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Despite Its Wall Street Woes, United Online Competitive

Despite Its Wall Street Woes, United Online Competitive CORPORATE FOCUS By SHELLY GARCIA, Senior Reporter Watching the Internet service market is a little like playing a game of telephone. By the time word of a new price plan gets around, it starts to sound like all the other players are doomed. Lately, it has begun to look like United Online Inc. is caught in just such a game. The company’s stellar earnings and revenue results don’t seem to matter to Wall Street, which has shunned the stock ever since AOL announced it would introduce a new, lower cost service and broadband providers began offering discounted prices on their Internet services as well. Since the price-cutting began last fall, shares in United Online have lost nearly 40 percent of their value, falling from a high of nearly $28 in September to the mid-teen range recently. On Wednesday, Dec. 31, shares in United Online closed at $16.79 per share. “You’ve seen the stock take its lumps,” said Peter Mirsky, digital commerce analyst with Oppenheimer & Co. in New York, which does not hold a position or do any banking business with United Online. “It sort of ignores the fact that even the big competitors, while they can play in the value price space, they are somewhat hamstrung by their legacy core premium price product.” United Online, which was formed in 2001 by the merger of Juno Online and NetZero, carved out a niche Mirsky describes as the Wal-Mart of the Internet, offering a no-frills dial-up service at $9.95 a month. The discounted pricing helped the company to compete against far larger, entrenched players like AOL and Earthlink, which were charging an additional $10 or more per month for their services. The subscriber base at Westlake Village-based United Online has been growing exponentially as a result, up 47 percent to 2.7 million subscribers as of the quarter ended Sept. 30, compared to the same period last year. For the same period in September, the company’s fiscal first quarter, United Online recorded net income of $8.9 million or $0.13 per diluted share, (after adjusting for a three-for-two stock split in November) on revenues of $88.8 million. That compares with earnings of $1.5 million or $0.02 per share on revenues of $58.1 million for the like period last year. In its guidance for the quarter ended December 30, 2003, United Online projected operating income of $13.4 million to $14.4 million on revenues ranging between $93 million and $95 million. That would compare with operating income before taxes of $5.2 million on revenues of $65.8 million for the same quarter last year. Higher-speed dial-up The recent growth, in part, has come from a new service, so-called “accelerated” dial-up, a speedier version offered at about $5 above the basic price, which now accounts for about 15 percent of United Online’s subscribers. But even as United Online has increased its penetration, rivals have moved into lower-priced alternatives. Broadband companies including SBC Communications Inc. and BellSouth Corp. are promoting cut-rate services and AOL announced plans to offer a $9.95 service dial-up service. That has led to the jitters on Wall Street. “I would call it a perception issue,” said Mirsky. “Their numbers have been very strong.” Many say the competition is more likely to impact premium dial-up services, not United Online, which never really competed with broadband and still can go toe-to-toe with competitors on basic dial-up, a theory backed up by the company’s performance. “We have been getting a hail storm of competition, and our business went up almost 50 percent in paid subscribers,” said Mark R. Goldston, United Online’s chairman and CEO. “And look at our profitability. So for me it was astonishing that our stock would have taken the hits it took, and it was based, in my view, on inane announcements.” That the stock price has remained depressed may be due to nothing more than a rash of profit taking by Wall Street, Goldston added, particularly since the company’s stock has been one of the winners on the street. Despite the recent declines, the company’s stock price is still trading at twice what it traded at last January. “I think there are a lot of people who made a lot of money during the 12-month period on United Online stock, who said, ‘hey, this has been great. I’m going to take my winnings and lock them in,'” Goldston said. “It doesn’t mean that’s the entire case, but there’s a strong argument to be made for that scenario.”

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