United Online Sinks Despite Gains

Revenue surges in the latest quarter, but the stock slumps.
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Updated from 11:41 a.m. EST

United Online

(UNTD)

sailed past expectations Wednesday morning, but its shares took a 5% hit anyway during a broad Nasdaq selloff.

For the fourth quarter ended Dec. 31, the provider of cut-rate Internet access service reported net income, based on generally accepted accounting principles, of $24.4 million, or 35 cents per share. Excluding a latest-quarter tax benefit, the company reported earnings per share of 21 cents, ahead of the First Call estimate of 17 cents and up from 13 cents in the corresponding quarter of 2002.

Revenue was $96.9 million, up 47% from the year-ago quarter and ahead of the Thomson First Call consensus of $95 million.

Shares in United Online declined along with the rest of the Nasdaq, dropping $1.02 to $17.80. The stock rose sharply early in 2003 before cresting just short of $30 last fall as investors worried about competitive issues.

For more than a year, operators of full-priced ISPs such as

EarthLink

(ELNK)

and

Time Warner's

(TWX)

AOL have been losing subscribers to both discount dial-up services and broadband ISPs operated by telcos and cable TV system operators.

Meanwhile, United Online -- which operates the Juno, NetZero and BlueLight discount ISP brands -- has clearly benefited from the migration away from EarthLink and AOL at the low end.

"What we've built here is a cash flow machine," CEO Mark Goldston told analysts on a call Wednesday. In his comments, he said value-priced ISPs could "easily" amount to 75% of the access market by the end of 2007. He also suggested that the company's accelerated dial-up service was a strong competitor with broadband services. A recent company survey indicated that 12% of its new accelerated dial-up customers came from broadband, he said.

As of Dec. 31, United Online counted 2.9 million total paying subscribers, up from 2.2 million a year earlier. The company added 172,000 paying subs in its latest quarter. Of that number, 2,000 appear to come from United Online's newly instituted practice of counting nonaccess subscribers to premium email services.

Approximately 22% of total pay subscribers at the end of the year also subscribed to at least one of the company's add-on services, such as accelerated dial-up and premium email. That penetration was up from 1% at the end of March, the company said.

Cash flow from operations amounted to $29 million for the fourth quarter, up from $21.3 million a year ago.

Looking ahead, the company forecasts first-quarter revenue of $101 million to $103 million, ahead of the First Call consensus for the quarter and at the high end of the range of estimates.

Adjusted operating income before depreciation and amortization, formerly known as EBITDA, will amount to $24 million to $25 million in the first quarter, the company says. That adjustment also excludes facility exit costs of $3.7 million. The company says it expects to relocated its Westlake Village headquarters to elsewhere in California. Analysts had been expecting oibda in the range of $21 million to $23 million.

For full 2004, the company forecasts adjusted OIBDA in the range of $100 million to $108 million, excluding $5.2 million in facility exit costs and $2.6 million in stock-based charges. Analyts surveyed by First Call had forecast OIBDA in the range of $97.5 million to $113 million.