Juno Online Services
face a grueling challenge in their joint bid for survival. But a quick look at some of the numbers behind their deal suggests that their goal isn't unreachable.
The companies, each of which offers free Internet access as well as budget-priced online service,
announced Thursday night they plan to merge. It's their hope that by pooling cash, cutting costs and sharing resources, they'll be able to eke out a business in the free, advertising-supported Internet service provider business that has claimed several victims during the past few years.
"We believe that the Internet advertising market ... is going to get better," NetZero CEO Mark Goldston told Wall Street analysts Friday. "We know it will."
The market appears to be similarly optimistic. Sell-side analysts on the conference call seemed reasonably encouraging about the deal; NetZero rose 23% Friday to close at $1.17, while Juno rose 21% to $1.79.
The question, of course, is whether Juno and NetZero, forming a new company called
, will be able to outlast the drought until the rain returns.
A look at the revenue numbers indicates that NetZero, trumpeted as bringing the better sales team to United Online, has plenty of opportunity to improve the yield of Juno's subscriber base. In the fiscal quarter ended March 2001, NetZero reported advertising and commerce revenue of $11 million off a base of 3.9 million active subscribers in the month of March. In other words, the company was able to reap about $2.82 in revenue per quarter from each active user. Meanwhile, Juno -- with 4.1 million active users in March, yet only $5.8 million in advertising and transaction fees for the quarter -- reported only $1.41 in revenue per subscriber, making it exactly half as productive as Juno's sales force.
The comparisons, admittedly, aren't quite that apples-to-apples. Juno and NetZero sell different types of ad availabilities, for starters. And though NetZero's barter revenue is minuscule, about 9% of Juno's advertising and commerce revenue is in the form of barter -- that is, not cash. Subtracting out the noncash revenue, Juno's reaping only $1.29 in cash per active user. Because 910,000 of Juno's 4.1 million paying subscribers are likely being forced to sit through fewer advertisements than their freeloading brethren, perhaps Juno's sales force shouldn't be held accountable for selling ads to show them. Even so, Juno is bringing in $1.65 in cash revenue per quarter to its nonpaying customers. In other words, NetZero has a potential turnaround here. And combining the two subscriber bases makes the audience more attractive than if they were in two pieces, say the companies. On the call, Goldston said advertiser interest has been increasing "exponentially" with each million NetZero adds to its user base.
Revenues are only part of the story. But the expense savings from the merger -- and United Online's ability to chop them below the revenue numbers -- are a little harder to quantify. The companies declined to specify how much savings they'll be able to achieve from the merger, other than that they'll number in the tens of millions per year and that about half of them will be in the form of telecommunications costs. Currently, Juno, believed to have a better hand on telecom costs, reported operating costs for its free service of $6.3 million for the quarter ended March 31 -- at least a half a million dollars above revenue from the free service.
So then the issue comes down to money, and whether it will last United Online until it achieves profitability in these capital-starved times. Together, as of March 31, the companies had a little more than $197 million in unrestricted cash and equivalents, with most of that coming from NetZero's treasury. Meanwhile, they were burning a total of $27 million a quarter in cash. Subtract out $20 million to $25 million cash in anticipated merger costs, and you've got at least six quarters of cash for United Online to burn before turning cash-flow positive. (NetZero suggests its burn will be worse in the current quarter because of an old marketing agreement, but that things will improve as that expires by midyear.) In other words, United Online has through the third quarter of 2002 to go cash-flow positive.
It would help if all the lines on the graph keep tilting in the right direction. Unfortunately, NetZero's active-user base was only slightly larger in March than it was in December; worse, it dropped from 3.9 million in March to 3.7 million in April. Juno said in April it expected its active-subscriber base to decline over the next few quarters as it nudges heavy users of its free service to either start paying up for unlimited access or rein in their appetites.
In a research note issued Friday,
J.P. Morgan H&Q
analyst Paul Noglows expressed cautious optimism about the deal, the success of which he says depends in great part on United Online's ability to migrate users of its free services to paying ones. "From a scale and consolidation standpoint, we think the merger makes sense," Noglows writes. "But we feel it prudent to wait for management's further financial guidance and for early signs of execution on the cost and migration fronts before making any change to our current stance." Noglows, whose firm has been an underwriter for both companies, has a market-perform rating on NetZero and no rating on Juno.
So the question remains: Is freedom just another word for nothing left to lose? Or will Juno and NetZero lose everything?