Q4 2004 United Online Inc. Earnings Conference Call

Operator

Ladies and gentlemen, this is the operator. Today's conference call is scheduled to begin momentarily. Until that time your lines will again be place on music hold. Thank you for your patience.

Operator

Good afternoon. My name is Marcus and I will be your conference facilitator today. At this time I would like 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 would like to ask a question during this time, simply press "star: then the number "one" on your telephone keypad. If you would like to withdraw your question, press the "pound" key. I would now like to turn the conference over to Mr. Brent Zimmerman.

Sir, you may begin your conference.

Brent Zimmerman - United Online - VP, IR

Thank you. Hello, and welcome to the United Online conference call to discuss the results of our fourth quarter ended December 31st, 2004. With me today is Mark Goldston, our chairman, CEO and president and Charles Hilliard, EVP and chief financial officer. In today's press release the company refers to adjusted operating income before depreciation and amortization, or OIBDA, as well as adjusted net income 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 general accepted accounting principals, or GAAP and should not be considered as an alternative to our superior to historical financial results reported in accordance with GAAP. Definitions of these numbers are provided in the press release along with reconciliation to the most comparable GAAP financial measures.

We're also providing slides to accompany today's call that are available now on or Web site along with the Webcast and I would encourage you to pull them up during the call. Before we get started I need to point out that the company does apply to safe harbor provisions as outlined in the press release to any forward-looking statements that will be made on this call.

Statements regarding our current expectations about our future operations, our financial conditions and performance, our pay account growth, future products and the industry in which we operate are forward-looking statements that are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.

More information about potential risk factors that could affect the companies 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 filing with the SEC. Projections provided by management in the press release and in today's call are based on information available to us at this time and management expects that internal projections and expectations may change over time.

However, the company does not intend to update those projections. Any persons replaying this broadcast after February 9, 2005 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 information may have changed.

And with that we're going to start off 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 chairmen, CEO and president, Mark Goldston.

Mark Goldston - United Online - Chairman, CEO and President

Thank you, Brent. And welcome everyone to the United Online December quarter earnings call. I'm going to give you an overview of the quarter and discuss some of the key trends we're seeing in the business and then I'm going to discuss our corporate strategy for 2005. I'm going to also briefly outline an exciting major new non-access business that we intend to develop during 2005 as well as some insight into advertising and e-commerce portion of our business as we look towards the future.

I'll then turn the mike over to Charles Hilliard, who will give you a more detailed look at the numbers for the quarter and for the fiscal year ended December 31st, 2004.

The December quarter featured record financial results once again at United Online. We registered new all time records of total revenue, adjusted OIBDA, billable services margin and total pay accounts and subscriptions. It was a very strong quarter in terms of our financial performance. In addition to having a record quarter in December 2004, we also had a record fiscal year for the year that ended December 31st, 2004.

United Online generated all time record levels of revenue, operating income, adjusted OIBDA, adjusted net income, cash flows from operations, free cash flow, billable services margins and total pay accounts in fiscal 2004. They were all time records. We were extremely proud of the combined efforts of the 742 United Online employees all around the world who have worked tirelessly to deliver another year of all time record results.

I'd now like to take a look at our pay accounts. Pay accounts for December, 2004, pay accounts increased by a net 1,594,000 during the quarter, including approximately 1,452,000 pay accounts acquired through our purchase of Classmates Online, bringing total paid subscribers at December 31st, 2004 to just under 5 million at $4.83 million. Without the Classmates acquisition, United Online registered organic pay account growth of 142,000.

Charles Unidentified Audience Member will provide some more granular details on the data later in the call. The paid access business alone declined by 11,000 pay accounts during the quarter, which was completely due to declines realized in our Juno and BlueLight businesses. The flagship NetZero brand, which has received all of our television advertising spending during 2004, registered a net increase in paid subscribers during the December quarter.

As many of you know, with the announced departure of our chief marketing officer in early December, I have assumed a much greater role in the day-to-day marketing of United Online. While we are currently searching for a new chief marketing officer, in the meantime I have taken over the duties of that function and the very capable marketing staff that we have at United Online now reports directly into my office.

As part of my increased involvement in marketing functions, we embarked upon a new ad campaign on December 24, 2004, featuring our new spokesperson, Dennis Miller, in a series of hard-hitting, feature focused TV ads. We've aired several of these ads to day and we have more to come. The results have been exceptional, with the NetZero paid access business showing strong growth since the launch of the new campaign.

These ads are a return to the focused, hard-hitting advertising that's been the hallmark of NetZero since our early days and the consumer response has been overwhelmingly positive. NetZero provides consumers with a compelling set of features at a very attractive price point and according to the most recent JD Power customer satisfaction study, NetZero ranked higher than the likes of AOL, MSN, SBC, Yahoo!, AT&T, etc. in overall customer satisfaction. In addition to our major shift in television creative, we have also embarked upon some innovative and aggressive new media strategies which I can't articulate on the call today for competitive purposes but suffice it to say we're once again flexing our marketing muscle and using the kinds of creative marketing tools that help build NetZero into a major brand.

As I will discuss later, we're developing new and innovative ways to leverage the strength of our flagship NetZero brand and we will take it far beyond Internet access alone. The competition in the value dial-up segment is greater today than it has been at any point in our history.

Two competitors are spending major amounts of money on TV and in direct marketing to try and realize some of the growth potential we have repeatedly outlined for the value category. While this increase in competition has dampened our overall pay access account gains, we believe that the value dial market will continue to grow and we believe that we are better adapting to the new competitive environment.

I'd now like to - in a departure, I'd like to share with you our corporate strategy for 2005. As we stated before on our conference calls, our corporate mission statement is to strengthen our position as a leading provider of consumer Internet subscription services. Under the umbrella of that mission statement, United Online's strategic theme for 2005 is connecting people.

The connecting people them will cover the following key areas: Connecting people to the Internet, to each other, to their pasts and to their areas of Interests. We will employ our 4 Cs strategy of connectivity, community, content and commerce. Within this 4 Cs strategy, we intend to cross-sell our various products and services across the more than 45 million registered users and the more than 15 million monthly active accounts that we have.

Let's review the key elements of our 4 Cs strategy, starting with connectivity. United Online's principal connectivity brand names, particularly NetZero, represent leadership within the Internet connectivity market due to positioning as value-priced services. Our brand clearly stands for innovation and value within the Internet access market and we strongly believe that the brands can be extended logically and powerfully within other areas of connectivity. Within the connectivity segment we intend to develop 2 distinct parts of our business, Internet access and something new for us, telephony.

First let's look at Internet access. Within the Internet access market we will continue to aggressively market our NetZero brand name on TV and through other media and utilize various online and guerrilla marketing tactics to promote the Juno brand name. We will continue to try to innovate within the accelerated dial-up market and build the feature set of our dial-up products to give consumers greater value for their money. We intend to build upon the exceptional quality that our access brands have and as they've achieved, in evidence to their strong JD Power ranking. And we're going to make our vertically priced segmented product offerings more clear and more compelling for the consumer.

Now let's look at telephony. Today we're announcing our intention to build a completely new business within United Online, a business that will be the cornerstone of our telephony effort under our connectivity strategy. We are creating a VoIP division, or voice over Internet protocol within United Online and it's our intention to develop and market a nationally advertised, value priced VoIP product under the NetZero brand name to the consumer market by the end of 2005.

The NetZero VoIP product will be designed to replace conventional home phone services and give consumers a high quality, attractively priced alternative to existing home LAN lines service and competitive VoIP entries. We will have multiple aspects to our VoIP product array and the goal of becoming the same kind of powerful disruptive market force in the VoIP category that we have been in the Internet access category.

NetZero is an ideal brand to compete within the VoIP segment, as it stands for high quality, attractively priced, feature rich connectivity and it maintains an 86% aided brand awareness level in the U.S.A. Our corporate strength lies in our ability to create unique connectivity software and use our marketing prowess to drive large groups of consumers to an innovative product offering. We did it with Free ISP, we did it with NetZero Platinum at $9.95, we did it with NetZero High Speed Accelerated Dial-up at $14.95 and we believe we can do it again with our new NetZero VoIP division.

We have been working on a unique VoIP product design that should help NetZero come to market with a VoIP product that offers consumers a compelling product at an attractive price. And after all, that's who we are at the core. We think the VoIP category is going to be huge and that it's got many of the same dynamics as the dialup Internet access market, including many of the same telecom-vendor relationships that we have today, similar types of scalability techniques, similar connectivity software, etc. These are all areas we are very familiar with. We have got a lot of in-house expertise at present in those areas. We think that the power of a NetZero VoIP product could be as potent in the VoIP category as NetZero Internet access in the ISP category. We're still refining our plan and our launch date is being nailed down as we speak.

Don't look for our VoIP initiative before the third or fourth quarter of 2005. Having looked at the first C of our 4 Cs strategy, which was. Let's look at the next 2 of the 4 Cs, which is community and content. Under community and content we intend to utilize our Classmates acquisition as the cornerstone of a community networking strategy of Internet subscription services designed to connect people with one other through common needs, goals, affiliations and interests.

The Classmates business provides both community and content to its over 38 million registered users and 8.7 million monthly active accounts. An additional piece of the United Online community and content strategy is our growing MegaWeb services unit. We plan on using MegaWeb services as a provider to our own brand and to those outside of the UOL community with the MySite personal Web site that is now in development along with the existing products in the MegaWeb portfolio, like Email My Name personalized email addresses.

Our goal is to make the Classmates site much more sticky and to make people use it more as a destination site or a launch pad for their online activities. Several quarters ago we stated on our earnings call that one of our key strategic goals was to penetrate the broadband user market without having to provide broadband Internet access. Specifically, our intention was to develop and acquire products and services which would appeal to broadband users, giving us a strong presence outside of the core dialup business we compete in with our ISP. Well I'm happy to report today that our 2 most recent acquisitions during 2004, Mega Web Services which we acquired from about that time in April 2004 and Classmates Online which we acquired in November 2004 had delivered on that strategy in spades.

In the case of MegaWeb Services an estimated 78 percent of all activity during the month of December were broadband users and in the case of Classmates an estimated 68 percent of all activity during the month of December were broadband users specifically executing against our stated goal of penetrating that segment without having to provide Internet access.

Therefore, these 2 acquisitions are not only strategically focused for us, they also allow us to tap into the universe of broadband users who seek additional subscription services beyond access. From an advertising and e-commerce perspective these users statistics are potentially very powerful tool for our United Online sales organization to use in selling advertising across the various United Online properties.

As it stands today, literally tens of thousands of people visit the Classmates website and sign up for their free service every single day. After becoming a free member, the Classmate user then receives messaging regarding the advantages of being a pay or what we call a "gold member" at price points ranging from $2.45 to $5.00 per month.

With the free Classmates membership users can list their name and personal profile data and do previews of the profiles of others within the 38 million plus Classmates member base. If the user wants to actually communicate with someone within that Classmates member base or view their full profile and full biography then they must sign up for a "gold" or "pay" membership and be able to engage in peer to peer email communication. That's the advantage of paying in Classmates.

We're working on some very compelling and innovative ways to address the manner in which people migrate from free to pay using our vast experience with NetZero and Juno in this dynamic United Online.

In addition, our plans of Classmates includes the use of branding efforts such as television, radio, and print advertising whereas previously Classmates has utilized the online medium for virtually 100 percent of their marketing efforts.

We also intend to develop additional applications and features that we hope will encourage the 38 million plus users of Classmates to visit more frequently and to use Classmates as more of a personal portal destination site rather than primarily as a registry just to find old friends.

Recently, Classmates introduced some exciting new products designed to increase the interaction between its members and make direct communication between those people far easier.

They're 2 key programs I can share with you today that exemplify this strategy. The first is called, "My Network and Announcements," and this was just launched in late November. The My Network product allows all Classmates members to create a personalized network of their friends and acquaintances across different schools, military groups or company's that they've worked for.

Previously if a Classmate member wanted to communicate with someone outside of the individual schools, military groups or company's that they'd work in their own registry it was a very difficult process. With the new My Network feature you can setup a personalized network of individuals across multiple schools, multiple military organizations and multiple workgroups beyond those that you personally attended so that your extended web of friends and acquaintances are placed in your personal network making it very easy contact them, send them updates or announcements about activities relating to members of the network. This is a very sticky application that should help facilitate greater usage among the Classmates members who choose to setup this feature.

If you're a "pay user" you can send and receive information within your "My Network." If you a free Classmates member, you can only receive information. You cannot send it. So just like on the regular Classmates service, if you pay you can initiate communication with people and if you don't pay you cannot. The same holds true in the My Network program. Once again, we're using the experience of how to convert free users to pay and to enhance the value proposition for pay users in the Classmates asset.

In just a little over 2 months since the introduction of My Network, over 300,000 individual My Networks have been setup by Classmates users and over 660,000 people in the Classmate system have received invitations to join these networks and actually have gone and done so. So in 60 days, 300,000 networks were setup and 660,000 individuals actually went into those networks.

These kind of significant numbers in a very short period of time attest to the powerful viral aspect of this business.

The second major new product that we're just in the process of launching of Classmates is called, "My News." This is an opt in program for Classmate users that provides tidbits of information about activities regarding individuals listed in your Classmates school, work or military affiliation and it sends it directly to them and in an email alert. This is a way of awakening stagnant users who may not be keeping up with the activity of their Classmates or frankly might be too lazy to drill down and look at the profile and announcements information themselves.

These 2 programs are an example of trying to transform the Classmates experience into more of a personal portal that facilitates viral inter-user communication and gives regularly updated information on people that you're interested in talking to.

When you think about our corporate skill set a United Online in building mass appeal brands, creating a compelling set of product features and migrating free users to a pay product, you can see why we're excited about the prospects for Classmates within the United Online family.

Given that we have not yet owned Classmates for an entire quarter, I would ask you to stay tuned for updates on the key programs we'll be implementing and our plans for expanding the appeal and the relevance of the service.

From a personal standpoint, I am really having fun with this new asset and having the chance to use our creative skills on something with a tremendous size and scope of the Classmates user base is really something that is driving us everyday.

The final "C" of the 4 "C's". We had connectivity. We had commerce. We had content and now we have community and now we'll move to the last one which is commerce and commerce is something we say to refer to our advertising and e-commerce revenue portion of United Online.

The commerce or advertising sales portion of our business should benefit from the resurgence and Internet advertising in the e-commerce market. As many of you know, NetZero was one of the true pioneers in targeted Internet advertising. While we focused our attention in the last few years on billable services revenues, now we will seek to maximize the combine reach of NetZero, Juno, Bluelight, MegaWeb Services and Classmates Audiences which exceeds 45 million in total registered users and over 15 million in monthly active accounts.

In fact, the most recent Neilson net ratings data indicates that the combined properties of United Online including our ISPs, Classmates and MegWeb Services attracted the twelfth largest audience on the entire Internet during December 2004 with the unique users of almost 27 million people. That's up from only 10 million people in December of 2003 according to Nielson and back then we were ranked fifty-third and now we ranked twelfth.

The scope and power of a 27 million user audience makes the opportunity of selling all United Online advertising as part of a network approach, something we will give serious thought to over the next several months. With our profile data and graduating years on the Classmates folks along with the data we have from our ISP users, we could create an even more powerful targeting tool that targets by gender, age and geography that could be unique within the Internet advertising market.

We intend to make commerce a major focal point of United Online going forward and we'll attempt to capitalize on the tremendous size and scope of our collective user audience on both dialup and broadband connection and allow advertisers targeting capabilities rarely seen on the scale as large as the one we will possess. Once again, stay turned.

I've shared a lot with you today in terms of the 2005 strategic plan for United Online. It's our goal to have a large percentage of our revenues in non-dialup Internet access by the end of 2007. While we feel confident in the sheer size of the dialup market and the attractive profitability of that business as we practice this today, we're also focused on diversifying our revenue and risk base while delivering increased top line and bottom line growth. I'll now turn the floor over to Charles Hilliard. Charles.

Charles S. Hilliard - United Online - EVP and CFO

Thank you Mark. This afternoon we presented our fourth quarter in 2004 annual results. Consistent with prior years, that's where I note, most of my commentary today will focus on our Q4 quarterly results. So let's start with a few financial highlights.

First, we posted recorded revenues of nearly $120 million with growth of 23 percent year-over-year. Excluding the impact of Classmates, revenue grew 14.5 percent as we grew revenues organically during Q4. For all of 2004, United Online posted nearly $449 million of revenue. That was up 32 percent versus 2003.

Second, we had yet another record of billable services margin up 520 basis points versus year ago quarter to 78.7 percent. The billable services margin benefited this quarter from continued declines in average telecom usage and costs per hour, plus a growing mix of our subscription business towards relatively higher margins not access services including our Classmate service.

Third, we continue to generate very strong free cash flow - $30.6 million during Q4 alone up 20 percent versus the year ago quarter. For all of 2004 United Online generated nearly $118 million of free cash flow up 53 percent from 2003.

Lastly, we produced record adjusted operating income before depreciation and amortization and what we actually refer to as OIBDA which was up 23 percent year-over-year to $30 million or 25.1 percent of revenue. 2004 adjusted OIBDA was $113.6 million up 55 percent in 2003.

Under our pay account subscription metrics. Due to the evolution of our business including the Classmates acquisition we refined our terminology for these metrics. However the definitions remain unchanged. Pay accounts are analogous to we historically referred to as pay subscribers and the same is true for subscriptions relative to revenue generating units for RGUs.

First, pay accounts increased by a net 1,594,000 in the quarter including the Classmates acquisitions which as 1,452,000 pay accounts at closing. Organically we grew by a net 142,000 pay accounts. While our flagship NetZero branded access base grew during the quarter overall pay access accounts had a net decline of 11,000.

As we discussed throughout 2004, while we continue to see attractive returns in our value price access business, our goal is to diversity our sources of revenues and pay accounts beyond it. In addition to acquisitions, we intend to continue to diversify by leveraging the customers, advertisers, technologies, network infrastructure brands, billing systems and subscription relationships of our access business.

In fact we're very pleased with our strategic progress that was demonstrated by this quarter's performance.

A primary driver of growth in pay accounts this quarter was premium email, a majority of which resulted from a platform consolidation program that was implemented in the quarter. This program required older software free June email accounts to upgrade their software or begin paying to retain the legacy platform.

Subscriptions grew by 1,636,000 which again included the 1,452,000 subscriptions that Classmates had at closing. Organically subscriptions grew by 184,000 this quarter.

At the end of 2003 if we recall, Internet access comprised 82 percent of our pay subscriptions with Accelerator representing the remaining 18 percent. Due to the growth of premium email, the acquisition and subsequent growth in consumer web posting and domain registration services the acquisition and subsequent growth of Classmates and the launch of our new subscription service, "Premium Content," at the end of 2004 Internet access comprised only 52 percent of our total subscription base with Accelerator growing to just 19 percent.

Okay here's our December quarter financials in a little more detail. Billable services revenues were $108.5 million up 23 percent year-over-year and six percent sequentially.

Average monthly revenue per pay account for RPU was $8.98 down from $10.45 in the year ago quarter and from $10.60 in the September quarter. The decline in RPU was due primarily to the addition of and the faster growth in relatively RPU services such as our Premium Email and Classmate services and due to the timing of the Classmates acquisitions during the quarter. This was offset partially by growth in Accelerator subscription penetration.

The Classmate service currently generates an RPU in the low $3.00 range. Consistent with our historical presentation RPU includes billable services revenues only despite the fact we generate significant advertising revenues from our pay account base.

Advertising and commerce revenues were up 24 percent year-over-year to $11.1 million. Aside from the Classmates acquisition, this comparison is impacted by $3.3 million of GM revenue in the fourth quarter of 2003 relating to an advertising agreement that expired in December of '03.

Excluding the impact of both the acquisition and the historical comparison with General Motors, ad and commerce revenues were up a strong 57% year-over-year reflecting our expanded reach with a free web hosting business and the impact of our search agreement with Yahoo and Overture.

With the recovery and growth of the online advertising market our ability to monetize user relationships beyond subscription combined with our large audience that Mark discussed continues to be an important competitive differentiator in our business model.

Our billable services margin benefited from further improvement in hourly telecom costs to less than six cents in Q4 versus about six cents in the September quarter and just under seven and a quarter cents in the year ago quarter.

As I already mentioned the margin for the quarter also improved due the relatively higher margins associated with our non-access subscriptions and due to lower average usage per pay access accounts which was down about one percent sequentially and down six percent year-over-year.

Our cost of free services were $2.5 million this quarter up 32 percent year-over-year. While the dollars are small compared to the size of our total profit and loss statements, the year-over-year increase was driven by the Classmates and web hosting acquisitions during 2004.

Sales and marketing this quarter was $48 million just over 40 percent of revenue versus 37.7 percent in the year ago quarter and the 39 percent in the September '04 quarter which brings us to customer acquisitions costs.

For the December quarter we estimate our gross pay account acquisition costs at about $59.00 up from $55.00 in the year ago quarter and down from $79.00 in the September quarter. The increased year-over-year reflects increased competition for pay access accounts offset by the lower costs to acquire lower RPU non-access pay accounts. Sequential trends also benefit from non-access fee account growth.

Consistent with prior periods we calculate gross pay account acquisition costs to include total sales and marketing expenses plus costs of free services less advertising and commerce revenue. This total was $39.3 million in the December quarter.

Product development expenses were up 48 percent year-over-year primarily due to our budget head count growth as well as the impact of acquisitions. As Mark discussed for 2005 we intend to continue to increase our investment in new technologies and services. Combined with the impact of 2004 acquisitions we anticipate growing our annual product development spending by 50-60 percent in 2005.

General and Administrative expenses were up 56 percent year-over-year due primarily to the acquisition as well as increased costs associated with Sarbanes-Oxley.

Total cash balances at year-end were approximately $233 million up $29.1 million during the quarter. We used about $100 million of cash to acquire Classmates in Q4 and we also borrowed $100 million under a four year senior secured term loan.

Let's go into business outlook. We're not providing our initial guidance for 2005 and are projecting Q1 revenues of $126-$129 million and adjusted OIBDA debt for Q1 of between $30 AND 31 million. For all of 2005 we're guiding to adjusted OIBDA between $124-$131 million. At the mid point our calendar of 2005 guidance implies year-over-year adjusted OIBDA growth of about 12 percent reflecting what we believe is an appropriate balance between current profitability and investment in longer term growth opportunity including VoIP. We project our pay accounts to grow to between 4.85 and 4.95 million by March 31, 2005.

Due to a number of recent advertising initiatives and consistent with historical seasonal trends for Q1 we anticipate positive growth in our total pay access paid during the March quarter. However, we do not expect the same level of growth in premium email that we experienced with the large E onetime platform consolidation in December.

Excluding potential acquisitions and depending on the timing of new initiatives we currently estimate 2005 capital expenditures to be within the range of $15-$25 million. Also, please note that the interest rate on a new four year term loan is lyward (ph) plus 300 basis points. However when combined with the amortization of our origination fees we estimate the spread to lyward between 400 and 425 basis points. Thank you everybody and I'll things back to Mark.

Mark Goldston - United Online - Chairman, CEO and President

Thanks Charles. We've heard a lot today in terms of our quarterly results. The annual results and giving you a touch of our strategic plan for 2005. We're very excited about the Classmates opportunity and what we can do up there. We feel really good about the new Dennis Miller advertising that we're running for NetZero and everyone is very, very bullish about our potential to become a player in the voice category. With that operator I'd like to open it up to questions. We'll provide answers in a proper Q format. If you could get everybody queued up we'd appreciate that.

QUESTION AND ANSWER

Operator

Thank you. [OPERATOR INSTRUCTIONS] We'll pause just a moment to compile the Q&A roster. Your first question comes from Jim Friedland with SG Cowan.

Dave Geister - SG Cowan - Analyst

Hi good afternoon. This is actually Dave Geister sitting in for Jim. Mark I just had a quick question on all these different initiatives that you're taking on with Classmates and both the VoIP service. If you could talk a little bit about the increase in the sales and marketing costs for those activities and I have one follow-up on the Classmates.

Mark Goldston - United Online - Chairman, CEO and President

Well basically we're managing a total sales and marketing budget so as you can imagine people within the company compete for those marketing dollars and so we tend to allocate them against what we perceive to be the highest and best use and that which will give us the best returns on that investment. So that's what we do. We've got several new products as you can see coming down the pike. We don't anticipate making a major increase in our overall marketing spin. What we do intend to do is to allocate the resources against the assets that ought to receive it and that's the way we've done it in the past. That's what we did with the accelerator product and that's what we're going to do going forward.

Charles S. Hilliard - United Online - EVP and CFO

I would say to quantify that if you look at the past orders - in fact all of the four we tended manage sales and marketing of between 39 and call it just over 40 percent of revenue. That type of philosophy - that type of zip code has not changed going forward and much of what we're looking at in '05 is very much a product development initiative and we think an exciting opportunity is to develop new services and technology to better monetize the existing audiences that's there without spending incrementally more as a percentage of revenue in sales and marketing.

Dave Geister - SG Cowan - Analyst

Just a follow-up on that on the product and development side. In the past it's kind of been around six to seven percent of revenue on a spend basis - with the increase in product development that you talked about in your comments will that change in '05 given the initiatives around voice over IP?

Mark Goldston - United Online - Chairman, CEO and President

It may go up slightly but again we're making investments in new revenue units and so obviously some of the product development investment will be a little bit in advance of the realized revenue by the fact that they're new products but even at the end of the day after the modest and I mean modest increase in overall product development expenditure as a relative percentage to total revenues competitively even it will still be rather modest.

Dave Geister - SG Cowan - Analyst

Just one last question on the Classmates acquisitions. What type of NOL's did your acquire and kind of the same thing with MegaWeb and will you be able to use those going forward?

Charles S. Hilliard - United Online - EVP and CFO

I'll take that Mark. With Classmates there would be a very small NOL and then there are tax benefits associated with some of the non-qualified options that we acquired and that's on the order of magnitude of $15-$20 million of tax shield that resulted about 40 percent level in the cash tax savings. The - about Web services acquisition was an asset transaction therefore no NOL's came with it. However there are tax benefits associated with being able to capitalize and then amortize for tax purposes and deduct for tax purposes the effective purchase price of $8.5 million over the life of those intangibles.

Dave Geister - SG Cowan - Analyst

Okay great. Thank you.

Operator

Your next question comes from Peter Mirsky with Oppenheimer & Company.

Peter Mirsky - Oppenheimer & Company - Analyst

Thanks very much guys. You mentioned earlier in your comments Mark that the Juno and Bluelight brands fell - in terms of subs on NetZero did increase. Could you just kind of comment either anecdotally or quantitatively whatever whether there was pickup by NetZero from Juno and Bluelight. Maybe talk a little bit about the logic of keeping multiple brands.

Charles S. Hilliard - United Online - EVP and CFO

Yes hey Peter good question. We don't give the granular breakout as you know in terms of the size of the franchise, but I will say we haven't spent any advertising dollars on television on Juno in - I want to say going on over a year and a half - probably close to two years. So that was a conscious decision on our part that a, because of the size of that brand where we believed it was in its product life cycle and its overall awareness level which was very high that it made sense for us financially to - I don't want to use the term milk the brand, but to harvest that brand - same thing with the Bluelight brand which obviously had lesser size and scope but did not merit fresh investment. Our belief is that the growth brand is - has been the flagship NetZero brand.

That's where we put the majority of our marketing dollars. That's the brand that comes up the highest in all the ranking. That's the brand that most recently ranked one of the top 150 mega-brands in America so that's the brand we put our assets behind. It's not a direct cannibalization where people are leaving Juno to go to NetZero - leaving Bluelight to go to NetZero it's just a mere fact that as you in the ISP category you have a level of churn that you're going to have every month anyway and if you're not spending a lot of money to try to grow a brand you're going to expect to see some attrition. But from our viewpoint this is very much managed and expected attrition that we attempt to counterbalance with the growth asset and the brand that receives all the activity which is NetZero.

Peter Mirsky - Oppenheimer & Company - Analyst

Okay. I'm sorry sir. If I'm a Juno customer and I'm canceling my subscription am I sent in anyway either through the customer service rep or by email sent something to sign up for NetZero?

Charles S. Hilliard - United Online - EVP and CFO

We're not - we don't use one brand versus another as - as the premium ISP might do by offering a value product. I mean at the end of the day that's not been a conscious effort on our part - I mean given the feature set are virtually identically as are the prices it would hard to imagine that that would be a compelling offering even if you were to make it. In essence, I don't want to spend $9.95 for Juno unless for some reason you don't like the brand name I'm not sure why they'd want to spend $9.95 for NetZero. Both of those products have great features and both offer accelerated dialup. So I'm not sure that that would be an effective tool if we'd chosen to use it.

Peter Mirsky - Oppenheimer & Company - Analyst

Okay and just a quick housekeeping follow on if I could. I think Charles you mentioned accelerated grew 19 percent. Is that right?

Charles S. Hilliard - United Online - EVP and CFO

It went from 18 percent total subscription at the end of 2003 to 19 percent total subscription at the end of '04.

Peter Mirsky - Oppenheimer & Company - Analyst

Okay thanks.

Charles S. Hilliard - United Online - EVP and CFO

Thank you Peter.

Operator

Your next question comes from Youssef Squali from Jefferies & Company.

Unidentified Audience Member

Thanks. This is actually Bill calling for Youssef. A couple of quick questions on the impact of Classmates during quarter. I think -- correct me if I'm wrong, but you said that excluding Classmates, there was 14.5% revenue growth year-over-year?

Charles S. Hilliard - United Online - EVP and CFO

Yes.

Unidentified Audience Member

And can you quantify at all the bottom line impact with the Classmates acquisition during the quarter.

Charles S. Hilliard - United Online - EVP and CFO

No.

Unidentified Audience Member

No, not at all.

Charles S. Hilliard - United Online - EVP and CFO

Not at all.

Unidentified Audience Member

Okay.

Charles S. Hilliard - United Online - EVP and CFO

As soon as we acquire something we manage a consolidated profit and loss statement.

Unidentified Audience Member

Okay is it safe to assume that the margins and what not for Classmates have stayed relatively stable that was provided in the proxy at the time of the acquisition?

Charles S. Hilliard - United Online - EVP and CFO

It's not safe to assume anything. We are in a variety of either investment mode and certain of our business as far as Mark talked about with Juno and Bluelight - a harvest mode with other parts of our business and our goal is to allocate cash flow and portions of P&L to the highest growth and best return parts of the business.

Unidentified Audience Member

Okay thanks. Quick question on the access side. Could you give some commentary on our offline distribution during the fourth quarter?

Mark Goldston - United Online - Chairman, CEO and President

Yes. As you know we have a relationship with Best Buy which launched last year in the fourth quarter. We also have Sam Goody and we've got Sun Coast, Media Play and Radio Shack and K-Mart which has been a partner of our since the Boule (ph) acquisition. So I would say overall during the December quarter our offline distribution was pretty good in terms of its yield. I wouldn't say it was great. I think it was pretty good.

In all candor we face a competitive situation which we thought from an economic standpoint challenged most wisdom within our company at least. We chose not to compete in a bounty war that ensued which we didn't think was sustainable, but which resulted in people in some cases increasing their bounties to the retailers by almost 50 percent.

They were offering numbers of free months beyond what they'd offered before and so as you know Charles and I and this management team pride ourselves on our fiscal responsibility and we're running a company to (inaudible) growth but to maximize profitability and some of the terms that were out there in our view just bordered on the ridiculous so we chose to sit it out. So not sit it out that we weren't in the stores, but we were in there with the offer that we'd contractually obligated ourselves to and so that's what we were willing to pay.

That's why we went into that distribution. We did not go into that distribution to play the game that AOL and some others had played previously, which was, we thought, at exorbitant cost. And so we're playing it the way it works for us and we're happy to do that. And we will calibrate our expectations going forward against a., what the competitive set is and b., what kind of yield we're going to get. But at Christmastime and going into the Christmas quarter, people were going nuts in terms of special offers and we didn't jump into that game.

Unidentified Speaker

Okay, thanks. And, if I may, 1 quick housekeeping question. I think you mentioned some subscriber guidance for 2005. I missed it. Maybe it was the first quarter?

Unidentified Speaker

Yes, first quarter -- ending the first quarter with between 4.85 and 4.95 million.

Operator

Thank you. Your next question comes from Aaron Kessler with Piper Jaffray.

Aaron Kessler - Piper Jaffray - Analyst

Hi, guys. A couple of quick questions here. Can you break out, if possible, the Web hosting subs, email subs, as well as the split between (inaudible) and standard ads?

Unidentified Speaker

I'm sorry, Aaron. Can you repeat that, please?

Aaron Kessler - Piper Jaffray - Analyst

Yes, I was looking for if you can break out the (inaudible) ads and standard subs as well as the Web hosting and email subs in the quarter?

Unidentified Speaker

The standard subs, which is the basic Internet access pay account, we finished the quarter with 3.1 million exactly. That was down from 3,111,000, all of which is reflected in the table attached -- the last table attached to the press release. And the remaining other Web services grew substantially with the Classmates acquisition. While I can tell you that all of those subscription services grew during the quarter, we're not breaking out every one of those individual ones.

Quite frankly, it's even more lengthy -- the list would be more lengthy than what you asked for. What I can say is the ARPU on a per subscription basis associated with those businesses, while ranging at about 83 cents at the low end up to a little over $8 at the high end, is somewhere in, call it the 3.60 to 3.80 range, depending on that mix on a per subscription basis. On a per pay account basis, because a number of those subscriptions are with basic accounts that are buying more than 1 subscription, it's on a normalized basis, call it in the high 7s, between $7.90 and $8 or so.

Aaron Kessler - Piper Jaffray - Analyst

Okay. And then for the group (ph) and the access, what are your expectations in '05 for the standard risk accelerator product and have you seen any impact at all from the new Netscape marketing campaign?

Unidentified Speaker

The guidance we've laid out there speaks for itself and stands on its own. We have discussed in my commentary, we are seeing positive trends in our pay access business in Q1 and we're guiding for growth in our total pay account base in Q1. And then beyond that for the rest of '05, I would just say stay tuned and we'll potentially update the guidance or not on the next call.

Operator

Your next question comes from Jason Williams with Body Brown (ph).

John Body - Body Brown - Analyst

Hi, it's actually John Body (ph). A couple of questions. Can you maybe give us a sense of what the total spend will be when you look at sales and marketing, increased product development cost and whatever CAPEX you're going to put on the balance sheet for the VoIP initiative in 2005?

Mark Goldston - United Online - Chairman, CEO and President

Are you looking for total spend for the total corporation or total spend against the voice initiative?

John Body - Body Brown - Analyst

Solely for the voice initiative in 2005.

Mark Goldston - United Online - Chairman, CEO and President

Well, we're not really going to break out what the individual spend is going to be against the setting up of the voice unit. It is baked within the total numbers that we gave you in terms of the total year and it is reflected, obviously, in the CAPEX budget. I mean there is a major capital investment that needs to be made for us to get into a business like that the way we want to do it and that's baked into -- I think Charles gave the 15 to 25 million in the CAPEX.

Charles S. Hilliard - United Online - EVP and CFO

Yes, it is, Mark. And what I would say is our goal in developing new businesses, whether it's voice or our premium content product or improvement to our acceleration software, is to advantage that within the overall profit and loss statement in the budget process which we recently completed and the amalgam of all that is reflected in our guidance.

John Body - Body Brown - Analyst

Okay. And what would your guestimate be, because I'm sure it's a ways off, but what would your guesstimate be as to when you'll reach critical mass and actually have a profitable business in VoIP?

Mark Goldston - United Online - Chairman, CEO and President

First we've got to get to our launch date, which we hope will be at some point during second half of 2005. The thing that's attractive to us about this business is the fact that it uses a lot of the --not only the skill sets, but a lot of the vendors and a lot of the technology that we've got within United Online because of our access businesses.

So it's just a lot of leverage that we get from going into a business like that. And without divulging where we're going to price our product and how we're going to do it, we are not people that want to wait a long period of time to realize profitability on new ventures. Not the way we look at business. So we are designing a business plan such that we can become profitable on this business in a reasonable timeframe and not just spend against it for multiple years before we get there.

John Body - Body Brown - Analyst

Okay. Can we just talk a little bit about cash position? I hate to use the word fail, but the Dutch auction tengere (ph) that no one tendered on. You bought some stock back, but what are your plans presently? You have 100 million of debt that I think you would have liked to use for stock. But give me some sense of what the goal is over the next year with the excess amount of cash that you're generating and what you're going to do with it.

Mark Goldston - United Online - Chairman, CEO and President

Well, as we stated previously, we still are looking at acquisitions within the Internet subscription services area and Classmates certainly fell under that, MegaWeb did. Both of those things we're really happy with. There are other things that we are looking at and we would like to potentially use our capital for as we continue to expand upon that strategy. We also, in terms of our stock situation, have the ability to use that to buy back additional shares of stock. We have an approved plan to do that from the Board of Directors. So both of those things should be very attractive outlets for us in the future, just as they have been in the past for the use of our excess capital.

John Body - Body Brown - Analyst

Well, at 5.5 or 6 times free cash flow, it's hard to make the case that you're going to find a lot on the acquisition front that's going to return you an upper teens ROE in the near term, which is what your stock will do at the price that it's at today. And it's lower than what you ended up paying on the Dutch -- for the small amount that you bought on the Dutch auction.

Mark Goldston - United Online - Chairman, CEO and President

Your point is that in your view the purchase of our own stock is a good use of our capital?

John Body - Body Brown - Analyst

Well, I think that's fairly obvious. The point I was trying to make is that acquisitions don't come with a guaranteed upper teens ROE.

Mark Goldston - United Online - Chairman, CEO and President

That's all true. You know we've been at this a long time. We have a pretty bright group of people that look at this stuff and it's not the first time we've done acquisitions. So we kind of know how to look at them and we know what they're worth to us and we know how they fit into our long term picture and that's how we look at things. At the end of the day, this isn't an investment fund; we're running a corporation. We have certain gaps within our product line that we think we need to fill and to the degree that we can find things we can buy, (inaudible) shore up those gaps and make us a stronger overall company, then that's how we look at it.

Charles S. Hilliard - United Online - EVP and CFO

Currently our authorization remaining -- our Board initially authorized 100 million, which we adopted last year. They authorized another 100 million and we've repurchased 25 against that so far. So that would be 75 million remaining.

John Body - Body Brown - Analyst

Okay, great. I'll just take that last answer as a guarantee that you'll make 20% return on invested capital on all your acquisitions. But thanks very much.

Operator

Thank you. At this time, there are no further questions.

Mark Goldston - United Online - Chairman, CEO and President

Thank you, operator. Thanks, everybody, for tuning in today to United Online earnings call. As always, if you have any questions, please direct them to either Charles Hilliard, our CFO, or Brent Zimmerman, our head of investor relations, and we'd be happy to get back to you. Thank you very much. Have a good day.

Operator

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