003 employee fund.
Other data for the quarter. Total revenues at just under $89m as Mark mentioned was a record for United Online. Total services revenue was just under $80m that was up 56% year over year. Adding commerce revenues of $9.1m we're up 33% year over year.
(Indiscernible) services revenues at 90% of total revenues for the quarter versus 88% to the year ago quarter continued to grow and continue to expand as a percentage of our total revenue base as, because Global Services continues to be our fastest growing revenue stream. Average monthly revenue per user or ARPU was $10.08 up 5% from $9.60 in the year ago quarter. Particularly impressive when you consider that our subscriber base is 47% larger than it was a year ago. ARPU continues to improve due to our success in driving subscribers to our $14.95 accelerated services.
Advertising and commerce revenues were up significantly this quarter due in large part to a $1.5m special performance bonus we earned from General Motors. We do not anticipate a performance bonus from GM in the December Quarter. Our four year advertising relationship with GM which ends in two months contributed 51% of added commerce revenues in the quarter versus 37% a year ago.
Revenues from search fees, the next largest portion of ad and commerce revenues were up 24% year over year and represented 17% of total ad and commerce revenues in Q1. Do you mind if I search through our two year agreement with Overture and Yahoo, which expires this March. We're in active discussions with a number of potential partners including Overture and Yahoo, regarding our future search business.
The build up services margin was up due to the increase in ARPU and an unexpected decrease in average hours per paid subscribers per month, which was down about 2% year over year, and down 3% sequentially. The drop was due primarily to events in the quarter such as a power outage and hurricane on the East Coast as well as the Blasterworm Virus which dampened normal usage patterns. Available services margin also benefited from a decrease in average per hour telecom card which was slightly below 7.5cents in the September quarter versus just below 0.08 cents in the June quarter and approximately 0.10 cents in the year ago quarter.
Cost of free services. $2.1m this quarter that was down 44% year over year. Our active free user base was down about 5% sequentially and 16% year over year. The decline in active free users and the reduction in hourly telecom rate help drive down our costs for free services year over year and sequentially.
As many of you know, we calculate our gross paid subscriber acquisition costs as follows, Cost of free services plus Sales and Marketing expenses Less ad and commerce revenues, which are generated by both our free users and paid subscribers. In the quarter net costs with $26.9m versus $13.5m a year ago and $21.8m in June '03. As discussed we added $173,000 net new paid subscribers in Q1 and grew our accelerated subscribers to 15% of our total case update to September 30th. As such, we estimate our cost per growth subscriber edition into Q1 as approximately $52.00 up about 5% versus $49.00 in the June 2003 quarter.
Given that our subscribers are becoming increasingly valuable as evidenced by a higher ARPU and billable services margin, we continue to be extremely pleased by our return on average subscriber acquisition costs. Marketing tends to be our most discretionary expense item and in light of our long range goal we plan to continue to invest in this area in a very disciplined manner.
(indiscernible) during the quarter was negatively impacted as I mentioned by the payment of annual employee bonuses, attributable to fiscal 2003. We tend to pay those in Q1 of each year. Product development expenses for the first quarter were down about 14% year over year, primarily due to decreased depreciation expense partially offset by increased capital costs. General and administrative expenses for the September '03 quarter were up about 25% versus last year's quarter and down about 12% sequentially.
In the September '02 quarter we received $700,000 credit as a result of a one time variable settlement of a contractual dispute. Additionally you may recall that the June '03 quarter was negatively impacted by the settlement of a legal dispute. Including the impact of these legal issues G&A was down about 3% sequentially and up about 11% year over year. Exclusive of unexpected or one-time items, we're forecasting mid single digit growth in product development and G&A expenses in fiscal 2004.
Exceeded in the earnings release our effective tax rate for financial reporting purposes increased to 40.5% beginning this quarter up 10% versus the year ago quarter. As such we believe it may be useful to compare the company's performance between periods on a taxable basis. That is, present our EPS growth using the 40.5% effective tax rate in all periods presented. On a tax equivalent basis, our earnings per share was 19 cents in the September '03 quarter which is what we reported. That was up nearly 10 fold from 2 cents from a year ago quarter and up 27 % versus 15 cents in the June 03 quarter achieved and the 45.5% in all periods. Tax equivalent adjusted EPS, 24 cents was recorded for September '03 that was up 157% compared to 9 cents in the year ago quarter and up 20% sequentially versus 20 cents in the June '03 quarter.
Now let's talk about our business outlook. Due to our strong performance in Q1 and current trend we're again raising guidance for fiscal 2004. We project (indiscernible)debt for Q2 of between $19 million and $20 million and between $80 million and $85 million for fiscal 2004. At the mid point, our revised fiscal 2004 guidance implies year over growth adjusted OIPDA growth of 64%. Total revenues for Q2 are estimated to be between $93 million and $95 million. Such result if they are achieved will result in year over year revenue growth of 41% to 44% I want to reiterate that we do not expect ETM performance bonus to reoccur in Q2. We are guiding for a global services margin to be slightly up in Q2 versus Q1 due to evenly higher average usage for (indiscernible) being more than offset by higher a ARPU due to incremental revenue turn accelerated subscribers. Also, I'd like to again point out that average usage was unusually low in Q1 due to issues including the blackout, hurricane and Blasterworm virus. We are also estimating higher fiscal year in 2004 total paid subscribers of between 2.95 and 3.15 million up from previous guidance of between 2.9 and 3.1 million.
Now let me wrap up and provide you with an update on our taxes. Currently we estimate that our total tax net operating loss carried forward or NOL for Federal Tax purposes are now $285 million. Our NOL has increased from our June estimates of $253 million by approximately $32 million due to a favorable ruling by the IRS which deals with the limitations on utilizations of NOL's (indiscernible) on merger. As a result this increases our NOL's available for use in fiscal 2004 to approximately $56 million, up from our June estimate of $38 million.
There are varying annual limitation on our remaining NOL's beyond fiscal '04 but at least $19 million should be available in each of fiscal '05 and '06 with $12.5 million available for fiscal year thereafter. Additionally State NOL's vary to some degree with Federal amount. Our feature tax rate cash date for income taxes and our NOL's usage is dependent upon a variety of factors including the company's actual results in the future as well as employee option exercises which today is providing significant tax shield and tax planning strategy. With that I'll turn the call back to Mark with some closing comments and then we can go into Q&A.
Mark Goldston - United Online Inc. - Chairman, CEO, & President
Thanks Charles. The result for the September quarter again demonstrate the strong operating performance in this business and the powerful leverage in this United Online model and we've continually shown improvement in organic sub growth and profitability while proving consumers with the very high quality, feature rich portfolio of products that are value priced and highly attractive in the commoditized world of dialup ISP. We mentioned on the June 2003 earnings call that we had expanded our mission statement to become the leading provider of value priced Internet services in the USA, not just Internet access. To that point, we're currently working on a couple of new product offerings that would seek to generate additional monthly subscription revenue while leveraging one of our core competencies which is to be able to maintain a strong billing relationship with our customers.
In closing, I want to comment on certain events of the past 4 weeks that have impacted our share price and have created questions from investors and the press and others. There've been three announcements over the past few weeks that have each had a major impact on our stock price. I'd like to take a few minutes to discuss these events and give you our perspective on what potential impact they would have on our business.
The first announcement was from SBC indicating that they were dropping the price of their DSL service which they provide in only 13 states to $26.95 a month from $29.95 a month only for those people who sign up for SBC Yahoo! DSL online or who sign up for a qualifying SBC phone service bundle package and commit to a full year's service, which then reverts back to a higher price at the end of the 12 month intro period. The $26.95 a month product is sort of a broad band light product, in that it only provides speeds of 384 kilobit down and 128 kilobit up. Those speeds are a fraction of what we all typically associate with a broadband DSL connection, which would normally be 1.5 megabit down and 384 kilobit up, a huge difference.
If you go to SBC's website you will see that SBC sells that program for 1.5 megabit down and 384 up at almost 4 times the cost of the $26.95 teaser product. They sell it for $99.95 a month. The reduced price move on their low speed broad band product was not a surprise to us just as it wasn't a surprise when SBC dropped their pricing on DSL below $30.00 a month some time ago. We said repeatedly over the past year and a half on earnings call that in our view, premium dialup would be squeezed from above by dropping prices for broadband light products and from below by the value segment of dialup in which we compete. In fact, the data suggests that while DSL and Cable companies have been dropping prices through promotional activity during the past 6 months, in an attempt to build their broadband user bases, the major premium dialup businesses were obviously negatively impacted as the premium dialup group dropped by over 2.8 million dialup users combined during that timeframe.
What's important to know is that in the face of dropping broadband prices during that same time frame United Online grew its value priced paid dialup sub base by 315,000 net additions. Therefore any success achieved by the broadband company who dropped their prices, came primarily at the expense of the premium dialup companies because they declined precipitously whereas United Online's value business grew significantly. Further, the United Online accelerated dialup services, have grown dramatically to over 400,000 subscribers in the face of dropping broadband prices and the opportunity to attract broadband users from lower speed DSL and cable products which are still much more expensive than the $14.95 a month speed and speed band products that we offer.
This is highlighted by the recent cyber target research study, indicating the 12.3% of our accelerated dialup users in that study, actually came from broadband. So the facts suggest that the squeeze we anticipated would be executed against premium dialup, has started to play out and the results are exactly as we thought and said they would be.
Broadband was increased in sub, premium dial-up would decline dramatically and United Online's value price dial-up base would grow substantially. All of which has happened. The next announcement came out a couple of weeks ago from Bell South. Ordbok can compete in a total of nine southern states to provide customers who spend between $35 and $60 a month on phone service, with the opportunity to receive a discounted dial-up ISP from Bell South.
Important to remember that even AT&T with its World-Net brand was unable to make a dent in the value price dial-up arena after two failed attempts with a $4.95 a month offering and then a bundled $7 a month ISP when they bundled that with 7 cents a minute long distance. AT&T spent millions of dollars marketing these programs and then pulled out of the value-priced arena, while United Online continued to grow.
The third of the three announcements to have a negative impact on our stock over the past four weeks were the AOL announcements or leak, as they, refer to it, regarding the potential introduction of the Netscape $9.95 a month raw internet access (their words) dial-up ISP at some unspecified date next year.
The initial reaction to the Netscape announcement was that AOL was finally going to address the value-priced ISP market and this could potentially hurt United Online. The only problem with this reaction, was that it completely ignored the facts and the fact is that AOL has been operating in the value segment of the dial-up market for over two years with their Wal-Mart connect service at $9.94 a month and more recently their Compuserve service at $9.95 a month.
The Wal-Mart connect brand was launched at a penny less than Net Zero and Juno back in 2001 and very little data is available from either company on how the service is done and we never hear AOL reference the performance of Wal-Mart connect on their earnings calls. We also never hear people ask questions about it.
Compuserve was repositioned as a value brand three years ago with a focus on the business segment and it's our understanding that the brand was later repositioned once again as a value-priced consumer dial-up ISP at $9.95 a month.
AOL Time Warner CEO, Dick Parsons said on their earnings call last week that they were going to use the Netscape brand a save tool for churning $23.90 a month AOL dial-up users. However, we believe that AOL has been employing a similar strategy on Compuserve and has mailed out CDs for $9.95 a month unlimited internet access and giving two months free on the Compuserve brand. Again, we have no way of knowing whether AOL has had any success in the value segment of the dial-up market, because like with the Wal-Mart Connect brand, where no mention was ever made of the effectiveness or the size of the Compuserve brand.
However, we all know how well United Online has done. So, to me the question that investors ought to be asking is what impact has the Wal-Mart Connect, Compuserve, People PC, AT&T, SBC Yahoo and Ordbok value-priced dial-up offerings had on the fortunes of United Online over the past two years. During that time, we had more than doubled our pay-user base to over 2.7 million subscribers, we saw our doable services margin increase by almost 2,800 basis points to 71.3%. We became the number one value ISP in the USA and we believe that United Online has been the most profitable ISP over the past twelve months as well. I only mention these events in order to underscore how United Online has performed in the face of competition from the likes of AOL, MSN, Earthlink, AT&T, SBC, Yahoo, the Ordbok and others.
In our view, the value segment of the ISP market will closely parallel the value segment of the airline market. Southwest Airlines was the pioneer of value-priced air travel. They were the market leader, they faced intense competition from the likes of Jet Blue, Mesa, now Delta has a brand called Song and lowered prices from Northwest and Continental. Investors expressed concern as to how Southwest was fair in the face of increased competition within the value segment, that they pioneered and dominated.
As those competitors entered the value segment, they all grew individually and the segment grew as well. They all generated impressive profit and Southwest has remained number one and has seen their earnings more than double. What's particularly interesting is the fact that the premier airline that continued to struggle financially, and from a passenger load standpoint as more and more of overall air travel leans to the growing value segment in an industry that overall is judged to be either a slow growth or no growth area.
I see direct parallels between Southwest Airlines and United Online and the dynamics of the respective segments in which we compete. So, through it all, United Online remains number one in the expanding value-priced ISP segment and we possess the most impressive subscriber and profit growth machine in the entire ISP industry. Competition within any value segment in any market is healthy for the category and typically, it spurs growth of the segment as it has for value-priced airlines, it has for online travel and other categories as well.
So, how will United Online fair in the expanding value segment of the dial-up ISP market? I think the results today speak for themselves and with that, I'd like to open it up to Q&A.
Operator would you please put people into the queue and take them one by one. We will take their questions and address them and then we'll coordinate that.
QUESTION AND ANSWER
Operator
Okay, at this time I'd like to remind everyone, in order to ask a question please press star then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster.
Your first question comes from Safar Rosky of US Bancorp Piper Jeffrey.
Safar Rosky - US Bancorp Piper Jeffrey - Analyst
Good morning gentlemen and congratulations on another excellent quarter. Mark, you answered a good deal of my questions. I appreciate the comments that described how you see the competitive landscape over the past few weeks. Let me if I may ask you to take this into future - - next year, let's say a year from now. How do you see the ISP landscape? - -obviously the premium and the world broadband offerings are under price pressure - - prices are coming down but as you noted, many of them are also coming down on the level of service to become light broadband. How do you see that impacting the migration of the consumers from the full priced dial-up - - you've got the full priced dial-up, let's say $25, $20, some of them will go up if they can afford it, some of them will come down and then they come down until they find your offering more valuable. Given all the happenings in the past few weeks, which as you noted doesn't seem to be any new development. How do you see the landscape a year from now in terms of the three segments if you could capitalize on the broadband with its own valuations, the full-priced dial-up and value-priced dial-up? Can I have a follow-up on that please?
Mark Goldston - United Online Inc. - Chairman, CEO, & President
Safar, that's actually - -that's a great question, because we spent about three hour two weeks ago in my staff meeting with the top 35 executives in the company actually going over just exactly that. So, I can give you an answer that is both fresh in my mind and also well baked internally.
From a broadband standpoint, I have said - - Safar you know cause you've been on the call - - for the past year and a half I have sat on earning calls and my belief was that the broadband industry would have to bring its prices down into the $20 to $30 range in order to get any growth beyond the early adapter, the tech savvy and the affluent in the businesses and in fact they have started to do that.
What I find particularly intriguing is that the messaging that they are using - - and again, this is a marketing issue. This is not anything beyond that. The messaging that they are using is devoid of any mention of the speed of the product. Let me enlighten. When people hear that there is a $26.95 or $21.95 broadband product, those of us who may be paying $80 or $90 a month for broadband because we need the 1.5 megabit broadband that we've all come to know, people look at a $26.95 price point and they go 'this is incredible, I should go and sign up for this right away', number one, hard to get, number two you'd find out it's really not the broadband that you know as high speed broadband, it's a 384, 128 product, which a lot of people call what you've referenced as 'broadband light.'
So, what's happening is they're using the marketing cleverly to get people to sign up - - and by the way, I think they've done a good job because the broadband market is starting to grow. So, what happens is, the premium dial-up customer says well 'whether I can or I can't get the $26.95 or the $29.95 broadband, there is no reason for me to continue to pay $23.90 a month or $21.95 a month for dial-up because it will just be a matter of time until I could get this lower priced broadband and so it's working to our advantage, which we thought it would because it's shaking the apple roots from the tree.
It's basically saying for those people who want the broadband product, they are going to go try to get it, you know it's got a lot of spotty coverage. So, what happens is they have now become dissatisfied with paying a high price for dial-up, so, when they come down to the value segment and sort of hang out there, until and unless they can get an attractively priced broadband product, when they get there Safar, we have the ability to sell them on our high-speed dial-up product, which frankly from a surfing standpoint are not much different than what you're getting for $26.95 from SBC Yahoo! DSL.
So, we are actually being helped in my view, and the numbers would bear me out by our growth rates, we're being helped by what's going on in the broadband market. My view a year from now is that more and more broadband companies will be in this broadband light category. So they will get growth, premium dial-up will continue to decline at accelerating rates and the value segment of the ISP market, as I stated before, will become a larger and larger segment of the market and we as the market leader with a 487 employee base and a construct to do this should logically become the beneficiary.
Ironically, a benefit that I didn't plan on which came out in our cyber target research which is why 12.3% of the people in the study came to us on high speed from Broadband is that the more people who sign up for low price Broadband Light the greater the potential for dissatisfaction with the Broadband product because it isn't the speed product that everybody has known to come and hear about. So ironically while it doesn't help premium dial up it may in fact help our accelerated dial up services because once people get this intoxicated need for speed and they're not really getting much of it with Broadband light we may actually find that they say well for this kind of speed, I should go try this accelerated dial up product. So that's our thesis, we've been right so far, hopefully we'll continue to be right in the future. The market dynamics and the recent trends would indicate that we are right on and we love where we sit.
Safar Rosky - US Bancorp Piper Jeffrey - Analyst
That's very interesting actually let me do a quick follow up on the advertising gain so much revenues. This quarter you mention that you had a one time gain from the GM contract but the overall advertising revenue is far on the rise and it seems to me that's been an area that we haven't focused on much at all but it could be very nice upside potential in upcoming quarters. You do have a fairly---a high traffic or that the high traffic websites within the internet within the US, so I'd like to know what are your thought on the potential from advertising as well as search going forward.
Mark Goldston - United Online Inc. - Chairman, CEO, & President
You know Saffa it's interesting; advertising which used to be 100% of our revenues is now about 10% of our revenues. The good news is all of the mechanisms that we had in place back in the heyday of the advertising industry online are still there. We do see the advertising industry starting to pick up and we do see the search industry as a tremendous opportunity over the next several years. We feel that both our user base in terms of their usage habit and the general search industry have indicators that would suggest to us that that's going to be an even better business 24 months ---12 months from now than even it is today. So we're excited about the opportunity within the search category as it relates to our brand and we also believe that should the trend on the internet advertising market continues because of the unique products that we're able to offer and the size of our user base that we should be in a very good position to capitalize on that.
Charles Hilliard - United Online Inc. - EVP, Finance, & CFO
Yes Saffa what I would add this is Charles is ---we've got a potentially to meet our transition within our advertising revenue that we need to work through the first being the expiration the GM contract at the end of this quarter that were pretty up in inventory and as you've mentioned spot pricing is getting better and we hope and believe that we'll continue to do that. And the other is as I mentioned more in act of negotiation with the incumbent overture Yahoo with both number of other party on where our search business will replace and went forward. So we remain very intrigued by the opportunity that presents itself there and I will say lets stay tuned and see how we transition though the GM deal with the economic put back on this new search deal before we began adjusting numbers.
Safar Rosky - US Bancorp Piper Jeffrey - Analyst
And one quick last question I apologize for taking too long but could you comment on your incremental operating margin which I believe was close to 38%, well above if you're competing on a sequential basis, well above your current operating margin. It was below what you had last quarter but obviously there are a bunch of factors playing here. Can you talk about what you expect your long term operating margin to be? Is the 38% - we see an indication that could be kind of a total operating margin for you?
Charles Hilliard - United Online Inc. - EVP, Finance, & CFO
the way we manage the business is we try to anchor in the circular equation of customer acquisition and subscriber growth and incremental profitability. Against a long term what I would call void growth rate and every quarter we try to take that as what we think is a very healthy rate, you know, between 20 and 30%. And to the extent that the business in the interim, a mean this quarter we saw tremendous pickup and potential revenue growth. We showed sequential (inaudible) growth of 20% so there, you know, we're getting kinds of the low end of our target on an annual basis in one quarter. We will turn around on a discretionary basis and invest it in sales and marketing. Because what we're trying to (inaudible) value here is a 3 to 5 years duration of growth not quarter over quarter, growth percent. So we'll anchor it targeting the business on that bottom-line and to the extent that it outperforms, which it did and saved this quarter. We're willing to turn around and reinvest as much as we can because we want to drive long term growth. Thank you Saffa.
Safar Rosky - US Bancorp Piper Jeffrey - Analyst
Great thank you.
Charles Hilliard - United Online Inc. - EVP, Finance, & CFO
Okay operator next question please.
Operator
Your next question comes from Youssef Squali of First Albany.
Youssef Squali - First Albany - Analyst
Hello yes good morning and thank you very much, a couple of questions for Charles Hilliard. Charles, How should we be thinking about your seldom marketing going forward? It looks you've decided to obviously spend a little more, invest in the business, because you're seeing an opportunity to get customers at a very attractive customer acquisition $52, this is a pre attractive. How far would you led that sag go before starting to reign it in, and corollary to that, would the increase in sales in the marketing. At least on a sequential basis I'm showing above 28% why is your subscriber growth guidance only for 50,000 more for the year?
Charles Hilliard - United Online Inc. - EVP, Finance, & CFO
The spice up in sales in marketing was reinvestment this is more of a same thing we were talking about. We had an extra $1.5m from GM, the add line grew, our group was up 33% and sequentially there was serge of margins standing by 310 basis points, cost of free services was down out here brighter than the line items were going strongly in our favor and so on an interim basis not wanting to show more than 20% sequential growth. We invested in sales and marketing and quite frankly the stack is simply a buy product to that discretionary stand. We are thrilled with a business that has its subscriber rates that is accelerating in value, so, you know spend an extra 5% or so sequentially on taking stack out. The stack at the end of the day is going to be result of that variable stand. We're not taking the business to stack we're taking the business to a long term growth rate in the winter.
Mark Goldston - United Online Inc. - Chairman, CEO, & President
And that is Yousesef, this is Mark, that is absolutely critical to understand. We do not manage this business based on stack that is a metric with the financial community has chosen to use because it can be computed and when you have a business that has a 71.3% gross margin and you earned 2% on your $217m of cash it makes no sense in any one quarter potentially to take 2 or $3m at extra profit and pile it on a balance sheet that is already loaded with cash that only earns 2% when we can go out and get a customary and make 71.3% gross margin on it. It would make no sense to do that and unfortunately because people have been able to compute the stock and because other ISP's which not only are in no growth, they're in declining mode and spend far more money to get basically declining sub basis they basically create an environment where people start monitoring customer acquisition cost. But in a company like this where you're getting a cash on cash return in six or seven months on a 22-24 months life of customer it would make no sense not to redeploy your capital back into the marketing line which I know you understand but I just think a lot of people haven't really understood that thought.
Charles Hilliard - United Online Inc. - EVP, Finance, & CFO
In fact Youssef, the payback period actually declines sequentially because the (inaudible) margin up with that so much. I think last quarter it was about 7.4 months a pay back of the gross margin line. This quarter 7.2 months, so if you look at that you have to look at the return you have to look at the return you're getting on the Stack and that actually improved sequentially.
Youssef Squali - First Albany - Analyst
That makes sense can you comment quickly on churn and then how much of the gross margin increase came from the higher speed product versus interest improvement in Telecom cost and how should we be looking at that going forward?
Charles Hilliard - United Online Inc. - EVP, Finance, & CFO
Churn with 4.4% in the quarter, it was taken up a little bit by our accelerated subscriber base, which is very - a very young average like base when we experience fairly life cycle churn as we do with the rest of the base because this is a brand new product with higher price and different expectations. Also to a lesser extent the black out and hurricane and the virus nicked us a little bit on churn in this quarter.
In terms of the upside from accelerator I would say that pick up in (inaudible) was more than half of the pick up in available services margin. And then when you begin looking at the other line item improvements, Telecom, would be next on the list, both in terms of lower usage which we were not expecting, as well as you know we went from less than 8 cents an hour in the June quarter, down to about 7.05 cents an hour in this quarter. And when you look at the volumes we're pushing through any movement in Telecom is very helpful.
Youssef Squali - First Albany - Analyst
Okay great thanks great quarter.
Mark Goldston - United Online Inc. - Chairman, CEO, & President
Thank you very much operator next question.
Operator
Your next question comes from Richard Corkman of Jeffrey.
Richard Corkman - Jeffrey - Analyst
Thanks a lot - great numbers.
Mark Goldston - United Online Inc. - Chairman, CEO, & President
Thank you.
Richard Corkman - Jeffrey - Analyst
Could you---Mark you had said last quarter you had talked about kind of theorizing the $200,000 you added last quarter on the accelerated was due to all the pent up demand. Well maybe it's still pent up because you bid another $200,000.
I just wanted to asked your thoughts on the sustainability of it because I suppose if you run the math and you talk about a 4.4% churn rate, even it's ultimately less than that you kind of whined up with a lot of new subs. Every quarter new gross additions and they're having to decide 10 verses 15 and so it just seems like there's a lot more sustainability in that number going forward than maybe.
Mark Goldston - United Online Inc. - Chairman, CEO, & President
You know Rick I do remember what I said last quarter and I was wrong. I basically said that we got 200,000 in the June quarter, which was unbelievable. And a lot of people, both those people who were naysayers and supporters alike, said well there was a lot of low hanging fruit because its a brand new product intensive demand. Which absolutely make a ton of sense and I agreed with. Having said that I would never have guessed in a million years that we would have gotten 200,000 more subscribers in this quarter no way - no how, having said that we have been more than pleasantly surprised with this business.
It is still early we've been in it for six months we have 400,000 subscribers in six months who would have estimated that so we don't really know where it's going. What we do know is that we took our marketing and spend roughly 40% of our total budget in the June quarter, to about 56% of our total budget in the September quarter because we love this business and we love the way it's responding. So we're going to continue as you could imagine Rick, we're going to continue to market like crazy against this high speed, speed band segment.
We think it makes a lot of sense. Ironically I actually think we've been helped by the Broad-band guys, I think this lowering of Broad-band pricing has given people that impression that speed maybe within their grasps. And when a lot of people either don't want to unnecessarily spend that $26 to $30 or can't get it, us being on the air talking about an accelerated dial up product that's giving you up to five times the speed, to a user that may have just seen a DSL or Cable commercial for a product that they can't get but would really like, that may actually be working to our advantage. So I think it's really hurting that premium dial up segment a lot cause it just begs the question of relevance. And it puts us in a situation where for the frugal or the people, who just don't need the speed, we've got this great $9.95 product and in many cases what's happening I believe is that they're coming to the website and they see what we offer for $14.95 and they are like - why not try that.
Its still monsterably cheaper than what I'm paying MSN and AOL, so why not try it and I'm not amazed, I'm pleasantly surprised. I'm huge believer in marketing because I'm a product of the craft. However having said that everybody who ever launches a new product in marketing, everyone, thinks its going to be a success and nine out of ten new products fail. So we just have to be careful not to start getting too excited with your own exhaust but 6 months in with these type of numbers we are---we're feeling very good about that business. And I can commit to you that we will continue to spend a very healthy portion of ad budget going forward on that business as long as it continues to perform.
Richard Corkman - Jeffrey - Analyst
It strikes me that if this is getting more than half of your budget and it's obviously some substantial portion of your gross Ads and your churn through your average customer every two years that, that 15% of your pay sub base right now is got to have pretty substantial increases over the next (multiple speaker).
Charles Hilliard - United Online Inc. - EVP, Finance, & CFO
Just remember don't confuse by---I'm not saying that I disagree with you because that's an entirely logical opinion for you spout. What I will tell you is don't confuse marketing with the actual user matrix. A lot of times in marketing, you will a--- what we call a halo product, we use to do this in the sneaker business we did it in the fragrance business. You market a halo product that create excitement and demand so that you can get people in the door and then they may in fact end up buying the value products or the budget products because of that. So the marketing spend that we're doing is owed one, to the attraction that we got and two to the patina that it places on dial up, a category that is taking a lot of sort of bullets on the bowl. A lot of people have thought that dial up is somewhat passé maybe seen as day, so remember it's our ability to add excitement and relevance and speed to dial up, without having to charge a high price is not only helpful to that business itself but helpful to the entire dial up offering that we have. And so you might argue that it makes sense to half of your immediate dollars on your hot new idea via new message anyway whether you weren't getting the attraction that we obviously have gotten.
Richard Corkman - Jeffrey - Analyst
Well that makes sense one last question if I could, you use the phrase loaded with cash on your balance sheet, good problem to have, only earning 2%, you mentioned a couple of potential uses for cash on your last call I was wondering if you could readdress that?
Mark Goldston - United Online Inc. - Chairman, CEO, & President
The three issues of cash that we mentioned were acquisitions, which we are actively looking at. Our entire corp debt group we have several things that we're looking at and hopefully we'll get one those things done this year. The second was use of cash as the stock buy back program we have a $100m authorization from the board and that's something that we feel is a great use of funds especially in our view of where the stock is. And then lastly we talked about a dividend and Charles in the finance organization are undergoing right now a major analysis of dividend programs that exist today and if we were to consider doing one what it would be, what the magnitude would be, what the payout ratio would be and whether that is in fact the highest invest use of cash.
It absolutely is the project that we're actively reviewing, as to the acquisition front and the stock buy back program, is something that we feel very strongly about. One could ask with the recent drop in the stock prices what had we done but the reality of is that the window that we had to buy shares, when that window was opened our stock was predominantly up in the $40 to 43$ range. It's only very recently while the window was closed that the stock has actually dropped.
Richard Corkman - Jeffrey - Analyst
Alright thank you very much and I hope you enjoyed that FDR book too.
Mark Goldston - United Online Inc. - Chairman, CEO, & President
Yes it was phenomenal thanks, next question operator.
Operator
Your next question comes from Darrell Smith of JP Morgan.
Darrell Smith - JP Morgan - Analyst
Thanks a lot, good quarter, give me your positive sub ads across your accelerated dial up in the face of cable operators reporting breeched strong access numbers. Specifically which competitor are they targeting as the primary users in this space and what percent of your accelerated team from your stand up product? I have a follow up question as well.
Mark Goldston - United Online Inc. - Chairman, CEO, & President
I'm sorry I did not understand the first part of your question you said something about cable operators and then I lost you what was your question?
Darrell Smith - JP Morgan - Analyst
I said give me your---your positive sub ads across your accelerated dial up in the face of cable operators reporting on the past couple of days here. Pretty positive growth matrix, specifically which competitors are you targeting as the primary losers in this space and then follow up to that is what percent of your accelerated team from your standard product?
Mark Goldston - United Online Inc. - Chairman, CEO, & President
First and foremost we don't necessarily target specific individual companies. Our target is the entire universe of people who have an ISP connection, Broad-Band and dial up. I mean clearly premium dialup is the obvious primary target for a value price offering, it has been and will continue to be. We have been pleasantly surprised at how relevant our accelerated dial up message is to the Broad-band market and not only for people who are considering going to broad band but as our study indicated, people who actually had broad band and are coming back to accelerated dial up.
So our marketing message would not change Darrell, whether we targeted only premium dial up, only broad band etc. What we're marketing is quality, value and speed and that is something that is we think very powerful to all of those audiences and doesn't require us to fragment our messaging. I mean did you ask me for my opinion, who would be the obvious loser in the battle, and this isn't new cause I've been saying that for a year and a half that this would happen. It's just that now it's happening. It's a premium dial-up. I've been saying repeatedly that there is no way logically that people would stay with the $21.95 or the $23.90 product when for $3.00 more, even if it's broad band light, and even if it's not the broad band you've come to know. Why would you spend $23.90 a month for a 56K connection when you could get broadband for that? Now you and I both know the issue is a lot of people can't get the broadband. It's only a promotional offer. You can only buy it online. You got to sign up for a year, then it reverts back. But don't confuse me with the facts. From a marketing-messaging standpoint that doesn't come out in any one messaging. Heck, you go to the website of some of these people and you can't even see what you're buying. All you see is price. So I would say that premium dial-up would be the primary loser in the battle. And ironically, maybe the broad band light products companies might be because it's one thing to get the customers, another thing to keep them.
Darrell Smith - JP Morgan - Analyst
And then, a follow up question to that is, if you look behind your core pre pay and an accelerate dial up drivers- can we discus your efforts on other premium financial services. So when can we expect to see new products that will enhance storage, POP forwarding, those kind of products in your efforts to raise your RP numbers.
Mark Goldston - United Online Inc. - Chairman, CEO, & President
In the continuation in the raising of the RP that we just experienced, we are looking at a couple of premium products that were way down the road on one, and I would love to try to get it out if possible. I'm working with the Marketing and Tech organization. I'd love to try to get it out at some point during this December quarter which is a possibility. If not, we'd look to launch it in the March quarter. But it's a premium service. It is an up charge. It would put us in a very competitive position versus the market leaders in that segment; otherwise we would never go into it. So we're aggressively looking at that. We're looking at a couple of other services which I really can't talk about for competitive reasons, both internally and through acquisition.
Charles Hilliard - United Online Inc. - EVP, Finance, & CFO
Hey Darrell, here to answer the question about the percentage of accelerator sub ad from our existing product. A metric we do disclose is the percentage of gross adds coming directly to the front door versus upgrading from our free service. And that percentage in the September quarter was 77% front-door, 23% upgrade. That's versus a June quarter at seventy thirty, 70% front door, 30% upgrade. And in the year ago quarter up 56% were front door and 44% were upgrades, which (multiple speakers) effectiveness of the marketing. But that it's on the consolidated pay subscriber add.
Darrell Smith - JP Morgan - Analyst
Fred thanks so much. Appreciate it.
Charles Hilliard - United Online Inc. - EVP, Finance, & CFO
Thank you Darrell
Mark Goldston - United Online Inc. - Chairman, CEO, & President
Next question, operator?
Operator
The next question comes form Peter Mercy Obpenhiemer (ph)
Peter Mercy - Obpenhiemer - Analyst
Thanks very much. Just kind of duck tailing on what Charles was talking about. Can you give any indication at least directionally apart from the 12.3% that came from broadband, where the accelerated subs (ph) were coming from? And actually I'll just draw on the follow-up question? Other than that the Best Buy deal that you just announced, are you content with your distribution channels? Are you looking for other things? Does Earthlink preclude you from doing anything else with Radio Shack? Kind of an unfinished question but there it is.
Charles Hilliard - United Online Inc. - EVP, Finance, & CFO
Yes. In terms of where they come from, we don't really disclose that in other that this cyber target research study, other than the people who upgrade from our own products. We don't really track that cause as I said before, on the question that Darrell had asked, we really target the entire universe of people who are on an ISP, not so focused as to a specific number. So we don't really have the data specifically as to where they are coming from other that our own and other than this broadband component that we just got from the cyber target research and the second part of your question had to do with what?
Peter Mercy - Obpenhiemer - Analyst
With new distribution channels like the Best Buy deal? Are you looking for others? Are you content with Best Buy?
Charles Hilliard - United Online Inc. - EVP, Finance, & CFO
Oh no! We are looking for others and in the Best Buy deal rolled into the stores October 14th into their stores. If you go in there now, you'll see us there. It's the only retail distribution deal we have. We do do a lot of distribution deals with online companies as we talked before, and that has been very effective mechanism for us that we look to expand daily. I also thought that we would look at other retailers. As you know Peter, we have a real tight screen in terms of what we'll pay to do this and logically what we pay because we are a value brand is a lot less than what others will. So we have to find partners in terms of retailers who see the attractiveness and the growth with the value ISP segment and therefore willing do a deal at economics that are far different than the economics that they have done with the premium dial-up ISP. So I don't believe that there are exclusive arrangements with these other retailers that would preclude us from doing business with anybody. However, I will say that in the case of Best Buy, we are the exclusive value ISP offering in the Best Buy stores.
Mark Goldston - United Online Inc. - Chairman, CEO, & President
And Peter, what I would add is that, if beyond the 48,000,000 existing dial-up households out there, there are there're 75% or so paying more than twenty bucks. That's a huge growth opportunity for us. We recognize that internet penetration in the US is 65% to 70% is skewed toward the upper income. And the next 20 million households coming online are skewed toward lower income. So it is a huge strategic opportunity for us to begin to reach off line to these brand new internet households. And Best Buy is certainly first to outgo in addressing that strategic opportunity.
Peter Mercy - Obpenhiemer - Analyst
Right. Thank you.
Charles Hilliard - United Online Inc. - EVP, Finance, & CFO
Thanks Peter. Next question operator.
Operator
Your next question comes form Mark Lee of Coffman Brothers (ph).
Mark Lee - Coffman Brothers - Analyst
Thank you. Good morning. I guess it's good afternoon now. I've go three questions. The first one is for Charles on free cash flow. If you exclude the 4.4million option-related gain in the quarter and then normalize for the $4 million swing in working capital, looks like free cash flow was down a little bit to $17 million. Just wondering Charles, if you could help walk me through one of the sequential decline there? And then the second question, kind of related to a previous question. Just want to verify that this calculation is correct- it looks like 40% of your total gross adds during the quarter took the high speed/speed band product in the quarter. Just wondering if that's correct? And if you could give us the churn figure for the quarter for high speed and then I'll follow up with a third on sales and marketing if that's okay?
Charles Hilliard - United Online Inc. - EVP, Finance, & CFO
With free cash flow, any options gained does not impact free cash flow. That's associated with financing activities. We define free cash flow as cash flow from operations because what goes on with financing activities does not impact the operation. So that 4.4 million gain would not be associated with it. And this quarter was down sequentially because we paid bonuses. We accrued them throughout the year and then we paid them after year-end when we report the numbers. So the amount of bonuses that we've paid this year were also up versus last year because we had that 1 1/2 year- we had a half a year bonus for Juno employees that got paid in the year-ago quarter, because we are in a transition for them, I guess you are -- fiscal June bonus program were before they were on a fiscal December.
Mark Lee - Coffman Brothers - Analyst
What was the impact of that?
Charles Hilliard - United Online Inc. - EVP, Finance, & CFO
The impact of that adjustment on the Juno fiscal- was around $3million.
Mark Lee - Coffman Brothers - Analyst
Okay.
Charles Hilliard - United Online Inc. - EVP, Finance, & CFO
The second was talking about total growth as you estimated 40% at high speed. And actually what the churn rate is- I can tell you that the churn rate is higher on that group of subscribers. It is a higher price -- it is premier life cycle -the average age on the on those folks is somewhere around three months or less versus a couple of years from the rest of the sub-base. And what we do is we present a consolidated subscriber churn rate which was 4.4% for the quarter. Our goal was not to break out each individual line item. As you can imagine, if we come out with a host of different subscription bases it'd be fairly challenging to present half a dozen or so churn metrics.
Mark Lee - Coffman Brothers - Analyst
Is the 40% number in the ballpark?
Charles Hilliard - United Online Inc. - EVP, Finance, & CFO
I can't answer that. I mean what's again we'll present a consolidated metrics, would throw out consolidated (indiscernible), consolidated billable services margin.
Mark Lee - Coffman Brothers - Analyst
Okay and.
Charles Hilliard - United Online Inc. - EVP, Finance, & CFO
What's the third question?
Mark Lee - Coffman Brothers - Analyst
The third question on sales and marketing. I'm just triangulating a little bit based on your guidance for subs single digit growth on product development and G&A and EBITDA number. But it looks like your guidance implies sales and marketing in fiscal 04' between $145 million and $150 million which is on a growth basis consistent with the EBITDA growth that you're projecting next year which is obviously consistent with the way that you manage the business. I'm just wondering if the sales and marketing figures is about in line. Thanks.
Charles Hilliard - United Online Inc. - EVP, Finance, & CFO
Alright. It is certainly in the ballpark Mark depending on what happens with the sub-ads(ph) and the way that record business perform. And once again, that is our unilateral and discretionary decision to make that investment to drive future revenue and profitability. That's in the ballpark.
Mark Lee - Coffman Brothers - Analyst
Thanks for answering my questions.
Charles Hilliard - United Online Inc. - EVP, Finance, & CFO
Thank you Mark. Next question? This will be the last question.
Operator
Your next question comes from Jeff Goverman of Pacific Crest.
Jeff Goverman - Pacific Crest - Analyst
Hi guys most of my questions have been answered but could you go through the nuts and bolts of the Best Buy agreement in terms of you know, is there signage? Are you going to be preloaded? How the salesmen compensated? That kind of thing.
Mark Goldston - United Online Inc. - Chairman, CEO, & President
We can't really disclose a lot of the specifics of it because the confidentiality of the agreement. I can tell you obviously what is in the stores, which is that we have major signage going in the stores with the end aisle displays, they got major cds that they done for them. They have in-store training materials and up sell materials for their clerks to explain what our products are, how to sell them. They have done you may have even seen in the last week or two when they drop the Best Buy Rodeo which - the insert that they put in the news paper, the color insert. There are multiple ads within those inserts promoting both net zero and Juno. So Best Buy is a very savvy retailer. And they are using all of the elements that are available to them within their arsenal to promote these products. And beyond that I'm not sure what else I could tell you.
Jeff Goverman - Pacific Crest - Analyst
Oh that's good enough thanks.
Mark Goldston - United Online Inc. - Chairman, CEO, & President
Okay thank you Jeff. Operator we'll take one last question.
Operator
Your final question comes from Lenny Baker, Swiss Barney.
Bill Morrison - Swiss Barney - Analyst
Well actually it's Bill Morrison for Lenny. Kind of following up a little bit like kind of a twist off the original question. But I kind of wanted to get your perspective I guess, at a very high level on where you see -- how you see the market evolving kind of over the longer term you know ten years from now, let say - what you know, how do - what percent of the ISP market you think ends up in Dial versus Broadband? And also where do you think it is today? You know every one has got their estimate out there but like you pointed out I mean it's really hard to between a lot of the re-selling agreements, between - you discussed AOL issue with CompuServe. You know it's kind of tough to zero in on what percentage Dial Up- what percentage premium or discounted in the Dial market. So just curious if you could tell us where you think the market percentages are today? Where you think it is ten years from now? And then I have on quick follow up.
Mark Goldston - United Online Inc. - Chairman, CEO, & President
Well in terms of ten years from now I'm still hoping we're going to have flying cars, so I'm still rooting for that one. But I be would be hard pressed - I can't give you anything for ten years out, because I can only say that if we went back four years and looked at what every body project and what we have today. The market today was supposed to be pushing 70% broadband. That didn't happen. (technical difficulty) wireless, WAP enable phones and none of us were supposed to be using our lab tops, because we're all suppose to be using pocket PCs with you know with 128K connection rate.
So that is - recently as four years ago. So all I know is what ever I tell you for ten years I guarantee you it would be wrong. So let me give you do know and how we do look at the business and maybe that would be helpful, Bill. So in terms of the current market our assessment is that the premium dial segment of the market is probably something approaching 80%. And regardless of what CompuServe and Wal-Mart and some of the other things are within the AOL numbers, because we don't know that and maybe others do. The reality of it is premium Dial up is about 80%. You've got this tremendously commoditized category that ironically has roughly 80% of its subscribers paying a premium price. That's 80% of the total 48m US Dial up house holds in our view, roughly 80%, 75 to 80 are in premium dial up products.
So those are people paying a lot of money for a commodity product. So in our view from United Online that's a massive opportunity. If the market never grew another individual, heck if the market went down 5 million, if the market went down 8 million, if the market went down 10 million. And instead of having 48 million people you had 43 million as JP Morgan put out in their report the other day and I noticed they thought that by 2007 that the dial up market would go from 48 to 43. Say you went down to 40 or 35 the reality of it is United Online competes today with about 5 or 6% of the paid subscribers. So that's about our market share. The 95, 94% of the people in America who pay for dial up access don't pay us and about 80% of them in our view are paying a premium price. So it's a huge opportunity for a shift within the category even if it's not a growth market overall. We think the value segment of the market grow significantly for necessity purposes and just because of the commoditization, one.
Two, broadband right now all estimates say that broadband is between 18 and 20% of US households. It has great penetration in businesses as you know but about 18 to 20% of US households. The limitations of broadband also have to do with the construct of the foot print. I mean cable television is only in 60 plus percent of US households. That's why there are satellite dishes. And so when broadband is dominated today, 2/3 of broad band is cable. And cable is not even ubiquitous when it comes to television households across the whole US. Our feeling is that the limitations of broadband build out had A to do with price and B to do with foot print and C to do with the relevance. And I only say relevance because there is a lot of people out there Bill - who only go to Amazon and EBay and Yahoo and check their e-mail. And so those people they don't need massive amounts of speed wither it's broadband or it's accelerated dial up.
So our view is that broadband will continue to grow. That broadband light which is this low speed broadband product will become more and more prevalent because otherwise they just won't get the average consumer to sign up with a $50,000 average income. And that as they do that they will get traction at the expense of premium dial up and I believe that they will help to create an aura around speed and affordability that should translate into a benefit for accelerated dial up product from people like us.
So my view is if I'm looking 5 years out I think the dial up market that's 48m is probably about something approaching 40-ish million, which you know is an 8 million decline. And my personal goal for United Online is for us to figure a way to get our 2.7 million users to get towards 5 million users. And if we can do that then we become an incredibly profitable company. And even at that level of users we would still only have roughly 15% share of even a smaller dial up market. So 15% share is impressive against the 5 or 6 that you have today. But it's hardly what you'd call market dominating. That's my view.
Bill Morrison - Swiss Barney - Analyst
That's really helpful thanks. I have one quick follow up do you guys know of any - are there any kind of start ups or research labs within the big companies working on compression technologies that might take kind of what you've got in your accelerator product to the next level? And is there - is it just not possible you know I'm not an engineer so I just don't know. Is it just not possible to take that to another level where you know you might be able to just get an accelerator product where you can get --- increase the speed of download in addition to the surfing over dial up connections?
Mark Goldston - United Online Inc. - Chairman, CEO, & President
Well you know again it's hard to say what have not yet been invented whether it will or will be. I can tell you that we internally are looking aggressively at ways to improve existing cashing and compression technology. Right now our products are incredible for compression of text. And the internet in general compresses dial up - internet compresses graphics already. So when you add an accelerator product to that well you will get marginal improvement in speed through the compression, you're already compressed product where you get tremendous improvement in text.
I believe over the next 12 to 24 months you will see major strides in the compression of graphics over dial connection in addition to improvement in already fast text compression. And that will be interesting because still you have to remember that if you have a broadband connect in your house, your ability to see a web page is a function of how quickly that web page is loading. The web site itself dictates a lot of the speed with which that page get shown. That in conjunction with your connection speed. So just having a high speed connection doesn't necessarily mean that every page is going to last faster, number one.
Number two, in broadband, broadband does not compress text. So if the compression technologies are to advance within the dial up universe the real interesting question is will there come a point in the next year or two years or so where accelerated dial up products through advanced cashing and compression, through predicted cashing and the like, really give you a true broadband like experience. Such that if you're not a heavy down loader of music and files you really wouldn't need to go all the way to a broadband product. That's the real key question and I believe people are working on that. And if I were a betting man I believe we will see that.
Bill Morrison - Swiss Barney - Analyst
Good thanks a lot.
Mark Goldston - United Online Inc. - Chairman, CEO, & President
Thank you operator that's all the time that we have. I want to thank every body for your time and attention. If you have any questions feel free to follow up with the Brent Zimmerman or Charles Elliot or myself and have a great day, thank you.
Operator
Thank you for your participation in the United Online First Quarter Earnings Conference Call. You may now disconnect.
