Event Date/Time: Aug. 02. 2005 / 2:00PM PT
Event Duration: 55 min
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CORPORATE PARTICIPANTS Elizabeth Gengl Mark Goldston Charles Hilliard |
CONFERENCE CALL PARTICIPANTS Youssef Squali Michael Trotsky (ph) Jason Avilio Dave Geisler Safa Rashtchy Pat Conlan (ph) |
PRESENTATION
Operator
Good afternoon. My name is Felicia and I will be your conference facilitator. At this time, I'd like to welcome everyone to the second quarter, 2005, earnings conference call. All lines have been place on mute to prevent any background noise. [ Operator instructions ]
I would now like to turn the call over to Ms. Elizabeth Gengl, SVP of Corporate Communications. Thank you. Please go ahead.
Elizabeth Gengl - United Online Inc. - SVP, Corporate Communications
Good afternoon and welcome to United Online's conference call to discuss the results of our second quarter, ended June 30, 2005. 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 are not determined in accordance with generally accepted accounting principals, 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 the reconciliation's most comparable GAAP financial measures.
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, our pay account growth, future products, and the industry in which we operate are forward-looking statements that are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.
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 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 replaying this broadcast after August 2nd, 2005 should recognize that any nonhistorical information discussed in the call might not be current or valid after that date because the 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 then we're going to open it up for questions. So we'll now give the floor to our Chairman, CEO, and President, Mark Goldston.
Mark Goldston - United Online Inc. - Chairman; CEO; President
Thank you, Liz. Good afternoon, everyone.
The June quarter was another record quarter for United Online. We recorded our 16th consecutive quarter of record revenues and adjusted OIBDA. Every single quarter following June 30th, 2001 has been a record for the Company and that puts United Online in some rarified air. We're extremely proud of what we've accomplished as a company.
We've previously articulated our strategy of expanding non-access subscription services and I'm very proud to announce that 100% of our growth in the June quarter came from our non-access businesses. In particular, we're very pleased with the growth in our Classmates business, as we've experienced a healthy gain in pay accounts during the first six months of this year. Having owned this business for less than a year, we're more excited about the potential for this company than ever, and our folks up in Seattle are doing a terrific job. With 40 million members and a system capable of connecting millions of users, Classmates is truly a unique asset. One of our goals is to enhance the Classmates business to make it a premiere vertical in the social networking arena.
While Classmates is currently a fantastic vehicle for connecting people with acquaintances from school, work, or the military, we think it can serve as a great platform for much more. We're currently integrating features from our recent PhotoSite acquisition into Classmates to enable users to post personal photos, create albums, purchase prints online, etcetera, while today, Classmates has limited functionality in that area.
We're also evaluating a variety of additional features which we think will provide the Classmates user base with a more dynamic, compelling and sticky online experience. We believe the social networking arena is one of the most exciting categories in the Internet and we believe that with our large and growing Classmates business, we are well-positioned in this place.
Our strategy is to take our PhotoSite unit and the United Online web services unit and make them OEM, or Original Equipment Manufacturer suppliers, to our access and non-access businesses. We liken that strategy, somewhat very similar to Bose Speaker's strategy, where Bose will sell its products directly to consumers in stores, but it does a large amount of its business as an OEM to the auto industry.
While we're certainly continue to pursue new users for PhotoSite and our personal website and hosting businesses, we would do that on a stand-alone basis, we believe the big idea is to take these products to the over 45 million United Online accounts and provide each and every one of them with a terrific solution for creating personal websites and a comprehensive photo album for posting, sharing, and printing.
In order to help us realize that rather lofty goal, we're pleased to announce that Ted Cahall will join us as an Executive Vice President of United Online and the Chief Operating Officer of the Classmates unit, on August 9th. Ted was the CIO of CNET, where he spent the last six-plus years overseeing the broad base of technologies deployed within the numerous CNET businesses. As we strive to significantly increase the breadth and scope of the Classmates business, and we will be launching a host of new services, we believe that Ted's deep knowledge and experience will be a great asset to our Company.
Now let me switch our focus to the access business. While we recorded a net decrease of 52,000 pay accounts during the June quarter, due to declines in our Juno and BlueLight businesses, which, as you know, are in harvest mode, our flagship NetZero brand continued to generate growth for the 18th consecutive quarter, dating back to the March 2001 quarter.
Our major news during the quarter was the late June introduction of our exciting technological breakthrough, NetZero HiSpeed 3G, the third generation of dialup access. Our goal was to find a new way to drive the access business and advance the state of the art in dialup in an increasingly competitive market. With NetZero 3G, we have a product that is the fastest dialup experience ever offered by a major brand, along with what we believe to be one of the most compelling new features in the industry. Instant On!.
Instant On! allows you to set your computer's time clock to access the Internet, set your E-mail for you or your favorite website, at a predetermined time and then, when you want to read your E-mail, you sit down at your computer and there's no waiting. It is up instantly on your screen. In one of our upcoming television ads we intend to highlight the Instant On! feature almost exclusively in that ad. We launched our TV ads in the middle of June for 3G and so far have been pleased with the consumer response in light of what you know is typically a slow period for Internet access.
Let me share some fascinating data with you on NetZero 3G: In independent testing by an outside testing service, NetZero HiSpeed 3G was found to be as fast as 256 kilobit broadband for web surfing, which is an astounding result: as fast as broadband. Now, with just a phone jack, everyone in America can have web surfing speed as fast as 256 kilobit broadband, right now, without special modems, no wiring, etcetera, with HiSpeed 3G. The testing service further showed that with the Instant On! feature built into the 3G product, users can view their pre-fetched E-mail and their content 13 times faster than 256 kilobyte broadband. That's remarkable for a value-priced dialup product or for any dialup product, for that matter.
In the last earnings call, I said our goal was to innovate and give consumers a compelling product that raises the bar in terms of quality, features, and speed. We believe NetZero HiSpeed 3G accomplishes that goal for our company. As more and more lower income households come onto the Internet and the AOL Free Portal business starts to gain traction, the lure of a high quality $9.95 a month dialup service and a broadband-like NetZero HiSpeed 3G service that's available to everyone immediately at the attractive price point of $14.95 a month, we think that becomes even more powerful in our view.
While we do not believe the dialup category as a whole is going to grow going forward, the migration of existing users to the more attractive, value priced segment and the influx of new users onto the Internet, looking for basic Internet access and attractive price, should make the value dial segment grow and we think United Online is poised to take advantage of that potential shift with our leading NetZero brands and the innovative features contained in our products.
With that as a backdrop, I spent the last seven months searching for a world-class marketing executive to join our team as Executive Vice President and Chief Marketing Officer of all of United Online. I'm pleased to announce that we found that world-class marketer to fill the all-important Chief Operating Officer role in Matt Wisk, who started with us yesterday. He's already doing a great job.
Matt Wisk came to United Online from TiVo, where he was the Chief Marketing Officer in a highly competitive subscription based business. Previously, Matt was the top marketing executive for the Americas with Nokia, where he spent almost a decade taking a virtually unknown brand and overtaking Motorola as the number one cell phone company in the world. Nokia became a household brand name under Matt Wisk, and his experience in both Europe as well as the USA will be invaluable to our Company going forward. Specifically, Matt's knowledge of the telecommunications business will be a huge asset to us as we prepare to launch NetZero VoIP.
Let me take a minute to actually talk about VoIP and where we stand today. We've made great progress on the VoIP front in the last 90 days and we believe that our launch goal by the end of 2005 remains attainable. Remember that while VoIP is clearly a new product line for us, the NetZero brand name is one of the best known names in the country and it stands for high quality, low price, widely available connectivity over telephone line. We believe that our brand and our large user base provides a competitive advantage from which to launch the VoIP product.
Our ultimate long-term goal will be to give everyone of United Online's over 45 million accounts a free VoIP account, with the hope that some of the viral marketing and distribution that we experienced in the early NetZero free ISP days will apply equally as well to our VoIP products. We've got a lot of work to do on the VoIP product, but I'm confident that our outstanding VoIP team -- with our team will continue to be able to deliver on the vision that we've practiced of launching our VoIP product.
Now you can clearly see that the strategy we've espoused over the last 12 months is starting to come together. We will pursue our goal of becoming a premiere social networking company through the seamless integration of the ability to find people, see people, and talk to people, using our Classmates, web services, PhotoSite, and VoIP products in a single suite of services uniquely delivered to millions and millions of people. We believe that is a very powerful business model and we intend to continue to work towards that goal.
From a financial perspective, we run a business that generates truly astounding cash flow numbers as evidenced by the $35.7 million of free cash flow we posted in the June 2005 quarter. That's almost $12 million a month of free cash flow. Our billable services margin is nearly 80%. We have a balance sheet that for years has been and continues to be cash rich.
From a product perspective, we've created a certifiable breakthrough innovation in dialup access that gives consumers a broadband-like experience over a dialup connection at a very attractive price and we've aggressively moved into the non-internet access businesses that leverage our core competencies while moving towards an overall goal of diversifying and decreasing our reliance on Internet access revenues.
The profitability of our Internet access business, and it is outstanding, helps us to fund that objective while enabling us to provide an extremely attractive dividend to our share holders. United Online is a great company with some tremendously valuable assets that we intend to deploy in a cohesive manner to create growth in areas that have strong, long-term prospects and which will enhance the stickiness of our products.
At the end of the day, we've proven time and time again over the past 6 1/2 years that this management team and this board of directors is particularly adept at responding to changing market dynamics and creating compelling new businesses. We did it before and we intend to do it again.
Thank you. I will now turn the mic over to Charles Hilliard.
Charles Hilliard - United Online Inc. - CFO; EVP- Finance
Thank you, Mark.
This was a important quarter in United Online's evolution, and we are very pleased with our execution and our results. As Mark highlighted, diversification is the key strategic focus for us and we believe Q2 was a critical juncture in demonstrating our progress.
All right. Let's get straight into the selected financial highlights. Number one, we generated record revenues of nearly $132 million with growth of 19% year over year.
Number two, we had another record billable services margin up 210 basis points versus the year-ago quarter to 79.4%. Similar to Q1, this quarter's billable services margin benefited from the growing mix of our subscription businesses towards relatively higher margin non-access services, including social networking.
Number three, we produced record free flow cash flow, as Mark mentioned: 35.7 million in Q2. That was up 38% year over year. Second quarter free cash flow benefited from changes in nonworking capital.
And number four, we've produced record adjusted OIBDA, up 17% year-over-year to $33.2 million or 25.3% of revenue versus $28.4 million or 25.7% of revenues a year ago.
Okay, let's get into pay account and subscription highlights. Pay accounts increased by a net 81,000 during the quarter, of which 75,000 was organic growth. Some 6,000 were associated with our PhotoSite acquisition. While pay access accounts declined by a net 52,000, non-access pay accounts grew organically by a record 127,000. At June 30th, 2005, non-access represented 39% of our pay account base. That's up from 3% a year ago.
Subscriptions grew by a net 138,000, or 132,000 organically. Subscription growth again outpaced pay account growth, due to the ongoing progress of upselling Accelerator, premium email, and premium content to our existing pay account base. Organic non-access subscription growth was 158,000, taking our non-access subscription base to over 2 million for the first time in Company history.
As Mark discussed, when you look at this quarter's performance from a financial or pay account-slash-subscription perspective, growth in our non-access businesses, particularly social networking, was the key theme. While non-access services have a lower R [ph] proven access, they carry a higher billable service margin and a larger contribution of ad revenues per dollar of billable services revenue.
While we recognize there's plenty of work ahead to execute our diversification strategy, we're pleased with our progress to date.
Okay. Let's get into June quarter financials in a little more detail. Billable services revenues were $117.5 million, up 15% year-over-year and 1% sequentially. Average monthly revenue per pay account, or RPU, was $7.85, down from $10.87 a year ago quarter and down from $7.93 sequentially. The decline in RPU was due to an increasing percentage of your pay accounts attributable to non-access. In Q2 our non-access RPU was in the low $3 range, with access in the mid to high $10 range.
Add-on commerce revenues were up 73% year-over-year and down 2% sequentially to $14 million. Year over year growth reflects primary the contribution from our Classmates acquisition. The sequential decline reflects fewer access accounts as well as seasonal decreases in access usage which negatively impact page views and search traffic.
Ad and commerce represented 11% of revenues this quarter. That's up from 7% a year ago.
Cost to billable services was $24.2 million this quarter, up 4% year over year. The increase was due to the Classmates acquisition, offset somewhat by a 6% decline year over year in average hourly usage per pay access account and a 3% decrease in hourly telecom costs to just over $0.06.
Sequentially, our hourly telecom costs increased 4%, due to a decline in total telecom hours utilized. This decline resulted in less efficient port utilization and a shift away from better pricing tiers that we received with higher volume. For Q3, we anticipate relatively stable telecom pricing per hour.
Cost of free services was $3.2 million this quarter, up 100% year over year. The increase was driven by the Classmates acquisition which, given the relatively large size of its free audience, carries a higher cost of free services versus a cost of billable services in absolute dollars. The increase was offset partially by the decline in telecom cost for access.
Sales and marketing was at $53.6 million this quarter or 40.7% of revenues versus 40.4% in the year-ago quarter and 41.4% in Q1.
Which brings us to customer acquisition costs. For the June quarter we estimate our gross pay customer acquisition cost at about $57. Five seven. That's down from $82 in the year-ago quarter and up from $51 in the March quarter. The decrease year over year reflects a lower relative cost of non-access pay account growth.
Consistent with historical Q1 to Q2 comparison, we saw a sequential uptick in customer acquisition costs across all of our businesses, particularly our personal web hosting service. In addition, we experienced some learning curve in watching Classmates on television for the first time in Q2.
Consistent with prior periods, we calculate gross pay customer acquisition cost to include total sales and marketing expenses plus cost of free services less ad and commerce revenue. This total was $42.7 million in the June quarter.
Product development expenses were up 46% year over year, primarily due to our budgeted head count growth and Classmates acquisition. As we discussed during our last two earnings calls, 2005 is an investment year in product development as we continue to diversify our business.
Currently, we anticipate product development expenses to grow approximately 40% -- four 0 percent -- year over year in absolute dollars, which is down from our previous estimate of approximately 50%.
General and administrative expenses were up 25% year over year, due to the impact of Classmates and increased overhead costs, offset partially by the incurrence of facility exit costs in the June 2004 quarter. Excluding facility exit costs, G&A was up 50% year over year.
Total cash balances were approximately 223.8 million at June 30, 2005, up 20.8 million during the quarter. We used approximately $5.8 million to pay down our term loan to 63.3 million of balance and we paid 12.6 million for dividends. I think as Mark talked about, the power of this business model to generate cash, we believe, speaks for itself.
All right. Let's talk about business outlook. Today we're providing guidance for Q3 revenues of between 131 and $133 million and adjusted OIBDA for Q3 of between 33 and $34 million. For all of 2005, we are revising our adjusted OIBDA guidance to between 131 and $134 million. That's up from our previous guidance of 127 to 132 million.
At the midpoint, our calendar 2005 guidance implies year over year adjusted OIBDA growth of about 17% as we continue to manage a balance between current profitability and ongoing investment and long term growth opportunities, including VoIP and Photos. Our pay account guidance for the quarter reflects anticipated continued trends, with declines in access and growth in non-access.
Excluding potential acquisition, we reiterate our estimate for 2005 capital expenditures to be within a range of 20 to $25 million.
And that's it for me and my prepared comments. I'll turn thing over to Mark.
Mark Goldston - United Online Inc. - Chairman; CEO; President
Okay, Charles. With that, I think, again a record financial quarter for the Company. Major progress in our non-access businesses and our initiatives that we've talked about over the last several months.
I'd like to open it up now to questions. Operator, can you please provide some direction for people to get into the queue?
QUESTION AND ANSWER
Operator
[OPERATOR INSTRUCTIONS] Your first question comes from the line of Youssef Squali with Jefferies & Company.
Youssef Squali - Jefferies & Co. - Analyst
Yes. Good afternoon. Youssef Squali. Good afternoon, guys. A few questions. First, Charles, could you comment on churn in the access in the quarter? If you can provide an absolute number, that would be great. Otherwise, can you just talk about it? Has it accelerated, decelerated?
Second, on sales and marketing we've seen a fair amount of Classmates on TV. So you've been very aggressive on that. How sustainable is that playing going forward in Q3 and Q4? And then I have a follow up.
Charles Hilliard - United Online Inc. - CFO; EVP- Finance
Okay. I'll take the churn question. Overall churn this quarter, Youssef, was 4.5%, down from 4.9%. And just in terms of trending between access and non-access, it was down in both of those segments directionally. So we were pleased with that.
Seasonally in Q3, we're looking for maybe a slight uptick in churn across both those sides of our business.
Mark Goldston - United Online Inc. - Chairman; CEO; President
And in terms of Classmates, we spent -- in the month of May, we spent about $3.6 million on Classmates Television. We ran it for one month. It had never been on television before. Amazingly, Advertising Age Magazine ranked it the ninth highest recalled ad on television of any brand in America for the month of May from a company that had never been on TV before. But we have not continued it after that. It was really in effect a test for us to see what kind of response we could get on the business and it responded very nicely. But then we came in to the end of June when we launched NetZero HiSpeed 3G, and so basically every dollar that we're spending on TV right now is going against the 3G launch.
Youssef Squali - Jefferies & Co. - Analyst
Okay. And then on the voice-over IP opportunity, how should we be thinking about it? Is it something that will be -- I think you said it will be launched by the end of the year. Do you believe that it will start being a meaningful part to your business in the second half of the year? Has all the investments been made that need to be made?
And second, I'm very familiar with voice-over IP over broadband, but the last time I tried it over dialup, it didn't work too well. Can you tell us what you think on that?
Charles Hilliard - United Online Inc. - CFO; EVP- Finance
Okay. Let me take about -- talk about how we're thinking about it financially in the model and Mark why don't you talk about the broadband versus the dialup dynamic. In terms of VoIP opportunity, Youssef, and in terms of the four quarters of guidance we provided, there's zero revenue and zero paid account growth reflected in our guidance and there is 100% of the anticipated expenses for this year as well as the anticipated CapEx this year to deploy that. It is a large amount of resources in focus for our development team currently and all the expense is in there with no potential revenue or pay account growth and we're hoping, once again, our goal is to get this out by the end of Q4.
Mark Goldston - United Online Inc. - Chairman; CEO; President
Right. And in terms of your comment, I can't comment on whatever your experience was or wasn't over dialup or broadband and what product you used, because I don't know what you used or how you used it.
And as I've said before, and I don't mean this to be cute, but we're kind of tired of people knocking us off when we come up with a major product innovation. So we're going to show up on the day we launch and that's when the world's going to find out how we're doing VoIP. And we're not saying a word about until we do. And the reason is that we are the marketing leader in this section and, as they've proven in dialup, every time we do something, they knock it off. And so we're going to make sure that whatever we're doing they've got a long lead time for developing a response.
But in typical United Online form, we are not planning on walking into a category as a need-to player. That is not how we enter places. So we will have a unique and compelling positioning, I believe, and our ability to try to utilize viral marketing will be greatly enhanced by the fact that we've got 45 million accounts in the United Online network. And we plan to try to mine that as soon as we possibly can.
Youssef Squali - Jefferies & Co. - Analyst
Great. Thank you.
Mark Goldston - United Online Inc. - Chairman; CEO; President
Thank you, Youssef.
Operator
Your next question comes from the line of Michael Trotsky with Park Capital.
Michael Trotsky - Par Capital Management - Analyst
Just a follow-up on that. I think you said your goal was to roll out VoIP accounts to 45 million -- your 45 million user base for free? And then presumably you will be charging for usage, right?
Mark Goldston - United Online Inc. - Chairman; CEO; President
Again, I'm not going to go into the presumption because then I would be telling you what we're doing, but --
Michael Trotsky - Par Capital Management - Analyst
I'm just wondering if this is a revenue opportunity or a retention tool?
Mark Goldston - United Online Inc. - Chairman; CEO; President
It will be a revenue opportunity. And there will be many facets to the NetZero VoIP plan. And one of those facets will logically include a free component. But there absolutely is revenue components and revenue plans within that. And we think we have a rather unique way to pull that off.
Charles Hilliard - United Online Inc. - CFO; EVP- Finance
And, Michael, I think would add to that, that if you look at our access business, our social networking business, our photo business, or our web services business, each and every one of them, in fact the most common theme among all of them is they have both a free and a pay component. And this will be no different.
Michael Trotsky - Par Capital Management - Analyst
Okay. Thank you.
Operator
Your next question comes from Jason Avilio with First Albany.
Jason Avilio - First Albany - Analyst
Hey, guys. Thanks for taking my call. A few questions for you. First, in terms of your advertising budget mix, Mark, maybe -- could you help us understand how that's being allocated between the 3G product and the $9.95 product and then the Classmates product and then maybe give us some sense or at least directionally what the subscriber acquisition cost looks like for each one of those products.
And then, Charles, a couple questions for you. Maybe you could give us a sense of what the organic revenue growth rate was, assuming the acquisitions were there in the second quarter of last year. And then, finally, I noticed CapEx is about $5 million. I'm sorry if I missed this. I have been jumping back and forth between calls. Could you give us a little bit of color on what we should expect CapEx to look like through the rest of 2005.
Mark Goldston - United Online Inc. - Chairman; CEO; President
I'll let Charles handle the stack cost and the other issues. In terms of advertising, 100% of our advertising up until about June 13th or June 15th was $9.95. And then on the 15th of June, I believe it was, we went to launch 3G, so 100% of our advertising from the 15th of June through today, 100% has been on the 3G product. Prior to June 15th, 100% was on the $9.95 product.
And Charles, do you want to take the other questions, in terms of --?
Charles Hilliard - United Online Inc. - CFO; EVP- Finance
Well, we're talking about stack, directionally, social networking sack is below that of access on average. We closely monitor and analyze what we believe is the incremental lifetime value of each sub acquired. And we analyze by channel that customer acquisition cost. Then we rotate resources, whether they're in product development or sales and marketing, to each line of business based on what we think is going to be the best return on that ratio of lifetime value to customer acquisition costs. And -- whether it's television, online acquisition, retail stores, etc, we use that methodology throughout the businesses and that's how we manage it.
Let me hit the CapEx question. I provided just a reiteration, Jason, that for full calendar 2005, our guidance is between 20 and 25 million, which means it's going to be a little bit back-end loaded. Year to date, we're at about 8.5 million.
And on the organic growth front, going through some form of pro-forma calculation, it would be in the low single digits with faster growth in ad and commerce revenue, impacted by the acquisition as well, versus slower growth in total services revenue. I think if you look at sequentially, you can understand that 100%of that is pure organic growth driven solely by non-access lines of business with the social networking business being the anchor tenant.
Jason Avilio - First Albany - Analyst
Great. Thanks.
Mark Goldston - United Online Inc. - Chairman; CEO; President
Thanks, Jason.
Operator
Your next question comes from the line of Jim Freidland with Sg Cowen.
Dave Geisler - SG Cowen - Analyst
Hi. Good afternoon. It's Dave Geisler in for Jim Freidland. I wanted to see, based on your comments earlier, if you can confirm that the Classmates revenue contribution for the quarter was approximately 20 million? And then secondly, you've had a nice uptick in terms of the percentage of access, etcetera, on Accelerated. I wanted to see if you could talk a little about the competitive environment as it relates to the aggressive [inaudible] pricing by the rbox and what you're seeing in terms of the accelerated product adoption in the quarter and then going forward? Thanks.
Mark Goldston - United Online Inc. - Chairman; CEO; President
Take the first one?
Charles Hilliard - United Online Inc. - CFO; EVP- Finance
Okay. I'll take the first one.
In terms of contribution, and we really look at it in our -- all of our non-access products, Classmates is by far and away the largest component of that. The revenue contribution, you know, one can look at the RPU in there. Classmate's RPU is relatively consistent with the RPU we see on total nonaccess, which I talked about in the low $3 range. And then, looking at ad and commerce revenue contribution, I did mention directionally that nonaccess has a higher percentage of ad and commerce revenue per dollar billable services revenue. I think that's about as granular as we want to go right with it for now.
Mark Goldston - United Online Inc. - Chairman; CEO; President
And then, in terms of the competitive environment, it is intense, if not illogical. There is a high degree of price irrationality in the DSL segment. Not so much in the cable segment. I believe they offer a fine product and they probably make a decent margin. The DSL industry, I think many of them have started to try to follow suit to compete with the sub-$20 pricing which economically doesn't look like it's sustainable but nonetheless, that seems to be the flavor of the month.
And so, yes, that's created an intense competitive environment and our answer to that is to have launched 3G, which is a product that for the most part, as you know, when people are selling these inexpensive broadband products, it is broadband light and against broadband light, which is typically about a 256 kilobit product, we actually have a product that lets you surf just as fast as that and using our E-mail feature, view your E-mail actually faster. So we are attempting to compete with people on a head-to-head basis with product features. And we think at a very attractive price point.
Having said that, broadband adoption obviously is increasing as we all thought that it would. But the dialup market remains huge. And when you look at it in the perspective of where we are, we're the number two overall player, and approximately 92 to 93% of the market for dialup today is paying someone other than United Online. So our opportunity remains. There's probably 30-plus million people out there, potentially 40 million people out there, who are paying somebody for dialup and are not paying us. And so our hope is that with our innovations and products and our aggressive marketing that, over time, we will be able to secure that.
I do strongly believe that the migration that we talked about earlier towards value dial over the next 24 months will intensify. That you will see is a dialup market that is predominantly focused against value price points because of what will be happening in the broadband segment. And we are uniquely positioned, A), to deliver a high quality product at a low price, but perhaps more importantly, our financial structure with our margins is such that we can do that, market it aggressively, and still make a tremendous amount of profit.
Dave Geisler - SG Cowen - Analyst
Great. Thank you. Appreciate it.
Mark Goldston - United Online Inc. - Chairman; CEO; President
You're welcome.
Operator
Your next question is a follow-up from Michael Trotsky with Par Capital Management.
Michael Trotsky - Par Capital Management - Analyst
Since Classmates is becoming a pretty significant part of your business now, can you go in a little more detail into the demographics of the customer base? Who are they? What's their income? What's their profile, etc? And then I'm particularly interested in the average life or churn out of that business.
Mark Goldston - United Online Inc. - Chairman; CEO; President
I can tell you in general, Michael, the age range on Classmates is probably between roughly 25 and 80 years old. Most people enter Classmates around the age of 28 as they're approaching their tenth high school reunion. It is a business that also has millions of users who are registered under the military section. So people who have been in particular platoon or division.
But by and large, the vast majority is the 40 million-plus members are representing 220,000 different schools. Age range, call it 25 to 80 years old. Their demographic is largely similar to the national demographic because of the huge size of the base. There is no particular geographic dispersion. It is a national, for lack of a better term, student body. And they -- from a behavioral standpoint, these are largely the same people that are surfing the web and going to the likes of yahoo! And eBay and Amazon and the other major websites on the Internet.
Part of the thing we think is appealing is our ability, because it is a social networking company, to be able to add this feature set which will allow people to actually see each other, pictorially, and then talk to each other, both through E-mail and ultimately through VoIP. Because today your ability to see someone on Classmates is very limited in terms of our photo capability. One of the reasons why we bought PhotoSite.
We also don't have on Classmates today the ability to have a personal web page. So we have personal profile but we don't have a personal web page. So our goal is to take our personal website division and our photo division and what will soon become our VoIP division and allow someone on Classmates to be able to see their classmate or see their friends, find them, and then either talk to them via E-mail or via telephone using VoIP, and to speak to someone, they will have to pay for that. To use extended photo capabilities, viewing albums and the like, they will have to pay for that. But to just post the general photo so that you can use the enhancement factor of the nostalgia of that website, you will be able to do that for free.
So we think we're making great strides towards creating more value on what is today a huge social networking base.
Charles Hilliard - United Online Inc. - CFO; EVP- Finance
And Michael, on the churn question -- it's Charles. Churn this quarter is about 4.5%. We've talked in the past that the Classmates churn is slightly higher than the average. And it's somewhat higher than access. But I would also point out to you that at 4.5% this quarter, we were about in line with where we were a year ago when 97% of our pay account base was access. And one of the big wins we put on the board with the social networking business is we've done a real good job of bringing their historical churn down.
One other piece of detail I'd add, churn on Classmates is very dependent on the mix of the pay accounts. Currently, the two largest constituencies are either in a one-year plan or a three-month plan. And as we work to optimize -- going back to that lifetime value versus customer acquisition cost, it may be more attractive in some parts of Classmates to acquire a three month sub that has a shorter life and therefore higher churn, but also a much lower customer acquisition cost, versus one year. So churn will move around, depending on what's going on with that mix.
Mark Goldston - United Online Inc. - Chairman; CEO; President
And the thing that's interesting, also, Michael, about Classmates versus an access, when someone churns off of your access business, they're going somewhere else. If they leave NetZero, or they leave AOL to come to NetZero, they're not likely to go back. They're moving on.
In the case of Classmates, a lot of the churn that occurs is a function of people not necessarily seeing additional added value to stay. If you look at what we're working on at Classmates, all of the features that we're talking about adding, between the pictures and the personal websites and all of the various features that we're launching, they're all designed to take people who are either free users and have never payed us or former pay users who are still in the network, they're still registered underneath their schools, we send out upwards of 25 million E-mails every single week on Classmates and what we put in those E-mails has a great determination as to what our hit rate is going to be for people to come back and become live active paying members. And so, we're very focused on that. It's very different than churn and ISP because here there is a very high likelihood that with product feature improvement you can recapture a churn customer.
Michael Trotsky - Par Capital Management - Analyst
Okay. Just two follow-ups then. You know, we're fairly used to evaluating the Company based on the access seasonality. Is there seasonality specific to Classmates?
And then, a second question just to follow up on this discussion, in terms of competition, who do you think the competition for Classmates is and is this new beta site from Yahoo!, the Yahoo! 360 Plan a potential competitor?
Mark Goldston - United Online Inc. - Chairman; CEO; President
I'LL take the second question first and then I'll let Charles take the first question. In terms of the competitive set, there really isn't the direct major competitor to Classmates. With 40 million plus people, you can imagine when you're going on to a social networking site to find people who may have gone to your school, the goal is to go to the party that has the largest number of people. There's really no benefit to going to somebody who's trying this business who has just a few million members. You want to go somewhere where there's 40, 50 million members. So in that regard, it is really very much a unique player.
There are some smaller candidates out there. But by and large I would say Classmates is the major one. There is a smaller business called reunion.com that does something similar but not exactly the same.
In terms of the category, social networking, clearly where we're going, people like My Space would be a competitor. Intermix I think just sold for -- what was it -- $650 million. The majority of the value of that company, was a My Space brand, which is decidedly smaller than Classmates in terms of the number of users it has. And it's way smaller than Classmates in terms of revenues, and as you know, Classmates historically has been a very profitable company.
So we look at this and say, we think that there are competitors out there in certain pockets but there's nobody who kind of does exactly what Classmates does and where we're going I think is the best of all worlds.
Is Yahoo! 360 potentially a competitor? I would say yes, it probably is. If we execute the vision that I have laid out for you, I would say that they probably would be. But again, we're starting from a pretty powerful base and the affiliations that exist within Classmates are some of the most compelling that you could ever find because they're based on your specific past.
Charles Hilliard - United Online Inc. - CFO; EVP- Finance
In terms of seasonality, Michael, as you mentioned on access, I'm just going to talk about historical. Q1 historically has been the best quarter for us in value on gross subscriber addition, with Q2 being the most challenging as people start heading into the summer months. It gets more challenging to get people to sign up.
For Classmates, historically, Q2 is actually a relatively good quarter as people start thinking about that reunion season and you also get new signups with people heading into their 28th year. Their first major reunion coming out of high school. Q4 for classmates is seasonally, at least historically, the slowest quarter, as people head into holiday time, they're thinking less about reconnecting with the social network and they've got other things including Christmas e-commerce on their mind.
Michael Trotsky - Par Capital Management - Analyst
Okay. Thanks a lot.
Mark Goldston - United Online Inc. - Chairman; CEO; President
Okay.
Operator
Your next question comes from the line of Safa Rashtchy from Piper Jaffray.
Safa Rashtchy - Piper Jaffray - Analyst
Good afternoon, Mark, Charles. Good quarter.
Mark Goldston - United Online Inc. - Chairman; CEO; President
Thank you, Safa.
Safa Rashtchy - Piper Jaffray - Analyst
I wanted to ask you about your strategy with regard to access business. Obviously as you noted competition in DSL has been heated recently. And you have been kind of sustaining and maybe losing some of the access subs. With new like initiatives like 3G, are you trying to basically maintain the current level of access or should we look at that as, as you put it, kind of a harvesting business and the focus really is going to be on the nonaccess subs?
Mark Goldston - United Online Inc. - Chairman; CEO; President
I would say -- good question. I would say that our goal is to try and grow our access business. Clearly, this is a business we're committed to. We like the business. We spent a lot of time and effort developing the 3G product. It was not developed just the whole status quo.
Having said that, we'll have to see over the next 6 to 12 months where that actually goes. Our goal is to try and grow that business. We do believe that the value segment of the market will become more and more relevant and will become larger, and we now have, whether you're looking at premium or value dial, we have the highest -- in my view, the highest quality, fastest, most innovative product in the dialup space. And so, to the degree that there's still going to be tens of millions of people in dial-up, then and we like what we have to offer and we'll see if they share that view.
Having said that, a big portion of our TV advertising over the next two quarters will be dedicated to our internet access business. We are right now in a time frame where we're developing a lot of the products for the nonaccess business. We're in the process of trying to integrate PhotoSite into the Classmates business. We're in the process of trying to integrate the personal portal capability into that. And VoIP, as we talked about, is something we hope to get out by the end of the year.
So, these other initiatives are exciting, they're major, but from a marketing standpoint they logically will not receive fuel from us before 2006.
Safa Rashtchy - Piper Jaffray - Analyst
And as a follow-up to that, Mark, do you expect the price points for the value segment to come down as the DSL prices are coming down or do you think that they'll be sustainable at the current levels?
Mark Goldston - United Online Inc. - Chairman; CEO; President
I actually don't think they're going to go down. I think you could make an argument that overall there's actually some potential upward mobility in that segment. One of our competitors, I believe NetScape, has been offering their products for $9.95 and then their accelerator for that and we saw that migrate back up.
And so I actually think that what's going to happen here, Safa, is that a lot of people in the premium dialup segment, a lot of the users, are going to get chased out of there. And they're either going to go try to get attractively priced DSL or they're just going to go to the value segment of dialup and say, I'll park myself there until and unless I can get attractively priced broadband. And as you go to United Online and NetZero, if you try the 3G product, unless you're someone who needs to do a lot of downloading, you may not see the need to go to broadband because of the speed that's there. But I think that there is a chance.
If you looked at the Jupiter study that was put out, I think the beginning of the year, they did an estimate of the dialup category in the value segment. And I thought it was intriguing that they showed for the entire year of '04 and '05 -- and I'm doing this from recollection so don't hold me to the specific numbers but hold me to the direction -- that the year 2004 and the year 2005, in value dial, were projected to be flat at what I believe they had in there was 6 million users. And that over the 3 ensuing years after '05, it was climbing to as high as 12 million users. So, I think they saw that it was absolutely going to grow and it would probably not start to happen until sometime in '06. And to the degree that their G2 is good, it kind of supports my theory that a lot of these premium dial people are going to look to leave and if they can't get the broadband, then they're just not going to keep paying 20-plus bucks a month.
Safa Rashtchy - Piper Jaffray - Analyst
Okay. Thanks.
One final question, if I may. You might have talked about this and I missed it. Could you give us some color or if you have some numbers, even better than that, on the kind of sell-through you have been able to have to the access subscribers of the nonaccess subscription services?
Charles Hilliard - United Online Inc. - CFO; EVP- Finance
Certainly, Safa. With some of the nonaccess subscription services, for example premium E-mail, the sell-through to existing pay access I would say has been reasonable. Penetration there in the low single digits. Where we've had the most success is actually with non-access accounts. Actually you're retaining -- a subscriber wanted to churn off dial, for example, to go to broadband and yet paying us to retain that NetZero premium E-mail account is, you know, a nice option on the future in that we have that recurring revenue relationship with them. But the ongoing communication of E-mail.
Premium content has also been something that's been relatively a successful launch in penetrating into the access base. And on some of the other services, like social networking and web hosting, much, much less so. We've probably done a better job of feeding some of the social networking growth from the access base versus vice versa. And much of that is because most of the audience on Classmates is broadband oriented.
Mark Goldston - United Online Inc. - Chairman; CEO; President
Interesting as a follow-up to that, Safa. The social networking category, as you know, is quite the buzz today. It was before and I think after the 600-plus million dollar acquisition of Intermix, with their [inaudible] -based business, I think the buzz increased rather significantly.
By all accounts of the revenues in that market, our business, our social networking business, principally with Classmates, is a very large portion of the total revenue done in the entire social networking category. So, we think that there's tremendous potential even beyond where we are. But as that category develops and more people are focused on it, we love the asset that we've got and it just gives us another thing to sell all of our access users, all of our personal website users, all of our photo users as well. We love the cross pollinization that can occur across all of these UOL brands. We do believe that the buzz that's out there on social networking is valid and that it is a hot category and that we've got some great assets to play there.
Safa Rashtchy - Piper Jaffray - Analyst
Okay. Thank you.
Mark Goldston - United Online Inc. - Chairman; CEO; President
Thank you. Felicia? Are there any more questions?
Operator
Yes, sir. Your next question comes from the line of Pat Conlin with Milestone Capital.
Pat Conlan - Milestone Capital - Analyst
Good afternoon, gentlemen. I have got a question regarding your VoIP offering and I'm wondering if that's a product that you're offering, or will offer to your dialup customers? My limited knowledge of VoIP is that it runs over a cable modem. So somebody that already has a high speed internet would use that modem to drop their bell line and run their phone over the cable connection. Maybe you could just elaborate to better educate me on that product. Or that industry.
Mark Goldston - United Online Inc. - Chairman; CEO; President
Good question. I really can't educate you on it without telling you more than I'm prepared to tell anybody about what we're doing on VoIP. So all I can tell you is that whatever you knew about VoIP before may or may not have anything to do with what we're actually intending to do. We've spent a lot of time putting a lot of innovation into the product that we're going to be introducing and I really can't say much more than that.
Pat Conlan - Milestone Capital - Analyst
Oh, okay. Can you say whether it's something that you will be able to offer to your dialup Internet customers?
Mark Goldston - United Online Inc. - Chairman; CEO; President
I can't really comment any more than that.
Pat Conlan - Milestone Capital - Analyst
Okay. All right.
Mark Goldston - United Online Inc. - Chairman; CEO; President
I would be giving away by competitive advantage by doing so.
Pat Conlan - Milestone Capital - Analyst
All right. We'll wait to find out. Thank you.
Mark Goldston - United Online Inc. - Chairman; CEO; President
Operator, I see we're coming up on 3:00, which is when we told people we would be done with the call, so I want to thank everyone for attending. If you have any follow-up questions you can direct them through Charles Hilliard, our Chief Financial Officer. And again, thank everybody for taking the time today to listen to our call.
Operator
This concludes today's second quarter 2005 earnings conference call. You may now disconnect.
