United Online Dials for Dollars, But Future May Be Broadband
CORPORATE FOCUS
By KATE BERRY, Staff Reporter
There comes a time in the life of a public company when investors lose confidence, take profits and drive the stock downward.
Such is the case, at least for now, with low-cost Internet service provider United Online Inc.
Shares of Westlake Village-based United Online have fallen 64 percent in the past five months to a split-adjusted $16.94 a share (the company had a 3-for-2 stock split Nov. 3). As recently as September, the stock was trading at a split-adjusted $28.
The sell-off comes in the face of a five-fold jump in fourth-quarter net income from the year-earlier period, to $24.4 million. Revenue jumped 47 percent, to $96.9 million.
“I’m stunned that the stock has responded the way it did,” said Mark Goldston, United Online’s chief executive, who owns 4.5 million shares. “It was the best quarter we ever had, we blew people away. The reality of it is a lot of other factors go into the stock market in general it’s been a funky place lately.”
Jim Friedland, an analyst at WR Hambrecht & Co., is one of three analysts who have put a “hold” on the stock (11 cover the company). He believes the biggest challenge is the business itself dialup Internet service.
Though many Internet users haven’t yet moved to expensive broadband service, some analysts project that dialup, with roughly 45 million subscribers today, could fall by almost half within the next few years.
Cable modems, DSL and new broadband access technologies are expected to take the place of dialup as prices drop in the next three years.
Friedland also believes that 2004 will be United Online’s peak year for new subscribers. He anticipates new subscriptions will fall by 35 percent from current levels in 2005.
“We believe United Online’s growth will slow dramatically within the next 12 to 18 months as dialup users continue to migrate to broadband and competition in the dialup market increases,” he wrote in a recent report.
Low-cost approach
United Online, with 2.9 million subscribers, was formed with the merger of pioneering free Internet access companies NetZero and Juno. It later branched into cheap dialup service as low as $9.95 a month. But AOL, the Time Warner Inc. unit and No. 1 ISP with 44 percent market share, and EarthLink Inc., with 13 percent, still control more than half of the dialup market.
Moreover, EarthLink has its own low-cost service, the PeoplePC brand, and AOL plans to offer a Netscape-branded $9.95 a month product in the near future.
Though United Online cannot compete with bigger broadband services, Goldston cites reports showing an additional 20 million online users are projected by 2007 and that many of those users, who have lower income levels, will gravitate toward low-cost dialup services such as Juno, NetZero or BlueLight, its three brands.
Moreover, the company continues to throw off an enormous amount of cash flow.
Its free dial-up service alone generated $9 million in advertising revenue during the fourth quarter, and the cost of running the service was just $1.9 million. Without any debt, investors can expect United Online to be looking for acquisitions to grow market share (now just 6 percent).
Indeed, United Online has come a long way since 2001, when Goldston stood in front a Nasdaq delisting board because the former NetZero was trading at just 39 cents a share. A month later, the company finalized its plans to merge with Juno, which sent the stock up to $1.22 a share, split-adjusted.
“Two years ago we had a market cap of just $70 million and today it’s over $1 billion,” he said. “The other guys are scrambling to put more ingredients in their product and they can chase us, but the reality is they will make less money because they’re selling the same product at a higher cost.”
But some analysts point out that United Online will not be able to sustain operating margins of 23 percent within the next year because its marketing expenses are skyrocketing.
Nevertheless, the company is in an expansion mode and expects to add between 60 to 80 new technology employees software developers, engineers and quality control supervisors to its current staff of 499.
There are also plans to move its headquarters from Westlake Village to a facility closer to Los Angeles, perhaps in the San Fernando Valley.
