Internet firm's gains even surprise owner

By Deborah Crowe, dcrowe@insidevc.com
September 25, 2003

Ventura County Star
http://www.insidevc.com

When Mark Goldston merged NetZero and Juno two years ago today, few outsiders believed he could turn two unprofitable providers of free and low-cost Internet access into a successful business.

Two years later, United Online is making a solid profit, boasting a growing paid-subscriber base and demonstrating remarkable cash flow for an online business.

"To be candid, I knew we would get here. I just thought it would have taken another year," Goldston said Wednesday after announcing a 3-for-2 stock split.

Management hopes to make the stock -- which closed at $40.23 on Wednesday -- more attractive to a larger pool of investors by offering increased liquidity, Goldston said.

The stock soared 280 percent in 2002 to end the year at $15.95. It was the Nasdaq's seventh-largest gainer last year and topped The Star's list of gainers among area public companies. Shares have risen another 152 percent this year.

The Westlake Village-based company has been dubbed the Southwest Airlines of the Internet for running a lean, efficient operation featuring low-cost, no-frills Internet access.

Subscribers have a choice of getting 10 hours a month of advertiser-subsidized access for free, paying $9.95 a month for regular dial-up service or $14.95 a month for "high-speed" dial-up access. The latter service is about 40 percent less than a comparable DSL connection.

The Internet service provider, with 2.55 million paid subscribers and another 2.6 million "free" users, appears to be luring Web surfers from rivals such as America Online and Earthlink, which charge more than double United Online's base rate.

The company's popularity with investors is no mystery to Michael Markowski, director of research at StockDiagnostics.com. It's the cash.

The company has a healthy bank account. United Online reported $193 million in cash at the end of its 2003 fiscal year on June 30. Goldston said the company usually generates anywhere from $15 million to $20 million of cash per quarter.

Wary investors in a post-Enron world more closely scrutinize a company's cash flow and price-to-earnings ratios, Markowski said, areas in which United Online fares well.

The company also has experienced a 65 percent growth in revenues in the last 12 months.

Earthlink, which has about 5 million subscribers, had only 6 percent revenue growth in the same period.

"They've got terrific cash flow for a Web company," said Markowski, noting that United Online is one of 49 Web companies out of 420 public Web companies that has generated positive cash flow from operations in its four most recent fiscal quarters.

"Their business model is cranking on all cylinders," Markowski said. "They're cutting into AOL's growth and taking customers away from both AOL and Earthlink. They're throwing off cash each quarter and investors like that."

Goldston said the company might eventually use some cash for acquisitions or to pay a dividend. The company's last acquisition was in November, when it bought Kmart's Bluelight.com -- with its 160,000 subscribers -- for $8.4 million.

"We wanted to take a year to digest what we have before we look at something else." Goldston said. "We want to give adequate attention to a new acquisition."

Two years ago, the fate of Goldston's company was far less assured. A month before the merger closed, shares were trading at 39 cents and had risen only to $1.84 at the time of the merger.

NetZero, launched in 1998 as free advertiser-supported Internet service, had struggled after the Internet bust in mid-2000 decimated the tech companies that comprised the bulk of its advertisers. New York-based competitor Juno was similarly treading water.

After the merger, the combined companies trimmed staff, invested in technology to boost productivity and tapped more overseas programming and customer service expertise. While 220 of the company's 451 employees work in Westlake Village, about 150 are based in Hyderabad, India.

"I think we have the highest revenue per employee on the Internet," Goldston said. "We have a maverick marketing philosophy, but a conservative business philosophy."