Event Date/Time: Feb. 04. 2004 / 11:00AM ET
Event Duration: 1 hr 33 min
| CORPORATE PARTICIPANTS
Brent Zimmerman Mark Goldston Charles Hilliard |
CONFERENCE CALL PARTICIPANTS
Saffar Rashi Youssef Squali Mark May Ned Zachar Darryl Smith Jeff Goverman Jim Freeman Peter Mirsky Andrew Tuttle |
PRESENTATION
Operator
Good morning. My name is Adrienne 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 of the lines have been placed on page to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS).
I will now turn the call over to Mr. Brent Zimmerman, Vice President of Investor Relations. Mr. Zimmerman, you may begin.
Brent Zimmerman - United Online - IR Contact
Thank you. Hello and welcome to United Online's conference call for our quarter ended December 31, 2003.
United Online recently changed its fiscal year from June 30th to December 31st, so this is also now our year-end.
With me today is Mark Goldston, our Chairman and CEO and President, and Charles Hilliard, EVP and Chief Financial Officer.
In today's press release, the Company refers to adjusted operating income before depreciation and amortization, or OIBDA adjusted net income and free cash -- (technical difficulty) -- all of which management believes are useful in evaluating the Company's operating performance. These numbers are not determined in accordance with Generally Accepted Accounting Principles, or GAAP, and should not be considered as an alternative to or superior to historical financial results presented in accordance with GAAP. Definitions of these numbers are provided the press release, along with reconciliations to the most comparable GAAP financial numbers.
We are also providing slides to accompany today's call that are available now on our Web site, along with the Web cast. We think these slides provide a very useful analysis of our results and I would encourage you to pull them up during the call. They will be available, along with a replay of the call, for seven days.
Before we get started, I need to point out that the Company does apply the Safe Harbor provisions as outlined in the press release to any forward-looking statements that may be made on this call. Statements regarding our current expectations about our future operations, our financial condition, our performance or the industry in which we operate are all forward-looking statements that are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.
More information about potential risk factors that could affect the Company's business and its financial results is included in today's press release under the caption "Cautionary Information Regarding Forward-looking Statements", and in United Online's most recent filings with the Securities and Exchange Commission.
Projections provided by management in the press release and in today's call are based on information available to us at this time and management expects that internal projections and expectations may change over time. However, the Company does not intend to update these projections.
Any persons replaying this broadcast after February 4, 2004 should recognize that any nonhistorical information discussed in the call might not be current or valid after that date because the circumstances and assumptions underlying such information may have changed.
With that, we're going to start out with a few comments from Mark and Charles and then we're going to open it up for questions, so I will now give the floor to our Chairman, Mark Goldston.
Mark Goldston - United Online - Chairman, President, CEO
Good morning, everyone. Welcome to the United Online December 2003 quarterly earnings call.
I will give you an overview of the quarter and the fiscal year, and then I will provide you with some insight into our strategy and the competitive environment. Then I'll turn the mic over to Charles Hilliard, our EVP and CFO, for more a detailed look at the financials. He will provide you with guidance for both the March 2004 quarter and for calendar 2004, which is now our fiscal year as well.
To give you an overview, the December 2003 quarter was another record quarter for United Online in terms of revenue, total paid subscribers and profitability. Total revenues for the quarter were up 47 percent year-over-year to a record 96.9 million, versus 65.8 million in the December, 2002 quarter. Total paid subscribers grew by a net 172,000 during the quarter, which was up 12 percent on an organic basis versus the December quarter a year ago when we generated 154,000 net organic paid subscriber additions. We reached a record 2.9 million paid subscribers at the end of the December quarter, a remarkable 716,000 paid subscribers increase, or an increase of 33 percent from the 2.2 million paid subs at December 31, 2002.
It's also important to note that in the December 2001 quarter, which was the first full quarter after the merger between NetZero and Juno, we had 1.5 million paid subscribers. That indicates that in the 24 months post-merger, we have almost doubled the size of our paid user base while most other major ISPs have faltered.
The December quarter marked the introduction of our new MegaMail product, which offers consumers 25 meg of e-mail storage for $9.95 per year or 100 meg of e-mail storage for $24.95 per year. These products are ideally suited to users of digital photography and other large file-sized attachments.
From a competitive standpoint, the higher margin MegaMail products are priced substantially below similar products offered by Yahoo and Hotmail. This product line was launched at the end of the quarter and is the first of what we hope will be many non-ISP add-on subscription services we offer across our brands.
Additionally, we began our new Overture partnership during the December quarter and today, we have our revised start page and toolbars on both the free and paid services featuring Search Powered by Yahoo, where the Yahoo logo treatments are prominently displayed. Our users see a variety of paid listings from Overture, as well as a number of algorithmic searches from Yahoo, when they execute a specific search. We've also made several enhancements to our search capabilities through some software innovations, and we look forward to maximizing our long-term partnership in this all-important and fast-growing field of algorithmic and sponsored search.
Let's talk about subscribers. I'm proud to announce that we grew our paid subscriber base by 172,000 and our accelerated dial-up subscriptions by a record 226,000 users during the December quarter.
As of the end of the quarter, our $14.95 higher margin accelerated dial-up products accounted for 22 percent of all United Online's 2.9 million paid subscribers and now totals 638,000 users as of December 31, 2003, just nine months after introduction.
We believe our NetZero high-speed and Juno speedband accelerated dial products have completely changed the landscape of the dial-up ISP market since their launch in April of 2003. Today, most major ISPs have followed suit and launched their own accelerated dial-up products. You know, many said that the accelerated dial-up market would never catch on and that companies only wanted faster access from broadband companies. As you know, on these calls, we vehemently disagreed with that thesis and we went about proving it through the aggressive marketing of our NetZero high-speed and Juno speedband accelerated dial-up services. After seeing the tremendous response United Online received, many competitors who had espoused that their future was in broadband, stepped up their campaigns in dial-up to compete with us on the accelerated dial-up front. Today, others are following the innovative move by United Online to develop an entirely new segment of the market and it has become the cornerstone of their narrow-band marketing focus.
The key benefit to consumers is a dramatic improvement in the overall quality of a dial-up experience, making the need for broadband in the consumer home less urgent in our view.
Let me give you some color on the accelerated business for the December quarter. When we introduced our accelerated dial-up services in the June, 2003 quarter, I told you that we devoted 40 percent of our total media spending in the June quarter to that effort and we generated 188,000 subscriptions in that quarter to accelerated dial-up. The media spend for the accelerated products during the September quarter rose to 56 percent of total media and helped us generate 202,000 additional subscribers.
In the December, 2003 quarter, we increased our percentage of overall media spending devoted to accelerated dial-up services to 80 percent of total media -- our highest level ever. We recorded an impressive 226,000 additional accelerated dial-up subscriptions because of this.
While we are extremely pleased with our increase in overall paid subscribers of 172,000 for the quarter -- because it is 12 percent up organically versus the year-ago period -- we are especially pleased by the fact that the large percentage of media dollars (80 percent) dedicated to our accelerated dial-up services gave us this 226,000 new user number for our accelerated services, remembering the fact that those users are paying us 50 percent more money than they would have at $9.95 and the margin is higher on that business. So we made a conscious decision to go after the higher margin accelerated subscription from both existing free users, existing $9.95 users, as well as from brand-new subscribers -- versus putting those dollars into only trying to secure additional new $9.95 customers. It was a pure and simple ROI analysis. I've talked about this before and I want to reiterate it now. The way we make our marketing spend is very much based on ROI. This was a pure and simple ROI analysis and because of the tremendous economics afforded by our $14.95 dial-up services, we felt it was prudent to spend the money the way we did to achieve a 22 percent penetration of our total paid subscriber base with NetZero high-speed and Juno speedband.
Media spending -- I want to talk to you about where we were on media for the quarter. During the December, 2003 quarter, we increased our overall media spending by only 4 percent sequentially. This is versus a sequential increase in the media spend of 25 percent in the September, 2003 quarter and 23 percent in the June, 2003 quarter. So we went from 23 percent increase in June, 25 percent increase in September, only 4 percent sequentially in December.
It's important to note that for the first time since the merger was completed in September, 2001, we did not increase sales and marketing as a percent of total revenues versus the previous quarter -- the first time that we didn't do it. We remained about flat versus the September, 2003 quarterly spend, at 38 percent of revenues.
We did increase the overall dollars we spent on sales and marketing to 36.6 million from 33.9 million in the September quarter. That was due, in large part, to the growth of distribution partnerships, including our new Best Buy relationship.
Our creative message during the quarter was almost exclusively focused on the NetZero high-speed challenge television advertising. This is really compelling TV, and the campaign shows real people being interviewed in shopping malls across the USA, where they are witnessing a demonstration of NetZero high-speed against standard dial-up Internet access. The results cannot be scripted legally because of the testimonial format. So basically, they are direct comments from the interviewees on their impressions of the speed of NetZero high-speed. Needless to say, the spots are very compelling and they helped us achieve our record growth in accelerated sign-ups during the December quarter. In addition, we put media on key television shows such as a Dog Eat Dog, Fear Factor, network prime time, football bowl games, ESPN, etc., and all of that helped to deliver our amazing results.
I want to give you a little brief view on our view of the future of dial-up. You know, we are very proud of what we've created with both our $9.95 and our accelerated dial-up services. We remain the leader in the value-priced access market with our $9.95 product and with our accelerated products. In our opinion, our accelerated dial-up products have helped elongate the lifecycle and relevance of dial-up Internet access to the estimated 45 million U.S. households who have dial-up Internet access today.
While broadband is certainly gaining presence in the residential consumer market, you must remember that as of the end of 2003, broadband only accounted for an estimated 24 million households, which is only about half the size of the dial-up market today. Further, it's important to note that in a survey of a sampling of our users, roughly 12 percent said they came to our accelerated dial-up service from broadband; that's an incredibly relevant statistic because that means that many broadband users, who may have been attracted to broadband due to aggressive price promotions, a promise of speed, etc., they are realizing that the lower speed broadband-like products, many of them bought, are really not that fast. The price they purchased it for it was a buy-down promotional rate that increases significantly after the twelve-month introductory period, and most importantly, that their online behavior -- which consists of surfing the Web and reading and sending e-mail -- can be well-served by a much cheaper, accelerated dial-up product like NetZero high-speed or Juno Speedband. Additionally, many of those customers who may have opted for the $40 to $100 per month full broadband experience may feel that the annual expenditure of 480 to $1200 for broadband versus just under $180 a year for NetZero high-speed or Juno Speedband is a huge price to pay for simply doing their e-mail and Web surfing, which is all most Internet subscribers use their home account for.
So during the 12 months ended in September, 2003, which is the most complete data that we have until the December numbers are in for all the broadband players -- and this is really important -- the broadband market experience of 45 percent increase in users in the 12 months ended September, '03 -- 45 percent -- during that same time, the top three premium dial-up companies, AOL, MSN and EarthLink, combined saw their premium dial-up base decline by about -- (technical difficulty) -- percent while United Online, with our value-priced positioning, for the year ended September 30, 2003, grew an impressive 47 percent. So, we grew 47 percent; broadband grew 45 percent; premium dial-up declined by 9 percent. This illustrates our belief -- and we've stated this before many times on earnings calls -- that the pressure from above and below on premium dial-up customers has forced migration either up to broadband or down to value dial-up. We believe this trend will continue.
You add to that dynamic the recent IDC research data suggesting that some 15 million U.S. households making less than $35,000 per year will be coming onto the Internet for the first time over the next four years, and you can see why we believe that the value segment of the U.S. dial-up market could easily be 75 percent of the total market by the end of 2007. Today, 75 percent of the total market is in premium dial-up.
We strongly believe that value-dial will dominate the U.S. dial-up market. It's for that reason that we feel that the growth opportunity for United Online is very strong over the next several years, regardless of whether you feel the total dial-up household market will be 45 million, 42 million, 40 million or whatever number you happen to believe.
There are even those who feel -- and I being one of them -- that, due to intense economic pressures brought about by the price slashing that's gone on in both the DSL and cable market, that the price of broadband Internet access in the home might actually increase over the next 12 to 24 months. I actually believe that. If that should occur, the previously mentioned growth opportunity for value-priced dial-up and accelerated dial-up would increase significantly. You noticed, yesterday I believe, there was an announcement from SBC that their DSL product, which they had previously announced was going down to $26.95 and which you can remember caused a lot of consternation for some reason around our stock and issues of dial-up -- they announced that they were no longer going to the offering the $26.95 price point; they were going back up to where they were before at $29.95. I believe that that may be an indicator of others who may follow suit in that broadband market, but we will have to wait and see how that plays out.
One thing that's for sure is that what we've built here is a cash-flow machine. I mean, this has developed to an exceptional cash flow business. While achieve record levels of adjusted OIBDA for the quarter of 24.4 million, our free cash flow was 25.5 million for the quarter, versus 19.2 million for the year ago quarter and for the calendar year ended December 31 of '03. Free cash flow was a record $77 million, up 79 percent versus million in calendar year '02.
We previously stated that it is our intention to deploy our substantial cash reserves in a manner which we believe will maximize long-term shareholder value. In the September, 2003 quarterly earnings call, we said that we believed that acquisitions and the repurchase of United Online common stock could be the most desirable uses of our excess cash. Therefore, we spent $40 million cash in the December, 2003 quarter alone on the repurchase of our stock under our $100 million approved stock repurchase plan. Since the inception of that plan, we've repurchased 4.1 million shares for $51.3 million, and we feel (indiscernible) we have an additional 48.7 million of authorized purchases remaining under the plan -- and that plan will expire on July 31, 2004. We feel that this was an excellent use of the Company's cash, and it demonstrates the confidence that management and the Board of Directors has in the future prospects for United Online. Even after spending the 40 million in cash during the quarter on stock repurchases, we still finished the quarter with $203.7 million in cash and cash equivalents on the balance sheet.
Going forward, given the high level of cash that we intend to generate over the course of calendar 2004, we will continue to evaluate the repurchase of our stock and making strategic acquisitions.
With that, I'd now like to turn the mic over to Charles Hilliard, who will give you a detailed review of the quarter, the calendar year, and provide you with guidance, going forward. Charles?
Charles Hilliard - United Online - CFO
Thank you, Mark, and good morning, everybody. The hallmark of United Online's strong 2003 results was three important financial trends for which the December quarter demonstrated a very strong continuation. Number one was consistent topline growth. Our year-over-year revenue growth for the December quarter was 47 percent and for all of 2003, revenue growth was nearly identical at 48 percent. Looking back, the range of year-over-year revenue growth during 2003 was a very strong and consistent 45 to 53 percent every quarter.
Number two was expanding margins. Our billable services margin expanded 220 basis points during the December quarter and was up 1130 basis points versus the year-ago quarter. Compared to the December 2001 quarter, our first full quarter as United Online, we've increased our billable services margin by over 3000 basis points.
Number three, strong free cash flow. During the December quarter and for all of 2003, our ratio of free cash flow to adjusted OIBDA was a very strong 105 percent. That is, for every dollar of adjusted OIBDA we produced during 2003, we generated $1.05 of free cash flow. Our ability to generate this very high percentage of free cash flow from OIBDA is due to our significant net operating loss carryforwards and our relatively low fixed-asset and working capital requirements.
Once again, the breadth of our December results was very impressive across each important revenue driver. Those revenue drivers today are, number one, our number of paid subscribers -- which, at December 31st, also included 2000 premium e-mail subscribers; number two, the number of add-on subscriptions, especially our accelerated dial-up subscriptions which numbered 638,000 at December 31st and another 5000 premium e-mail subscriptions from paid access subscribers.
To help analyze our progress in driving incremental subscriptions beyond core paid subscribers growth, we have added a new metric to our reporting this quarter called "Revenue Generating Units" or RGUs. This is a metric used by many cable companies. RGUs are simply the total of all paid subscribers plus the number of add-on subscriptions purchased by those subscribers. For example, if we have successfully sold 22 percent of our paid subscribers and add-on subscriptions, our RGUs -- as they do today -- will equal 122 percent of total paid subscribers. I'll discuss RGUs a little further in a few minutes.
Number three, the other important revenue driver is advertising and commerce revenues. Particularly, going forward, we're going to focus on search revenues from our partnership with Yahoo and Overture.
Now, let's discuss our December quarter in a little more detail. Highlights for the quarter -- some of this Mark covered. Our operating income before D&A was at 24.4 million, which was up 114 percent year-over-year. Our billable services margin was 73.5 percent versus 62.2 percent a year ago and 71.3 percent in the September quarter. Paid subscribers growth at 172,000 was a 12 percent acceleration versus organic sub growth in the year-ago quarter. Please note that our December '02 quarter included the acquisition of 174,000 Bluelight subs. Organically, we grew 154,000 subs in that quarter. And for the year, we added 716,000 paid subs, all organic, a record and a 33 percent growth rate.
RGU growth was 403,00 162 percent acceleration versus organic RGU growth in the year-ago quarter, when our paid business consisted solely of standard,$9.95 Internet access.
The last big highlight I'd like to point out is free cash flow -- again, at 25.5 million in the quarter, up 33 percent over year-over-year. For all of 2003, we generated 77 million of free cash flow, which was well over $1 a share.
Some selected data for the quarter -- total revenues at just under $97 million was a record. Total services revenues were a record and they were up 51 percent year-over-year. Advertising and commerce revenues at $9 million were up 17 percent year-over-year. Global services revenues were 91 percent of total revenues in the quarter, versus 88 percent a year ago. Average monthly revenue per user, or ARPU, was $10.45, up 9 percent from $9.63 in the year-ago quarter. ARPU continues to improve due to our success in driving subscribers to our accelerated dial-up add-on service.
Advertising and commerce revenues were up 17 percent year-over-year and down slightly sequentially due to the $1.5 million bonus we earned from GM in the September, 2003 quarter. Excluding the bonus, we were up 17 percent sequentially. Our four-year advertising relationship with General motors, which ended on December 31st, contributed 37 percent of add and commerce revenues in the quarter, versus 36 percent a year ago. Revenues from search fees, the next largest portion of (indiscernible) commerce revenues, were 24 percent of total add-in commerce revenues for the December quarter, up 39 percent year-over-year.
We announced in November that we had extended our search agreement with Overture for an additional three years and that the consumer experience is now branded Yahoo! Search. Given that we now have a long-term search partner and the economics of that market have improved significantly, as Mark mentioned, we are focusing very closely on more ways to improve our 5.3 million users' search experience and drive increasing traffic to our partner. We will update you all of you on that progress on our next quarterly call.
The billable services margin was again up due to an increase in ARPU and again and unexpected decrease in average hours per paid subscriber per month, which was down about 8 percent year-over-year and 2 percent sequentially. Given that the past two quarters have shown an unexpected decrease in average usage per paid account, we are keeping an eye on a potential trend, which may indicate that heavier and less profitable users are migrating to broadband. However, we are seeing a sequential pickup in usage for the March quarter, which we would expect, and last year's comparable period showed a 3 percent sequential increase.
The billable services margin also benefited from a decrease in average per-hour telecom costs, which was about 7.25 cents in the December quarter, versus about 7.5 cents in the September quarter and approximately 9 cents in the year-ago quarter.
Cost of (indiscernible) services, at 1.9 million this quarter, was down 41 percent year-over-year. Our active free user base was down 4 percent sequentially and about 15 percent year-over-year. The decline in active free users and a reduction in hourly telecom rates helped drive down our cost of free services year-over-year and sequentially. Our active user base grew 2 percent this quarter to a new two-year high of 5.3 million.
Sales and marketing -- $36.6 million this quarter, or 37.7 percent of revenues, was up 750 basis points versus the year-ago quarter but it was down 50 basis points from 38.2 percent in the September quarter.
Since we formed United Online, our strategy has been to increase sales and marketing as a percent of revenue every quarter as the business grew and our margins supported it. As we discussed on the last call, our goal for this December quarter was to do precisely the same thing. However, this quarter, we have far less visibility on our marketing spend and given our commitment to bottom line performance first, we budgeted very conservatively with respect to our Best Buy deal, which launched in mid-October.
Let me explain our thinking a little bit. First, this was our inaugural major retail distribution program. Second, even after significant analysis and discussions with our partner, our estimated range of potential quarterly distribution expense associated with the deal was very, very broad. You see, under the deal, we pay Best Buy based on the number of new subscribers they help us acquire. The more subs from Best Buy in a quarter, the more expense for United Online. Thus, in setting our marketing budget for the December quarter, we elected to protect our bottom-line by reducing our television media spend in order to afford the potential high end of our Best Buy expense estimate.
As you can imagine, we watched the Best Buy sign-ups very closely throughout the quarter. However, even our early budget had their performance being back-end loaded due to the leadtime of store rollout, employee training, putting displays up and the timing of holiday purchases. By the time we recognized that Best Buy was going to achieve the lower end of our estimate for the quarter, we could not reinvest all the dollars available in the budget back into television media in a manner in which we felt was providing appropriate value. That is a very close distinction. And at the end of the day, our sales and marketing spend this quarter was much lighter than we would have planned it, resulting in the drop in sales and marketing as a percent of revenue.
Nevertheless, we can report that Best Buy has been a first-rate partner with which to work and after full-store rollout and a little seasoning of the relationship, we are very, very excited about the long-term value of this distribution deal for both parties.
Regardless of the size of our media spend in the quarter, we were able to drive strong paid subscriber growth, record new accelerated subscriptions and growth in active users to a new two-year high. Performance, measured by each of these metrics, provides further evidence of the growing strength of our franchise.
Now, let's turn to subscriber acquisition costs for SAC. As we discussed in the past, we measure the success of our marketing based on Return On Investment and we manage it based on percentage of revenues on a quarterly basis. Historically, our progress in growing our business could be fairly easily measured by our gross paid subscriber acquisition costs, since we only had one paid product and a fairly static ARPU of around $9.60 to $9.65.
Today, benchmarking current subscriber acquisition costs versus the past is fairly more complex. We have two major subscription services to which we are allocated marketing expenses, both internally and externally. We have shifted significant marketing personnel resources and internal advertising inventory to upselling our paid subscribers to add-on services.
Externally, our media spending has been instrumental in driving $9.95 subscribers to pay the additional $5 for the accelerated service. We just have no way to measure how much of our media spending to allocate to those (indiscernible) upsells.
To be sure, add-on subscription growth creates tremendous value, as shown by our much higher ARPU of $10.45 and expanded billable services margin of 73.5 percent. However, with respect to the SAC (ph) calculation, there is no way to measure any value creation beyond acquiring brand-new paid subscribers.
As I mentioned in previous calls, a paid subscriber using our accelerated service generates 50 percent higher revenue and higher margins than a $9.95 subscriber. Over time, we estimate about 60 percent more free cash flow from a subscriber who has also purchased an accelerated subscription versus the $9.95 subscriber.
For the December quarter, we estimate our gross paid subscriber acquisition costs -- assigning no incremental value to accelerated subscriptions -- at $55, which is up 6 percent, or $3, sequentially from the $52 in the September quarter. On an apples-to-apples basis, giving accelerators 60 percent higher cash flows -- and that's assigning a .6 subscriber value to an incremental accelerated subscription -- would result in a SAC (ph) of about $41 on a $9.95 equivalent basis, versus about $40 in the September quarter.
One more comparison -- in the year ago quarter, when we only had $9.95 paid subscribers, our SAC was $38.
Recognizing that we intend to expand the types of subscription services we offer and the added complexity of measuring SAC, we are now presenting revenue-generating units which track total subscription growth. Using RGUs, our subscription acquisition cost was about $35 in the December quarter, flat with September, which was also $35. Consistent with prior periods, we calculate total subscriber acquisition costs to include total sales and marketing expenses, plus cost of free services, less ads and commerce revenue. This total was $29.5 million in the December quarter.
While we'll continue to measure and manage our marketing expense based on ROI and as a percent of revenue respectively, we recognize that others find use in the SAC metric. Regardless of how one measures the effectiveness of our marketing spend, there is no doubt that our return on marketing investment has remained as strong as ever, even though we've increased the size of our quarterly sales and marketing spend by almost four times since the December, 2001 quarter. At the end of the day, this is the most telling testament to the success we have achieved with our combination subscriber and subscription growth strategy.
All right, let's move on. Free cash flow comparisons year-over-year are impacted by a large working capital benefit in the December, 2002 quarter from the first-time extension of credit terms from our primary television media vendor that we received in that year-ago quarter. Prior development G&A expenses were up about 2 percent sequentially, due primarily to a modest increase in personnel-related costs. Including facility exit costs and stock-based charges, we are forecasting low to mid double-digit growth in product development and G&A expense for calendar 2004 as we expand our employee base and facilities to handle our growth and invest for the future.
On a tax equivalent basis, our GAAP EPS this quarter was 18 cents, versus a nickel in the year-ago quarter. On a tax equivalent basis, our adjusted EPS was 21 cents, compared to 8 cents in the year-ago quarter.
Let's talk about our business outlook. Due to our strong performance in Q4 and our current trends, we are introducing calendar 2004 guidance. We project adjusted OIBDA for Q1 of 2004 between 24 and $25 million. This reflects the resumption of a more normalized marketing spending level in our first quarter following the end of our GM advertising deal. We are also forecasting between 100 million and 108 million for fiscal 2004 in OIBDA. That reflects our budgeted growth in headcount, especially in product development and planned marketing spending for the year. At the midpoint, our calendar 2004 guidance implies year-over-year OIBDA growth of 41 percent. Calendar 2004 OIBDA guidance reflects an increase of 20 to $23 million to our previously-provided fiscal 2004, which was previously ended June guidance of 80 to 85 million (sic).
As shown in our guidance table, we are projecting stock-based charges this year associated with our Board's decision to change certain senior executives' equity incentives from 100 percent stock options to part options and part restricted stock. The restricted stock vests after four years with no interim vesting. The shift away from pure options is not inconsistent with a trend we have been seeing from public companies, both in tech and many other sectors.
Also in our guidance, we are anticipating facility exit costs attributable to our planned relocation of our Wesley Village headquarters. We've outspread our current facilities since mid-1999, which actually here in Westlake is two facilities about two blocks apart. Our space needs have already begun to exceed our existing square footage and as I mentioned, we are planning for quite a bit of growth in 2004. Also, we look forward to the efficiencies of having all of our Southern California employees under one roof. Our current goal is to complete that move by the end of Q3.
Total revenues for Q1 are estimated to be between 101 and 103 million. Such results, if achieved, would result in year-over-year revenue growth of between 37 and 40 percent. We are guiding for our billable services margin to be flat in Q1 versus Q4, due to seasonally higher average usage per paid sub offset by a higher ARPU. While we've been a bit surprised by the sequential decline in average usage for the past two quarters, once again, we have seen an expected increase in usage to date in this seasonally higher usage quarter.
We are also estimating calendar year-end 2004 total paid subscribers to be between 3.3 million and 3.5 million. This is an increase of 350,000 on both ends to our previously provide June 2004 guidance of between 2.95 and 3.15 million.
Capital expenditures for 2004 are projected to be between 13 and $15 million, including an estimated 4.5 to $5.5 million associated with our anticipated headquarters relocation. (indiscernible) recurring, operating CapEx is below $10 million.
Update on taxes -- currently, we estimate that our total net operating loss carry-forwards, or NOLs, for federal tax purposes are now $272 million. Our NOLs available for use in calendar '04 are approximately $61 million. There are varying annual limitation (sic) on our remaining NOLs beyond calendar '04, but at least $19 million should be available in each of calendar '05 with a little less in calendar '06 at about 17 million and about $12.5 million available for fiscal year thereafter. Additionally, state NOLs vary to some degree with federal amount.
Our future tax rate cash pays for income taxes in our NOL usage is dependent upon a variety of factors, including the Company's actual results in the future, as well as employee option exercises and tax planning strategies.
Thank you, everybody. I will turn it back to Mark.
Mark Goldston - United Online - Chairman, President, CEO
Thanks, Charles. Before we open the call for questions, operator, I'd like to make all of you aware of one important development that occurred last week. The Board of Directors of United Online granted new, four-year contract extensions to myself, Charles Hilliard and two other top officers, Brian Woods, our Chief Marketing Officer, and Fred Randall, our General Counsel, ensuring that we are all signed on with United Online through February of 2008.
I have personally been very proud of the fact that we have virtually no turnover in the senior ranks of this company and have had virtually no turnover in the top 30 to 40 people here for the last several years. I think that has had a great impact on our success to date. We are something of an anomaly within this particular industry that we are in because of the continuity that we've had with management.
As Charles and I come upon our five-year anniversary with the Company next month, we are very proud of what we've built from basically scratch into the dominant value ISP in the country, if not the world.
So with that, I'd like to open it up, operator, to questions. We will put the queue -- put them in the queue and then we will take them as we go.
QUESTION AND ANSWER
Operator
(OPERATOR INSTRUCTIONS). Your first question comes from the line of Saffar Rashi (ph) of Piper Jaffray.
Saffar Rashi - U.S. Bancorp Piper Jaffray - Analyst
Good morning, Mark, Charles. Congratulations on another excellent quarter.
Unidentified Speaker
Thank you.
Saffar Rashi - U.S. Bancorp Piper Jaffray - Analyst
A couple of questions -- Mark, your initial comments were very interesting, especially as it related to broadband. It sounded like you have the opportunity, or maybe even the intention and strategy, of even attacking broadband and offering a low-end solution with your accelerated -- the success that you showed with your value-priced dial-up clearly was a very attractive alternative for the full price fares. It seemed to me that the accelerated option had become, for lack of a better word, a poor man's broadband. But the numbers you showed suggest maybe it is more than that. My question is, is that how you will be positioning the accelerated product? B, in doing so, do you need to add other functionalities and features and further speed it up, if it's possible at all, or is it really just going to be kind of an in-between product? Then I have a follow-up.
Mark Goldston - United Online - Chairman, President, CEO
That's a great question. If you think back to when we launched this, what I said on the call back then was we had sort of a marketing trick up our sleeve. I didn't want to elaborate on it for a couple of reasons. Number one, marketing tricks are only great in retrospect if they work; number two, as you can imagine, I didn't want to tip our hand to our potential competitors. But the trick up our sleeve was that we felt if we did a good job of marketing high-speed, that we could basically appeal to a large portion of broadband users because the research that was published -- I believe it was by Goldman Sachs in May of 2003, which was this huge research study that they did with a company called Synovate (ph) -- indicated that when asked dial-up users why they may switch to broadband, 72 percent of those people stated as their Number One choice speed. Only 2 percent of those people stated that download capability and the ability to download music and software more quickly was the reason to switch -- only 2 percent. So we looked at that and said, "Wait a minute. If only 2 percent of the people state downloading capability as their reason to switch and 72 percent said it was speed and almost 57 percent said that broadband was still too expensive, even its promotional-priced state' -- we knew that if we could somehow show the consumers that they could get an experience of surfing faster and doing their e-mail faster without touting download capability -- because we don't prove that -- that we may actually be able to convert people who are either on their way to broadband or people who have bought broadband and weren't happy with it. I would submit to you that as we sit here today with 638,000 accelerated dial-up users, 12 percent of whom appear to have come from broadband, that that's exactly what has happened.
So going forward, we are constantly looking to improve our accelerated dial-up product from a software standpoint. We're working on some stuff right now. But to be candid with you, while that would be frosting on the cake, because the broadband user is after speed and price and not necessarily download capability, we've really don't need to do a heck of a lot more other than to increase the speed over where it is today and possibly even increase the graphic quality of the images. If we can do that, then I think when you start getting into the group of people who are on the fence about broadband and are price-sensitive to begin with, I think you may find that accelerated dial-up not only is a bigger opportunity than most people originally thought it was, I think accelerated dial-up will become the entire dial-up market. This is my belief of what will happen.
Saffar Rashi - U.S. Bancorp Piper Jaffray - Analyst
A follow-up but before that, maybe a couple of quick housekeeping items for you, Charles. Can you talk about -- with the descriptions you gave about the tax issues, what are you looking as an effective tax rate for '04? Also, I don't know if I missed it, but did you talk about the churn rate? If you have any thoughts on it, what it was and what you're looking for?
Finally, the second part of my question has to do with the operating margins. You had an impressive increase in operating margin to 19 percent this quarter. The numbers you have given suggest that, obviously, you haven't given revenue guidance but if you kind of take your Q1 as a run-rate, then look at some estimates for '04, it suggests that the operating margin will not increase as much. It is that a correct assumption or what kind of operating margin should we be looking at?
Charles Hilliard - United Online - CFO
Let me start with the second part of your question, which is the easiest to answer, which is the churn rate, which was at 4.3 percent in the quarter; that was down from 4.4 percent in September.
Going to the first part of your question, which is tax issues, on a cash basis, our expectation is to pay minimal taxes for calendar '04. In fact, our change in fiscal will help us a little bit with the NOL moratorium of usage in California. So, we expect -- let's call it less than $5 million, maybe closer to 0 in terms of cash taxes this quarter.
On a GAAP basis, the effective tax rate will be around 41, 42 percent. On an adjusted net income basis, it will be about 40 percent.
In terms of the operating margins, going forward, we had a big pick-up in -- one thing I track is our OIBDA margin. That did eclipse 25 percent this quarter. Part of that was because of the subdued marketing spend that we discussed. If you look at the OIBDA margin for all of calendar '03, it was a little less than 22 percent; it was about 21.7 percent. Our goal is, year-over-year, to expand that margin but not necessarily to be operating at north of 25 percent throughout the year. As we have discussed in the past, our goal is to hit our bottom-line growth numbers while reinvesting as much as we can in the future. If you look at the guidance, with 41 percent year-over-year growth in OIBDA, we think that's a substantial growth rate while still making the appropriate long-term investment. because we are here for the long-term. Did that answer your question?
Saffar Rashi - U.S. Bancorp Piper Jaffray - Analyst
Thank you very much, yes.
Operator
Youssef Squali of First Albany Capital.
Youssef Squali - First Albany Corp. - Analyst
Yes, thank you. A few questions. First, Charles, on the marketing spend, I'm not sure if I really understood it right. So, going forward, are you basically guiding for marketing spend to be increasing as a percentage of total revenues, i.e., that inflection point that we saw in the quarter to reverse itself going into Q1, etc.? Or the percentage -- or the decline, sequential decline we're seeing is sustainable? That's one.
Two, by my math, you added about 716,000 subs in the year. You spent about 120 million. For 2004, you're guiding for 400 to 600,000 subscribers, give or take (indiscernible) spent, at least by my math, about 160, 170. Is the assumption here that you'll basically be adding more on the higher price subs? Then I have one follow-up.
Charles Hilliard - United Online - CFO
In terms of marketing spend as a percentage of revenue, it ticked down by 50 basis points, and that was not by design. Our goal would be to slightly increase that as a percentage of revenue. We do not anticipate, for example, anywhere near the sequential or future increase we saw between the June and September quarters, which was close to 500 basis points sequentially. I would say something in the zip code of between 38, 38.5, if the business is going very, very strong, maybe a pick-up to 39 percent. But once again, that is driven by what is going on with the topline, with subscriber growth, with ARPU, with billable services margin and what's left in the tank to continue to reinvest in the future.
Our goal is not to be (indiscernible) sales and marketing because we are getting a fabulously higher return on it. So, this will be something that we carefully manage. We think we are at about -- we are very close to sort of the peak on the percentage of revenue we will be reinvesting in this line item, especially as we look at putting more into things like product development, where we can demonstrate with Accelerator that our R&D spend gets very, very high returns as well.
In terms of guidance, going forward, you know, we are looking at trying to continue to drive the mix of new sub adds coming in using the accelerated service. The guidance is up 408 to 608 to give you the precise numbers. It reflects that we want to drive both core paid subscribers as well as incremental add-on subscription. We think, if we execute that properly, we can continue to drive the types of returns we've seen in the past on our investment in sales and marketing.
Mark Goldston - United Online - Chairman, President, CEO
Just as an add-on to that, this is a very interesting quarter in that we did two major new moves, in effect, in marketing. One, we spent 80 percent of the marketing budget on high-speed accelerator -- highest ever. We spent 56 percent in the previous quarter, 40 percent the quarter before that. So virtually almost all of our money was spent trying to get Accelerator subscribers. We did a phenomenal job of doing that.
Two, as you know, in the past, some people have criticized the customer acquisition cost and the marketing spend and you know this better than I do. You know, it keeps going up and up and up and we keep telling people that we don't run the business that way. We can say it a thousand times. We run the business on ROI. Because of the nature of the Best Buy deal and the uncertainty and you had to go deep into the quarter and make sure you had some fuel in your tank, we ended up spending not as much money on marketing. What that proved is that our marketing spend clearly is within our control, one. Two, when you pull back on the throttle a little bit, you still can get great growth -- which we did -- going up 12 percent to the 172,000 and putting up record numbers in accelerator. So, what it shows people is that, A, we can pull back on the throttle and still have a tremendous growth machine and that the reason why we don't pull back on the throttle and why, going forward, we probably would not is because we feel it's a great long-term investment for the business, one. Two, from a competitive standpoint, the entire world now has decided not they want to get into the accelerated dial-up business. People are trying, for their second and third attempts, to get into the value segment and we continually raise the barrier-to-entry as the market leader in those segments by spending the way we spend and still having a tremendous bottom-line profit. So, I think that's a real core advantage of what we bring to the table.
Youssef Squali - First Albany Corp. - Analyst
Just as a follow-up to that I guess, OIBDA guidance of 100 to 108 -- your first-quarter guidance is already 24 to 25, so just annualizing that number, you're already hitting the low end of your guidance. Why do you think there is a chance of seeing that number dramatically slow down?
Charles Hilliard - United Online - CFO
Which numbers slow down?
Youssef Squali - First Albany Corp. - Analyst
The OIBDA throughout the year? Because again, if you use 25 million as a base, then that's 100 million already.
Charles Hilliard - United Online - CFO
Well, that leaves room for future growth in sequential quarters. Once again, we are setting up our annual budget to be hitting north of 40 percent OIBDA growth -- (multiple speakers).
Mark Goldston - United Online - Chairman, President, CEO
Just to put some color on that, 24.4 million, which is what we generated, if you calendarize that, it's four quarters. That runs 97.6, so 100 to 100.8 over 97.6 is alone better growth than you'll see from the vast majority of other companies that are out there giving guidance, one.
Two, we want to be clear about the fact that while the 24.4 million of adjusted OIBDA was a tremendous number, it is, in part, reflective of the fact that we didn't spend as much money on marketing as we would have intended to spend had this been a normal quarter without a back-end loaded uncertainty of (indiscernible) new distribution partner. So what Charles said in his remarks were we intend to return to a normalized level of marketing spend, going forward. So, this was a terrific performance. It was somewhat aberrant only in the fact that we didn't spend as much as we wanted to spend, and we do believe that marketing spend on this business is well justified.
Charles Hilliard - United Online - CFO
I would add to that that we are looking at increasing our annual product development and G&A spend by the low to mid double digits as we continue to make these long-term investments and build-out new products and add new subscription services.
Youssef Squali - First Albany Corp. - Analyst
Thanks a lot and congratulations.
Operator
Mark May of Kaufman Brothers.
Mark May - Kaufman Brothers - Analyst
good morning. I guess just two questions, the first has to do with migration. I'm wandering if you can give us the statistics again for the percent of the free users that migrated to a pay service. Also, the percent of your $9.95 product customers that migrated up to high-speed?
The other question has to do with Search. It sounds like you guys are more optimistic about growing your add revenue, particularly Search this year. I'm just wondering what type of growth that you're budgeting into that? I guess you did around 2.5 million in Search revenue in the fourth quarter. What do you think you can growth to by the fourth quarter this year? Thanks a lot.
Charles Hilliard - United Online - CFO
On migration, we do talk about upgrades from free. We don't talk about upgrades from $9.95 because we also have downgrades and the people migrating in between from the basic access service up to these add-on products and back would be challenging for me to discuss on a quarterly call, especially if we add subsequent paid services. But the migration up from free was 21 percent of total gross adds this quarter, and (indiscernible) direct to the front door is 79 percent. Upgrades were down slightly as a percent of gross adds from 23 percent in the September quarter, and in the September quarter 77 percent of gross adds were direct to the front door.
On the Search front, we are both more optimistic and more enthusiastic about the Search opportunity, going forward. We do have a new long-term partner; we do have a higher quality search experience and we do have a focus internally on taking up our share of existing subscribers and free users Search traffic. We are in the early stages of that; this was something that was only signed in Q4. We saw a little bit of upside from sort of this new focus and new agreement paradigm. What we would say is, stay tuned. We're going to keep an eye on the upside, and I think we will have some good progress to report in 90 days.
Mark May - Kaufman Brothers - Analyst
If I could ask two follow-up questions, the first one on churn? Churn went down sequentially. Maybe I would not have been surprised if it went up sequentially, given that you have more new customers on the high-speed product. Can you just talk about why that number went down sequentially?
In terms of the subscriber guidance for '04, you gave it on a total paid kind of Access guidance. I'm just wondering if you can talk a little bit about your expectations for RGU growth this year and maybe, around that, talk about what you're doing, either to promote the e-mail service or launch other, new non-access services throughout the year. Just what should we expect on the RGU front this year?
Charles Hilliard - United Online - CFO
Why don't I comment on churn and on sub-guidance and then you can talk about (indiscernible) marketing plans on launching some of these new services.
Churn was down sequentially, and part of that is this theme that we've talked about; we've made a heavy investment for a company with less than 500 employees in this accelerated dial product. Since we talked to you 90 days ago, we've rolled out a new version of the product. By the way, it received a fabulous write-up by (indiscernible) and the Wall Street Journal. We improved the average acceleration to the user; we improved the graphics quality; we added an icon to the desktop which shows the users each and every page, the percentage acceleration of that; and we think that we have improved that experience. Our goal is to continue to improve it. I think that that showed up with improvement in churn.
Also, the other dynamic that as the user bases season and you get through the early lifecycle churn, hopefully we will return to more normal churn levels. That is something that was a big focus of ours when we saw it tick up last quarter with a huge spike in growth of high-speed.
On sub guidance, we have stuck to the paid subs part of subs guidance because RGUs is a new metric that we introduced. We will keep an open mind on adding that as a metric of guidance, going forward. There is certainly some discussion on that front. Certainly, we would expect that RGUs would exceed paid subscriber guidance in terms of growth. It is currently our intention to continue to focus on our add-on subscription services, which today are primarily accelerated dial. But that being said, we do have some other plans for the future. Mark, do you want to talk about other subscription products?
Mark Goldston - United Online - Chairman, President, CEO
The launch of MegaMail, Mark, in December we think is a good potential opportunity. There's a ton of people out there on Hotmail and on Yahoo! e-mail who are buying extra storage, especially now with digital photography and the like. In fact, one of the things we did do recently on our accelerator products is we are now including MegaMail 25, which is the 25 meg MegaMail (indiscernible). We are now concluding that in the $14.95 price point for our accelerated customers so they not only are getting a much better product than we used to offer but now, they're also getting an additional $9.95 value included in the product.
So going forward, we have some unique ideas on how we can promote MegaMail to our existing users and potentially to some new users. We're looking at other add-on services that we can get into which give us monthly or annual subscription rates that take advantage of our tremendous billing efficiency that we've got in this company. I can't really talk about them now because I know that I have competitors that are listening to this call or who will replay it, so I really don't want to tip my hand but just suffice it to say that we changed our mission statement in June of '03 to go from being the nation's leader provider of value-priced Internet access to being the nation's leading provider of value-priced Internet services. MegaMail was the first of what we hope will be several services like that, which will be add-on subscription services that will go into the RGU calculation. So, I would say it's like we are McDonald's; we used to make just hamburgers; we just launched french fries and we may have apple pie and other things coming down the road, which are ways to increase our "Register Ring" on our existing customers and also appeal to people who may not necessarily want (indiscernible) for access but may be very interested in some of the other add-on subscription services that we will develop.
Operator, next question?
Operator
Ned Zachar of Thomas Weisel Partners.
Ned Zachar - Thomas Weisel Partners - Analyst
Good morning, everybody. Terrific numbers, well done. A couple of questions -- some follow-ups on things that have been mentioned on the call so far. Mark, I think you mentioned, or Charles, that you wanted to make sure that you could handle the growth in the Company. A hallmark of what the Company has done so far has been increasing productivity per employee. Can you give us some sense of what kind of additional headcount you might be thinking about over the next year or two? That's question number one.
Question number two is, Charles, you mentioned you thought that 38 or 38.5 percent approaching the peak as far as sales and marketing as a percent of revenues (sic). I'd love to hear you give a little bit of color as to why you have some degree of confidence that that's going to be the peak?
Then lastly, Mark, you mentioned some numbers on high-speed that weren't quite the same as what I think we had heard before. The reference here was when you were talking about how much of the media you were spending of your quarterly budget directed toward high-speed (sic). I think you mentioned 40 percent in the June quarter and 188,000. I thought was 208 in that quarter. Then 56 percent (indiscernible) and then 202 in the June -- and then 226, of course, matches up with what you talked about (indiscernible), so color in there would be great.
Mark Goldston - United Online - Chairman, President, CEO
(indiscernible) and I will do that. I just want to clear up the last one first so that we can move beyond that so you're not waiting for that one. One, we spent 40 percent of the media in June, 56 percent of the media in September, 80 percent of the media in December. The 188 was the amount of accelerated subscribers that we added in that particular quarter. You might recall that we launched Accelerator actually in March of 2003.
Ned Zachar - Thomas Weisel Partners - Analyst
So you had a little bit to go -- (Multiple Speakers)?
Mark Goldston - United Online - Chairman, President, CEO
We had a little bit of a stub going into the quarter, so yes, you were right on your 208 number. We had 188 of those came actually in the June quarter itself and then the other 20,000 were there already when we started the June quarter, so that's where that came from. So, it's completely consistent. I just wanted to make sure you understood the granularity on that.
In terms of headcount (indiscernible) and you raised an interesting point. I have, as you know, because we've spoken about this before, I am very focused on annualized revenue per employee. I think it is perhaps the key metric by which someone not only evaluates the efficiency of a company but also whether there truly is operating leverage in a business.
Having said that, ours is getting to levels that I've never seen before. When I was in the sneaker business in the late '80s at Reebok, Reebok and Nike were unique within the entire U.S. in that we had annualized revenue per employee of 400,000 to $500,000 per employee. Those were basically marketing and sales organizations with no manufacturing that sold high-priced products and had tremendous efficiencies. Our number, at 787,000 -- I've never seen a number that high in a business.
Having said that, while we are incredibly proud of it, what we are really more proud of is the way our company has grown within this hotly competitive space. In order for us to continue to grow and to continue to look at add-on subscription services rather than just using the existing leverage of the current employee base, we will be acquiring some outside talent and skill in some of these areas that we intend to penetrate so that we can fortify our software-development organization and some of our operations into some categories that we might not have been in before. So, we probably will add, over the next 12 to 24 months, probably between 60 to 70 people, potentially, in the United States, and we may add another 30 to 50 people in our Hyderabad, India operations, which you remember is very efficient and the average employee there costs us, on average, probably I want to say 1/8 to maybe 1/10 of what the equivalent U.S. costs would be.
So, we don't create jobs that normally would have been U.S. jobs and move them into India; we create jobs for the Indian operation that are specific to the functions that have long been performed by that operation. The new U.S. jobs will be very much in line with the new add-on subscription businesses that we intend to get into. By moving to our new facility later in the June quarter, we will be able to do it -- because to be candid with you, we have been hamstrung by our lack of space. So, even if we wanted to add new employees, we really haven't been able to do it because we are out of room. So, I would tell you that continue to evaluate us based on annualized revenue per employee -- it is a great metric. Also, understand that at 787,000, you are pushing the outer limits of what anybody could imagine. While we will always continue to try to improve upon it, we only hire people when we feel that we are going to get an incremental ROI on the individual hired. We do ROI analysis on every dollar that we spent in the Company and human capital is no different.
Charles, do you want to take the 38 percent question?
Charles Hilliard - United Online - CFO
Yes. Part of the (indiscernible) headcount growth is we, today, are not addressing very profitable high-value and high ROI growth opportunities, simply because we don't have the resources to do it. So we think it is a very positive ROI to be investing in that headcount.
On the range that I talked about in terms of approaching or getting very near to the peak on the percentage of marketing spend, part of that is we're not expecting another 1300 basis point increase in billable services margin. So as the margins begin to -- within the current business -- get closer to their long-term potential, we start to be able to hone in on a reasonable reinvestment rate in sales and marketing. We run a very, very tight budget here; we run a line item general ledger on every single expense. I literally spend time reviewing people's very, very small expenses, as does the rest of the finance team, and we feel very confident in our ability to manage the cost center and sales and marketing to make sure we're getting the appropriate return and long-term growth on it.
Ned Zachar - Thomas Weisel Partners - Analyst
Should we be thinking about this in terms of a given amount of percentage total revenues generating a given amount of gross adds? Maybe that doesn't go up -- maybe the gross add number doesn't o up as much, but if you improve churn a little bit, then your nets could improve to some degree. Is that how we should be thinking about this?
Charles Hilliard - United Online - CFO
The other dynamic is what happens with upsells to add-on subscription services and what impact does that have on our (inaudible) margin.
Mark Goldston - United Online - Chairman, President, CEO
That is perhaps most the important point that Charles made in his talk and right now because, candidly, we could have spent the marketing dollars that we spent in the quarter, put them all against our $9.95 ad campaign that shows why pay AOL -- you remember that campaign and how effective that was? We could have put all of those dollars against it; we definitely would have shown up with more than 172,000 subscribers.
I'll tell you another thing we could've done. Instead of pulling in the 24.4 million of OIBDA, we could've pulled in 21 million of OIBDA, had everyone be very pleased and taken the extra 3.4 million and we could've spent in the last week or two of the year. It would have been a very inefficient purchase but even if we had done it at a $100 customer acquisition cost -- an exorbitant number -- we would have likely been over 200,000 net pay adds. We didn't feel that that was the best use of the shareholders' money, to spend it in the last two weeks at ridiculously high spot market rates and generate a SAC (ph) in the last two weeks that was virtually double what we had. But had we chosen -- A, to do that and, B, focused the money on only the $9.95, the net pay add number would be higher. So, the reason why we are introducing these RGUs is that's really not how are looking at the business; we're looking at spending our money and how we generate revenues from that money. If more of the revenues come through add-on subscriptions versus brand-new subscribers, then so be it -- because we will be a better, more powerful company because of that.
Ned Zachar - Thomas Weisel Partners - Analyst
Terrific. Thanks for your help.
Operator
Darryl Smith (ph) with JP Morgan.
Darryl Smith - JP Morgan - Analyst
Great, congratulations. You've now seen almost an entire quarter of traction with the Best Buy relationship. Can you us more color on how the results came in compared to expectations, where they came in on a percentage of contribution to new sub growth? Then if the incremental Best Buy customers are more skewed towards accelerated or your traditional dial-up products? Finally, how much you could see Best Buy contributing as a total of new sub growth by the end of '04?
Charles Hilliard - United Online - CFO
One, in terms of Best Buy in total, we launched the Best Buy program in the middle of October. Of my 26 years, I spent 20, 21 of them dealing with selling products through retail channels. So, for me, it was kind of back to the future because I remembered all of the issues that I had. Whether it was at Revlon or Faberge or Johnson & Johnson, when we would launch products into a retail mass merchant chain and the logistical issues involved with setting up displays and the like -- I had kind of forgotten about it but the reality of it is Best Buy has a phenomenal operation, a very large operation. We were a brand-new product line for them and quite candidly, they were slow in getting the displays out to the stores. We actually had to augment some of that by hiring our own merchandising people to go out and assist in setting up displays that were sitting in some back rooms in the various Best Buy stores around the country. It wasn't, frankly, until the beginning to middle of December that we achieved the 70 to 75 percent display representation in Best Buy stores. You'd like to have 90 percent-plus throughout the entire period, and we were in the 40 to 45 percent range throughout October and November and didn't even get to 70-plus percent until the middle of December. So, that's not criticism; that's a reality. We (indiscernible) loud and clear -- brand-new brands in there, new training, new displays, etc.
So, on a going-forward basis, we would've hoped that, starting in January and going forward, we would be level-set such that they now know us; we're not the brand-new vendor any more. They know displays are coming; they know they need to be set up, etc.
We don't disclose the percentage of users that we got from Best Buy in this quarter and likely will not do it on a going-forward basis because, as you can imagine, we're also evaluating other retail distribution partners if they make sense, and we may end up at a point, at the end of 2004, where we have two, three, four five maybe six of these, who knows? So we couldn't go through the granularity of describing each and every one of those.
I will tell you that, in the Best Buy environment, I would imagine, on a going forward basis -- and this is not a projection, I'm just giving you an opinion -- I would imagine that you would see more people signing up for the accelerated dial-up product than you would for the basic $9.95 only because Best Buy is touting the fact that they've got high-speed computers and they also have broadband for sale in their stores. When a consumer goes up to the Best Buy clerk to check out and they look at what the cost of broadband and they see a (sic) NetZero high-speed and Juno Speedband at only $14.95, it actually brings the value equation to them a lot more prominently than it does by watching a television commercial and having to remember what some broadband commercial said their price was. Here, you're staring at it right at the cash register; you're looking at a broadband display. So, I think it actually gives us a chance to sell people on high-speed a lot easier in a Best Buy environment than in a general media environment. Does that answer your question as best as I can?
Darryl Smith - JP Morgan - Analyst
Yes, thanks.
Operator
Jeff Goverman of Pacific Crest.
Jeff Goverman - Pacific Crest Securities - Analyst
Have you seen any changes in the competitive environment now that we seem to have Netscape out in the marketplace?
Mark Goldston - United Online - Chairman, President, CEO
I'm telling you the difference a quarter makes, Jeff! Nice to hear from you. Last quarter, as our pre-split stock went from $43 down to $26 on nothing but what we said were benign competitive announcements, that's all anybody talked about. Today, very few people talk about that. We still consider it to be an issue that we should address, so I'm glad that you asked it.
In terms of Netscape or any of these others, our contention has been all along that our competitive set is going to increase. We pioneered this segment; it was referred to as a micro niche. It is now no longer a micro niche; in fact, it is the powerful growing niche in all of dial-up. Our competitors had to get over the fact that they were critical of this segment and didn't think it was viable; then they saw our results and realized they needed to get into it. AOL is now in for the third time in two years with Netscape. They tried, I believe unsuccessfully, with CompuServe and Wal-Mart Connect. We will see what they are able to do with the Netscape brand. Certainly, they've made a lot of noise about it, so I would imagine that, this quarter, the March quarter, will be the quarter when we all go to war. They spent a lot of time and did a lot of PR on Netscape, made all the noise about what they were going to do and did some auction of some e-mail names on eBay. I'm not sure how it went but they made a lot of noise about it. So, I would say that the war has started.
Listening to the EarthLink earnings call, they spent a lot of time talking about People PC and the fact that they thought their future growth was going to come largely from People PC and their broadband. If you look at it, EarthLink is also offering six months at half-price on their premium dial-up, which makes it a value brand. I think Microsoft is now even offering six months at $9.95 promotionally.
So, you basically, Jeff, got everybody and their brother in this value dial space. I would say that the March quarter is the battleground; that's when we will see how good we are, see how we perform and we will see how good they are and how they perform. All we've ever asked is for people to bring the battle to us and let us fight it on a marketing basis. I think we are here.
So I would tell you that, while there certainly was competition in this December quarter -- and look at how we fared -- the competition is only going to get more intense -- A, by the launch of these new products and, B, I don't know if you watched the Super Bowl, but the entire AOL marketing message on the Super Bowl, including the halftime debacle, was AOL top speed. If you look at the fact that the number of ads that they ran on the Super Bowl and the $10 million that they spent on the halftime show -- I will give you an interesting statistic. They spent as much money in one single three-hour football game as we basically spent in the entire December quarter on media. So just to put it in perspective, that's what I think is the competitive environment. I think it's going to increase the size of the accelerator market and I think it's going to increase the size of the value dial market. We are the leader in both of those segments, so I believe that we will fare quite well and I think our guidance reflects that. But you know, it's kind of like the day of reckoning is upon us and I'm hoping that when people are on the AOL and the EarthLink earnings call for their March quarter, just like ours, that they ask them very detailed questions about how they performed in the accelerated dial-up and in the value space because I'm sure that they will ask us the same question. Then you guys and gals can go benchmark how we did against everyone else.
Jeff Goverman - Pacific Crest Securities - Analyst
Thanks.
Operator
Jim Freeman (ph) of WR Hambrecht.
Jim Freeman - WR Hambrecht - Analyst
Most of my questions have been answered but I will make this one quick one. You had great profitability, especially in the marketing line. Going forward, with the free subscriber base coming down and getting more from Overture, what can be a steady-state gross margin in that marketing line?
Charles Hilliard - United Online - CFO
Jim, the gross margin line -- we measure it on the direct costs of billable services versus billable services revenues, which is about 73.5 percent this past quarter, which, you know, has nothing to do with the amount of sales and marketing. You know, I'm not quite sure I understand your question.
Mark Goldston - United Online - Chairman, President, CEO
Can you ask the question in a different way?
Jim Freeman - WR Hambrecht - Analyst
So (indiscernible) talking about gross margins on the billable services, the cost of advertising and commerce margin I guess (indiscernible) the total gross margin. Because you actually had a substantial fall-through from the profitability in the last two quarters. Going forward, I'm just wondering, is sort of the advertising commerce as a percent of the add-in commerce revenues -- what sort of a steady-state number with the free subscribers coming down -- so they are costing you less -- and then you are starting -- you have this deal with Overture?
Charles Hilliard - United Online - CFO
I think I understand your question. On add-in commerce revenue, as you know, we're going through a transition period with General Motors. The March quarter will be the first quarter we don't have them; last quarter, they were 37 percent of add-in commerce revenues. I think we have provided detailed guidance in the past. We would expect, on the inventory, on the order of magnitude of a 75 percent haircut, so we would lose 75 percent of 37 percent of add-in commerce revenues. We do anticipate regaining some of that through our Search relationship with Overture.
It is too early, Jim, for me to give you specific guidance on that. I'm hoping 90 days from now, the answer will be different, where I will be able to give you more specific guidance on that.
So a partial recovery through Search -- I think that's about as far as I can go.
On the cost of free services, we would anticipate that number, in terms of absolute dollars per quarter, to continue to come down but I would say relatively modestly. You know, it will be down year-over-year. It might be relatively flat quarter-over-quarter because we get a little more usage here. You know, the margin, obviously, will be the product of what's happening on both of those lines. (multiple speakers). That's a soft answer to your very specific question.
Unidentified Speaker
Thank you, Jim.
Operator
Peter Mirsky of Oppenheimer.
Peter Mirsky - Oppenheimer & Co. - Analyst
Thanks. Just a couple of questions on the MegaMail and then just one follow-up. Charles, it sounded like you had said that there are 2000 MegaMail subscribers that are not existing ISP subscribers. Is that right?
Charles Hilliard - United Online - CFO
That's correct.
Peter Mirsky - Oppenheimer & Co. - Analyst
Can you give a rough breakdown of the percentage on the 9.95 product versus the $24.95 product?
Charles Hilliard - United Online - CFO
The mix is more skewed towards the $9.95 product but again, the product was out for 2.5 weeks, but it is more skewed towards the $9.95 product.
Peter Mirsky - Oppenheimer & Co. - Analyst
Is that going to have an impact on your margin for the accelerated products, since it's offered -- the 9.95 is offered for free with the accelerated?
Charles Hilliard - United Online - CFO
Virtually indiscernible -- diminimus impact.
Mark Goldston - United Online - Chairman, President, CEO
By the way, Peter, the diminimus impact that it has on the accelerator tells you a little bit of something about how profitable it is as a stand-alone product.
Peter Mirsky - Oppenheimer & Co. - Analyst
Thank you very much. Then I wonder -- looking at the subscriber adds -- for 172,000 for the quarter, if you back out the accelerated sub adds and the non-access, which I assume are MegaMail, it looks like the -- if we will call them basic -- the $9.95 subs actually went down. Is that a reasonable way to look at it?
Unidentified Speaker
It is not, Peter. We sell the $14.95 product as an add-on -- a $5 add-on to the $9.95. You have to have the 9.95 product to get the accelerated product. The analogy Mark has used in the past is a Saab Turbo; you have to own the Saab to get the Turbo. So the overall size of that base is growing.
The good news is the number of people that are buying the Turbo is accelerating and we hope to offer them more things like MegaMail and other products in the future.
Mark Goldston - United Online - Chairman, President, CEO
Charles, that's a very important point to make because we do not, at this point, sell a stand-alone accelerator product. You know, the only way you can get an accelerator is to buy our $9.95 Access and in effect add it on. So, that's the way the product is marketed. No, if at some point in the future, if we ever get to the point where we have a stand-alone accelerator product, that would be broken out separately. But as it relates to the people who go for a $14.95 product from us, they have to buy the access first, which is $9.95, then buy the $5.
Peter Mirsky - Oppenheimer & Co. - Analyst
Thanks very much, guys.
Operator
Andrew Tuttle of Jefferies.
Andrew Tuttle - Jefferies & Co. - Analyst
Nice quarter! Most of my questions were answered, but I guess you're probably not going to get any more specific on the add revenue in the first quarter as it relates to your 101 to 103 million guidance. I was wondering if there is going to be any pattern to the advertising revenue, going forward, given that a larger percentage of that will be related to Overture?
Mark Goldston - United Online - Chairman, President, CEO
Well, the advertising market, in general, as you know, has a seasonal component to it. The fourth quarter of the year, December quarter is typically a great quarter in the advertising market -- in general -- and they have been. You typically see, in the marketplace, back-to-school quarter and December quarter are good, and then the March quarters and the June quarter in the total advertising world -- if you look at publishing in general -- media the same way -- tend to be a little bit slower.
Having said that, we are -- (technical difficulty) -- a change in our advertising and commerce revenue mix because of the fact that General Motors is no longer there and so we free up that inventory to do other things with it, either sell it to outside vendors or if we think the ROI is better, use some of that inventory to market our own access and add-on subscription products, one.
Two, we have made a significant move in the Search area, internally, to try to maximize that opportunity. We, in the past -- while we were certainly happy with our Overture relationships, so this has nothing to do with them -- we really didn't spend a lot of time figuring out how to maximize Search. We had a Search box up on our site; we put it there, we got what we got and that was it. We have spent a ton of time internally, from a software standpoint, trying to find ways to enhance the users' Search experience. If you saw the total number of searches that were conducted in a quarter on NetZero, Juno and Bluelight, it's an astonishing number. We only got a fraction of those people to basically pay us. So, we've gone to great pains, from a software and a positioning standpoint, to try to capture more of that. Our new agreement with Overture and Yahoo allows us to be able to do that in a manner which is much more significant from a consumer experience standpoint I believe than it was before. We only did sponsored listings before; now, we've got sponsored listings and (indiscernible) algorithmic search. The quality of the product is decidedly better and so the need for the user to go outside of what we offer is a lot lower than it was before.
Charles Hilliard - United Online - CFO
One thing I would add onto that, Andrew, you asked about any seasonal patterns. If we are looking at Search (indiscernible) replacing GM as our Number One driver of add and commerce revenue, it will be tied more to seasonal usage patterns. Therefore, the more hours our pay and pre users (indiscernible) more interesting business -- the more hours they use, the more Search revenue would expect to get -- and vice versa.
Mark Goldston - United Online - Chairman, President, CEO
Thank you very much. Operator, we will take one last question and then we will let people get on.
Operator
Youssef Squali of First Albany Capital.
Youssef Squali - First Albany Corp. - Analyst
Just a quick follow-up -- looking at your free base, this is really the first time where you actually - or I should say this is the lowest loss that you've had in eight quarters, maybe even more. Can you explain why that is? What are you doing to actually grow or lose less subscribers there? Maybe more importantly, what are your plans to try to increase the migration? Historically, you've been very successful in migrating those guys (indiscernible) usage, etc. Are you at a point where you think you're going to do some of that?
Mark Goldston - United Online - Chairman, President, CEO
Number one is the fact that the number is lower, you're right -- is tremendous. Number two, we really didn't do anything. I would love o make up a reason for you but we really didn't do anything to make that happen. I think we're getting to a point where we've kind of gotten to a level there that seems to be relatively stable. You know, while it has declined and we planned for it t decline, the level of decline gets smaller, number one.
Number two, I think that that free base is typified by people who either only use it for e-mail or use it as a backup for travel, or a backup to broadband or a backup to their regular ISP, so it's become an amazingly (indiscernible). What is interesting (inaudible) the costs of free services was I think 1.9 million in the December quarter. If you go back to the June 2001 quarter, it cost us almost $23 million in costs of free services. Now, it's 1.9.
Now, with this Search focus that we've got, the free user just becomes a heck of a lot more profitable to us, between the low usage and the incremental monetization, than they ever were before. That free business that we originally invented as NetZero has actually become a tremendous business and a very profitable business and something that, while we looked at it over the last 24 months as purely a customer acquisition vehicle, has now become, on its own, a great revenue and profitability contributor.
In terms of going forward and increasing migration, it's a great question. We do intend to continue to aggressively market our accelerator product to the free base as well as $9.95. Previously, we probably spent more time just delivering the $9.95 message to the free base. Now, I think our goal may be to increase the focus on $9.95 because if those people have us as a backup and of those people are either on broadband or wanting to go to broadband, then maybe our promoting our accelerated dial services will have a more powerful, salient message to them than just offering them $9.95 dial-up.
Charles Hilliard - United Online - CFO
This free business, Youssef, makes us unique. We are the only nationwide branded free access offering. Today, we still get between 8 and 10,000 new free accounts created every single day without spending a nickel marketing it. That is a tremendous asset and a tremendous barrier-to-entry. Because if people want to talk about bringing prices down, well guess what? We own the lowest end of the market.
Mark Goldston - United Online - Chairman, President, CEO
So it is interesting, in closing on that, that the three elements that we sort of pioneered that took a lot of slack in the market, which was free Internet access, value-priced dial-up and accelerated dial-up, are now probably the three hottest areas in Internet access -- certainly in dial-up Internet access. We've gotten to a point where we really truly understand how to run those businesses profitably and efficiently and how to grow them.
Mark Goldston - United Online - Chairman, President, CEO
Operator, with that, we're going to close the call. I thank everybody for listing. A transcript, obviously, is available of this call. If you have any direct questions, I would call Brent Zimmerman, our VP of Investor Relations, and/or Charles Hilliard or myself and we will be happy to help you. Thank you very much and have a great day.
Operator
Thank you participating on today's conference call. You may now disconnect.
