Is United Online Doing a Roll-up?

United Online, Inc. (UNTD) is a provider of connectivity and online media services and is now famous for its withdrawn Classmates.com IPO. Its primary Content & Media segment services include social networking site Classmates.com which it acquired for $131.4 million in November 2004 and online loyalty marketing service MyPoints. Their Communications segment includes Internet access and email services through NetZero and Juno.

For Q1, 2008, the Company reported revenues of $121.8 million, beating the market’s expectations of $118.8 million and recording a reduction of 6% over the year. Contribution from Classmates Media increased to 42.6% for the quarter compared to 32.7% the previous year.

The EPS grew by 14.8% to $0.31 from $0.27 the year before. The street was looking for an EPS of $0.24 for the quarter.

Going forward, for Q2, they expect revenues of $117 – $121 million, with consolidated adjusted OIBDA of $34 – $38 million. For the year, they projected a decline in the revenue with consolidated adjusted OIBDA of $147 – $152 million.

During the quarter, ARPU for Classmates was $3.10, down 4% from $3.22 the previous year and sequentially down 5% from $3.26. Despite the economic pressures, they reported growth in paid accounts of 322,000 recording the single highest quarterly increase ever. United had earlier indicated that they were going to spin out Classmates, and take it public separately. Later, they withdrew the IPO amidst concerns that social media monetization is an iffy affair.

Anyway, Classmates claims that their record growth was possible due to the web site redesign which makes the user experience more compelling. They launched a new version of the member profile page that helps users create more user-generated content and interact with other members frequently. They plan to launch similar features throughout the year on both Classmates.com and their international site StayFriends.

On the Communications segment, they reiterated their confidence in the long life of the dial up connection. Citing the lack of broadband penetration outside of the major metropolitan areas and unavailability of Internet access options priced at less than $10 a month as reasons for their confidence, United Online reminds us that dial up internet still exists as a lucrative business in the U.S.

Recently, United Online also announced the acquisition of FTD Group which is a leading provider of floral products in the U.S., Canada, the U.K. and the Republic of Ireland. The company has a significant presence on the Internet with 90% of their consumer segment orders originating online. The acquisition is a good stepping stone for UNTD into retail. Given that only 12% of the $20 billion floral market is currently online, the market prospects are strong.

The stock rose 8% to $11.32 on the announcement of its results and is trading at similar levels right now. It’s a lightly traded stock, but it appears that the company is using its $800 Million market cap to acquire interesting internet brands. I have always felt that roll-ups are a fine way to build internet portfolios, and if United Online has abandoned its idea of a Classmates IPO, and instead, is doing a roll-up, I’d say, that is a smart strategy. In that case, I’d give the stock a Buy rating.

Another leading online company that recently announced their Q1 results was Sina Corporation (SINA), China’s Internet portal. Their revenues increased 39% over the year to $71.3 million and were substantially higher than the market’s expectations of $67.5 million. EPS also grew from the previous year’s $0.19 to $0.33 recording a 74% increase during the year. The street was expecting an EPS of $0.24.

Segment wise, Advertising revenues increased 51% over the year to $47.8 million while the Non-advertising revenues increased 20% to $23.5 million. During the quarter, they launched SINA space and SINA TV which added to their web 2.0 product lines.

The Company estimates revenues for Q2 in the range of $88.0 – $90.0 million, with advertising revenues to be between $64.0 – $65.0 million.

With the upcoming Beijing Olympic Games, the online advertising opportunities are bound to increase. They recently announced the launch of their China news website in English which can expect good traffic on account of the Games as well.

The stock had touched a 52 week low of $32 in March this year but is currently trading at $46 levels.