Event Date/Time: Jul. 31. 2003 / 11:00AM ET
Event Duration: 1 hr 7 min
| CORPORATE PARTICIPANTS
Brent Zimmerman Mark Goldston Charles Hilliard |
CONFERENCE CALL PARTICIPANTS
Safa Rashtchy Mark May Jeff Goverman Richard Klugman Youssef Squali Ned Zacher |
Operator
Good morning, my name is Christie, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the United Online fourth-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If you'd like to ask a question during this time (Caller Instructions) Thank you.
I will now turn the call over to Mr. Zimmerman, Vice President of Investor Relations.
Brent Zimmerman - UNTD - VP, IR
Thank you, Christie. Hello, and welcome to United Online's conference call to discuss the results of our fourth-quarter and fiscal year ended June 30th 2003. With me today is Mark Goldston, our Chairman, CEO and President, and Charles Hilliard, our Executive Vice President and CFO.
In today's press release the Company refers to adjusted operating income before depreciation and amortization, adjusted net income, and free cash flow -- all of which management believes are useful in evaluating the companies operating performance. These numbers are not determined in accordance with generally accepted accounting principles, or GAAP, and should not be considered as an alternative, 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.
I want to point out that beginning with the June 2003 quarter, the Company changed the terminology for two of these financial measures. What we now refer to as operating income before depreciation and amortization was previously called EBITDA. The financial measure we now refer to as adjusted net income, was previously called pro forma net income. These are changes in terminology only and do not impact historical comparisons.
Before we get started, I need to point out that the Company does apply to 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 conditions, or performance in the industry in which we operate are forward-looking statements that are subject to a number of risks and uncertainties, and 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 most recent filings with the Securities and Exchange Commission.
Projections provided 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 productions.
Any persons replaying this broadcast after July 31, 2003 should recognize that any non-historical information discussed in the call might not be current or valid after that date, because of circumstances and assumptions underlying such assumptions may have changed.
With that we are going to start out with a few comments from Mark and Charles, and then we are going to open it up for questions. So I will now give the floor to our Chairman Mark Goldston.
Mark Goldston - UNTD - President, CEO & Chairman
Thank you, Brent. Thank you everyone. Welcome to the United Online June 2003 earnings call. Today, we will review the results for the June 2003 quarter and the entire fiscal 2003 period, given that our fiscal year ended on June 30th of 2003.
The June 2003 quarter was another record quarter for United Online. The June quarter was especially impressive given that we achieved record level of billable services margin, adjusted operating income before depreciation and amortization, net income, and EPS, while we successfully introduced a major new product.
As many of you know, the June quarter was highlighted by our aggressive launch of the most exciting new product to come out of our Company since the $9.95 ISP service. This product was the accelerated dial-up that we marketed under the NetZero high-speed and Juno SpeedBand brand-names.
This product was soft launched in late March, and the full national marketing push began on April 14th 2003, with national TV ad pouting that these products are up to five times faster than conventional dial-up, and priced at only $14.95 a month. While that price point is over 50% greater than our standard $9.95 service, the $14.95 price point still represents a substantial savings of $7 to $9 a month versus AOL, MSN, and EarthLink, whose standard prices range from $21.95 to $23.90 per month.
In many of the investor meetings and conferences that we have attended since the launch of these two new products, the number one question that Charles Hilliard and I have been asked is, How is sign up for the new accelerated dial-up going? And we are finally ready to share the results with you.
The success of this launch has been extremely impressive and beyond our internal projections for the June 2003 quarter. We ended the quarter with 8% of our record 2.55 million paid subscribers or over 200,000 people opting for this higher priced, higher margined accelerated product. That would've been a lofty goal for a twelve-month period, much less one quarter. These results certainly validate our view that the dial-up universe wants a higher-speed product that is relevant, affordable, easy-to-use, and widely available right now.
We estimate that the margins on the $14.95 High Speed and SpeedBand products will be, on average, about 1.6 times higher than the margins we derived from our very profitable $9.95 users. This opportunity encouraged us, as I told you in the last earnings call that we would, to spend over 40% of our total media dollars of $17.3 million in the June 2003 quarter on the launch of High Speed and SpeedBand. So we spent 40% of our roughly $17.3 million media budget on these two products. Because of our powerful marketing campaign, we were able to attract both new and existing $9.95 subscribers to the new $14.95 product. On a pure metric basis, the June quarter was another very strong quarter.
Total revenues were a record $79.6 million, which was up 46% versus the year ago quarter. Total pay subscribers were up 142,000 versus 109,000 in the year ago quarter. Billable services margin was over 68% and net income, excluding income tax benefit we recorded, was a record $10.3 million. For the fiscal year ended June 30th 2003, United Online generated pay subscriber growth of 49% for the year. Finishing with a record 2.55 million paid subscribers.
On top of this solid growth, we're thrilled that with 8% of our paid subscriber base represented by the new accelerated dial-up subscribers, we have already achieved some critical mass in another large opportunity to further up sell our users. Remember, we originally answered the pay ISP business by up selling our free users to a $9.95 monthly service.
Also, you should remember that while our future revenues and profits will reflect the impact of $9.95 subscribers upgrading to the accelerated dial-up services, our subscriber ignition metric, on its own, will not reflect any of that benefit. Our average revenue per billable user, or ARPBU as we call it, however, certainly will reflect that.
Last quarter, I gave you an example of McDonald's up selling existing customers to buy a highly profitable 95 cent Apple pie, which would increase their revenue, increase their profit, and increase their average cash register ring, but without impacting the actual number of new meals McDonald's would sell. In classic marketing parlents, the up sell is the most desirable of all marketing tools because of the tremendous operating leverage of flow-through afforded by the sale of a product to an existing customer. As a leader in the value priced ISP category, we've positioned our business based on our view of the changing dynamics of the ISP category, which has proven to be accurate.
We have been exposing our beliefs that the premium dial segment would come under intense pressure from lower prices for DSL and broadband cable at the high end, and from the migration to high-quality, value priced dial-up like United Online, on the lower end. Add to that mix, the fact that consumers can now get high-speed Web surfing at up to five times the rate of conventional dial-up for only $14.95 per month from United Online, and you can see why some of the premium priced dial-up players have recorded major subscriber decline.
We were really interested to see that the Goldman Sachs Group released a report that their Internet conference in May of 2003, that they have done in conjunction with the market research firm, [Syniveight] on the dial-up and broadband market. That report indicated that 72% of dial-up users who are planning to upgrade to broadband in the next year, cited faster speed as the major reason they would potentially switch to broadband. This report from Goldman Sachs and Syniveight also indicated that 57% of dial-up users who are not planning to upgrade to broadband stated that broadband prices were still too expensive to even consider switching.
All these views are consistent with the opinion that we have expressed to you on our earnings calls for the past seven quarters. One of the more enlightening points noted in the Goldman Sachs Syniveight research, was that only 2% of the dial-up users surveyed who were planning to switch to broadband indicated an increases ease of downloading music and software was their top reason to switch to broadband. Only 2% of the people indicated that.
These research views support why we at United Online are so excited about the accelerated dial-up business. It speeds up Web surfing by up to five times, addressing users express need for speed, and while it may not improve, it will improve downloads like music and video, the data suggests that the downloading aspect of broadband is almost irrelevant in getting dial-up users to switch to broadband.
So at a monthly price, it is significantly cheaper than the $40 average broadband price, NetZero high speed and Juno SpeedBand have the chance to lead a movement which could elongate the lifecycle, relevance, and profitability of the huge 48 million plus estimated U.S. households in dial-up.
In summary, with results like these it is clear that United Online had a very solid year in fiscal 2003, and a very strong June 2003 quarter as well. Our strategies have been well articulated. They have been consistent, innovative, and our strict financial controls, which is one of the hallmarks of our Company, have become increasingly more effective with each passing quarter.
Let me elaborate on that a little bit. We, Charles and I have spoken to you repeatedly about this in the past is that we pride ourselves as a Company on our creativity, our dedication, and our strategic vision. At this point, United Online is one of the most efficient companies in the entire tech industry, because of our remarkably high annualized revenue per employee at $701,000 of annualized revenue per employee. Which is significantly higher than Amazon and eBay, and it is more than double that of Yahoo!
Impressively, our average annualized revenue per employee is up almost 37% year over year, and the leverage that we have built into our highly automated and robust infrastructure has helped us achieve that efficiency. Our operating mantra focuses on skillful execution of our highly focused business plan, which is designed to make United Online the dominant player in the emerging value priced ISP segment.
As the pioneer of the value priced ISP category, we are committed to dominating that market segment in helping to fuel the migration of premium priced dial-up users to our $9.95 and $14.95 per month product. In addition, our accelerated dial-up products have the potential to attract existing, marginally satisfied broadband users who are not interested in the download capabilities of either cable or DSL, but do want fast Web surfing and faster e-mail. Our accelerated dial-up products also provide a mobile high-speed solution for travelers, who by definition, cannot take their fixed wall broadband with them on the road.
With that, I am going to turn the mike over to Charles Hilliard, our EVP and CFO, and he's going to give you detailed specifics of these impressive results. In addition, Charles will discuss with you our guidance for the September 2003 quarter, and our updated outlook for fiscal 2004, which will end on June 30th of 2004.
So Charles?
Charles Hilliard - UNTD - CFO & EVP, Finance
Thank you Mark and good morning everybody. This morning I'm going to discuss a few of our highlights from the June 2003 quarter. Second, I will cover other selected financial and subscriber data for the quarter. Third, I will cover our business outlook.
While our release also discusses our annual results for fiscal 2003, the vast majority of my discussion this morning is going to focus on the June 2003 quarterly results. Let's go through the highlights of the quarter.
Number 1, our adjusted operating income before depreciation and amortization were $16.2 million, which was up 129% year over year. Number two, our billable services margin at 68.2% was 1120 basis point improvement year over year, and a 390 basis point improvement sequentially. Paid subscriber growth was 142,000, putting us at 2.55 million, which was up 49% during the past 12 months. Our accelerated dial-up subscriber base came in at approximately 8% of our total pay sub base. And free cash flow at $18.2 million for the quarter, and in fiscal 2003 United Online generated over $61 million of free cash flow.
Let's cover some other selective data for the quarter. Total revenues at $79.6 million was up 46% year over year. Billable services revenues were at $72.4 million, or up 51% year over year. Advertising and commerce revenues were $7.2 million, up 10% year over year. Billable services revenue expanded to 91% of total revenues for the quarter, versus 88% in the year ago quarter, as growth and billable services revenue outpaced growth and commerce revenues.
Our average monthly revenue per user, or ARPU, was $9.75, up about 1% from $9.66 in the year ago quarter. ARPU improved as the result of the launch of our accelerated dial-up services during the quarter. However, revenues from the accelerated service were relatively modest during the quarter due to promotional pricing that was offered through May on the product.
Advertising and commerce revenues were 10% year of year, and declined about 8% sequentially versus a seasonally stronger March quarter. Our four-year advertising relationship with General Motors, which ends on December 31st of this year, contributed about 38% in ad and commerce revenues in the quarter, versus about 37% year ago. Revenues from search fees, the next largest portion of our ad and commerce revenues were up over 50% year over year. We monetize search through our 2 year agreement with Overture which expires in March 2004.
Move on to the billable services margin. 68.2%, it was up over a thousand basis points year over year, versus 57% a year ago, and up nearly 400 basis points versus 64.3% in the March '03 quarter. The margin benefited by average hours per paid subscriber per month being down approximately 7% sequentially, and up about 4% year over year. Due to the seasonality of our business, we had positive impact on our billable services income compared to the March 2003 quarter.
Billable services margin also benefited from the increase in ARPU, and slight sequential decrease in average per hour telecom costs, which was slightly below 8 cents in the June 2003 quarter. Hour per hour telecom costs were slightly above 8 cents a quarter ago, and just under 11 cents in the year ago quarter.
Cost of free services, $2.6 million this quarter, down 41% year over year. Our active free user base was down about 6 percent sequentially and 7% year over year. The decline in our active free users and a reduction in hourly telecom rate helps to right down our cost of free services year over year. As many of you know, we calculate our growth paid subscriber acquisition costs as follows, cost of free services plus sales and marketing expenses less ad and commerce revenues, which are generated by both our free and our paid users. In the quarter this net cost was $21.8 million, and that's $12.4 million a year ago, and $19 million in the March '03 quarter.
As discussed, we added 142,000 net new paid subscribers in the June '03 quarter, and grew our accelerated subscribers to 8% of our paid sub base at June 30th '03. We estimate that overtime a $14.95 accelerated dial-up sub generates approximately 1.6 times the incremental operating income of the $9.95 sub. Thus, adding one accelerated dial-up sub is equivalent to adding 1.6 $9.95 cents.
As Mark talked about, upgrading a $9.95 sub to $14.95 is equivalent economically to adding 0.6 $9.95 subs. Accounting for this benefit, our cost per gross subscriber addition was about $39 in the June quarter, compared to $38 in the year ago quarter and $36 in the March '03 quarter.
Without accounting for the greater financial benefit of an accelerated subscriber, our cost of gross subscriber addition in the June '03 quarter was approximately $49 versus $38 and $36 in the June '02 and March '03 quarters respectively. As Mark pointed, over 40% of our media budget for the June quarter would support the launch of our accelerated services, and by any measure, those efforts clearly paid off.
To say the least, we have been very pleased with the returns generated on our sales and marketing activities, and we will continue to invest in this area in a very disciplined manner, as we manage the business to achieve an attractive long-term, bottom-line growth rate.
Let's talk about free cash flow. $18.2 million in the quarter, which as I had mentioned, was at 49% year over year, and up 15% sequentially. For the fiscal year, we generated over $61 million of free cash flow. General and administrative expenses for the June '03 quarter were up about 23% versus last year's June quarter, and up about 11%, excuse me, sequentially. D/A in the June '03 quarter was negatively impacted by a $700,000 accrual for the settlement of a legal dispute.
Our balance sheet continues to improve with no long-term debt and total cash balances of $193 million at June 30th of '03. We spent almost $4 million during the quarter on share repurchases, and as mentioned in the release, our board recently authorized expanding our total program size to $100 million.
Mark mentioned our annualized revenue per employee, which is something that we keep a close eye on as an important measure of productivity as we continue to invest in human capital in growing our business. We believe this metric offers some further insight into the efficiencies of our companies operation.
Let's go into business outlook. Given our strong performance in the June quarter and the current trends we are seeing, we're raising guidance for fiscal 2004. We project operating income before depreciation and amortization for the September quarter between $16.5 and $17.5 million. For fiscal 2004, we estimate between $74 and $79 million, up from previous guidance of between $68 and $73 million. At the mid point, our revised fiscal 2004 guidance implies year over year growth for fiscal '04, up 52%, compared to our fiscal 2003 adjusted operating income before D/A.
Total revenues for the September '03 quarter are estimated to be between $83 and $85 million. Such results, if they were achieved, would result in year over year revenue growth of 43% to 46%. We are guiding for our billable services margin to be about flat in the September '03 quarter versus June of '03, due to investments we are making in customer support and our accelerated platform being offset by a higher ARPU due to revenues by accelerated subscribers.
We are also estimating fiscal year end 2004 total paid subscribers of between 2.9 million and 3.1 million. As we mentioned in last quarters release, the effective cash rate for 2004 financial reporting purposes is expected to increase to approximately 40.5%. The increase in our effective tax rate will not impact the amount of cash paid for taxes in fiscal 2004, as a result of the companies tax and operating loss carry forwards, and the projected tax yield for stock option exercises. Cash paid for income taxes in fiscal 2004 will likely be limited only to California state income taxes, given the two-year moratorium on usage of NOLs in California.
Currently, we estimate that our total net operating loss carry forwards for federal tax purposes going into fiscal 2004, will be approximately $253 million. There are annual usage limitations for using these NOLs an as such, we estimate that about $38 million will be available for use in fiscal 2004, and $12.5 million available per year thereafter.
Data NOLs will vary to some degree with federal amount. Our future tax rate, cash paid for income tax, and our NOL usage is dependent upon a variety of factors including the company's actual results in the future, as well as our tax planning strategies. Capital expenditures, we currently expect fiscal 2004 Capex, assuming no significant changes in our business, to be in the range of $7 to $8 million, versus 6 million we spent in fiscal 2003, which was within our guidance. Consistent with historical trends, free cash flow for the September quarter will be impacted by the payment of fiscal 2003 bonuses.
With that, I will turn the call back to Mark for some closing comments, and then we can move into the Q/A.
Mark Goldston - UNTD - President, CEO & Chairman
Thank you, Charles. With the very strong results we posted of our last 12 months and the effectiveness of this very focused business plan, we spent a great deal of time at the managers team and the Board of Directors level looking at how we can leverage the outstanding infrastructure and the core competencies that we've got at United Online. Because at present, our mission statement is focused on United Online becoming the leading provider of value priced Internet access in the USA. Clearly, we have executed that mission statement at a very high level of proficiency. As we now sit atop the value priced ISP segment in the USA at number 1.
As we evolve, we have chosen to expand our mission statement to becoming the leading provider of value priced Internet services, instead of just confining the strategy to access. The first foray into this new mission statement for our company, was the launch of a software product which was the accelerated dial-up introduction under the NetZero high-speed, and Juno SpeedBand brand-names. This software driven product featured a $5 per month retail up charge, and clearly takes advantage of our core technological billing and marketing competencies.
So going forward, we will continue to look for additional opportunities through internal software development, vendor partnerships, and utilizing our vast $193 million cash hoard towards potential acquisitions of companies with services that can meet our tight screening process for incremental revenue, and most importantly, profitability.
With the $193 million in cash and no debt that we've got on our balance sheet as of June 30, of 03, many have asked Charles and I to articulate a cash strategy for investors on a going forward basis. Our cash is an asset that provides us the flexibility to act quickly when opportunities arise, and in conjunction with the expanded mission statement that I just explained, we intend to look aggressively at potential opportunities to utilize that cash. In addition as Charles mentioned, 2 days ago our Board of Directors increased our share repurchase program to $100 million, of which we have used $11.3 million to date since inception.
We intend to continue to look at opportunities to repurchase our shares in United Online. Additionally, we are exploring a variety of other ways to effectively deploy our cash, and are reviewing the possibility of providing a cash dividend to our shareholders, due in part to the very favorable tax treatment now accorded to dividend. That review is very preliminary, and it is important to note that we, as a Company, have not made any decisions on dividends at this time. It is just another thing that we are considering doing as a way of managing our large cash base.
In summary, I want to convey to all of you the fact that this management team is focused on creating long-term value for our shareholders, and we will use our cash in a manner that fits with our strategic goals.
At this point, I would like to open up the call to Q/A from interested parties. I'd like you to please follow the directions from the operator for getting in the queue, and Charles and I will be happy to answer questions.
Operator, at this time I would like to turn in back over to you to queue up the Q/A.
QUESTION AND ANSWER
Operator
At this time I would like to remind everyone in order to ask a question (Caller Instructions). We'll pause for just a moment to compile the Q/A roster. Your fist question comes from Safa Rashtchy of Piper Jaffray.
Safa Rashtchy - US Bancorp Piper Jaffray - Analyst
Good morning guys. Congratulations, great quarter.
Charles Hilliard - UNTD - CFO & EVP, Finance
Thank you Safa.
Safa Rashtchy - US Bancorp Piper Jaffray - Analyst
A couple of questions on the impressive addition of the new high-speed subscribers of 200,000 or so. First, can you give us a sense of how that compares with the competitive services -- there hasn't been much disclosure but I'm assuming that you have some sense of whether you are growing much faster or not. If the price differentiation verses the service are making any competitive differences? And also, how much of that was a conversion of your existing subs versus total new ads?
Mark Goldston - UNTD - President, CEO & Chairman
Sofa, this is Mark. Basically, it is interesting. As you know, people have been asking Charles and I all quarter how this thing has been going, because I guess the folks at EarthLink had indicated early on that they had signed up I think they said 14,000 early on, and I think they ended up probably with about 25,000 was my recollection of what they had said in one of the reports on their EarthLink Plus 2895 product. They also noted recently that they now said after reading what they did in the quarter that they were going to just include it in their regular products. So you could be the judge on your own as to whether you think that 25,000 is good number or not a good number, whatever it is.
That is the only competitive G2 that I've got relating to accelerated dial-up. I also have heard the AOL intends to include some level of accelerated dial-up in their new software release. This is consistent Safa with what we have been saying all long, is that we do think this is the future of dial-up and it is a great thing for the industry. Having said that, coming in with 200,000 people on a product that is 50% more expensive than our $9.95 for us, we consider to be beyond our wildest expectations, as you can imagine.
In terms of where they came from, in total, we have roughly 70% of our users in the quarter, in total, coming to the front door, directly to the front door, which is the highest percentage in the history of the Company. To put it in perspective, in the December 2001 quarter we had approximately 24% of the people coming right to the front door. In this quarter it was 70%. So within that 70% number, that is for total pay users coming to the front door, so the accelerated people are included in that number. We are not going to, as we said earlier, go through the granularity of breaking out each independent service that we may now launch to give you that.
So what we are going to do is continue to tell people a total number, and the total number at 70% was the best number that we've ever gotten. And frankly, hats off to our marketing department because that basically says how successful these marketing programs were. And we are now at a point where we are getting a tremendously high percentage of people just going right to the front door and never even bothering to go through the free service.
Safa Rashtchy - US Bancorp Piper Jaffray - Analyst
And a follow up if I may, actually, picking up on the marketing point Mark, you obviously have had a pretty effective marketing campaign -- could elaborate on your thoughts on expanding it? It obviously may involve higher customer acquisition costs, but as you know, the revenues are significantly higher. So can you give us a sense of how high you are willing to go or how high does it make sense to go? It seems like this is a good time for aggressive marketing and I just want to get a sense of your metrics and how much you want to spend?
Mark Goldston - UNTD - President, CEO & Chairman
Yeah, Safa, I'm going to give you a little color on this because we've talked about this at some investor meetings conferences before. The way we look at this and I understand it is not necessarily some of the people in the analytical community and/or the investor community may look at it -- the way the company looks at the business and we have said this before, we look at ROI. People have chosen to glom on to something called the customer acquisition costs, because it is a metric that you can compute, but that is not how we run our company. We run our company based on return on invested capital. That is how you get through our operations committee. That is how any product in this company gets approved to go out the door.
So to that end, from an ROI standpoint, the money that we spent in the June quarter, 40% of our $17.3 million media budget, was phenomenally successful from an ROI standpoint, because of what it was able to get us in the high-speed market, and because of how profitable those users are. So on a going forward basis, we intend, certainly for the quarter that we are in now and in the foreseeable future, to spend more money which we have done in the last several quarters, because our ability to get pay users would have a 68.2% billable services margin, and to get additional $14.95 users, who have a margin that is even better than that is a great use of our capital. And so, I would say that Charles' example that he gave of how to look at customer acquisition cost, if that is a number that you want to focus on.
In terms of the adjusted number, which is factoring in the benefits and the incremental profit that you get from the high-speed users, is the way to look at that business, and my belief is that as long as the momentum is there and the traction is there on both our core business, which is up -- year over year is 142,000 -- is up, what is that? 30% some odd, and the tremendous traction we got on the high-speed, I would continue to fuel that for the near future, because it is obviously giving us a great return on our invested capital.
Charles?
Charles Hilliard - UNTD - CFO & EVP, Finance
Safa, I would say that while sales and marketing continues to be a very discretionary line item for us, the guidance that we put out there implies we will continue to reinvest in it. It should go up at an absolute dollar amount and go up very slightly in terms of a percentage of revenue. That is one way to look at it. We have been ticking it up slightly as a percent of revenue. It is the only line on the cost side that has been going up as a percent of revenue over the past 7 or 8 quarters. We have been very pleased with the return on invested capital or IR as Mark articulated, and as long as we are happy with that we will continue to reinvest.
Safa Rashtchy - US Bancorp Piper Jaffray - Analyst
That sounds good. We're happy as long as your net income and free cash flow keeps flowing.
Mark Goldston - UNTD - President, CEO & Chairman
Safa we are totally aligned because that really is what drives our whole Company. That is how we look at the business.
Safa Rashtchy - US Bancorp Piper Jaffray - Analyst
Great. Thanks, great quarter.
Mark Goldston - UNTD - President, CEO & Chairman
Thank you very much.
Operator
The next question comes from Mark May of Kaufman Brothers.
Mark May - Kaufman Brothers - Analyst
Hey guys, how's it going? A couple of quick questions -- good quarter -- the first one focused on the high-speed and SpeedBand product and really is coming of what Mark just said to the last question, which is, it seemed like -- I don't know if you meant to -- but that you were downplaying a little bit the opportunity to migrate the $9.95 customers up by saying 70% of the users were coming into the door. And I'm just wondering if, how big of an opportunity do you think that is in terms of migrating users? It seems like it would be a lower sales and marketing acquisition channel for you.
And then related to high-speed and SpeedBand, I'm just wondering what your guidance implies in terms of growth in that product? Just playing around with the numbers, it seems like I would have expected the operating income before depreciation and amortization to have gone up a little more than what it did based on at least the early success for that product. And if I could ask a follow up on advertising, that would be great.
Mark Goldston - UNTD - President, CEO & Chairman
Mark, I will take part of that question and then I will let Charles take the other part. In terms of the early part of your question, and our ability to migrate people, et cetera. You have to remember that when we run television advertising promoting high-speed or SpeedBand, much of that advertising is directed at existing NetZero and Juno $9.95 customers to encourage them, who already have the Software, to convert. Yes, we run banner ad, yes we run e-mails etcetera, but in terms of the effectiveness, they are far less effective than the power of running large TV campaigns.
So, some of the migration that we get is not just a gimme, we have to go out and earn that, and one of the ways that we earn it is running our own TV ads to get that done, one.
Two, don't read the 70% number that I gave you in the wrong way. What that is basically saying is that in aggregate, everybody who has come to us, who is paying us, 70% of those people are coming to the front door. Now, many of those people may come and sign up for $9.95 and then after that see our advertising for high-speed either on our own service or on television and then convert. And a lot of that is what happened in the most recent quarter.
Thirdly, you have to remember that we ran a promotion on this product through the month of May where we gave away the first month of the accelerated product for free. So you had to pay $9.95 but you didn't have to pay the extra $5, so we run that through May. So, obviously Mark, that is reflected in the revenues and the income because, clearly, for two-thirds of the three-month quarter, you were on promotion.
And lastly, as you probably know, anytime you launch a major new products especially with a blast of marketing like we did, you likely will get great traction early on because it is a brand-new product, nobody knew about it before and you get a lot of early adopters coming in. Having said that, I think any marketer would be foolish to assume that you take that 200,000 number and expect to replicate it on a going forward basis. It doesn't mean you're not going to be successful, but you had a feeding frenzy I think because of the fact that this was such a revolutionary concept and there was a lot of built-up latent demand for high-speed Internet access that people really weren't willing to go pay for and Broadband, it could now get for this.
We will be successful going forward with high-speed. We're very excited about it. But you did get a lot of early traction from the marketing and from the newness of the concept to the marketplace.
Charles Hilliard - UNTD - CFO & EVP, Finance
Mark, I guess in terms of the pure numbers, the operating income before D/A growth sequentially was up 18% and that margin cleared 20% for the first time in the history of the company. In the fiscal '04 guidance, I think as I mentioned, at the midpoint is up 52% year over year. We think those are tremendous growth prospects and that is very much partly fueled by our success in accelerated dial-up.
Mark Goldston - UNTD - President, CEO & Chairman
One other thing and I don't mean this to sound facetious is you have to be careful you don't get jaded, and make us victims of our own success. To have a company in this day and age to have this type of performance and to provide the kind of guidance that we have that gets you up, in effect to over 50% on operating income, off of a base that was already starting at $50.2 million which is what we had for this fiscal year, is, in our view, quite impressive and talks to what a growth company this is.
Mark May - Kaufman Brothers - Analyst
To my earlier question, what type of growth in the sub base are you forecasting?
Mark Goldston - UNTD - President, CEO & Chairman
In the accelerated sub base?
Mark May - Kaufman Brothers - Analyst
Yes.
Mark Goldston - UNTD - President, CEO & Chairman
It will be a component of total sub growth. We are sharing guidance on totaled sub growth going all the way out to the end of fiscal '04, but we currently view ourselves sort of in the bottom of the first inning with accelerated dial and we want to see what the long-term trends look like.
Mark May - Kaufman Brothers - Analyst
I guess is the 8% number a fair number going forward for the next few quarters or?
Mark Goldston - UNTD - President, CEO & Chairman
We have been giving guidance on that so that would be giving additional guidance, which we are not doing. What I can tell you is in the last quarterly earnings call, if you remember in my remarks, I said that beginning with the June 2003 quarter, for the first time in the history of United Online that billable subscriber service revenue growth may no longer be solely dependent on pay sub growth in the quarter. The reason for that is this accelerated product.
Again, if you look at the 200,000 we just got, that is exactly what is going on. Yes, the 142,000 was a terrific number, but we are now more focused on the revenue line and on the profit line and the internal dynamics which we use to run the business, we view as much less important on an external basis. We want people to look at this and say, has this company achieved solid revenue growth and solid profit growth?
The internal mechanisms by which we choose to get there by pulsing our accelerated, pulsing our $9.95, or whatever else we may launch is just part of the arrow that we've got in our quiver.
Mark May - Kaufman Brothers - Analyst
And based on your comment earlier about the ARPBU impact in the quarter from the initial customers getting it free the first month at a discount, it looks like the ARPBU for this high-speed SpeedBand product was around $12.40 or $12.50, somewhere around there. So pretty close to the retail price. Is there anything to read into that in terms of when the customer came on during the quarter, or what is driving that fairly high ARPBU right out of the gates?
Mark Goldston - UNTD - President, CEO & Chairman
Some of the people begin paying later in the quarter, the extra $5 Mark. And we think that that is a product that can migrate up to an ARPU north of $14 overtime.
Mark May - Kaufman Brothers - Analyst
Okay.
Charles Hilliard - UNTD - CFO & EVP, Finance
Does that answer your question, Mark?
Mark May - Kaufman Brothers - Analyst
Absolutely. And, if I could just ask a follow up, it looks like the advertising revenue was down, not quite a bit -- a decent amount sequentially, and the growth from a year on year basis was down, just wondering if you could talk about why that was and what we should be expecting for the next few quarters? And if you can tell us how much GM was of the ad revenue in the quarter that would be great?
Charles Hilliard - UNTD - CFO & EVP, Finance
I mentioned in my comments that it was about 37% during the quarter. That compares to about 38% in the year ago quarter.
Mark Goldston - UNTD - President, CEO & Chairman
In terms of the actual ad revenue Charles, do you want to comment on that?
Mark May - Kaufman Brothers - Analyst
I apologize if you've already caught this, I wasn't on the line the whole time.
Charles Hilliard - UNTD - CFO & EVP, Finance
Mark, excuse me, it was GM at 38 this quarter, 37 in the year ago quarter. Our ad and commerce revenue is partly tied to the amount that our subscribers are online, given sequentially that our average hours per paid sub were down 7%. For example, search revenues as percent of total ad and commerce revenues were flat quarter over quarter. As we saw a decline in usage per average sub translates into a decline in ad revenues. Also, contractually with GM, we have contractually some quarters where they buy more and quarters where they buy less. And that overtime should pick up in some of the seasonally stronger quarters like September.
Mark Goldston - UNTD - President, CEO & Chairman
Mark, what's important is as Charles goes to great pains in these calls to make these points clear and I think sometimes we have so much to report that some of it may get lost because, being on the other end of this it is hard to bring it all in.
Year over year, the advertising and commerce revenues were up 10%, which is important. This is a business as Charles has stated, that in quarters where our usage is later, for seasonality purposes, we will have better margins, which we did, and we will have less inventory to sell, because unlike a portal, we manufacture inventory through hours of usage. The more you are on, the more ads we can sell and serve. So in quarters where our usage is lower, like one of these quarters, our costs will be better, our margins will be higher, but we will have potentially less inventory to sell.
So year over year, which is a good way to compare the business because seasonality to seasonality is the same obviously, June of '03 over June of '02, it was up 10% so, we think we have a lot of opportunities to even get better in advertising and e-commerce revenues. We've got programs designed to do that, but part of the uniqueness of our business verses looking at a portal is the fact that our ability to sell our inventory is directly related to the amount of hours that our users are online.
Mark May - Kaufman Brothers - Analyst
Thanks for answering all of my questions.
Operator
Your next question comes from Richard Klugman of Jefferies.
Richard Klugman - Jefferies - Analyst
Thanks a lot. Congrats on those accelerated subs. I was curious. I know you're not going to give where that 8% is going, but kind of conceptually, as we look to EarthLink throwing in the towel and effectively giving the software for free, AOL talking the same thing with 9.0, presumably they will be pushing that as hard as they did with 8.0 when they come out with it. I was curious; do you see that perhaps maybe the whole $10 story to be a little bit tougher to sell going forward?
Since effectively, you used to be selling $10 as get the same thing that they are selling for $22 or $24, and you can't quite do that since their $22 or $24 has more than your $10 has. So it's kind of like, I guess you're spending 40% of your ad budget on a $15 product 60% on a $10, does it make sense given what you saw in this quarter on the take rate and how that competitive dynamic is shifting, may be that 40% of your ad budget, may be the 60/40 gets swapped in the future?
Mark Goldston - UNTD - President, CEO & Chairman
You know Rick, it's funny. It's almost like people keep asking Barry Bond, how can you continue to hit 50 plus home runs, you're 36, you're 37, you're 38, and at the end of the day, from a competitive standpoint, I don't see how it gets any tougher.
In the December quarter, six months ago, MSN and AOL, if you remember all of the hype about it, spent on their 8.0 launches $500 million in a quarter on marketing that bled into the March quarter, and look at how this company performed. We have, in the past, had such incredible competition almost to the point where it seems surreal. We had AT/T marketing a $4.95 ISP. Then they pulled back and made it a $7.00 ISP. We had People PC when it was an independent company probably spend $200 million marketing a $9.95 product, then AOL went to Wal-Mart and created almost 2 years ago Wal-Mart Connect, which is a $9.94 product that is available to 100 million Americans every week going to a Wal-Mart store. Then Kmart, the second largest retailer, before we bought BlueLight, launched an $8.95 dial-up.
It's gotten to the point where we are almost numb from the competitive situation. And so, EarthLink and AOL and anybody else who wants to now include accelerated dial-up in their product. The way I look at it is this, 25 years ago when I worked at Johnson / Johnson, we launched a product called Extra Strength Tylenol. We had a regular product and we launched an Extra Strength product. No one else had an Extra Strength product. Years later after Extra Strength Tylenol had gotten a massive market share, all of the Aspirin companies decided to start calling their products Maximum Strength.
It was kind of a day late and a dollar short because Tylenol remained the number one used, because they had pioneer segment, they became known for it and it was a tremendous consumer value statement. We think we've got the same thing here.
AOL has got a lot to sell to consumers. Between their content, their features and etcetera, accelerated dial-up will be one of a list of twenty things that they have in their 9.0. Same thing with EarthLink. EarthLink talks about their pop-up blocking and their Spam and their this and that, accelerated will be another thing they sell.
We are focused on 2 messages, the value of our product, in terms of an absolute price point, and the speed that we can provide you while still maintaining the value relationship. In marketing parlay that is called the unique selling proposition. We have one, the competition does not. So we will have formidable competition out there, we will have a lot of spending a lot of time trying to figure how to get their share of this pie. We don't believe in the past, that they have been as successful as we have been, and hopefully, they won't be as successful in the future.
But, I would be lying to you if I told you that we did not concern ourselves with the competitive set, because we do every day that we show up at this company. But in the past, regardless of how much money these folks have spent, they have not proven to be successful. So maybe going forward, they will be more successful. But certainly the advent of spending money on a new product in this space is not new, and that is something that we are not used to dealing with.
Richard Klugman - Jefferies - Analyst
I appreciate that. What I meant is a $10 a harder sell now, because before it was, get the same stuff for less than half, it's just a harder one because it is not quite the same stuff.
Mark Goldston - UNTD - President, CEO & Chairman
You know Rick. At the risk of stating the obvious -- well I guess not stating the obvious. When you're dealing with people whose average income are between $55,000 and $65,000, and you may or may not know this but you can look at the consumer packages industry for reference. Absolute price point is what drives consumption. Value is important, absolute price point drives it. When you're on a limited budget and you have a limited amount of disposable income, you want to believe you're buying value, but if to get the value you have to spend a lot of money, you will not get mass consumption. It's basic fundamental marketing theory. So at the end of the day, that $10 absolute price point is as much or more of an attractant as the value proposition itself, because on a limited budget, people don't have to spend $23 or $22 they can spend $10.
So if they add more features to their product on a feature to feature basis, does that dampen or dilute the message a little bit? Maybe it does, but at the end of the day people who migrate to the value statement of the marketplace are migrating because of the absolute price point and the performance of that product. And they are not really doing a feature to feature comparative.
Richard Klugman - Jefferies - Analyst
So you don't anticipate, it sounds like, changing that 40% ad spend ratio materially going forward?
Mark Goldston - UNTD - President, CEO & Chairman
Basically, at the risk of stating what is obvious to us, we seem to have gotten a formula here that is working tremendously well. We are going to continue to operate that formula and if for some reason, that formula did not continue to go very well, we would tweak it either up or down. But right now, I am kind of reticent to jiggle that joystick too much because it seems to really be working.
Richard Klugman - Jefferies - Analyst
Another question on the use of cash, which you went through all of your options. It sounds like you are focusing more on subscribers unrelated to access as an add on -- the apple pie analogy.
Mark Goldston - UNTD - President, CEO & Chairman
You may have misinterpreted what I said. What I was saying is previously, we looked only at the access business, previously. We looked at buying cash flow of billable access subscribers. We are absolutely still looking to do that. However, in addition, because we have now been very successful with launching an additional billable subscription service it isn't related to pure access itself, we will now look at other services that are out there that can be an add on to the basic access business that we can use our core competency of our billing infrastructure, our operational efficiency, and our marketing. And if we can find a way to leverage those three core competencies against an additional billable services revenue number during the course of a quarter, than that is something we would absolutely look to acquire.
Richard Klugman - Jefferies - Analyst
I guess I interpreted that to mean that -- not that you are giving up -- but that it doesn't look, there are that many BlueLights that are easily buyable in the near future?
Mark Goldston - UNTD - President, CEO & Chairman
I wouldn't read that from what I said Rick. I think what I would read is that this company has now developed additional core competencies to what it used to have where our basic core competencies used to just be our ability to provide access. We now have more competencies that we think we can leverage.
And so, instead of keeping our aperture so tight that we don't look at other things which could be accretive, and could provide us with a more robust product, we now have decided that we are going to look at those. It will never be an outlier. It won't be something where you ever hit the side of your head and go, why would they have done that? It would be totally obvious as to why we would've added these additional billable services that we're looking at.
Frankly, with 5,000 to 6,000 pay ISPs out there, there's no shortage of potential candidates. What we do is look at whether or not those are worthy acquisition targets because of the fundamentals of the businesses that they run. The existence of those businesses is abundant. The question is whether they are worth buying or not.
Richard Klugman - Jefferies - Analyst
Last question, and I apologize for taking so much time here -- you mentioned the possibility of doing a dividend, what is your time frame on when we could expect a decision there?
Mark Goldston - UNTD - President, CEO & Chairman
What I was trying to say was, I would say the number 2 question that Charles and I get after how are you doing on Accelerator, is what are you going to do with all the cash? So, obviously we have so much cash. And this business throws up so much cash flow every quarter, I mean, you are talking about a business that is throwing off $15, $20 million of cash flow every quarter on top of a starting point of $193 million, that obviously you have to look at other vehicles other than just pure acquisition.
The 2 most prominent ones that you would look at would be the repurchase of your own stock, hence, our increase of our buyback program to $100 million. And the potential for dividend. Charles and the finance team are looking at all these options. They are going to do an analysis, they will come up with some recommendation and conclusion, and at that point, we will review it and see what does and doesn't make sense. But I just wanted you as investors and analysts to know that we are focused on the cash and we are focused on ways in which we can deploy it and we haven't ruled out possibilities.
Richard Klugman - Jefferies - Analyst
Thanks a lot.
Mark Goldston - UNTD - President, CEO & Chairman
Thank you, Rick.
Operator
Your next question comes from Youssef Squali of First Albany.
Youssef Squali - First Albany - Analyst
I will try to make mine short for everybody's benefit. No. 1, what was your churn in the quarter, and how should we be thinking about churn going forward? I would imagine that it should start churning down as you upgrade more and more of your users to the higher speed product. No. 2, why wouldn't growth margins go up in the second-quarter, in the September quarter, given the fact that you will have gotten the full benefit of higher margin, higher speed data customers? Thanks.
Charles Hilliard - UNTD - CFO & EVP, Finance
First of all, the churn during the June 2003 quarter was 4.1%. That's down versus 4.2% in the March '03 quarter and in the year ago June quarter, just to remind you we were at 4.4%. And so you're right, it has been trending down and it continues to be very much a component of growth. The faster we grow in general, the higher our churn is because the churn rate on new customers in the early part of their lifecycle is higher than that of seasoned customers. And we're delighted and very happy with our team that although we have growing very rapidly, we have brought that churn rate down. In terms of gross margin, two comments.
No. 1, in the September quarter as I mentioned in some of my comments, we are going to make some investments in customer support which will add some costs. And then No. 2, with the overwhelming growth we witnessed in accelerated dial, we are investing in the infrastructure to support that. And that will impact margins.
Youssef Squali - First Albany - Analyst
So you're talking about gross? I'm talking about gross margins, not operating margins.
Charles Hilliard - UNTD - CFO & EVP, Finance
No, I'm talking about items that will impact the gross margins. The depreciation of the network equipment to support accelerated dial, and the investments we're making in customer support will both impact the billable services margins.
Youssef Squali - First Albany - Analyst
I see. Thank you.
Operator
Your next question comes from Ned Zacher of Thomas Weisel Partners.
Ned Zacher - Thomas Weisel Partners - Analyst
Morning everybody. Thanks very much for taking the question. A follow-up. What kinds of things Charles, do you need to do, as a generic example that you would need to handle as far as the Teller Enterprise is concerned? What kinds of support mechanisms are necessary to handle -- are people or is it really that there is some additional boxes or equipment that you need to have?
Charles Hilliard - UNTD - CFO & EVP, Finance
There is, no. 1, additional boxes. Because at the end of the day, we are serving some of these customers and are handling more bandwidth. And no. 2, with the rollout of any new product that has a little bit of a different wrinkle to it, it tends to be slightly more customer service intensive. So that means we may be processing more e-mails in our facility in [Hyberdab] or that we may be answering more phone calls with our outsource telecom customer support provider.
The last thing I would remind all of you is, the gross margin came up dramatically in the seasonally light June quarter. It was up nearly 400 basis points quarter over quarter and it's knocking on the door of getting toward 70% already. So we think it is a very bullish outlook to be making these investments that we're talking about in customer support and our accelerated infrastructure, while maintaining guidance at the high 68% level on billable services margin.
Ned Zacher - Thomas Weisel Partners - Analyst
Okay switching gears a little bit. Prospect for renewal on the General Motors contract that you mentioned is going to expire at the end of the year? Any thoughts on that?
Mark Goldston - UNTD - President, CEO & Chairman
No update from last quarter. We do not expect it to be renewed. And that has all from the last several orders been baked into the guidance.
Ned Zacher - Thomas Weisel Partners - Analyst
Then, on a go-forward basis, should we continue to model the idea, model the concept that people get a one month trial on the accelerated product or would you change your mind on that issue?
Mark Goldston - UNTD - President, CEO & Chairman
We always reserve the right to change our mind. I would say that beginning with June, we began charging everyone $14.95 and it will have a small impact in this quarter of some of the free months running off as we head into the beginning of this quarter. But for the time being, as I mentioned that ARPU should get to north of $14 on the subscribers.
Ned Zacher - Thomas Weisel Partners - Analyst
And then last question, you mentioned the number, I may have missed it. As Mark pointed out, there's been lots of data that's been given out this morning. Something being up 43% to 46%, do you recall what that was? If not we can catch it offline as well. It wasn't the revenue guidance was at?
Mark Goldston - UNTD - President, CEO & Chairman
You're talking about in Charles' speech?
Ned Zacher - Thomas Weisel Partners - Analyst
I think it was in Charles', yes.
Mark Goldston - UNTD - President, CEO & Chairman
He said the selected data for the quarter, the $79.6 million, that we were up 46% year-over-year.
Charles Hilliard - UNTD - CFO & EVP, Finance
I know exactly what you're asking Ned. The revenue guidance for the September quarter is up 43% to 46% over the prior year September quarter.
Ned Zacher - Thomas Weisel Partners - Analyst
Okay terrific. These were great numbers. Keep it up guys.
Mark Goldston - UNTD - President, CEO & Chairman
Operator, I think we have time for 1 more question and we can let people get on their way.
Operator
Okay, your next question comes from Jeff Goverman, Pacific Crest.
Jeff Goverman - Pacific Crest Securities - Analyst
Just one small housekeeping question. Charles was there a some hundred thousand dollar charge in G/A for a lawsuit? Is that correct as I understand?
Charles Hilliard - UNTD - CFO & EVP, Finance
Yes, for a settlement of two legal disputes.
Jeff Goverman - Pacific Crest Securities - Analyst
So we can take that out on a go-forward basis, from our models?
Charles Hilliard - UNTD - CFO & EVP, Finance
Yes, we hope things like that are not recurring.
Jeff Goverman - Pacific Crest Securities - Analyst
And also in terms of the free-user base. I guess free is a less effective trial, less effective than it used to be, or you're just feeling better about your marketing mix going forward in terms of your message?
Mark Goldston - UNTD - President, CEO & Chairman
No, it's not a question of being less effective. It's still a great tool for us. If you think about the efficiency of it and how low the cost is coming to free services. I mean this quarter, it was only $2.6 million of cost. Let me just give you a reference point. Before we started putting limits on the service, back in the June quarter of 2001, we spent like $22 million in a quarter on free services.
So it's a great marketing tool, it is a great customer acquisition vehicle. Frankly, we've just gotten so effective at our peer marketing and getting people to the front door, that as percentage of total, it appears to be lower. But we love this free service because it makes us money. It's very efficient and it's completely unique as a tool within the industry.
The only thing I said before Jeff, and I will say it again, is that we need to be $2.6 million $2.7 million whatever. As long as it's got a healthy enough size of user base, that it continues to give us migrants and continues to be an effective tool, we love having it. But unlike in the old days, where we were so concerned about how to keep that free base high. Now we are really less concerned with that. We look at it purely as a customer acquisition vehicle and it's got its own ROI analysis for the Company. And right now it's got a fantastic ROI and we love that business.
Jeff Goverman - Pacific Crest Securities - Analyst
Just one last question. Over the years, how many people actually have signed up for the free service, in estimate sort of size?
Charles Hilliard - UNTD - CFO & EVP, Finance
The registered user base on free for Juno and NetZero, the numbers are astronomical, in excess of 25 to 30 million.
Jeff Goverman - Pacific Crest Securities - Analyst
Okay, thanks. Good quarter.
Mark Goldston - UNTD - President, CEO & Chairman
Thank you very much. Well, I really want to thank everybody for taking the time to do this and for staying with us through the Q/A. As always, if you have additional questions, please feel free to direct them through Brent Zimmerman and Charles and/or myself. We'd be happy to answer that whenever we can. So everybody have a great day, and thanks for tuning in. Bye.
Operator
Thank you. This concludes your conference. You may now disconnect.
