United Online Stock Price Climbs, Earnings Lag Behind By CARLOS MARTINEZ Staff Reporter When NetZero agreed to acquire struggling Internet service provider Juno Online Services Inc. last year, analysts were skeptical. They figured NetZero CEO Mark Goldston’s move would likely speed the demise of both companies. The argument heard on Wall Street was, two companies burning through cash as fast as they can don’t amount to one profitable merged enterprise. A year later, Goldston, CEO of the merged company, is close to having the proverbial last laugh as United Online Inc. experiences its most robust growth ever and its stock, which hit its 52-week high of $13.79 last month, has remained strong over the past month. “A lot of that criticism had a lot to do with all the tech mergers that were going on, and was not really about us,” said Goldston, who engineered the $70 million deal that closed Sept. 25, 2001. The day after the merger closed, United Online’s stock opened at $1.79 a share. On Sept. 27 of this year, it was trading at $9.60. “There was a lot of thinking that went on before the merger ever took place, and we figured out what we needed to do to become successful,” he said. Although, the company’s most recent quarterly numbers fall short of an operating profit, Goldston is confident it’s just a matter of time before his company is in the black. For the quarter ending June 30, United Online reported a $2.7 million loss on $54.4 million in revenue, which was an improvement on the previous quarter when it reported a $7.3 million loss on $50.9 million in revenue. Even that is a long way from a year earlier, when the then-separate companies reported combined revenues of $41.5 million, but lost $101 million in the quarter ending March 30, 2001. Todd Scott, an analyst with Morgan Stanley, has been persuaded. “You can see market share growth over a period of time because they’re fulfilling demand in their niche,” Scott said. “I see solid growth over time, but not a market leader.” Goldston himself shies away from suggestions United Online might challenge the proverbial ISP market leader, America Online, any time soon. “As long as we continue our steady growth and improve shareholder value, we’ll be happy. We don’t have to be the market leader to succeed,” he said. A successful strategy of cutting back on the free NetZero basic service and migrating those users to its pay service, which is $9.99 a month, has reduced the company’s losses and attracted the attention of analysts who are now bullish on the company’s future. “They’re cutting costs, streamlining the operation and they’re finding they can move people over from the free service to a paying one,” said Lanny Baker, an analyst with Salomon Smith Barney. United Online’s ability to keep costs down is especially attractive to Wall Street, Baker said. The company’s customer support, now outsourced and costing United Online $1.95 per minute, is unique among ISPs, giving the company a break from maintaining an expensive customer service unit, Baker added. With its no-frills $9.95 monthly service, United Online’s paid subscriber base has grown to 1.7 million users since the service began just before the merger, while its free service has shrunk to 3.1 million users from a high of 6.1 million a year ago. “From those numbers, we can tell that they’ve migrated over to our pay service,” Goldston said. But some analysts wonder whether the growth curve will continue. Youssef Squali, an analyst with First Albany Corp., said he was unsure United Online would be able to replenish its free subscriber base, which it then tries to migrate to its pay service. “It’s a tricky situation to attract enough people to a free service that is sometimes difficult to use,” Squali said of the free Internet service which features a permanent ad window and a steady stream of pop-up ads. Goldston is optimistic about the free service’s future. He pledged that it will continue to attract users as it has since the company was founded in 1998. “We’ve proven that people like the free service and we’ve also proven that we can then attract them to our pay service,” Goldston said. “We’re the Southwest Airlines of the industry. It’s no frills, low cost and high quality service.” If not necessarily adding to the improved prospects, certainly indicating Goldston’s confidence in the company is its bid to acquire Kmart Corp.’s Internet service provider, BlueLight.com. According to a United Online filing with the Securities and Exchange Commission, the company plans to submit a bid for the service at a Chicago bankruptcy court auction scheduled for Oct. 7. Kmart filed for Chapter 11 bankruptcy protection last year and has said it plans to auction the ISP in order to focus on its core business. Goldston would not speak specifically to the BlueLight.com issue, but he said United Online is looking to acquire other ISPs to improve its subscriber base and its market share. “We have $145 million in cash that we’d like to use to fund these acquisitions,” he said. Goldston said United Online plans to move heavily into the high-speed broadband market are still years away, but the company has taken some steps already by signing a deal with broadband reseller Comcast Corp. to provide service to its cable customers in Nashville and Indianapolis. Some analysts are unsure of how the low-cost ISP will respond to the more expensive broadband market. “It’s a different game altogether,” said First Albany’s Squali. United Online offers two broadband packages in its two markets. One goes for $39.95 a month; the other is $44.90 a month and includes a dial-up service. Nevertheless, broadband is on the back burner. For now, Goldston wants to focus on the company’s core pay dial-up service which he says is growing quickly. By the end of the quarter, the company hopes to add between 70,000 and 90,000 new pay subscribers, still a far cry from AOL’s 34 million users, Microsoft Corp.’s 8 million and Earthlink’s 4.9 million. But so what, Goldston asks. “We’re running the most cost-efficient company in the sector. We can grow the size of our user base and not add any more employees,” he said. “We know what have to do to succeed.”
