Q3 2004 United Online Inc. Earnings Conference Call

Operator

 Good morning. My name is Katie and I will be your conference facilitator today. At this time, I would like to welcome everyone to the United Online third 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. (OPERATOR INSTRUCTIONS). I would now like to turn the call over to Brent Zimmerman, Vice President of Investor Relations. Please go ahead, sir.

 Hello and welcome to United Online's conference call to discuss the results of our third quarter ended September 30, 2004, and the Company's proposed acquisition of Classmates Online, Inc. 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 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 Principles, or GAAP, and should not be considered as an alternative to or superior to historical financial results presented in accordance with GAAP. Definitions of these numbers are provided in the press release along with reconciliations to the most comparable GAAP financial measures. We are also providing slides to accompany today's call that are available now on our website, along with the web cast. I would encourage you to pull them up during the call.

Before we get started I need to point out that the Company does apply the Safe Harbor provision 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 operation, our financial condition, our performance, the industry in which we operate and the Company's proposed acquisition of Classmates Online, Inc., 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. For more information about potential risk factors that could affect the Company's business and its financial results are included in today's press release under the caption, Cautionary Information Regarding Forward-looking Statements, and in United Online's most recent filings with the Securities and Exchange Commission.

Projections provided by management in the press release 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. We also note that these projections exclude any potential impact on the proposed acquisition of Classmates Online, Inc. Any persons that reclaim this broadcast after October 25, 2004 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 change. With that, we're going to start with a few comments from Mark and Charles and then we're going to open it up for questions. So I will now give the floor to our Chairman, Mark Goldston.

 Thank you Brent. Good morning everyone. Welcome to the September quarter earnings call for United Online. I will give you an overview of the quarter. I will discuss some key trends and review our planned purchase of Classmates Online, Inc. I will then turn the call over to Charles Hilliard, our EVP and CFO, for a detailed look at the numbers. The September 2004 quarter was a strong quarter from the financial results standpoint, once again for United Online, as we registered new all-time record levels of total revenue, operating income, adjusted OIBDA, billable services margin, and total paid subscribers. We also reported very strong free cash flow as well. We are proud of the financial discipline that we built into United Online and I think our results speak for themselves in that regard. Now I would like to turn our attention to subscriber performance during the quarter.

Pay subscribers increased by a net 43,000 during the quarter resulting in an all-time record total pay subscribers level of 3,232,000. Within the 43,000 net pay sub-adds during the quarter, we are 9,000 net new pay subs on our access business. We continued seeing the affects of lower seasonal Internet usage and the resulted impact on subscriber downloads and the impact of an intense competitive environment with price deals, free months, etc. Outside of access, we're pleased to announce that our premium e-mail subscriptions surpassed the 100,000 mark in the quarter speaking to the effectiveness of some of our line extension efforts, etc. During the latter part of this quarter we hope to launch the new mySite.com personal website product, to join our very recently released personalized e-mail product called appropriately, emailMyName. Our candidate, Zero, marketing campaign continued to receive impressive accolades from the likes of Addage (ph) Magazine, registering among the overall leaders in total recall of all brands marketed in the U.S.A., from the June through September audit period. We will begin airing a new NetZero campaign, post the November elections, and we feel that our candidate, Zero, might actually garner some write-in votes in the upcoming presidential election and that would be actually kind of funny. At least we would know that there would be affordable access for all Americans which is the platform that he's running on.

Let's shift our focus now to distribution, which is the other critical top of the funnel effort within United Online and the means that we use to generate new users and also a way to appeal to the new V's (ph) who don't currently have Internet access and, therefore, would not be able to download our two-minute file to become a member of NetZero or Juno. We call that off-line distribution. I am proud to say that last year at this time we had just begun rolling out our first ever retail distribution partnership with Best Buy. Over the past 12 months, Best Buy has done a fabulous job and displaying and selling our NetZero and Juno brands.

We are very pleased with our Best Buy relationship and we have attempted to expand our retail distribution arsenal significantly as we prepare United Online to take advantage of the 25 million new households projected to come online from the beginning of 2005 through 2007, as estimated by the research firm, IDC, in their August 2003 report. IDC estimates that 60 percent of those households will make less than $35,000 per year and that makes them perfect potential NetZero or Juno users given the fact that we have a highly appealing dominant position as the nation's leading value priced ISP. To that point, we feel that we must be distributed in major retail outlets in order to effectively capture the new first-time Internet user who obviously is not online and cannot take advantage of our two-minute downloadable client. The recently released 2004 Jupiter research study on U.S. Internet access growth says that the value dial-up market, defined as products below $15 per month will nearly double by 2008, going from 6.2 million households in 2004, to 12 million households in 2008. The 18 percent compound annual growth rate during the 2004 and 2008 exceeds the 14.4 percent compound growth rate expected for broadband during that period according to the Jupiter study. That is a very strong point. The premium dial-up segment, defined as over $20 per month, is expected to decline roughly 10 million people at a compound annual decline rate of 7.7 percent versus a compound annual growth rate of 18 percent per value dial and 14.4 percent for broadband.

Importantly, the Jupiter study estimates that the total dial-up market in the U.S. will be 55.2 million households at December 31, 2004, and that by December 31st of 2008, they estimate the U.S. dial-up market will see a very robust 49.7 million households from the 55.2 million today. Jupiter estimates that U.S. broadband households will grow from 26.9 at 12/31/04 to 46 million at 12/31/08. However, that would still trail in the Jupiter study, the U.S. dial-up market by 3.7 million households as of December 31, 2008. If this huge influx of lower income U.S. households coming online materializes as indicated in the IDC report, it should help keep the overall dial-up market robust during the next several years, and should be particularly advantageous to United Online and the other players actually in our segment, especially those in the value segment of dial-up ISP as evidenced by the projections for growth in the value dial category contained in the 2004 Jupiter study.

These are only estimates and projections from two major research firms and other analysts may have very different projections for the access market. However, we believe that the IDC and Jupiter reports are an indication that the dial-up market particularly the value segment could remain significant in size for some years to come. We have recently announced several major new off-line partnerships which should significantly increase our presence and give many of the aforementioned people that we talked about coming online over the next 3 years to 4 years another very effective means of signing up for our services. We have just begun our relationship with RadioShack and are in the process of being rolled out to over 5,000 RadioShack stores around America. We will begin appearing in Sam Goody music stores, Suncoast video stores, Media Play music outlets, as well. We worked hard with Kmart to significantly enhance our distribution program with them. We will soon be featured on kiosks in Sam's Club stores all around America as well. We made phenomenal strides in securing high-quality retail distribution partnerships with some of the leading companies in the U.S.A. over the past 12 months, and we hope that the one-two punch of these great retail partnerships and our compelling two-minute download software, will be very appealing to those people either thinking about signing up for ISP service for the first-time, or for the importance switcher market who are unhappy with their current service for one reason or another.

Many times we have found the this dissatisfaction of current users with their service is based on price, but often times it is based upon a lack of customer satisfaction with the quality of their ISP service. Further to that point, I'm very proud to announce that in the recently published J.D. Power customer satisfaction rankings for the U.S. dial-up ISP market, Juno and NetZero came in at number 2 overall in customer satisfaction, ahead of higher priced brands such as AOL, MSN, AT&T, SBC, Yahoo!, BellSouth and several others. We were the number one ranked value-ISP in America and the number 2 overall ISP in the country in terms of customer satisfaction, which is a very impressive accomplishment given the fact that we cost upwards of 50 percent to 60 percent less than all of those premium priced brands. We spent a great deal of time focusing on creating the highest quality, most compelling service offering we can with NetZero and Juno. It is obvious that all of that hard work has paid off.

I want to send special kudos to our technology team and our network group for the tremendous work that they have done in making our NetZero and Juno products among the very best in the world. I would now like to shift the focus and speak about our exciting upcoming acquisition of Classmates Online, Inc. After spending the past 12 months literally scouring the Internet for attractive acquisition candidates, that would fit within our previously stated mission statement of becoming a leading provider of consumer Internet subscription services. We are thrilled to be able to sign a definitive agreement to acquire Classmates Online, one of the true leaders in online community-based networking. We will be paying approximately $128 million in cash and we expect that Classmates will have approximately $28 million of cash on their balance sheet. The purchase price for Classmates we funded out of our cash reserves which are $203 million at September 30, 2004. It's important to note that Classmates Online has been EBITDA positive since 2001.

It is a strong company and a company we are very excited to become part of the United Online family. We have been stating on our earnings calls for the past 12 months that we were committed to putting our cash to work in finding an acquisition that would help diversify our business, away from pure access and deliver upon the goals of expanding into nonaccess Internet subscription services that could be used by people on dial-up, broadband, or wireless Internet connections. During that time, we have also introduced a number of new internally developed services that meet this criteria as well. When you add a powerful franchise like Classmates Online to the United Online family, you really help to take our diversified Internet subscription service strategy to a new and higher level. Classmates can add millions of numbers across the U.S.A. and Canada with friends and acquaintances from their past affiliations at grade school, high school, college, the military, and from previous companies that they may have worked for.

It is clearly one of the largest businesses of its kind in the world and we are thrilled about the prospects of working with their impressive team. Classmates' CEO, Mike Smith, will report directly to me and I look forward to working with him and his fine organization of 175 employees up in Seattle on finding ways to grow the business that today counts over 38 million registered members and over 10 million monthly active accounts, of which 1.4 million are paid subscribers. The combination of the United Online monthly active account base of 6.6 million with the more than 10 million Classmates active user base, will give us a significant platform for marketing, advertising, and new initiatives. We intend to continue to look at additional opportunities including acquisitions, new products, and potentially stock repurchases, to leverage our resources and utilize our capital. With that, I would now like to turn the mike over the Charles Hilliard to go over the financial performance. Charles.

 Thank you Mark. Good morning everybody. Let me start with some of our financial highlights for Q3. First of all, we had another record billable services margin, up 20 basis points sequentially and up 620 basis points versus the year ago quarter, to 77.5 percent. The billable services margin benefited again this quarter from a decline in per hour telecom costs. Number 2, we continue to generate very strong free cash flow. Adjusting for cash paid for the relocation of our corporate offices, we generated $27.5 million of free cash flow during the quarter and our ratio of free cash flow to adjusted OIBDA was 94 percent. That is for every dollar of adjusted OIBDA that we produced during the September quarter, we generated 94 cents of free cash flow. For the last 12 months, United Online has generated nearly $113 million free cash flow. Number 3, we have produced record adjusted OIBDA, up 51 percent year-over-year to $29.2 million, to 26.4 percent of revenue, and that was beyond the high end of our guidance for the quarter. On the subscriber end, RGU metrics. Pay subscribers, as Mark mentioned, increased by a net 43,000 during the quarter. We added net 34,000 premium email and web hosting subs and 9000 new access subs.

As I will cover in a bit of detail later, we continue to see competition particularly in online channels for access, to which we're taking a financially disciplined approach while we build out our off-line distribution channel. While we do not believe seasonality factors were as distinct this quarter as June, we did see a slight sequential decrease in average hourly usage per pay access account which correlated directly with the sequential change in gross subscriber additions. Revenue generating units, or RGUs, which encompasses all of our subscription relationships grew by 123,000 in the quarter. At September 30th we had multiple subscription relationships with a record 35 percent of our pay subscriber base and this includes subscribers to our accelerated product which added 73,000 subscriptions during the quarter. Let's move into the financials in a little more detail. Total revenues at $110.7 million, were up 25 percent year-over-year and were above the midpoint of our guidance. Billable services revenues were $102.1 million, up 28 percent year-over-year, and down slightly sequentially.

Billable services revenues were 92 percent of total revenues in the current quarter compared to 90 percent in the prior year quarter. Average monthly revenue per user, or ARPU, was $10.60, up 5 percent versus the year ago quarter and down sequentially by about 2.5 percent. While this quarter's ARPU benefited from growth in accelerated subscriptions, it was down sequentially due to relatively higher growth in on our lower ARPU premium email service and due to an increase in certain marketing programs, such as First Month Free, which had a negative effect on ARPU during the quarter.

Ad and commerce revenues were down 6 percent year-to-year but up a strong 6 percent sequentially. The year-over-year comparison was impacted by the inclusion of $4.7 million of GM revenues in the year ago quarter, which related to our 4 year advertising relationship that expired in December of last year. Excluding the GM revenues, advertising and commerce revenues were up 93 percent year-over-year. Our ability to monetize our user relationships through innovative advertising products combined with our free account base continues to be an important competitive differentiator of our business model. Our billable services margin benefited from further improvement in hourly telecom costs to 6 cents in Q3 versus about 6 1/3 cents in the June quarter and just under 7.5 cents in the year ago quarter. The margin also improved due to lower average uses per pay access account which was down 1 percent sequentially and 7 percent year-over-year.

Cost of free services were $1.6 million this quarter, which were down 23 percent year-over-year, and up 1 percent sequentially. Our active free access accounts which include active free websites, were down about 8.4 percent sequentially and up about 35 percent year-over-year. The year-over-year increase was due to the web hosting acquisition that we made in April of 2004. Sales and marketing. $43.2 million or 39 percent of revenues this quarter, up about 80 basis points versus just over 38 percent in the year ago quarter and down about 140 basis points from 40.4 percent in the June quarter. We continue to manage our sales and marketing expenses in a highly disciplined manner to accomplish our financial objectives, and are pleased with the progress we're making in growing our off-line distribution relationships, which Mark discussed in some detail.

That brings us to subscriber acquisition cost, or SAC. For the September quarter we estimate our gross pay subscriber acquisition cost at about $79, down from $82 in the June quarter. Using RGUs, our subscription acquisition cost was about $53 in the September quarter, up from about $49 in June. Consistent with prior periods, we calculate total subscriber and subscription acquisition costs to include total sales and marketing expenses plus cost of free services, less ad and commerce revenues. This total was $36.2 million in the September quarter. Product development expenses were up 38 percent year-over-year, primarily due to our budgeted headcount growth as well as the impact of our web hosting acquisition. General administrative expenses were up 46 percent year-over-year and 7 percent sequentially. The year-over-year comparison was impacted by increases in legal fees and increases in professional consulting fees related to our Sarbanes-Oxley compliance efforts, and the inclusion of $1.6 million of lease termination fees and accelerated depreciation expenses related to our recent office move.

Free cash flow was up 59 percent year-over-year, and 6 percent sequentially to $27.5 million, which I mentioned earlier. The quarter was positively impacted, both year-over-year and sequentially, by favorable working capital changes. The sequential comparison was negatively impacted by employee bonus payments in Q3, which totaled about $6.5 million. These bonuses are associated with the 12 month period ended June 2004. Given our recent change in fiscal year end, we expect to pay bonuses in the March quarter going forward. Cash balances were about $203 million at the end of September, down less than $1 million during the quarter. We used $25 million during the quarter to repurchase 2.7 million shares of our common stock. This brings total shares repurchased to date to 9.7 million at an aggregate cost of $125 million. We have another $75 million available for repurchase under our existing program. Let's turn to business outlook. We're projecting adjusted OIBDA for Q4 of between $27 million and $29 million and are increasing our 2004 adjusted OIBDA guidance to between 110.6 million and 112.6 million, up slightly from our previous range of $110 million to $112 million. At the midpoint, our calendar 2004 guidance implies year-over-year adjusted OIBDA growth of 52 percent. We're reducing our year end 2004 projected pay subscriber guidance to a range of between 3.25 million in 3.35 million. I want to point out that our business outlook does not reflect any potential impact on the proposed Classmates acquisition that we intend to close sometime in Q4. Our updated revenue and subscriber guidance reflects the trends we have experienced in the two most recent quarters and the resulting impact to our visibility for subscriber growth. Thank you everybody. Mark, back to you.

 Thanks Charles. Just in closing, before we open up to questions, I want to just reiterate how excited we are about the Classmates acquisition, and working with those fine folks up in Seattle, Washington. We think it is a great business and we are really excited to have it become part of the United Online family. So with that, operator, we would like to open it up to questions and if you could explain to people how to get into the queue, we will process them as we can.

QUESTION AND ANSWER

 (OPERATOR INSTRUCTIONS). Safa Rashtchy with Piper Jaffray.

 Good morning Mark, Charles. A couple of questions on the access side since it is still the biggest component of your revenue. Given that you have noted the competition continues to be strong, what is the outlook as to when you might see a reacceleration of growth in the net sub-adds. From what I see, if our model is right, the net sub-adds as well as the accelerated sub-adds have been declining. Can we see -- continue to see a decline for the next couple of quarters until your off-line marketing picks up? Or what is the outlook for growth in that area? I have a quick follow-up.

 Two things, (1), the net sub-adds have been increasing the rate of growth, may be declining. But I want to be clear that the net sub-adds on the business have been increasing.

 On the access side, I thought you had 9,000 compared to 19,000 last quarter?

 (indiscernible) thing, is that we still went up by 9,000. We didn't decline by 9,000.

 No, I'm sorry. I should have been clear. You're still adding, but the rate of addition --.

 It's not a trivial point because in the category where many people report net subscriber declines, we still have a business which on a net basis is growing. Having said that, the competitive environment out there is intense. You are probably well aware of that. The folks at AOL and EarthLink and others from a save standpoint, have been very aggressive in terms of free months and special offers and the like. Obviously have done a reasonably effective job at that. The good news is that if you look at the Jupiter study, which is one that just came out, they show the value access business over the next 4 years going from 6 million to 12 million subscribers. It is interesting that in that report they showed 2003 to 2004 was flat at 6 million. So they do think it's going to double and they do think it will end up at 12 million, but they did think that 2003 to 2004 was going to be flat. It's just interesting given the way the market is playing out.

Safa, we are a marketing company, and we will aggressively protect our value segment turf and attempt to grow this business. Having said that, the market is very competitive out there. We try to take prudent moves rather than just pulling the fire alarm as some might expect that you would do, and I am very proud of the fact that the Company put up record adjusted OIBDA in the quarter and in fact record revenue. So we try to do things that we think are both aggressive yet prudent. We have some ideas up our sleeve as to what we can try to do. We are coming into a part of the year between the December quarter and the March quarter which are typically, from an historical perspective, better for access than the June and September quarters. So we will have a new marketing campaign hopefully on the air later in November as well, post the election, and we will continue to try to be as innovative as we have been in the past trying to find ways to grow our business.

I'm excited about having the Best Buy organization up for an entire quarter, this year. We really didn't have it last year. We've got a new strong partnership with RadioShack and the Musicland Group, etc., we are excited about seeing what that can yield. And our marketing group continues to try to come up with innovative ways to grow the business. We are in no way saying that we do not believe that the value priced access business is not going to grow. We're in no way saying that. Over the long-term we still love this category. We think it is going to be very large, and right now we are just flying through a competitive storm that was not helped by seasonality, and we are responding to that and we have got some very clever ideas up our sleeves, which I hope to be able to talk about more when we get together on the next call.

 That sounds good Mark. On that note, actually, could you talk about given the new more fierce competitive environment, what you expect to happen with the subscriber acquisition costs, in particular on access because on other services the competition -- competitive (indiscernible) is different? And can you give us some sense of how much do you think that could go up? To what level would you be willing to pay up or would you just kind of scale back and kind of wait until the competition frees up its offerings?

 Without giving you specific numbers, which I am sure the folks that I'm competing with that are listening on this call would love to hear, I can tell you that I don't believe that we are underspent in the category. I do not believe that. I don't think this is an issue of we've got to spend a lot more money to get the growth that we want. We're going to go back to work and try to be more clever about what we do. I do not feel that we are underspent. Having said that, we obviously reserve the right if we need to increase our marketing budget, to do so. But I am not going to sit here and tell you -- I was going to say, look you in the eye, but obviously that's not possible -- I'm not going to sit here and tell you that I think we are not spending enough in marketing on this business. I absolutely believe that we are. Having said that, I think we just have to be more creative and do a better job of going out there in getting new users and that is what we intend to do.

 Finally, if I may, on Classmates acquisition, it seems like a great addition to your subscription services. Classmate is always known to be a very efficient with customer acquisition costs. Do you expect to add some further efficiencies to it? Can you talk what kind of synergies in terms of the cost side that you expect to gain with this acquisition?

 Well number 1, they have been very efficient. They have done a wonderful job of getting 38 million registered users. We would intend to try to get in there and work with Mike Smith and that team on coming out with some new creative ways to fill that funnel even further. The cross-sell opportunities between these two companies of having close to 17 million monthly active accounts should be significant, as you think about all of the various services that we offer combined with what they offer. So we have ideas in terms of integration and cross-sell. We have a lot of marketing ideas just on a Classmates business on its own, and those folks have done a very fine job on their own of marketing and creating that business, which as I said has been EBITDA profitable since 2001. We don't anticipate making any major structural changes in that business. They've got a fine group, 175 people up there, and we're looking forward to working with them. As you know, we have a lot of resources, both intellectual and capital here at United Online, that we intend to offer up to the Classmates folks to try to help buoy that business. But we are buying a company that is clearly not a turnaround. It is an excellent business, one that we have been looking at for quite some time and we are excited to be able to acquire it.

 Great, thank you.

 Youssef Squali with Jefferies & Co.

 A few questions. Mark, I am a little bit at a loss here. How can you reconcile a growth in the market that you have talked about in your prepared remarks and the 9,000 net adds that you have added, which by my math is the lowest you've added since September of 2000. Is there anything else beyond competition which may be causing subscriber growth to be this anemic and will we see subscriber growth in 2005?

 Those are both two big questions. Let me go back to my prepared remarks and then the color that I added in response to Safa's question. If you look at the growth statistics that I have been quoting and referencing the source, the source of the new multimillions of users coming online at IDC, the actual category growth numbers that we cited were from the 2004 Jupiter study. The 2004 Jupiter study specifically as related to value priced Internet access, stated that the category was 6 million users in 2003, and was 6 million users again in 2004. However, that category by 2008 would become 12 million. So their projection is that the category will double and their belief is that it was flat from 2003 the 2004. If you buy into that data, you would not be greatly surprised to see net adds the likes of which we just put up. Having said that, 9,000 net subscriber additions in a value-priced segment that is projected to grow by a lot, but by their view has not grown a lot in the last 12 months, is not inconsistent, one. Two, you have to remember these were net adds. We still showed up with well in excess of 400,000 people coming in the top of the funnel, signing up for our value priced services during the quarter. When you evaluate us against some of the competitors who have businesses that are a fraction, I mean a fraction of the size of United Online's business, their hurdle rate to get net subscriber additions is decidedly lower.

In the case of our competitor the other day who showed up and quoted their net subscriber additions, again for them to get that they don't have to get anywhere near the gross adds that we need to get. That is the business that we have got. We have plans in place to try in go back and grow this value business the way we are accustomed to growing and the way that we want to grow the business. But the environment for the last 6 months, both from a seasonal standpoint and from a competitive standpoint has been quite intense, and through all that we still managed to show growth, albeit not the kind of growth that we want to show, but we are in no way saying that we think the value priced segment has flattened out and that we think our prospects have flattened out. We are dealing with a situation competitively and otherwise that is causing us to have to reload our guns and figure out another way to go after it and that is exactly what we're doing.

 Is a price decrease in the cards?

 I don't really think a price decrease right now. Let me restate that. Had we offered our services for the entire quarter that was just completed at a lower-price, I am not sure you would have seen a lot different result. I don't think this is so much price. I think right now there is a finite group of people who we can attract to value priced access and a lot of that has typically come from the competitive environment in terms of switchers. I think the competition is doing a more effective job of keeping the apples from falling out of the tree, shall we say, and the thing that we're looking forward to is these new people that are going to come online who don't have access who are going to be relying on the off-line channel to be able to get their access and that is why we have certainly built of our arsenal in that regard. I would like, competitively, people are doing a better job holding onto their customers, being more aggressive with their marketing, and we're going to respond to that. I don't think price cutting is necessarily the way to go to do that and I think we're just going to be more clever in how we market our brands, which has pretty much been the hallmark of our Company.

 Lastly on Classmates.com, which by the way I think is a very sensible acquisition. The EBITDA margins, working out the numbers, turns out to roughly 16 percent for the last 9 months and that compares with an EBITDA margin -- or an OIBDA margin for you guys in the mid-20s. Will it become accretive and how will you get it there?

 Youssef, obviously on an EBITDA basis or an adjusted earnings basis be accretive. On a GAAP basis, it would depend on purchase accounting. And the level of accretion of the margins on that business would be reflected by how aggressive we want to grow it and the type of investment we want to make in sales of marketing. So on that front, I would say, stay tuned.

 From a pure EBITDA margins point of view, it is dilutive, right?

 It is currently running at a lower EBITDA margin than United Online. The strategy going forward will depend on how aggressive we want to grow it and the resulting impact on EBITDA margin. We are going to run the entire business, United Online combined with Classmates, on a consolidated basis and invest dollars in the P&L where we think they will be most effective.

 Fair enough. Great, thanks a lot.

 Mark May with Kaufman Brothers.

 Good morning. First question is actually in response to some comments that Mark made earlier in an answer to a question. Mark, you mentioned that you are still seeing net subscriber additions in the quarter, and going into the fourth quarter is seasonally strongest. But if I look at the subscriber guidance for Q4, at the low end of that I believe it might imply a decline in excess subs if you back out e-mail and web hosting. At best I guess, it would be flat. So I am just wondering if you agree with that, and what assumptions you are making in your guidance. Why are you assuming access subs to be down in what is typically a seasonally strong quarter?

 Mark, it's Charles. What I would say is the guidance is the guidance and we don't sit here with a crystal ball. We go through a very detailed process looking at gross add trends, churn trends which by the way have been moving in our favor. They were at -- churn was at 4.3 percent in the September quarter, and we put a range out there that we're comfortable with and we worked at hitting it. That is about the extent of the detail we will provide on that.

 Second question, I guess somewhat related. I was surprised to see that your sales and marketing line went down. Obviously there are a lot of pieces to that. It went down during the third quarter at a time when I think PeoplePC increased their spend on TV. And just last week you've got Netscape launching a $10 million TV campaign in the fourth quarter. Can you just talk about what you expect sales and marketing to do, not just in the fourth quarter but in 2005?

 We will, during the quarter and going into 2005, evaluate the extent of our guidance for '05. Sales and marketing, our expectation would be to continue the path of managing the business for bottom-line growth. What we have done is we have taken a look at our sales and marketing spend which provides us with quite a bit of financial flexibility during the quarter and we have been investing in the P&L in other areas, including in product development as well as covering some of these Sarbanes-Oxley costs. And we were happy to see by the way, that go down this quarter along with churn declining and we will continue to reinvest in channels which we think are more valuable in terms of return on investment, and we will also continue, as Mark mentioned, with a very healthy media spend.

 Just to reiterate what we have been saying all along, we run this business for the bottom-line, and we make prudent decisions based upon that and we're not going to sacrifice that diligent bottom-line strategy to respond in a whip-saw manner to what may be happening around us unless we believe that we were underspent which we do not believe. I do not believe for a minute that we are underspent.

 So no response to the new campaigns being launched out there?

 No, as we said before, we expected this competitive environment to heat up. We expected that EarthLink, given that they've gotten no growth on that narrowband premium business in years, to put more of their money in the value segment, and they have. We expected that AOL, in trying to get growth in their dial-up business, would potentially promote a Netscape business. None of this is a surprise to us. So what we need to do is to be clever about how we will respond to it, but that is not necessarily a response that requires you to spend more money. It doesn't mean that you wouldn't, but that is not necessarily what is required. We have to find, in that environment, a way for us to continue to carve out our special niche and make more people come to our business than go to theirs.

 I would add that the response has been 12 months in the making by us building out thousands, if not several thousands, retail and other points of off-line distribution to be combined with our media spend. What we have seen is people can put dollars to work very quickly in some of the online spaces, such as Search and the affiliate networks, or they can throw money on television. And these long-tailed distribution relationships with offline people, we think, are going to be important competitive assets going forward.

 How would you rank -- do you expect to be as aggressive with share buybacks going forward as you were in the quarter given this Classmates deal?

 As always on the share repurchase front, we will be opportunistic. We do have an approved program and it will be completely subject to prevailing market conditions and facts and circumstances of their business at that time.

 Does your guidance imply -- I know you give a share count guidance number in Q4. Does that imply some buybacks?

 It does not. We would not imply that.

 Great. On the gross margin, you have seen nice improvement this year. I know usage was down in the quarter, but generally speaking usage continues to trend up I believe, and with your ARPUs beginning to decline, what would you -- have gross margins sort of peaked here, and would you expect gross margins to start to decline next year? I guess I'm just talking about the access business?

 We have seen, on a fairly long-term basis I would say, at least over the last 5 quarters or so, year-over-year and sequential declines in average usage. What we have done is we have put that benefit on the P&L as well as the benefit associated with lower average telecom costs and invested that back into subscription relationships providing people with things like first month free, which are more typical in these offline channels than they have been in our online acquisition channels. That is providing us with the financial flexibility to build out better long-term assets. May have a slightly lower ARPU today, but with improved margins and improved churns and improved subscriber acquisition costs, I think if you calculate the long-term value of that subscription relationship it actually improved in the quarter and over the last couple of quarters. It will -- the entire market is very dynamic, and we will continue to respond to it in the manner we think creates the most value.

 Do you guys prefer usage to go down or go up? I'm curious about that.

 It is not exactly in our control. To the extent it goes up we have a nice hedge because we do do, I think, a pretty good job of monetizing people through Search and other advertising revenues which, by the way, was up nicely this quarter. If it goes down, well we don't get as much advertising revenue benefits as on the gross margin. I would say at this point in time, with very high 70 percent gross margin, we are relatively indifferent.

 Okay, thanks a lot.

 Jim Friedland with SG Cowen.

 A couple of questions, first on Classmates. Can you give us an idea of what monthly churn in that business is, and ARPU? Then on NOLs, going into '05 and '06, how much NOLs can you use in 2005 and 2006?

 We're not going to disclose ARPUs or churn on that business. They will be reflected to the extent we close the transaction in our consolidated metric. I can send you to the Company's website where their price point for a 1 year subscription is $39, a 2 year subscription is $59. I believe they have a total of 5 price points. With respect to NOLs, as disclosed in the second bullet point under our discussion of liquidity and capital resources in our most recent 10-Q, available in 2005 is $19 million; 2006 is $17 million; and for 2007 through 2020, $12.5 million each year, none of which reflects anything to do with Classmates.

 With the Classmates acquisitions, will any of that NOL -- will you get additional NOLs from that potentially?

 We want to wait until we are done with purchase accounting. There may be a possibility, but I'm going to leave that question open right now, Jim, until we finish up with our purchase accounting and get the deal closed. We will provide that update on the next call.

 Okay, great. Thank you.

 Peter Mirsky with Oppenheimer.

 Thanks very much. Actually most of my questions have been asked. Charles, I apologize if you said this one already, but did you give a churn number overall?

 I did. No apologies needed. We're happy to talk about it. 3.4 percent this quarter, down from 4.5 in June.

 Also, Mark, you had cited the J.D. Power quality for customer satisfaction statistic. To what extent do you think the market is telling you that price is vastly more important? Or do you really want -- do you think that drastic or significant price cutting is necessary just to stay and be competitive?

 What do you mean by that Peter?

 It just seems that it's become very much a commodity product, and again Netscape obviously is a bit opaque but PeoplePC gives a number. Their sub-adds were reasonably strong. I'm just wondering how you feel -- I am trying to gauge who you guys are going to try to compete with them? Is it going to be on price; is it going to be on quality?

 Again, we believe that we and they have a very attractive price point were we are, one. Two, since 75 percent of the dial-up market -- or 68 is the number, is still a premium priced, anybody that is out there 9.95 to 14.95 is still very attractively priced against that. And majority of the growth, we all believe, is going to come from the premium segment. So as long as United Online, I can't speak for our competitors, as long as we are priced at a 50 percent to 60 percent reduction versus the premium people, and they still have close to 70 percent of the market, we believe that the price point where we are at is compelling and attractive, one. Two, we don't think that customer satisfaction issue is trivial because in the past, people had said that consumers believe that the lower-priced products would have lower quality.

So we have worked hard to try to make it look as if we are not only one of the most attractively priced options, but we are better than almost everybody else in the category, from satisfaction standpoint. And by the way that not only helps you in attracting customers but over the long-term, that absolutely helps your churn. If your customer satisfaction levels are very high, you have to believe if you're priced competitive and you have high-quality, that over time your user base should churn at a better, at a lower rate than it would if your customer satisfaction numbers were low. I know I'm stating the obvious, but that is how we look at the business.

 Can I just ask you to comment on one other thing. It may be too early since the product was announced, but your accelerator for broadband. Can you comment at all or give any color on that?

 It's too early and we just put the product out.

 Thanks a lot.

 Jason Avilio with First Albany.

 Thanks for taking my call. A couple of questions. First, I notice the ARPU decrease. Charles, perhaps you could help us understand the dynamics of that decrease, what percentage of it is coming the from pricing decision on the access products that you guys are marketing through Search, and I guess to a lesser extent, on your own website? Secondly, I think you alluded to 1.4 million pay subs for Classmates and about $9 million EBITDA. I am wondering if you could give us a sense of what that was historically from a growth perspective? Thanks.

 Why don't I take the first. With respect to the ARPU decrease, Jason, the pricing on that since we have run some promotions online, some people want to commit to 12 months. We will give them some break on price which we see mathematically benefits subscriber acquisition costs as well as churn. We will see the longer-term impact on that going forward. The biggest impact is really on first month free, to the extent that we acquire subscribers that may have a 24 month average life. To the extent we don't recognize any revenue on that subscriber in the first month, that is going to have an impact to current ARPU. However, given that we are acquiring people in off-line channels and these people tend to be more oriented towards new people on the Internet versus switchers, we believe at this point in time that the churn profile on those people will actually be better longer-term.

So we think on average we are acquiring a higher value sub long-term that is not reflected in current ARPU. But it is really first month free that is having the biggest impact on ARPU, as well as secondarily the mix of subs diversifying into some of the new businesses which, while they may have lower average price points, we also think over the long-term will be very attractive businesses to go in. Really, the pricing plans we are acquiring in some of these online channels are having a fairly minimal impact on ARPU particularly because they are not first month free. Mark, do you want to talk a little bit about sub-trends?

 In the Classmates? At the end of day, the Classmates business, 1.4 million pay subscribers, is a very healthy number. They have recently gone through a replatforming of their business, a software replatforming that needed to be done in order to give them scalability potential. They have done that. They have done a very effective job of doing that. So we feel that with the 1.4 million that they've got today, and the 10.3 million monthly actives that they've got, which includes their free accounts, that we've got a pretty formidable base with which to start and to continue to grow that business. And as I said earlier, the cross-sell opportunities which we intend to try to plumb, could be significant over the long-term here.

 Great, thanks.

 (OPERATOR INSTRUCTIONS).

 Operator, I think that probably means there are no more questions left in the queue. With that, I would like to thank everybody for attending the call today. As always, if you have any additional questions, you can please direct them to Brent Zimmerman, our VP of Investor Relations; Charles Hilliard, our CFO; or myself. Thank you very much everybody and have a great day. Bye.

 This concludes today's United Online third quarter earnings conference call. You may now disconnect.