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EXCEL - IDEA: XBRL DOCUMENT - UNITED ONLINE INC | Financial_Report.xls |
EX-31.2 - EX-31.2 - UNITED ONLINE INC | a2200767zex-31_2.htm |
EX-10.4 - EX-10.4 - UNITED ONLINE INC | a2200767zex-10_4.htm |
EX-10.3 - EX-10.3 - UNITED ONLINE INC | a2200767zex-10_3.htm |
EX-10.1 - EX-10.1 - UNITED ONLINE INC | a2200767zex-10_1.htm |
EX-32.1 - EX-32.1 - UNITED ONLINE INC | a2200767zex-32_1.htm |
EX-10.2 - EX-10.2 - UNITED ONLINE INC | a2200767zex-10_2.htm |
EX-31.1 - EX-31.1 - UNITED ONLINE INC | a2200767zex-31_1.htm |
EX-32.2 - EX-32.2 - UNITED ONLINE INC | a2200767zex-32_2.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) | ||
ý |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
For the Quarterly Period Ended September 30, 2010 |
||
Or |
||
o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
For the transition period from to |
Commission file number 000-33367
UNITED ONLINE, INC.
(Exact name of Registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
77-0575839 (I.R.S. Employer Identification No.) |
|
21301 Burbank Boulevard, Woodland Hills, California (Address of principal executive office) |
91367 (Zip Code) |
(818) 287-3000
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ý | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
There were 85,970,433 shares of the Registrant's common stock outstanding at October 29, 2010.
UNITED ONLINE, INC.
INDEX TO FORM 10-Q
For the Quarter Ended September 30, 2010
In this document, "United Online," "UOL," the "Company," "we," "us" and "our" refer to United Online, Inc. and its subsidiaries.
This Quarterly Report on Form 10-Q and the documents incorporated herein by reference contain forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, as amended, based on our current expectations, estimates and projections about our operations, industry, financial condition, performance, results of operations, and liquidity. Statements containing words such as "may," "believe," "anticipate," "expect," "intend," "plan," "project," "projections," "business outlook," "estimate," or similar expressions constitute forward-looking statements. These forward-looking statements include, but are not limited to, statements about future financial performance; revenues; segment metrics; operating expenses; market trends, including those in the markets in which we compete; operating and marketing efficiencies; liquidity; cash flows and uses of cash; dividends; capital expenditures; depreciation and amortization; tax payments; foreign currency exchange rates; hedging arrangements; our ability to repay indebtedness, pay dividends and invest in initiatives; our products and
2
services; pricing; competition; strategies; and new business initiatives, products, services, and features. Potential factors that could affect the matters about which the forward-looking statements are made include, among others, the factors disclosed in the section entitled "Risk Factors" in this Quarterly Report on Form 10-Q and additional factors that accompany the related forward-looking statements in this Quarterly Report on Form 10-Q and our other filings with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as the date hereof. Any such forward-looking statements are not guarantees of future performance or results and involve risks and uncertainties that may cause actual performance and results to differ materially from those predicted. Reported results should not be considered an indication of future performance. Except as required by law, we undertake no obligation to publicly release the results of any revision to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
3
UNITED ONLINE, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
|
September 30, 2010 | December 31, 2009 | |||||||
---|---|---|---|---|---|---|---|---|---|
Assets |
|||||||||
Current assets: |
|||||||||
Cash and cash equivalents |
$ | 89,680 | $ | 115,509 | |||||
Accounts receivable, net of allowance for doubtful accounts |
45,096 | 55,874 | |||||||
Deferred tax assets, net |
15,711 | 15,797 | |||||||
Other current assets |
20,344 | 25,599 | |||||||
Total current assets |
170,831 | 212,779 | |||||||
Property and equipment, net |
62,092 | 63,547 | |||||||
Goodwill |
460,293 | 464,151 | |||||||
Intangible assets, net |
268,511 | 292,520 | |||||||
Other assets |
14,074 | 16,937 | |||||||
Total assets |
$ | 975,801 | $ | 1,049,934 | |||||
Liabilities and Stockholders' Equity |
|||||||||
Current liabilities: |
|||||||||
Accounts payable |
$ | 53,214 | $ | 71,668 | |||||
Accrued liabilities |
47,322 | 50,428 | |||||||
Member redemption liability |
19,278 | 20,666 | |||||||
Deferred revenue |
72,067 | 74,294 | |||||||
Current portion of long-term debt |
4,531 | 24,383 | |||||||
Total current liabilities |
196,412 | 241,439 | |||||||
Member redemption liability |
4,796 | 5,089 | |||||||
Deferred revenue |
3,293 | 3,340 | |||||||
Long-term debt, net of discounts |
272,554 | 304,563 | |||||||
Deferred tax liabilities, net |
40,477 | 44,788 | |||||||
Other liabilities |
18,280 | 18,064 | |||||||
Total liabilities |
535,812 | 617,283 | |||||||
Commitments and contingencies |
|||||||||
Stockholders' equity: |
|||||||||
Common stock |
9 | 8 | |||||||
Additional paid-in capital |
494,285 | 518,580 | |||||||
Accumulated other comprehensive loss |
(32,668 | ) | (26,963 | ) | |||||
Accumulated deficit |
(21,637 | ) | (58,974 | ) | |||||
Total stockholders' equity |
439,989 | 432,651 | |||||||
Total liabilities and stockholders' equity |
$ | 975,801 | $ | 1,049,934 | |||||
The
accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.
4
UNITED ONLINE, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
|
Quarter Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | 2010 | 2009 | |||||||||||
Revenues: |
|||||||||||||||
Services |
$ | 115,781 | $ | 138,337 | $ | 363,734 | $ | 434,919 | |||||||
Products |
77,760 | 77,869 | 324,218 | 305,723 | |||||||||||
Total revenues |
193,541 | 216,206 | 687,952 | 740,642 | |||||||||||
Operating expenses: |
|||||||||||||||
Cost of revenuesservices |
25,008 | 26,274 | 75,688 | 83,879 | |||||||||||
Cost of revenuesproducts |
59,386 | 58,288 | 244,799 | 223,466 | |||||||||||
Sales and marketing |
34,783 | 46,146 | 133,926 | 155,584 | |||||||||||
Technology and development |
14,334 | 15,700 | 42,329 | 49,637 | |||||||||||
General and administrative |
26,333 | 28,111 | 84,576 | 88,632 | |||||||||||
Amortization of intangible assets |
8,020 | 9,013 | 24,298 | 26,252 | |||||||||||
Restructuring charges |
70 | | 1,061 | | |||||||||||
Total operating expenses |
167,934 | 183,532 | 606,677 | 627,450 | |||||||||||
Operating income |
25,607 | 32,674 | 81,275 | 113,192 | |||||||||||
Interest income |
382 | 498 | 1,259 | 1,184 | |||||||||||
Interest expense |
(5,471 | ) | (7,542 | ) | (18,934 | ) | (24,547 | ) | |||||||
Other income (expense), net |
(40 | ) | 567 | 95 | 698 | ||||||||||
Income before income taxes |
20,478 | 26,197 | 63,695 | 90,527 | |||||||||||
Provision for income taxes |
8,319 | 10,042 | 26,358 | 38,052 | |||||||||||
Net income |
$ | 12,159 | $ | 16,155 | $ | 37,337 | $ | 52,475 | |||||||
Income allocated to participating securities |
(747 | ) | (1,222 | ) | (2,334 | ) | (3,491 | ) | |||||||
Net income applicable to common stockholders |
$ | 11,412 | $ | 14,933 | $ | 35,003 | $ | 48,984 | |||||||
Basic net income per common share |
$ | 0.13 | $ | 0.18 | $ | 0.40 | $ | 0.59 | |||||||
Shares used to calculate basic net income per common share |
86,649 | 84,028 | 86,479 | 83,372 | |||||||||||
Diluted net income per common share |
$ | 0.13 | $ | 0.18 | $ | 0.40 | $ | 0.58 | |||||||
Shares used to calculate diluted net income per common share |
87,069 | 84,688 | 87,134 | 83,807 | |||||||||||
Dividends paid per common share |
$ | 0.10 | $ | 0.10 | $ | 0.30 | $ | 0.30 | |||||||
The
accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.
5
UNITED ONLINE, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
|
Quarter Ended September 30, |
Nine Months Ended September 30, |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | 2010 | 2009 | ||||||||||
Net income |
$ | 12,159 | $ | 16,155 | $ | 37,337 | $ | 52,475 | ||||||
Foreign currency translation |
8,862 | (4,804 | ) | (5,705 | ) | 18,406 | ||||||||
Comprehensive income |
$ | 21,021 | $ | 11,351 | $ | 31,632 | $ | 70,881 | ||||||
The
accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.
6
UNITED ONLINE, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
|
Common Stock | |
Accumulated Other Comprehensive Loss |
|
|
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Additional Paid-In Capital |
Accumulated Deficit |
Total Stockholders' Equity |
|||||||||||||||||
|
Shares | Amount | ||||||||||||||||||
Balance at January 1, 2010 |
84,958 | $ | 8 | $ | 518,580 | $ | (26,963 | ) | $ | (58,974 | ) | $ | 432,651 | |||||||
Exercises of stock options |
77 | | 254 | | | 254 | ||||||||||||||
Issuance of common stock through employee stock purchase plan |
573 | | 2,612 | | | 2,612 | ||||||||||||||
Vesting of restricted stock units |
2,119 | 1 | (1 | ) | | | | |||||||||||||
Repurchases of common stock |
(2,162 | ) | | (19,125 | ) | | | (19,125 | ) | |||||||||||
Dividends and dividend equivalents paid on shares outstanding and restricted stock units |
| | (27,804 | ) | | | (27,804 | ) | ||||||||||||
Change in dividend equivalents payable on restricted stock units |
| | 173 | | | 173 | ||||||||||||||
Stock-based compensation |
| | 20,913 | | | 20,913 | ||||||||||||||
Foreign currency translation |
| | | (5,705 | ) | | (5,705 | ) | ||||||||||||
Tax shortfalls from equity awards |
| | (1,317 | ) | | | (1,317 | ) | ||||||||||||
Net income |
| | | | 37,337 | 37,337 | ||||||||||||||
Balance at September 30, 2010 |
85,565 | $ | 9 | $ | 494,285 | $ | (32,668 | ) | $ | (21,637 | ) | $ | 439,989 | |||||||
The
accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.
7
UNITED ONLINE, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
Nine Months Ended September 30, |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | ||||||||
Cash flows from operating activities: |
||||||||||
Net income |
$ | 37,337 | $ | 52,475 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||
Depreciation and amortization |
44,503 | 45,061 | ||||||||
Stock-based compensation |
20,913 | 29,204 | ||||||||
Provision for doubtful accounts receivable |
4,070 | 4,687 | ||||||||
Accretion of discounts and amortization of debt issue costs |
3,337 | 3,883 | ||||||||
Deferred taxes, net |
(4,513 | ) | (4,407 | ) | ||||||
Tax shortfalls from equity awards |
(521 | ) | (2,704 | ) | ||||||
Excess tax benefits from equity awards |
(442 | ) | (94 | ) | ||||||
Other |
399 | 318 | ||||||||
Changes in operating assets and liabilities: |
||||||||||
Accounts receivable |
6,414 | 2,211 | ||||||||
Other assets |
7,280 | 10,312 | ||||||||
Accounts payable and accrued liabilities |
(20,504 | ) | (33,933 | ) | ||||||
Member redemption liability |
(1,681 | ) | (1,086 | ) | ||||||
Deferred revenue |
(1,624 | ) | (1,254 | ) | ||||||
Other liabilities |
453 | (398 | ) | |||||||
Net cash provided by operating activities |
95,421 | 104,275 | ||||||||
Cash flows from investing activities: |
||||||||||
Purchases of property and equipment |
(19,064 | ) | (17,190 | ) | ||||||
Purchases of rights, content and intellectual property |
(2,205 | ) | | |||||||
Proceeds from sales of assets, net |
219 | 14 | ||||||||
Net cash used for investing activities |
(21,050 | ) | (17,176 | ) | ||||||
Cash flows from financing activities: |
||||||||||
Payments on term loans |
(54,819 | ) | (42,930 | ) | ||||||
Proceeds from exercises of stock options |
254 | 535 | ||||||||
Proceeds from employee stock purchase plan |
2,612 | 2,490 | ||||||||
Repurchases of common stock |
(19,125 | ) | (5,217 | ) | ||||||
Dividends and dividend equivalents paid on outstanding shares and restricted stock units |
(27,804 | ) | (27,118 | ) | ||||||
Excess tax benefits from equity awards |
442 | 94 | ||||||||
Net cash used for financing activities |
(98,440 | ) | (72,146 | ) | ||||||
Effect of foreign currency exchange rate changes on cash and cash equivalents |
(1,760 | ) | 1,957 | |||||||
Change in cash and cash equivalents |
(25,829 | ) | 16,910 | |||||||
Cash and cash equivalents, beginning of period |
115,509 | 104,514 | ||||||||
Cash and cash equivalents, end of period |
$ | 89,680 | $ | 121,424 | ||||||
Supplemental disclosure of non-cash investing and financing activities: |
||||||||||
Increase (decrease) in dividend equivalents payable on restricted stock units |
$ | (173 | ) | $ | 146 |
The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.
8
UNITED ONLINE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION, ACCOUNTING POLICIES, AND RECENT ACCOUNTING PRONOUNCEMENTS
Description of Business
United Online, Inc. (together with its subsidiaries, "United Online", "UOL" or the "Company") is a leading provider of consumer products and services over the Internet through a number of brands, including FTD, Interflora, Classmates, StayFriends, NetZero, and MyPoints. The Company reports its business in three reportable segments: FTD, Classmates Media and Communications. The Company's FTD segment provides floral and related products and services to consumers and retail florists, as well as to other retail locations offering floral and related products and services. The Company's Classmates Media services are online social networking and online loyalty marketing. The Company's primary Communications services are Internet access and email. On a combined basis, the Company's web properties attract a significant number of Internet users and the Company offers a broad array of Internet marketing services for advertisers.
Basis of Presentation
The Company's unaudited condensed consolidated financial statements for the quarters and nine months ended September 30, 2010 and 2009 have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"), including those for interim financial information, and with the instructions for Form 10-Q and Article 10 of Regulation S-X issued by Securities and Exchange Commission ("SEC"). Accordingly, they do not include all of the information and note disclosures required by GAAP for complete financial statements. All significant intercompany accounts and transactions have been eliminated in consolidation. The unaudited condensed consolidated financial statements, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for a fair statement of the results for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for any future periods. The unaudited condensed consolidated balance sheet information at December 31, 2009 is derived from the Company's audited consolidated financial statements, filed on February 23, 2010 with the SEC in the Company's Annual Report on Form 10-K for the year ended December 31, 2009, but does not include all of the disclosures required by GAAP.
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent liabilities and the reported amounts of revenues and expenses. Actual results could differ from these estimates and assumptions. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2009 included in the Company's Annual Report on Form 10-K.
The most significant areas of the unaudited condensed consolidated financial statements that require management judgment include the Company's revenue recognition, allocation of purchase price in business combinations, goodwill and indefinite-lived intangible assets, definite-lived intangible assets and other long-lived assets, member redemption liability, income taxes, and legal contingencies.
ReclassificationsCertain prior period amounts have been reclassified to conform to the current period presentation. These changes had no impact on the previously reported consolidated results of operations or stockholders' equity.
9
UNITED ONLINE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION, ACCOUNTING POLICIES, AND RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
Recent Accounting Pronouncements
Credit Quality of Financing Receivables and the Allowance for Credit LossesIn July 2010, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, as codified in Accounting Standards Codification ("ASC") 310. This update enhances the disclosures about the credit quality of financing receivables and the allowance for credit losses, including required disclosures related to credit quality indicators, past due information and modifications of financing receivables. This update will be effective in the quarter ending December 31, 2010 and will affect the disclosures in the Company's Annual Report on Form 10-K for the year ending December 31, 2010.
2. SEGMENT INFORMATION
Segment revenues and segment income from operations were as follows (in thousands):
|
Quarter Ended September 30, 2010 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
FTD | Classmates Media | Communications | Total | ||||||||||
Services |
$ | 27,145 | $ | 33,203 | $ | 32,896 | $ | 93,244 | ||||||
Products |
77,760 | | | 77,760 | ||||||||||
Advertising |
141 | 15,902 | 7,269 | 23,312 | ||||||||||
Total segment revenues |
$ | 105,046 | $ | 49,105 | $ | 40,165 | $ | 194,316 | ||||||
Segment income from operations |
$ | 12,680 | $ | 11,790 | $ | 15,795 | $ | 40,265 | ||||||
|
Quarter Ended September 30, 2009 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
FTD | Classmates Media | Communications | Total | ||||||||||
Services |
$ | 28,535 | $ | 38,283 | $ | 42,050 | $ | 108,868 | ||||||
Products |
77,869 | | | 77,869 | ||||||||||
Advertising |
1,122 | 20,399 | 8,629 | 30,150 | ||||||||||
Total segment revenues |
$ | 107,526 | $ | 58,682 | $ | 50,679 | $ | 216,887 | ||||||
Segment income from operations |
$ | 15,253 | $ | 16,998 | $ | 15,613 | $ | 47,864 | ||||||
|
Nine Months Ended September 30, 2010 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
FTD | Classmates Media | Communications | Total | ||||||||||
Services |
$ | 89,421 | $ | 100,368 | $ | 105,179 | $ | 294,968 | ||||||
Products |
324,218 | | | 324,218 | ||||||||||
Advertising |
763 | 48,023 | 22,266 | 71,052 | ||||||||||
Total segment revenues |
$ | 414,402 | $ | 148,391 | $ | 127,445 | $ | 690,238 | ||||||
Segment income from operations |
$ | 44,302 | $ | 32,844 | $ | 48,632 | $ | 125,778 | ||||||
10
UNITED ONLINE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SEGMENT INFORMATION (Continued)
|
Nine Months Ended September 30, 2009 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
FTD | Classmates Media | Communications | Total | ||||||||||
Services |
$ | 93,690 | $ | 115,222 | $ | 135,757 | $ | 344,669 | ||||||
Products |
305,723 | | | 305,723 | ||||||||||
Advertising |
5,316 | 60,088 | 27,047 | 92,451 | ||||||||||
Total segment revenues |
$ | 404,729 | $ | 175,310 | $ | 162,804 | $ | 742,843 | ||||||
Segment income from operations |
$ | 58,392 | $ | 43,276 | $ | 56,585 | $ | 158,253 | ||||||
A reconciliation of segment revenues to consolidated revenues was as follows for each period presented (in thousands):
|
Quarter Ended September 30, |
Nine Months Ended September 30, |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | 2010 | 2009 | ||||||||||
Segment revenues: |
||||||||||||||
FTD |
$ | 105,046 | $ | 107,526 | $ | 414,402 | $ | 404,729 | ||||||
Classmates Media |
49,105 | 58,682 | 148,391 | 175,310 | ||||||||||
Communications |
40,165 | 50,679 | 127,445 | 162,804 | ||||||||||
Intersegment eliminations |
(775 | ) | (681 | ) | (2,286 | ) | (2,201 | ) | ||||||
Consolidated revenues |
$ | 193,541 | $ | 216,206 | $ | 687,952 | $ | 740,642 | ||||||
A reconciliation of segment operating expenses (which excludes depreciation and amortization of intangible assets) to consolidated operating expenses was as follows for each period presented (in thousands):
|
Quarter Ended September 30, |
Nine Months Ended September 30, |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | 2010 | 2009 | ||||||||||
Segment operating expenses: |
||||||||||||||
FTD |
$ | 92,366 | $ | 92,273 | $ | 370,100 | $ | 346,337 | ||||||
Classmates Media |
37,315 | 41,684 | 115,547 | 132,034 | ||||||||||
Communications |
24,370 | 35,066 | 78,813 | 106,219 | ||||||||||
Total segment operating expenses |
154,051 | 169,023 | 564,460 | 584,590 | ||||||||||
Depreciation |
6,604 | 6,177 | 20,168 | 18,809 | ||||||||||
Amortization of intangible assets |
8,054 | 9,013 | 24,335 | 26,252 | ||||||||||
Intersegment eliminations |
(775 | ) | (681 | ) | (2,286 | ) | (2,201 | ) | ||||||
Consolidated operating expenses |
$ | 167,934 | $ | 183,532 | $ | 606,677 | $ | 627,450 | ||||||
11
UNITED ONLINE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SEGMENT INFORMATION (Continued)
A reconciliation of segment income from operations (which excludes depreciation and amortization of intangible assets) to consolidated operating income was as follows for each period presented (in thousands):
|
Quarter Ended September 30, |
Nine Months Ended September 30, |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | 2010 | 2009 | ||||||||||
Segment income from operations: |
||||||||||||||
FTD |
$ | 12,680 | $ | 15,253 | $ | 44,302 | $ | 58,392 | ||||||
Classmates Media |
11,790 | 16,998 | 32,844 | 43,276 | ||||||||||
Communications |
15,795 | 15,613 | 48,632 | 56,585 | ||||||||||
Total segment income from operations |
40,265 | 47,864 | 125,778 | 158,253 | ||||||||||
Depreciation |
(6,604 | ) | (6,177 | ) | (20,168 | ) | (18,809 | ) | ||||||
Amortization of intangible assets |
(8,054 | ) | (9,013 | ) | (24,335 | ) | (26,252 | ) | ||||||
Consolidated operating income |
$ | 25,607 | $ | 32,674 | $ | 81,275 | $ | 113,192 | ||||||
International revenues are generated by the Company's operations in Europe. International revenues totaled $39.1 million and $132.4 million for the quarter and nine months ended September 30, 2010, respectively. International revenues totaled $39.2 million and $123.8 million for the quarter and nine months ended September 30, 2009, respectively.
Geographic information for long-lived assets, which consist of property and equipment and other assets, was as follows (in thousands):
|
September 30, 2010 |
December 31, 2009 |
||||||
---|---|---|---|---|---|---|---|---|
United States |
$ | 66,740 | $ | 71,280 | ||||
Europe |
9,426 | 9,204 | ||||||
Total long-lived assets |
$ | 76,166 | $ | 80,484 | ||||
Segment assets are not reported to, or used by, the Company's chief operating decision maker to allocate resources to or assess performance of the segments and, therefore, pursuant to ASC 280, Segment Reporting, total segment assets have not been disclosed.
3. BALANCE SHEET COMPONENTS
Other Current Assets
Other current assets consisted of the following (in thousands):
|
September 30, 2010 |
December 31, 2009 |
||||||
---|---|---|---|---|---|---|---|---|
Prepaid expenses |
$ | 13,222 | $ | 14,112 | ||||
Gift cards related to member redemption liability |
2,164 | 4,017 | ||||||
Floral-related inventories, net |
3,109 | 4,035 | ||||||
Other |
1,849 | 3,435 | ||||||
Total |
$ | 20,344 | $ | 25,599 | ||||
12
UNITED ONLINE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. BALANCE SHEET COMPONENTS (Continued)
Property and Equipment
Property and equipment consisted of the following (in thousands):
|
September 30, 2010 |
December 31, 2009 |
||||||
---|---|---|---|---|---|---|---|---|
Computer software and equipment |
$ | 176,008 | $ | 159,359 | ||||
Land and buildings |
17,388 | 17,671 | ||||||
Furniture and fixtures |
14,323 | 16,485 | ||||||
|
207,719 | 193,515 | ||||||
Less: accumulated depreciation and amortization |
(145,627 | ) | (129,968 | ) | ||||
Total |
$ | 62,092 | $ | 63,547 | ||||
Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
|
September 30, 2010 |
December 31, 2009 |
||||||
---|---|---|---|---|---|---|---|---|
Employee compensation and related expenses |
$ | 21,727 | $ | 22,475 | ||||
Income taxes payable |
9,119 | 8,565 | ||||||
Non-income taxes payable |
5,146 | 5,325 | ||||||
Customer deposits |
3,030 | 3,636 | ||||||
Reserve for pending legal settlement |
2,298 | 2,200 | ||||||
Other |
6,002 | 8,227 | ||||||
Total |
$ | 47,322 | $ | 50,428 | ||||
4. GOODWILL, INTANGIBLE ASSETS AND OTHER LONG-LIVED ASSETS
Goodwill
The changes in goodwill by reportable segment for the nine months ended September 30, 2010 were as follows (in thousands):
|
FTD | Classmates Media |
Communications | Total | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance at January 1, 2010: |
|||||||||||||||
Goodwill (excluding impairment charges) |
$ | 445,931 | $ | 124,731 | $ | 13,227 | $ | 583,889 | |||||||
Accumulated impairment charges |
(114,000 | ) | | (5,738 | ) | (119,738 | ) | ||||||||
Goodwill at January 1, 2010 |
331,931 | 124,731 | 7,489 | 464,151 | |||||||||||
Foreign currency translation |
(3,849 | ) | (9 | ) | | (3,858 | ) | ||||||||
Balance at September 30, 2010: |
|||||||||||||||
Goodwill (excluding impairment charges) |
442,082 | 124,722 | 13,227 | 580,031 | |||||||||||
Accumulated impairment charges |
(114,000 | ) | | (5,738 | ) | (119,738 | ) | ||||||||
Goodwill at September 30, 2010 |
$ | 328,082 | $ | 124,722 | $ | 7,489 | $ | 460,293 | |||||||
13
UNITED ONLINE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. GOODWILL, INTANGIBLE ASSETS AND OTHER LONG-LIVED ASSETS (Continued)
Intangible Assets
Intangible assets consisted of the following (in thousands):
|
September 30, 2010 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
Gross Value |
Accumulated Amortization |
Net | ||||||||
Pay accounts and free accounts |
$ | 100,840 | $ | (90,688 | ) | $ | 10,152 | ||||
Customer contracts and relationships |
112,037 | (45,919 | ) | 66,118 | |||||||
Trademarks and trade names |
182,753 | (16,930 | ) | 165,823 | |||||||
Software and technology |
46,554 | (22,468 | ) | 24,086 | |||||||
Rights, content and intellectual property |
6,804 | (4,472 | ) | 2,332 | |||||||
Total |
$ | 448,988 | $ | (180,477 | ) | $ | 268,511 | ||||
|
December 31, 2009 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
Gross Value |
Accumulated Amortization |
Net | ||||||||
Pay accounts and free accounts |
$ | 100,825 | $ | (88,935 | ) | $ | 11,890 | ||||
Customer contracts and relationships |
112,575 | (31,856 | ) | 80,719 | |||||||
Trademarks and trade names |
184,020 | (14,912 | ) | 169,108 | |||||||
Software and technology |
46,726 | (16,279 | ) | 30,447 | |||||||
Rights, content and intellectual property |
4,602 | (4,246 | ) | 356 | |||||||
Total |
$ | 448,748 | $ | (156,228 | ) | $ | 292,520 | ||||
The Company's acquired trademarks and trade names of $229.8 million related to the acquisition by the Company of FTD Group, Inc. (together with its subsidiaries, "FTD") in August 2008, prior to impairment charges, are indefinite-lived and, accordingly, there is no associated amortization expense or accumulated amortization. At September 30, 2010 and December 31, 2009, the FTD trademarks and trade names after impairment and foreign currency translation adjustments totaled $157.0 million and $158.2 million, respectively.
5. CREDIT AGREEMENTS
UOL Credit Agreement
In connection with the acquisition by the Company of FTD in August 2008, United Online, Inc. entered into a $60 million senior secured credit agreement with Silicon Valley Bank (the "UOL Credit Agreement") and borrowed $60 million thereunder. The net proceeds of the term loan under the UOL Credit Agreement were used to finance, in part, the acquisition of FTD. In April 2010, United Online, Inc. paid $14.7 million to retire this credit facility.
FTD Credit Agreement
In connection with the FTD acquisition in August 2008, UNOLA Corp., then an indirect wholly-owned subsidiary of United Online, Inc., which subsequently merged into FTD Group, Inc., entered into a $425 million senior secured credit agreement with Wells Fargo Bank National Association, as Administrative Agent (the "FTD Credit Agreement"), consisting of (i) a term loan A facility of up to
14
UNITED ONLINE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. CREDIT AGREEMENTS (Continued)
$75 million, (ii) a term loan B facility of up to $300 million, and (iii) a revolving credit facility of up to $50 million.
The changes in the Company's debt balances, net of discounts, for the nine months ended September 30, 2010 were as follows (in thousands):
|
Balance at January 1, 2010 |
Repayments of Debt |
Accretion of Discounts |
Balance at September 30, 2010 |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
UOL Credit Agreement |
$ | 24,383 | $ | (24,819 | ) | $ | 436 | $ | | |||||
FTD Credit Agreement, term loan A |
59,779 | (5,835 | ) | 423 | 54,367 | |||||||||
FTD Credit Agreement, term loan B |
244,784 | (24,165 | ) | 2,099 | 222,718 | |||||||||
FTD Credit Agreement, revolving credit facility |
| | | | ||||||||||
Total |
$ | 328,946 | $ | (54,819 | ) | $ | 2,958 | $ | 277,085 | |||||
Future minimum principal payments based upon scheduled mandatory debt payments under the FTD Credit Agreement, excluding required prepayments based on excess cash flows, were as follows at September 30, 2010 (in thousands):
|
|
Year Ending December 31, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Total Gross Debt |
||||||||||||||||
|
2011 | 2012 | 2013 | 2014 | |||||||||||||
FTD Credit Agreement, term loan A |
$ | 55,356 | $ | 5,032 | $ | 7,129 | $ | 43,195 | $ | | |||||||
FTD Credit Agreement, term loan B |
229,269 | 1,764 | 2,351 | 2,351 | 222,803 | ||||||||||||
Total |
$ | 284,625 | $ | 6,796 | $ | 9,480 | $ | 45,546 | $ | 222,803 | |||||||
At September 30, 2010, the borrowing capacity under the FTD revolving credit facility, which was reduced by $1.1 million in outstanding letters of credit, was $48.9 million.
Subject to certain exceptions, FTD Group, Inc. is required to make annual prepayments of a portion of the term loans under the FTD Credit Agreement based on excess cash flow as defined in the FTD Credit Agreement.
6. FAIR VALUE MEASUREMENTS
ASC 820, Fair Value Measurements and Disclosures, establishes a three-tiered hierarchy that draws a distinction between market participant assumptions based on (i) quoted prices (unadjusted) in active markets for identical assets and liabilities (Level 1); (ii) inputs other than quoted prices in active markets that are observable either directly or indirectly (Level 2); and (iii) unobservable inputs that require the Company to use present value and other valuation techniques in the determination of fair value (Level 3). The following table presents information about assets at September 30, 2010 that are required to be measured at fair value on a recurring basis (in thousands):
Description
|
Level 1 Fair Value |
|||
---|---|---|---|---|
Money market funds |
$ | 55,841 |
The Company estimated the fair value of its long-term debt using a discounted cash flow technique that incorporates a market interest yield curve with adjustments for duration and risk profile. In
15
UNITED ONLINE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. FAIR VALUE MEASUREMENTS (Continued)
determining the market interest yield curve, the Company considered, among other factors, its estimate of its credit rating. The Company estimated its credit rating as BBB/BB+ for the long-term debt associated with the FTD Credit Agreement, resulting in a discount rate of 4%. The table below summarizes the fair value estimates for long-term debt, net of discounts, including current portion, at September 30, 2010, as defined by ASC 825, Disclosures about Fair Value of Financial Instruments (in thousands):
|
Carrying Amount |
Estimated Fair Value |
|||||
---|---|---|---|---|---|---|---|
Long-term debt, net of discounts, including current portion |
$ | 277,085 | $ | 311,035 |
7. STOCKHOLDERS' EQUITY
Common Stock Repurchases
United Online, Inc.'s Board of Directors authorized a common stock repurchase program (the "Program") that allows the Company to repurchase shares of its common stock through open market or privately negotiated transactions based on prevailing market conditions and other factors through December 31, 2010. The Company repurchased 2.2 million shares of common stock under the Program for $11.0 million in the quarter ended September 30, 2010. From August 2001 through September 30, 2010, the Company had repurchased $150.2 million of its common stock under the Program, leaving $49.8 million of authorization remaining under the Program.
Shares withheld upon the vesting of restricted stock units and upon the issuance of stock awards to pay applicable required employee withholding taxes are considered common stock repurchases, but are not counted as purchases against the Program. Upon vesting of restricted stock units or issuance of stock awards, the Company currently does not collect the applicable required employee withholding taxes from employees. Instead, the Company automatically withholds, from the restricted stock units that vest, and from the stock awards that are issued, the portion of those shares with a fair market value equal to the amount of the required employee withholding taxes due, which is accounted for as a repurchase of common stock. The Company then pays the applicable withholding taxes in cash. The amounts remitted in the nine months ended September 30, 2010 and 2009 were $8.2 million and $5.2 million, respectively, for which the Company withheld 1.4 million and 0.9 million shares of common stock, respectively, that were underlying the restricted stock units which vested and stock awards that were issued. For information regarding the common stock repurchases consummated during the quarter ended September 30, 2010, see "Item 2. Unregistered Sales of Equity Securities and Use of Proceeds," which appears elsewhere in this Quarterly Report on Form 10-Q.
Dividends
Dividends are paid on shares of common stock outstanding as of the record date. In addition, dividend equivalents are generally paid on unvested restricted stock units outstanding as of the record date.
In February, April and July 2010, United Online, Inc.'s Board of Directors declared quarterly cash dividends of $0.10 per share of common stock. The dividends were paid on February 26, 2010, May 28, 2010 and August 31, 2010 and totaled $9.1 million, $9.4 million and $9.3 million, respectively, including dividend equivalents paid on outstanding restricted stock units.
16
UNITED ONLINE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. STOCKHOLDERS' EQUITY (Continued)
In October 2010, United Online, Inc.'s Board of Directors declared a quarterly cash dividend of $0.10 per share of common stock. The record date for the dividend is November 12, 2010 and the dividend will be paid on November 30, 2010.
The payment of future dividends is discretionary and is subject to determination by United Online, Inc.'s Board of Directors each quarter following its review of the Company's financial performance and other factors. Dividends are declared and paid out of the Company's surplus, as defined and computed in accordance with the General Corporation Law of the State of Delaware.
8. STOCK-BASED COMPENSATION PLANS
Stock-Based Compensation
The following table summarizes the stock-based compensation that has been included in the following captions within the unaudited condensed consolidated statements of operations for each of the periods presented (in thousands):
|
Quarter Ended September 30, |
Nine Months Ended September 30, |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | 2010 | 2009 | ||||||||||
Operating expenses: |
||||||||||||||
Cost of revenuesservices |
$ | 112 | $ | 201 | $ | 426 | $ | 728 | ||||||
Cost of revenuesproducts |
7 | 20 | 37 | 20 | ||||||||||
Sales and marketing |
976 | 1,421 | 3,179 | 4,120 | ||||||||||
Technology and development |
722 | 1,202 | 2,550 | 3,713 | ||||||||||
General and administrative |
4,875 | 6,748 | 14,721 | 20,623 | ||||||||||
Total stock-based compensation |
$ | 6,692 | $ | 9,592 | $ | 20,913 | $ | 29,204 | ||||||
Recent Awards
Effective February 15, 2010, the Compensation Committee of the Board of Directors of United Online, Inc. (the "Compensation Committee") approved grants of 1.0 million restricted stock units with a grant-date fair value equal to $6.5 million to certain members of the Company's senior management. Each restricted stock unit entitles the recipient to receive one share of United Online Inc.'s common stock upon vesting. The restricted stock units will vest as to one-third of the total number of shares awarded annually over a three-year period beginning February 15, 2010.
Effective February 15, 2010, the Secondary Compensation Committee of the Board of Directors of United Online, Inc. approved grants of 1.2 million restricted stock units with a grant-date fair value equal to $7.7 million to certain of the Company's non-executive officer employees. The restricted stock units will vest as to twenty-five percent of the total number of shares awarded annually over a four-year period beginning February 15, 2010.
Effective February 15, 2010, the Compensation Committee approved grants of 0.7 million shares of common stock with a grant-date fair value equal to $3.7 million to the Company's executive officers in connection with awards earned under the 2009 Management Bonus Plan.
17
UNITED ONLINE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. NET INCOME PER COMMON SHARE
The following table sets forth the computation of basic and diluted net income per common share for the quarters and nine months ended September 30, 2010 and 2009 (in thousands, except per share amounts):
|
Quarter Ended September 30, |
Nine Months Ended September 30, |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | 2010 | 2009 | ||||||||||
Numerator: |
||||||||||||||
Net income |
$ | 12,159 | $ | 16,155 | $ | 37,337 | $ | 52,475 | ||||||
Income allocated to participating securities |
(747 | ) | (1,222 | ) | (2,334 | ) | (3,491 | ) | ||||||
Net income applicable to common stockholders |
$ | 11,412 | $ | 14,933 | $ | 35,003 | $ | 48,984 | ||||||
Denominator: |
||||||||||||||
Shares used to calculate basic net income per common share |
86,649 | 84,028 | 86,479 | 83,372 | ||||||||||
Add: Dilutive effect of non-participating securities |
420 | 660 | 655 | 435 | ||||||||||
Shares used to calculate diluted net income per common share |
87,069 | 84,688 | 87,134 | 83,807 | ||||||||||
Basic net income per common share |
$ | 0.13 | $ | 0.18 | $ | 0.40 | $ | 0.59 | ||||||
Diluted net income per common share |
$ | 0.13 | $ | 0.18 | $ | 0.40 | $ | 0.58 | ||||||
The diluted net income per common share computations exclude stock options and restricted stock units which are antidilutive. Weighted-average antidilutive shares for the quarter and nine months ended September 30, 2010 were 3.0 million and 2.6 million, respectively. Weighted-average antidilutive shares for the quarter and nine months ended September 30, 2009 were 3.4 million and 6.0 million, respectively.
10. RESTRUCTURING CHARGES
For the nine months ended September 30, 2010, the Company recorded restructuring charges totaling $1.1 million primarily related to the closure of certain FTD call center facilities in the United States and the United Kingdom. These restructuring charges primarily included lease termination costs and employee termination benefits.
11. LEGAL CONTINGENCIES
In April 2001 and in May 2001, lawsuits were filed in the United States District Court for the Southern District of New York against NetZero, Inc. ("NetZero"), certain officers and directors of NetZero and the underwriters of NetZero's initial public offering, Goldman Sachs Group, Inc., BancBoston Robertson Stephens, Inc. and Salomon Smith Barney, Inc. A consolidated amended complaint was filed in April 2002. The complaint alleges that the prospectus through which NetZero conducted its initial public offering in September 1999 was materially false and misleading because it failed to disclose, among other things, that (i) the underwriters had solicited and received excessive and
18
UNITED ONLINE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. LEGAL CONTINGENCIES (Continued)
undisclosed commissions from certain investors in exchange for which the underwriters allocated to those investors material portions of the restricted number of NetZero shares issued in connection with the offering; and (ii) the underwriters had entered into agreements with customers whereby the underwriters agreed to allocate NetZero shares to those customers in the offering in exchange for which the customers agreed to purchase additional NetZero shares in the aftermarket at pre-determined prices. Plaintiffs are seeking injunctive relief and damages. The case against NetZero was coordinated with approximately 300 other suits filed against more than 300 issuers that conducted their initial public offerings between 1998 and 2000, their underwriters and an unspecified number of their individual corporate officers and directors. The parties in the approximately 300 coordinated class actions, including NetZero, the underwriter defendants in the NetZero class action, and the plaintiff class in the NetZero action, have reached an agreement in principle under which the insurers for the issuer defendants in the coordinated cases will make a settlement payment on behalf of the issuers, including NetZero. On October 5, 2009, the district court issued an order granting final approval of the settlement and certifying the settlement class. Certain individuals have appealed the October 5, 2009 order and one objector has filed a brief in support of his appeal of the judgment approving the settlement. The schedule for filing an opposition to the appeal has not yet been determined.
In 2009, a committee of the United States Senate commenced an investigation of post-transaction sales practices and the companies that have engaged in such practices. As part of such investigation, the Company received a request for information from the committee and has cooperated with, and responded to, such request. In addition, Classmates Online, Inc. received a civil investigative demand from the Attorney General for the State of Washington, and Classmates Online, Inc. and FTD, Inc. received subpoenas from the Attorney General for the State of New York, regarding their respective investigations into such practices and the companies that have engaged in them, including these subsidiaries. The Company has been cooperating with the investigations and in August 2010, each of Classmates Online, Inc. and FTD, Inc. entered into an Assurance of Discontinuance with the Attorney General for the State of New York to resolve its investigation. As part of such resolution, Classmates Online, Inc. and FTD, Inc. paid $960,000 and $640,000, respectively, to a fund that will pay for consumer education, refunds and the costs of the investigation of the Attorney General for the State of New York. FTD.com Inc. and Classmates Online, Inc. have also received subpoenas from the Attorney General for the State of Kansas and the Attorney General for the State of Maryland, respectively. These subpoenas were issued on behalf of a Multistate Work Group that consists of the Attorneys General for the following states: Delaware, Florida, Idaho, Illinois, Kansas, Maine, Maryland, Michigan, New Mexico, New Jersey, North Dakota, Ohio, Oregon, Pennsylvania, Texas, and Vermont. Based on the subpoenas, the Company believes the primary focus of the inquiries concerns certain post-transaction sales practices in which these subsidiaries previously engaged with certain third-party vendors. In addition, Classmates Online, Inc. has received a subpoena from the Attorney General for the District of Columbia regarding its marketing, billing, and renewal practices, including, without limitation, its post-transaction sales practices. The Company is cooperating with these investigations. However, the Company cannot predict the outcome of these or any other governmental investigations or other legal actions or their potential implications for the Company's business. There are no assurances that additional governmental investigations or other legal actions will not be instituted in connection with the Company's former post-transaction sales practices or other current or former business practices.
19
UNITED ONLINE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. LEGAL CONTINGENCIES (Continued)
The Company is subject to various legal proceedings, investigations, claims, and litigation that can involve complex questions of fact and law and may require the expenditure of significant funds and the diversion of other resources to defend. There can be no assurance that such legal proceedings, investigations, claims, and litigation, which are inherently uncertain, will not materially and adversely affect the Company's business, financial condition, results of operations, or cash flows. At September 30, 2010, the Company had a reserve of $2.3 million for a pending legal settlement.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This Quarterly Report on Form 10-Q and the documents incorporated herein by reference contain forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, as amended, based on our current expectations, estimates and projections about our operations, industry, financial condition, performance, results of operations, and liquidity. Statements containing words such as "may," "believe," "anticipate," "expect," "intend," "plan," "project," "projections," "business outlook," "estimate," or similar expressions constitute forward-looking statements. These forward-looking statements include, but are not limited to, statements about future financial performance; revenues; segment metrics; operating expenses; market trends, including those in the markets in which we compete; operating and marketing efficiencies; liquidity; cash flows and uses of cash; dividends; capital expenditures; depreciation and amortization; tax payments; foreign currency exchange rates; hedging arrangements; our ability to repay indebtedness, pay dividends and invest in initiatives; our products and services; pricing; competition; strategies; and new business initiatives, products, services, and features. Potential factors that could affect the matters about which the forward-looking statements are made include, among others, the factors disclosed in the section entitled "Risk Factors" in this Quarterly Report on Form 10-Q and additional factors that accompany the related forward-looking statements in this Quarterly Report on Form 10-Q and our other filings with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as the date hereof. Any such forward-looking statements are not guarantees of future performance or results and involve risks and uncertainties that may cause actual performance and results to differ materially from those predicted. Reported results should not be considered an indication of future performance. Except as required by law, we undertake no obligation to publicly release the results of any revision to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
Overview
We are a leading provider of consumer products and services over the Internet through a number of brands including FTD, Interflora, Classmates, StayFriends, NetZero, and MyPoints. Our FTD segment provides floral and related products and services to consumers and retail florists, as well as to other retail locations offering floral and related products and services. Our Classmates Media segment services are online social networking and online loyalty marketing. Our primary Communications segment services are Internet access and email. On a combined basis, our web properties attract a significant number of Internet users, and we offer a broad range of Internet marketing services for advertisers.
Segment Definitions
We report our businesses in three reportable segments:
Segment
|
Products and Services | |
---|---|---|
FTD | Floral and related products and services for consumers, retail florists and other retail locations | |
Classmates Media | Online social networking and online loyalty marketing services | |
Communications | Internet access, email, Internet security, and web hosting services |
21
Segment Services
FTD
FTD Group, Inc. (together with its subsidiaries, "FTD") is a leading provider of floral and related products and services to consumers and retail florists, as well as to other retail locations offering floral and related products and services, in the United States ("U.S."), Canada, the United Kingdom ("U.K."), and the Republic of Ireland. The business uses the highly recognized FTD and Interflora brands, both supported by the Mercury Man logo. FTD is a nationwide floral marketer, which we refer to as FTD's consumer business, and a provider of floral network services, which we refer to as FTD's floral network business. These businesses are complementary, as the majority of floral orders generated by the consumer business are fulfilled and hand-delivered by the members of the FTD floral network. FTD does not own or operate any retail locations.
Consumer Business. FTD is a leading marketer of flowers and specialty gift items to consumers. FTD operates in the U.S. and Canada, primarily through the www.ftd.com website and 1-800-SEND-FTD toll-free telephone number, and in the U.K. and the Republic of Ireland through the www.interflora.co.uk and www.interflora.ie websites and various telephone numbers. FTD also operates mobile websites that are optimized for mobile phones with Internet connections. While floral arrangements and plants are FTD's primary offerings, FTD also markets and sells other specialty gift items including gourmet food, special occasion gifts, bath and beauty products, jewelry, wine and gift baskets, chocolates, and stuffed animals.
Floral Network Business. FTD provides a comprehensive suite of products and services that promote revenue growth and enhance the operating efficiencies of its floral network members, including services that enable such members to receive, send and deliver floral orders. Floral network members include traditional retail florists, as well as other retailers offering floral and related products and services, that are located primarily in the U.S., Canada, the U.K., and the Republic of Ireland. The large network of floral network members provides an order fulfillment vehicle for our consumer business and allows FTD to offer same-day delivery capability (subject to certain limitations) to populations throughout the U.S., Canada, the U.K., and Ireland.
Classmates Media
Our Classmates Media services include online social networking under the Classmates brand and online loyalty marketing under the MyPoints brand. Our Classmates Media services also include international online social networking under the StayFriends and Trombi brands.
Online Social Networking. Our social networking websites enable users to locate and interact with acquaintances from their past, with school affiliations as the primary focus. Led by our flagship Classmates website (www.classmates.com) that serves the U.S. and Canada, our social networking services have a large and diverse population of users, with over 60 million registered accounts at September 30, 2010.
Our social networking members can choose between free membership and a paid subscription offering additional features. Free accounts constitute the vast majority of our social networking accounts. Revenues from our social networking services are derived from subscription fees and advertising fees.
Online Loyalty Marketing. MyPoints connects advertisers with its members by allowing members to earn rewards points for engaging in online activities. MyPoints is a free service for consumers who need only provide their name, zip code, gender, date of birth, and an email address to register. Members register to receive direct email marketing and other online loyalty promotions, and earn points for responding to email offers, taking market research companies' surveys, shopping online at the MyPoints
22
website (www.mypoints.com) which serves as a shopping portal, searching the Internet through a MyPoints branded toolbar, playing MyPoints branded online games, and engaging in other online activities. Rewards points are redeemable primarily in the form of third-party gift cards from over 75 merchants, including, among others, retailers, theaters, restaurants, airlines, and hotels. Participating merchants include, among others, iTunes, Marriott, and Target.
Communications
Our principal Communications pay service is dial-up Internet access, offered under the NetZero and Juno brands. We also offer broadband services, email, Internet security services, and web hosting services. Most of our Communications revenues are derived from dial-up Internet access pay accounts.
Internet Access Services. Our Internet access services consist of dial-up and, to a much lesser extent, broadband services. Our dial-up Internet access services are provided on both a free and pay basis, with the free services subject to hourly and other limitations. Basic pay dial-up Internet access services include Internet access and an email account, although we also offer an enhanced email service as a stand-alone pay service. In addition, we offer accelerated dial-up Internet access services which can significantly reduce the time for certain web pages to download when compared to our basic dial-up Internet access services. Our accelerated dial-up Internet access services are also bundled with additional benefits including pop-up blocking, antivirus software and enhanced email storage. Our dial-up Internet access services are available in more than 11,000 cities across the U.S. and Canada.
Our broadband Internet access services consist of digital subscriber lines (also known as "DSL") services that we purchase from third parties and resell under our own brands. These services are primarily used as a means to retain users who are leaving our dial-up Internet access services and we have conducted very limited marketing of our broadband Internet access services to the general public.
Key Business Metrics
We review a number of key business metrics to help us monitor our performance and trends affecting our businesses, and to develop forecasts and budgets. These key measures are:
FTD Segment Metrics
Consumer Orders. We monitor the number of consumer orders for floral and gift products during a given period. Consumer orders are orders delivered during the period that originated in the U.S. and Canada, primarily from the www.ftd.com website and the 1-800-SEND-FTD telephone number, and in the U.K. and the Republic of Ireland, primarily from the www.interflora.co.uk and www.interflora.ie websites and various telephone numbers. Orders originating with a florist or other retail location for delivery to consumers are not included. The number of consumer orders received may fluctuate significantly from period to period due to seasonality resulting from the timing of key holidays; general economic conditions; fluctuations in marketing expenditures on initiatives designed to attract new and retain existing customers; changes in pricing for our floral, plant and specialty gift products or competitive offerings; and changing consumer preferences, among other factors.
Average Order Value. We monitor the average value for consumer orders delivered in a given period, which we refer to as the average order value. Average order value represents the average U.S. Dollar amount received for consumer orders delivered during a period. This average U.S. Dollar amount is determined after translating local currency amounts received for orders delivered principally in the U.K. and the Republic of Ireland into U.S. Dollars. Average order value includes merchandise revenue and shipping and service fees paid by the consumer, less certain discounts and certain refunds. Average order values may fluctuate from period to period based on the average foreign currency exchange rates; product mix; changes in merchandise pricing, shipping and service fees; levels of certain refunds issued; and discounts, among other factors.
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Classmates Media and Communications Segment Metrics
Pay Accounts. We generate a significant portion of our revenues from our pay accounts and they represent one of the most important drivers of our business model. A pay account is defined as a member who has subscribed to, and paid for, our Classmates Media or Communications services, and whose subscription has not terminated or expired. A pay account does not equate to a unique subscriber since one subscriber could have several pay accounts. At any point in time, our pay account base includes a number of accounts receiving a free period of service as either a promotion or retention tool and a number of accounts that have notified us that they are terminating their service but whose service remains in effect. In general, the key metrics that affect our revenues from our pay accounts base include the number of pay accounts and the average monthly revenue per pay account ("ARPU"). A pay account generally becomes a free account following the expiration or termination of the related subscription.
ARPU. We monitor ARPU, which is a monthly measure calculated by dividing services revenues generated from the pay accounts of our Classmates Media or Communications segment, as applicable, for a period (after translation into U.S. Dollars) by the average number of segment pay accounts for that period, divided by the number of months in that period. The average number of pay accounts is the simple average of the number of pay accounts at the beginning and end of a period. ARPU may fluctuate significantly from period to period as a result of a variety of factors, including, but not limited to, the extent to which promotional, discounted or retention pricing is used to attract new, or retain existing, paying subscribers; changes in the mix of pay services and the related pricing plans; increases or decreases in the price of our services; the timing of pay accounts being added or removed during a period; and the average foreign currency exchange rate between the U.S. Dollar and the Euro.
Churn. To evaluate the retention characteristics of our membership base, we also monitor the percentage of pay accounts that terminate or expire, which we refer to as our average monthly churn rate. Our average monthly churn rate is calculated as the total number of pay accounts that terminated or expired in a period divided by the average number of pay accounts for that period, divided by the number of months in that period. Our average monthly churn percentage may fluctuate from period to period due to our mix of subscription terms, which affects the timing of subscription expirations, and other factors. We make certain normalizing adjustments to the calculation of our churn percentage for periods in which we add a significant number of pay accounts due to acquisitions. For our Communications segment pay accounts, we do not include in our churn calculation those accounts canceled during the first 30 days of service unless the accounts have upgraded from free accounts, although a number of such accounts will be included in our account totals at any given measurement date. Subscribers who cancel one pay service but subscribe to another pay service are not necessarily considered to have canceled a pay account depending on the services and, as such, our segment churn rates are not necessarily indicative of the percentage of subscribers canceling any particular service.
Active Accounts. We monitor the number of active accounts among our membership base. Classmates Media segment active accounts are defined as the sum of all social networking pay accounts as of the date presented; the monthly average for the period of all free social networking accounts who have visited our domestic or international social networking websites (excluding The Names Database) at least once during the period; and the monthly average for the period of all online loyalty marketing members who have earned or redeemed points during such period. Communications segment active accounts include all Communications segment pay accounts as of the date presented combined with the number of free Internet access and email accounts that logged on to our services at least once during the preceding 31 days.
In general, we count and track pay accounts and free accounts by unique member identifiers. Users have the ability to register for separate services under separate brands and member identifiers independently. We do not track whether a pay account has purchased more than one of our services
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unless the account uses the same member identifier. As a result, total active accounts may not represent total unique users.
Key Metrics
The table below sets forth, for the quarterly periods presented, as applicable, our consolidated revenues, segment revenues, consumer orders, average order value, average currency exchange rate, pay accounts (at the end of the period), segment churn (monthly average for the period), ARPU (monthly average for the period), and segment active accounts (monthly average for the period).
Revenues and operating results from our FTD segment are impacted by seasonal holiday timing variations and fluctuations in foreign currency exchange rates. As such, we believe that comparisons of our FTD segment's revenues and operating results for any period with those of the immediately preceding period or, in some instances, the same period of the preceding fiscal year, may be of limited relevance in evaluating its historical financial performance and predicting its future financial performance.
|
Quarter Ended | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
September 30, 2010 |
June 30, 2010 |
March 31, 2010 |
December 31, 2009 |
September 30, 2009 |
||||||||||||||
Consolidated: |
|||||||||||||||||||
Revenues (in thousands) |
$ | 193,541 | $ | 242,686 | $ | 251,725 | $ | 249,490 | $ | 216,206 | |||||||||
FTD: |
|||||||||||||||||||
Segment revenues (in thousands) |
$ | 105,046 | $ | 152,669 | $ | 156,687 | $ | 141,116 | $ | 107,526 | |||||||||
% of consolidated revenues |
54 | % | 63 | % | 62 | % | 57 | % | 50 | % | |||||||||
Consumer orders (in thousands) |
1,085 | 1,851 | 1,813 | 1,594 | 1,075 | ||||||||||||||
Average order value |
$ | 60.77 | $ | 58.76 | $ | 59.42 | $ | 60.14 | $ | 61.29 | |||||||||
Average currency exchange rate: GBP to USD |
1.55 | 1.49 | 1.54 | 1.63 | 1.64 | ||||||||||||||
Classmates Media: |
|||||||||||||||||||
Segment revenues (in thousands) |
$ | 49,105 | $ | 48,784 | $ | 50,502 | $ | 60,712 | $ | 58,682 | |||||||||
% of consolidated revenues |
25 | % | 20 | % | 20 | % | 24 | % | 27 | % | |||||||||
Pay accounts (in thousands) |
4,795 | 4,982 | 4,988 | 4,886 | 4,785 | ||||||||||||||
Segment churn |
3.5 | % | 3.1 | % | 3.2 | % | 3.8 | % | 3.8 | % | |||||||||
ARPU |
$ | 2.26 | $ | 2.22 | $ | 2.29 | $ | 2.53 | $ | 2.71 | |||||||||
Segment active accounts (in millions) |
15.0 | 16.1 | 17.5 | 19.4 | 16.9 | ||||||||||||||
Communications: |
|||||||||||||||||||
Segment revenues (in thousands) |
$ | 40,165 | $ | 42,039 | $ | 45,241 | $ | 48,429 | $ | 50,679 | |||||||||
% of consolidated revenues |
21 | % | 17 | % | 18 | % | 19 | % | 23 | % | |||||||||
Pay accounts (in thousands): |
|||||||||||||||||||
Access |
801 | 880 | 967 | 1,036 | 1,118 | ||||||||||||||
Other |
295 | 300 | 306 | 314 | 322 | ||||||||||||||
Total pay accounts |
1,096 | 1,180 | 1,273 | 1,350 | 1,440 | ||||||||||||||
Segment churn |
4.0 | % | 4.2 | % | 4.3 | % | 4.4 | % | 4.6 | % | |||||||||
ARPU |
$ | 9.58 | $ | 9.57 | $ | 9.41 | $ | 9.43 | $ | 9.43 | |||||||||
Segment active accounts (in millions) |
1.9 | 2.0 | 2.1 | 2.2 | 2.3 |
Critical Accounting Policies, Estimates and Assumptions
Goodwill
During the quarter ended June 30, 2010, we performed an interim impairment assessment of goodwill for our MyPoints reporting unit. We determined that an interim impairment assessment for the MyPoints reporting unit was appropriate as a result of updated projections for 2010 results of
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operations, which indicated significant expected underperformance compared to previously-forecasted results for 2010. Goodwill allocated to the MyPoints reporting unit was $49.1 million at June 30, 2010. Our interim assessment analysis did not result in any impairment charges during the second quarter of 2010 as the fair value of our MyPoints reporting unit exceeded its carrying value by approximately 20%. The estimated fair value for the MyPoints reporting unit was determined using a combination of the income approach and the market approach. The determination of whether or not goodwill is impaired involves a significant level of judgment in the assumptions underlying the approaches used to determine the estimated fair value of the MyPoints reporting unit, including judgments about appropriate discount rates and revenue growth. Our analysis included sufficient tolerance for sensitivity in key assumptions.
Financial Statement Presentation
Revenues
Services Revenues
FTD
FTD services revenues consist of fees charged to its floral network members for access to the FTD and Interflora brands and the Mercury Man logo, access to the floral networks, credit card processing services, e-commerce websites services, online advertising tools, and telephone answering, order-taking, transmission, and clearing-house services.
Classmates Media and Communications
Classmates Media services revenues consist of amounts charged to pay accounts for social networking services. Communications services revenues consist of amounts charged to pay accounts for Internet access, email, web hosting, Internet security, and other services, with substantially all of such revenues associated with Internet access. Our Classmates Media and Communications services revenues are primarily dependent on two factors: the average number of pay accounts for a period and the ARPU. In general, we charge our pay accounts in advance of providing a service, which results in the deferral of services revenue to the period in which the services are provided.
Products Revenues
Products revenues consist of merchandise revenue and related shipping and service fees, less discounts and refunds, for FTD consumer orders as well as revenues generated from sales of containers, software and hardware systems, cut flowers, packaging and promotional products, and a wide variety of other floral-related supplies to floral network members. We do not generate products revenues from our Classmates Media segment or our Communications segment.
Advertising Revenues
We provide advertising opportunities to marketers with both brand and direct response objectives through a full suite of display, search, email, and text-link opportunities across our various properties. We also offer targeting technologies, website sponsorships and website integrations.
FTD
FTD advertising revenues consist primarily of post-transaction sales that are generated when FTD consumers are presented with third-party offers immediately after completing a purchase on the www.ftd.com and www.interflora.co.uk websites.
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Classmates Media
Our online social networking services generate advertising revenues primarily from display advertisements and from post-transaction sales occurring after Classmates members have completed the pay account registration process. Advertising inventory on our social networking websites includes text and graphic placements on the user home page, profile page, class list page, and most other pages on our websites. We also sell a portion of our advertising inventory through third-party advertising resellers.
Our online loyalty marketing service revenues are derived from advertising fees, consisting primarily of fees based on performance measures, that are generated when emails are transmitted to members, when members respond to emails, when members complete online transactions, and when members engage in a variety of other activities including, but not limited to, games, Internet searches and market research surveys.
Communications
Our Communications services generate advertising revenues from search placements, display advertisements and online market research. Substantially all of our Communications advertising revenues are generated from our Internet access services. Advertising revenues also include intercompany commissions from our Classmates Media segment which are included in reported segment results and are eliminated upon consolidation.
Cost of Revenues
FTD
FTD cost of revenues includes product costs; shipping and delivery costs; costs associated with taking orders; printing and postage costs; costs related to FTD's product quality guarantee; systems installation, training and support costs; data center costs; personnel- and overhead-related costs associated with operating our networks and data centers; depreciation of network computers and equipment; license fees; costs related to providing customer support; costs related to customer billing for floral network members; fees associated with the storage and processing of customer credit cards and associated bank fees; and domain name registration fees.
Classmates Media
Classmates Media cost of revenues includes costs of points earned by members of our online loyalty marketing service; data center costs; personnel- and overhead-related costs associated with operating our networks and data centers; depreciation of network computers and equipment; license fees; costs related to providing customer support; costs related to customer billing and billing support for our pay accounts; fees associated with the storage and processing of customer credit cards and associated bank fees; and domain name registration fees.
Communications
Communications cost of revenues includes telecommunications and data center costs; personnel- and overhead-related costs associated with operating our networks and data centers; depreciation of network computers and equipment; license fees; costs related to providing customer support; costs related to customer billing and billing support for our pay accounts; fees associated with the storage and processing of customer credit cards and associated bank fees; and domain name registration fees.
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Sales and Marketing
Sales and marketing expenses include expenses associated with promoting our brands, products and services and with generating advertising revenues. Expenses associated with promoting our brands, products and services include advertising and promotion expenses; fees paid to distribution partners, third-party advertising networks and co-registration partners to acquire new pay and free accounts; personnel and overhead-related expenses for marketing, merchandising, customer service, and sales personnel; and telemarketing costs incurred to acquire and retain pay accounts and up-sell pay accounts to additional services. Expenses associated with generating advertising revenues include sales commissions and personnel-related expenses. We have expended significant amounts on sales and marketing, including branding and customer acquisition campaigns consisting of television, Internet, sponsorships, radio, print, and outdoor advertising, and on retail and other performance-based distribution relationships. Marketing and advertising costs to promote our products and services are expensed in the period incurred. Advertising and promotion expenses include media, agency and promotion expenses. Media production costs are expensed the first time the advertisement is run. Media and agency costs are expensed over the period the advertising runs.
Technology and Development
Technology and development expenses include expenses for product development, maintenance of existing software and technology and development of new or improved software and technology, including personnel-related expenses for our technology group in various office locations. Costs incurred by us to manage and monitor our technology and development activities are expensed as incurred. Costs relating to the acquisition and development of internal-use software are capitalized when appropriate and depreciated over their estimated useful lives, generally three years.
General and Administrative
General and administrative expenses include personnel-related expenses for executive, finance, legal, human resources, facilities, internal audit, investor relations, and internal customer support personnel. In addition, general and administrative expenses include, among other costs, professional fees for legal, accounting and financial services; insurance; occupancy and other overhead-related costs; office relocation costs; non-income taxes; and expenses incurred as a result of settlements, judgments, fines, penalties, assessments, or other resolutions related to litigation, arbitration, investigations, disputes, or similar matters, or reserves for any of the foregoing. General and administrative expenses also include expenses resulting from actual or proposed transactions such as business combinations, mergers, acquisitions, and financing transactions, including expenses for advisors and representatives such as investment bankers, consultants, attorneys, and accounting firms.
Amortization of Intangible Assets
Amortization of intangible assets principally includes amortization of: acquired pay accounts and free accounts; certain acquired trademarks and trade names; purchased software and technology; acquired customer and advertising contracts and related relationships; acquired rights, content and intellectual property; and other acquired identifiable intangible assets. In accordance with the provisions set forth in ASC 350, goodwill and indefinite-lived intangible assets are not being amortized but are tested for impairment at a reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would indicate the fair value of a reporting unit is below its carrying value.
Restructuring Charges
Restructuring charges consist of costs associated with the realignment and reorganization of our operations and generally include severance expenses and facility closure and relocation costs.
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Interest Income
Interest income consists of earnings on our cash, cash equivalents and short-term investments held from time to time, and interest on long-term receivables from FTD's technology system sales.
Interest Expense
Interest expense consists of interest expense on our credit facilities, including accretion of discounts and amortization of debt issue costs, and interest expense relating to our interest rate cap.
Other Income (Expense), Net
Other income (expense), net, generally consists of realized gains and losses recognized in connection with the sale of short-term investments, gains and losses on the sale of assets, equity earnings on investments in subsidiaries, and gains and losses on foreign currency exchange rate transactions. Additionally, other income (expense), net, consists of realized and unrealized gains and losses on foreign currency forward contracts and one-time, non-operating income and expenses.
Results of Operations
The following tables set forth, for the periods presented, selected historical statements of operations data. The information contained in the tables below should be read in conjunction with Liquidity and Capital Resources, Contractual Obligations, and Other Commitments included in this Item 2 as well as "Quantitative and Qualitative Disclosures About Market Risk" included in Part I, Item 3 of this Quarterly Report on Form 10-Q, and the unaudited condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Unaudited condensed consolidated financial information was as follows (in thousands):
|
Quarter Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | 2010 | 2009 | |||||||||||
Revenues |
$ | 193,541 | $ | 216,206 | $ | 687,952 | $ | 740,642 | |||||||
Operating expenses: |
|||||||||||||||
Cost of revenues |
84,394 | 84,562 | 320,487 | 307,345 | |||||||||||
Sales and marketing |
34,783 | 46,146 | 133,926 | 155,584 | |||||||||||
Technology and development |
14,334 | 15,700 | 42,329 | 49,637 | |||||||||||
General and administrative |
26,333 | 28,111 | 84,576 | 88,632 | |||||||||||
Amortization of intangible assets |
8,020 | 9,013 | 24,298 | 26,252 | |||||||||||
Restructuring charges |
70 | | 1,061 | | |||||||||||
Total operating expenses |
167,934 | 183,532 | 606,677 | 627,450 | |||||||||||
Operating income |
25,607 | 32,674 | 81,275 | 113,192 | |||||||||||
Interest income |
382 | 498 | 1,259 | 1,184 | |||||||||||
Interest expense |
(5,471 | ) | (7,542 | ) | (18,934 | ) | (24,547 | ) | |||||||
Other income (expense), net |
(40 | ) | 567 | 95 | 698 | ||||||||||
Income before income taxes |
20,478 | 26,197 | 63,695 | 90,527 | |||||||||||
Provision for income taxes |
8,319 | 10,042 | 26,358 | 38,052 | |||||||||||
Net income |
$ | 12,159 | $ | 16,155 | $ | 37,337 | $ | 52,475 | |||||||
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Information for our three reportable segments was as follows (in thousands):
|
FTD | Classmates Media | Communications | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Quarter Ended September 30, |
Quarter Ended September 30, |
Quarter Ended September 30, |
||||||||||||||||||
|
2010 | 2009 | 2010 | 2009 | 2010 | 2009 | |||||||||||||||
Revenues |
$ | 105,046 | $ | 107,526 | $ | 49,105 | $ | 58,682 | $ | 40,165 | $ | 50,679 | |||||||||
Operating expenses: |
|||||||||||||||||||||
Cost of revenues |
63,197 | 62,581 | 8,794 | 7,918 | 9,867 | 11,469 | |||||||||||||||
Sales and marketing |
16,451 | 16,731 | 14,371 | 19,016 | 4,201 | 10,745 | |||||||||||||||
Technology and development |
2,608 | 2,993 | 6,070 | 5,966 | 3,382 | 4,615 | |||||||||||||||
General and administrative |
10,040 | 9,968 | 8,080 | 8,784 | 6,920 | 8,237 | |||||||||||||||
Restructuring charges |
70 | | | | | | |||||||||||||||
Total operating expenses |
92,366 | 92,273 | 37,315 | 41,684 | 24,370 | 35,066 | |||||||||||||||
Segment income from operations |
$ | 12,680 | $ | 15,253 | $ | 11,790 | $ | 16,998 | $ | 15,795 | $ | 15,613 | |||||||||
|
FTD | Classmates Media | Communications | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Nine Months Ended September 30, |
Nine Months Ended September 30, |
Nine Months Ended September 30, |
||||||||||||||||||
|
2010 | 2009 | 2010 | 2009 | 2010 | 2009 | |||||||||||||||
Revenues |
$ | 414,402 | $ | 404,729 | $ | 148,391 | $ | 175,310 | $ | 127,445 | $ | 162,804 | |||||||||
Operating expenses: |
|||||||||||||||||||||
Cost of revenues |
257,056 | 237,604 | 24,835 | 25,821 | 30,416 | 36,328 | |||||||||||||||
Sales and marketing |
71,126 | 67,463 | 47,089 | 57,802 | 16,363 | 31,434 | |||||||||||||||
Technology and development |
8,505 | 9,029 | 17,208 | 20,206 | 9,800 | 14,154 | |||||||||||||||
General and administrative |
32,261 | 32,241 | 26,506 | 28,205 | 22,234 | 24,303 | |||||||||||||||
Restructuring charges |
1,152 | | (91 | ) | | | | ||||||||||||||
Total operating expenses |
370,100 | 346,337 | 115,547 | 132,034 | 78,813 | 106,219 | |||||||||||||||
Segment income from operations |
$ | 44,302 | $ | 58,392 | $ | 32,844 | $ | 43,276 | $ | 48,632 | $ | 56,585 | |||||||||
A reconciliation of segment revenues to consolidated revenues was as follows for each period presented (in thousands):
|
Quarter Ended September 30, |
Nine Months Ended September 30, |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | 2010 | 2009 | ||||||||||
Segment revenues: |
||||||||||||||
FTD |
$ | 105,046 | $ | 107,526 | $ | 414,402 | $ | 404,729 | ||||||
Classmates Media |
49,105 | 58,682 | 148,391 | 175,310 | ||||||||||
Communications |
40,165 | 50,679 | 127,445 | 162,804 | ||||||||||
Intersegment eliminations |
(775 | ) | (681 | ) | (2,286 | ) | (2,201 | ) | ||||||
Consolidated revenues |
$ | 193,541 | $ | 216,206 | $ | 687,952 | $ | 740,642 | ||||||
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A reconciliation of segment operating expenses (which excludes depreciation and amortization of intangible assets) to consolidated operating expenses was as follows for each period presented (in thousands):
|
Quarter Ended September 30, |
Nine Months Ended September 30, |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | 2010 | 2009 | ||||||||||
Segment operating expenses: |
||||||||||||||
FTD |
$ | 92,366 | $ | 92,273 | $ | 370,100 | $ | 346,337 | ||||||
Classmates Media |
37,315 | 41,684 | 115,547 | 132,034 | ||||||||||
Communications |
24,370 | 35,066 | 78,813 | 106,219 | ||||||||||
Total segment operating expenses |
154,051 | 169,023 | 564,460 | 584,590 | ||||||||||
Depreciation |
6,604 | 6,177 | 20,168 | 18,809 | ||||||||||
Amortization of intangible assets |
8,054 | 9,013 | 24,335 | 26,252 | ||||||||||
Intersegment eliminations |
(775 | ) | (681 | ) | (2,286 | ) | (2,201 | ) | ||||||
Consolidated operating expenses |
$ | 167,934 | $ | 183,532 | $ | 606,677 | $ | 627,450 | ||||||
A reconciliation of segment income from operations (which excludes depreciation and amortization of intangible assets) to consolidated operating income was as follows for each period presented (in thousands):
|
Quarter Ended September 30, |
Nine Months Ended September 30, |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | 2010 | 2009 | ||||||||||
Segment income from operations: |
||||||||||||||
FTD |
$ | 12,680 | $ | 15,253 | $ | 44,302 | $ | 58,392 | ||||||
Classmates Media |
11,790 | 16,998 | 32,844 | 43,276 | ||||||||||
Communications |
15,795 | 15,613 | 48,632 | 56,585 | ||||||||||
Total segment income from operations |
40,265 | 47,864 | 125,778 | 158,253 | ||||||||||
Depreciation |
(6,604 | ) | (6,177 | ) | (20,168 | ) | (18,809 | ) | ||||||
Amortization of intangible assets |
(8,054 | ) | (9,013 | ) | (24,335 | ) | (26,252 | ) | ||||||
Consolidated operating income |
$ | 25,607 | $ | 32,674 | $ | 81,275 | $ | 113,192 | ||||||
31
Quarter and Nine Months Ended September 30, 2010 compared to Quarter and Nine Months
Ended September 30, 2009
The following table presents our consolidated operating results as a percentage of consolidated revenues for the quarters and nine months ended September 30, 2010 and 2009.
|
Quarter Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | 2010 | 2009 | |||||||||||
Revenues |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||
Operating expenses: |
|||||||||||||||
Cost of revenues |
43.6 | 39.1 | 46.6 | 41.5 | |||||||||||
Sales and marketing |
18.0 | 21.3 | 19.5 | 21.0 | |||||||||||
Technology and development |
7.4 | 7.3 | 6.2 | 6.7 | |||||||||||
General and administrative |
13.6 | 13.0 | 12.3 | 12.0 | |||||||||||
Amortization of intangible assets |
4.1 | 4.2 | 3.5 | 3.5 | |||||||||||
Restructuring charges |
| | 0.2 | | |||||||||||
Total operating expenses |
86.8 | 84.9 | 88.2 | 84.7 | |||||||||||
Operating income |
13.2 | 15.1 | 11.8 | 15.3 | |||||||||||
Interest income |
0.2 | 0.2 | 0.2 | 0.2 | |||||||||||
Interest expense |
(2.8 | ) | (3.5 | ) | (2.8 | ) | (3.3 | ) | |||||||
Other income (expense), net |
| 0.3 | | 0.1 | |||||||||||
Income before income taxes |
10.6 | 12.1 | 9.3 | 12.2 | |||||||||||
Provision for income taxes |
4.3 | 4.6 | 3.8 | 5.1 | |||||||||||
Net income |
6.3 | % | 7.5 | % | 5.4 | % | 7.1 | % | |||||||
Consolidated Results
Revenues. Consolidated revenues decreased by $22.7 million, or 10%, to $193.5 million for the quarter ended September 30, 2010, compared to $216.2 million for the quarter ended September 30, 2009. The decrease was due to a $10.5 million decrease in revenues from our Communications segment, a $9.6 million decrease in revenues from our Classmates Media segment and a $2.5 million decrease in revenues from our FTD segment. Consolidated revenues related to our FTD, Classmates Media and Communications segments constituted 54.1%, 25.3% and 20.7%, respectively, of our total segment revenues for the quarter ended September 30, 2010, compared to 49.6%, 27.1% and 23.4%, respectively, for the quarter ended September 30, 2009. As a result of a number of factors, including those discussed throughout the results of operations discussion, we anticipate consolidated revenues and operating income will decrease in 2010 as compared to 2009.
Consolidated revenues decreased by $52.7 million, or 7%, to $688.0 million for the nine months ended September 30, 2010, compared to $740.6 million for the nine months ended September 30, 2009. The decrease was due to a $35.4 million decrease in revenues from our Communications segment and a $26.9 million decrease in revenues from our Classmates Media segment, partially offset by a $9.7 million increase in revenues from our FTD segment. Consolidated revenues related to our FTD, Classmates Media and Communications segments constituted 60.0%, 21.5% and 18.5%, respectively, of our total segment revenues for the nine months ended September 30, 2010, compared to 54.5%, 23.6% and 21.9%, respectively, for the nine months ended September 30, 2009.
Cost of Revenues. Consolidated cost of revenues decreased by $0.2 million, or less than 1%, to $84.4 million for the quarter ended September 30, 2010, compared to $84.6 million for the quarter ended September 30, 2009. Consolidated cost of revenues as a percentage of consolidated revenues
32
increased to 43.6% for the quarter ended September 30, 2010, compared to 39.1% for the prior-year period. The decrease of $0.2 million was due to a $1.6 million decrease in cost of revenues associated with our Communications segment. The decrease was partially offset by a $0.9 million increase in cost of revenues associated with our Classmates Media segment and a $0.6 million increase in cost of revenues associated with our FTD segment. Cost of revenues related to our FTD, Classmates Media and Communications segments constituted 77.2%, 10.7% and 12.1%, respectively, of our total segment cost of revenues for the quarter ended September 30, 2010, compared to 76.3%, 9.7% and 14.0%, respectively, for the quarter ended September 30, 2009.
Consolidated cost of revenues increased by $13.1 million, or 4%, to $320.5 million for the nine months ended September 30, 2010, compared to $307.3 million for the nine months ended September 30, 2009. Consolidated cost of revenues as a percentage of consolidated revenues increased to 46.6% for the nine months ended September 30, 2010, compared to 41.5% for the prior-year period. The increase of $13.1 million was due to a $19.5 million increase in cost of revenues associated with our FTD segment and a $0.8 million increase in depreciation expense. These increases were partially offset by a $5.9 million decrease in cost of revenues associated with our Communications segment and a $1.0 million decrease associated with our Classmates Media segment. Cost of revenues related to our FTD, Classmates Media and Communications segments constituted 82.3%, 8.0% and 9.7%, respectively, of our total segment cost of revenues for the nine months ended September 30, 2010, compared to 79.3%, 8.6% and 12.1%, respectively, for the nine months ended September 30, 2009.
Sales and Marketing Expenses. Consolidated sales and marketing expenses decreased by $11.4 million, or 25%, to $34.8 million for the quarter ended September 30, 2010, compared to $46.1 million for the quarter ended September 30, 2009. Consolidated sales and marketing expenses as a percentage of consolidated revenues decreased to 18.0% for the quarter ended September 30, 2010, compared to 21.3% for the prior-year period. The decrease of $11.4 million was due to a $6.5 million decrease in sales and marketing expenses associated with our Communications segment, a $4.6 million decrease in sales and marketing expenses associated with our Classmates Media segment and a $0.3 million decrease in sales and marketing expenses associated with our FTD segment. Sales and marketing expenses related to our FTD, Classmates Media and Communications segments constituted 47.0%, 41.0% and 12.0%, respectively, of total segment sales and marketing expenses for the quarter ended September 30, 2010, compared to 36.0%, 40.9% and 23.1%, respectively, for the quarter ended September 30, 2009.
Consolidated sales and marketing expenses decreased by $21.7 million, or 14%, to $133.9 million for the nine months ended September 30, 2010, compared to $155.6 million for the nine months ended September 30, 2009. Consolidated sales and marketing expenses as a percentage of consolidated revenues decreased to 19.5% for the nine months ended September 30, 2010, compared to 21.0% for the prior-year period. The decrease of $21.7 million was due to a $15.1 million decrease in sales and marketing expenses associated with our Communications segment and a $10.7 million decrease in sales and marketing expenses associated with our Classmates Media segment. These decreases were partially offset by a $3.7 million increase in sales and marketing expenses associated with our FTD segment and a $0.3 million increase in depreciation expense. Sales and marketing expenses related to our FTD, Classmates Media and Communications segments constituted 52.9%, 35.0% and 12.2%, respectively, of total segment sales and marketing expenses for the nine months ended September 30, 2010, compared to 43.1%, 36.9% and 20.1%, respectively, for the nine months ended September 30, 2009.
Technology and Development Expenses. Consolidated technology and development expenses decreased by $1.4 million, or 9%, to $14.3 million for the quarter ended September 30, 2010, compared to $15.7 million for the quarter ended September 30, 2009. Consolidated technology and development expenses as a percentage of consolidated revenues were 7.4% for the quarter ended September 30, 2010, compared to 7.3% for the prior-year period. The decrease of $1.4 million was primarily related to a $1.2 million decrease in technology and development expenses associated with our Communications
33
segment and a $0.4 million decrease in technology and development expenses associated with our FTD segment. Technology and development expenses related to our FTD, Classmates Media and Communications segments constituted 21.6%, 50.3% and 28.0%, respectively, of total segment technology and development expenses for the quarter ended September 30, 2010, compared to 22.0%, 44.0% and 34.0%, respectively, for the quarter ended September 30, 2009.
Consolidated technology and development expenses decreased by $7.3 million, or 15%, to $42.3 million for the nine months ended September 30, 2010, compared to $49.6 million for the nine months ended September 30, 2009. Consolidated technology and development expenses as a percentage of consolidated revenues decreased to 6.2% for the nine months ended September 30, 2010, compared to 6.7% for the prior-year period. The decrease of $7.3 million was primarily related to a $4.4 million decrease in technology and development expenses associated with our Communications segment, a $3.0 million decrease associated with our Classmates Media segment and a $0.5 million decrease associated with our FTD segment. These decreases were partially offset by a $0.6 million increase in depreciation expense. Technology and development expenses related to our FTD, Classmates Media and Communications segments constituted 23.9%, 48.5% and 27.6%, respectively, of total segment technology and development expenses for the nine months ended September 30, 2010, compared to 20.8%, 46.6% and 32.6%, respectively, for the nine months ended September 30, 2009.
General and Administrative Expenses. Consolidated general and administrative expenses decreased by $1.8 million, or 6%, to $26.3 million for the quarter ended September 30, 2010, compared to $28.1 million for the quarter ended September 30, 2009. Consolidated general and administrative expenses as a percentage of consolidated revenues increased to 13.6% for the quarter ended September 30, 2010, compared to 13.0% for the prior-year period. The decrease of $1.8 million was primarily due to a $1.3 million decrease associated with our Communications segment and a $0.7 million decrease associated with our Classmates Media segment. General and administrative expenses related to our FTD, Classmates Media and Communications segments constituted 40.1%, 32.3% and 27.6%, respectively, of total segment general and administrative expenses for the quarter ended September 30, 2010, compared to 36.9%, 32.5% and 30.5%, respectively, for the quarter ended September 30, 2009.
Consolidated general and administrative expenses decreased by $4.1 million, or 5%, to $84.6 million for the nine months ended September 30, 2010, compared to $88.6 million for the nine months ended September 30, 2009. Consolidated general and administrative expenses as a percentage of consolidated revenues increased to 12.3% for the nine months ended September 30, 2010, compared to 12.0% for the prior-year period. The decrease of $4.1 million was primarily due to a $2.1 million decrease in general and administrative expenses associated with our Communications segment, a $1.7 million decrease in general and administrative expenses associated with our Classmates Media segment and a $0.3 million decrease in depreciation expense. Consolidated general and administrative expenses for the nine months ended September 30, 2010 included $2.0 million of expenses incurred in the first quarter of this year in connection with a potential transaction that failed to consummate. Such expenses were allocated to the FTD, Classmates Media and Communications segments equally and are reflected in the aforementioned results. General and administrative expenses related to our FTD, Classmates Media and Communications segments constituted 39.8%, 32.7% and 27.4%, respectively, of total segment general and administrative expenses for the nine months ended September 30, 2010, compared to 38.0%, 33.3% and 28.7%, respectively, for the nine months ended September 30, 2009.
Amortization of Intangible Assets. Consolidated amortization of intangible assets decreased by $1.0 million, or 11%, to $8.0 million for the quarter ended September 30, 2010, compared to $9.0 million for the quarter ended September 30, 2009. Consolidated amortization of intangible assets decreased by $2.0 million, or 7%, to $24.3 million for the nine months ended September 30, 2010, compared to $26.3 million for the nine months ended September 30, 2009. The decreases were
34
primarily due to certain intangible assets related to our acquisition of Classmates Online, Inc. and its subsidiaries in 2004 becoming fully amortized in 2009 and 2010.
Restructuring Charges. Consolidated restructuring charges were $0.1 million and $1.1 million for the quarter and nine months ended September 30, 2010, respectively. There were no restructuring charges for the quarter and nine months ended September 30, 2009. Restructuring charges for the quarter and nine months ended September 30, 2010 were primarily related to the closure of certain FTD call center facilities in the U.S. and the U.K.
Interest Income. Interest income decreased by $0.1 million, or 23%, to $0.4 million for the quarter ended September 30, 2010, compared to $0.5 million for the quarter ended September 30, 2009. Interest income increased by $0.1 million, or 6%, to $1.3 million for the nine months ended September 30, 2010, compared to $1.2 million for the nine months ended September 30, 2009.
Interest Expense. Interest expense decreased by $2.1 million, or 27%, to $5.5 million for the quarter ended September 30, 2010, compared to $7.5 million for the quarter ended September 30, 2009. Interest expense decreased by $5.6 million, or 23%, to $18.9 million for the nine months ended September 30, 2010, compared to $24.5 million for the nine months ended September 30, 2009. The decrease was primarily due to declining debt balances as a result of repayments on our credit facilities.
Other Income (Expense), Net. Other income (expense), net, was $(40,000) and $0.1 million for the quarter and nine months ended September 30, 2010, respectively, compared to $0.6 million and $0.7 million for the quarter and nine months ended September 30, 2009, respectively.
Provision for Income Taxes. For the quarter and nine months ended September 30, 2010, we recorded a provision for income taxes of $8.3 million and $26.4 million, respectively, on pre-tax income of $20.5 million and $63.7 million, respectively, resulting in a year-to-date effective income tax rate of 41.4%. For the quarter and nine months ended September 30, 2009, we recorded a provision for income taxes of $10.0 million and $38.1 million, respectively, on pre-tax income of $26.2 million and $90.5 million, respectively, resulting in a year-to-date effective income tax rate of 42.0%. The year-over-year rate has declined primarily due to the benefit from the decrease in non-deductible stock-based compensation, partially offset by an increase in the year-to-date effective income tax rate as a result of both a higher percentage of permanent differences relative to pre-tax income in the nine months ended September 30, 2010 and a year-over-year decrease in discrete benefits, compared to the nine months ended September 30, 2009.
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FTD Segment Results
The following table presents FTD segment's operating expenses and income from operations as a percentage of FTD revenues for the quarters and nine months ended September 30, 2010 and 2009.
|
Quarter Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | 2010 | 2009 | |||||||||||
Revenues |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||
Operating expenses: |
|||||||||||||||
Cost of revenues |
60.2 | 58.2 | 62.0 | 58.7 | |||||||||||
Sales and marketing |
15.7 | 15.6 | 17.2 | 16.7 | |||||||||||
Technology and development |
2.5 | 2.8 | 2.1 | 2.2 | |||||||||||
General and administrative |
9.6 | 9.3 | 7.8 | 8.0 | |||||||||||
Restructuring charges |
0.1 | | 0.3 | | |||||||||||
Total operating expenses |
87.9 | 85.8 | 89.3 | 85.6 | |||||||||||
Segment income from operations |
12.1 | % | 14.2 | % | 10.7 | % | 14.4 | % | |||||||
FTD Revenues. FTD revenues decreased by $2.5 million, or 2%, to $105.0 million for the quarter ended September 30, 2010, compared to $107.5 million for the quarter ended September 30, 2009. Excluding the impact of foreign currency exchange rates of $1.7 million due to a weaker British Pound versus the U.S. Dollar, revenues decreased by $0.8 million, or 1%, compared to the prior-year period, due to a $1.0 million decrease in advertising revenues generated from post-transaction sales. The decrease was partially offset by an increase in consumer order volume.
FTD revenues increased by $9.7 million, or 2%, to $414.4 million for the nine months ended September 30, 2010, compared to $404.7 million for the nine months ended September 30, 2009. Excluding the impact of foreign currency exchange rates of $0.6 million due to a stronger British Pound versus the U.S. Dollar, revenues increased by $9.0 million, or 2%, compared to the prior-year period, due to increased consumer order volume. The increase was partially offset by a decrease in advertising revenues generated from post-transaction sales.
FTD Cost of Revenues. FTD cost of revenues increased by $0.6 million, or 1%, to $63.2 million for the quarter ended September 30, 2010, compared to $62.6 million for the quarter ended September 30, 2009. Excluding the impact of foreign currency exchange rates of $1.1 million, cost of revenues increased by $1.8 million, or 3%, compared to the prior-year period, primarily as a result of an increase in consumer order volume as well as a shift in the mix of products and services sold and increased shipping costs. FTD cost of revenues as a percentage of revenues increased to 60.2% for the quarter ended September 30, 2010, compared to 58.2% for the prior-year period. Cost of revenues as a percentage of revenues was negatively impacted by an increased level of discounts on products sold to consumers, increased shipping costs, a shift in the mix of products and services sold, and a decrease in post-transaction sales, which have minimal cost of revenues.
FTD cost of revenues increased by $19.5 million, or 8%, to $257.1 million for the nine months ended September 30, 2010, compared to $237.6 million for the nine months ended September 30, 2009. Excluding the impact of foreign currency exchange rates of $0.5 million, cost of revenues increased by $18.9 million, or 8%, compared to the prior-year period, primarily as a result of an increase in consumer order volume as well a shift in the mix of products and services sold and increased shipping costs. FTD cost of revenues as a percentage of revenues increased to 62.0% for the nine months ended September 30, 2010, compared to 58.7% for the prior-year period. Cost of revenues as a percentage of revenues was negatively impacted by an increased level of discounts on products sold to consumers,
36
increased shipping costs, a shift in the mix of products and services sold, and a decrease in post-transaction sales, which have minimal cost of revenues.
FTD Sales and Marketing Expenses. FTD sales and marketing expenses decreased by $0.3 million, or 2%, to $16.5 million for the quarter ended September 30, 2010, compared to $16.7 million for the quarter ended September 30, 2009. FTD sales and marketing expenses as a percentage of revenues increased slightly to 15.7% for the quarter ended September 30, 2010, compared to 15.6% for the prior-year period.
FTD sales and marketing expenses increased by $3.7 million, or 5%, to $71.1 million for the nine months ended September 30, 2010, compared to $67.5 million for the nine months ended September 30, 2009. FTD sales and marketing expenses as a percentage of revenues increased to 17.2% for the nine months ended September 30, 2010, compared to 16.7% for the prior-year period. The increase was primarily due to higher marketing expenditures related to television advertising for the Valentine's Day and Mother's Day holidays in 2010 and higher customer service costs, partially offset by a decrease in print advertising expenses.
FTD Technology and Development Expenses. FTD technology and development expenses decreased by $0.4 million, or 13%, to $2.6 million for the quarter ended September 30, 2010, compared to $3.0 million for the quarter ended September 30, 2009. FTD technology and development expenses as a percentage of revenues decreased to 2.5% for the quarter ended September 30, 2010, compared to 2.8% for the prior-year period. The decrease was primarily due to lower web hosting costs.
FTD technology and development expenses decreased by $0.5 million, or 6%, to $8.5 million for the nine months ended September 30, 2010, compared to $9.0 million for the nine months ended September 30, 2009. FTD technology and development expenses as a percentage of revenues decreased slightly to 2.1% for the nine months ended September 30, 2010, compared to 2.2% for the prior-year period. The decrease was primarily due to lower web hosting costs and lower personnel-related costs.
FTD General and Administrative Expenses. FTD general and administrative expenses remained flat at $10.0 million for the quarter ended September 30, 2010, compared to the quarter ended September 30, 2009. FTD general and administrative expenses as a percentage of revenues increased to 9.6% for the quarter ended September 30, 2010, compared to 9.3% for the prior-year period.
FTD general and administrative expenses increased by $0.1 million to $32.3 million for the nine months ended September 30, 2010, compared to $32.2 million for the nine months ended September 30, 2009. FTD general and administrative expenses as a percentage of revenues decreased to 7.8% for the nine months ended September 30, 2010, compared to 8.0% for the prior-year period. The increase in general and administrative expenses was largely attributable to expenses of $0.7 million related to a potential transaction in the first quarter of this year that failed to consummate and a $0.4 million charge, net of an insurance reimbursement, related to the resolution of the investigation of the Attorney General for New York, as well as an increase in professional fees associated with such matter. These increases were partially offset by a decrease in bad debt expense and a decrease in stock-based compensation.
FTD Restructuring Charges. FTD recorded restructuring charges of $0.1 million and $1.2 million, respectively, for the quarter and the nine months ended September 30, 2010. These charges were primarily related to the closure of certain call center facilities in the U.S. and the U.K. There were no restructuring charges for the quarter and nine months ended September 30, 2009.
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Classmates Media Segment Results
The following table presents the Classmates Media segment's operating expenses and income from operations as a percentage of Classmates Media revenues for the quarters and nine months ended September 30, 2010 and 2009.
|
Quarter Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | 2010 | 2009 | |||||||||||
Revenues |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||
Operating expenses: |
|||||||||||||||
Cost of revenues |
17.9 | 13.5 | 16.7 | 14.7 | |||||||||||
Sales and marketing |
29.3 | 32.4 | 31.7 | 33.0 | |||||||||||
Technology and development |
12.4 | 10.2 | 11.6 | 11.5 | |||||||||||
General and administrative |
16.5 | 15.0 | 17.9 | 16.1 | |||||||||||
Restructuring charges |
| | (0.1 | ) | | ||||||||||
Total operating expenses |
76.0 | 71.0 | 77.9 | 75.3 | |||||||||||
Segment income from operations |
24.0 | % | 29.0 | % | 22.1 | % | 24.7 | % | |||||||
Classmates Media Revenues. Classmates Media revenues decreased by $9.6 million, or 16%, to $49.1 million for the quarter ended September 30, 2010, compared to $58.7 million for the quarter ended September 30, 2009. The decrease was partially due to a $5.1 million decrease in services revenues. Services revenues decreased, despite a 4% increase in our average number of pay accounts from 4.7 million for the quarter ended September 30, 2009 to 4.9 million for the quarter ended September 30, 2010, as a result of a 17% decrease in ARPU from $2.71 for the quarter ended September 30, 2009 to $2.26 for the quarter ended September 30, 2010. The decrease in ARPU was primarily attributable to a greater percentage of discounted pricing plans offered primarily to certain domestic online social networking pay accounts on a promotional basis. At September 30, 2010, the number of pay accounts decreased by 187,000 when compared to June 30, 2010. We anticipate that the number of pay accounts will decline in the fourth quarter of this year by a greater amount than the decline experienced in the quarter ended September 30, 2010. We expect ARPU to increase during the fourth quarter as a large number of pay accounts on discounted pricing plans renew at full price on their anniversary dates; however, we will continue to offer various levels of discounted pricing plans and have no assurance that ARPU will increase in the future. We expect churn to increase further in the fourth quarter primarily because a larger number of pay accounts on discounted pricing plans will have subscription terms expire during the fourth quarter as compared to the third quarter. In addition, Classmates Media advertising revenues decreased by $4.5 million in the quarter ended September 30, 2010, compared to the quarter ended September 30, 2009, primarily due to a decrease in revenues generated from post-transaction sales, partially offset by an increase in revenues generated from our online loyalty marketing service.
Classmates Media revenues decreased by $26.9 million, or 15%, to $148.4 million for the nine months ended September 30, 2010, compared to $175.3 million for the nine months ended September 30, 2009. The decrease was partially due to a $14.9 million decrease in services revenues. Services revenues decreased, despite a 6% increase in our average number of pay accounts from 4.6 million for the nine months ended September 30, 2009 to 4.8 million for the nine months ended September 30, 2010, as a result of an 18% decrease in ARPU from $2.81 for the nine months ended September 30, 2009 to $2.30 for the nine months ended September 30, 2010. The decrease in ARPU was primarily attributable to a greater percentage of discounted pricing plans offered primarily to certain domestic online social networking pay accounts on a promotional basis. In addition, Classmates Media advertising revenues decreased by $12.1 million primarily due to a decrease in revenues
38
generated from post-transaction sales in the nine months ended September 30, 2010, compared to the nine months ended September 30, 2009, partially offset by an increase in revenues generated from our online loyalty marketing services.
Classmates Media Cost of Revenues. Classmates Media cost of revenues increased by $0.9 million, or 11%, to $8.8 million for the quarter ended September 30, 2010, compared to $7.9 million for the quarter ended September 30, 2009. Classmates Media cost of revenues as a percentage of Classmates Media revenues increased to 17.9% for the quarter ended September 30, 2010, compared to 13.5% for the prior-year period. The increase of $0.9 million was primarily due to a $0.7 million increase in overhead-related costs and a $0.5 million increase in the cost of points earned by members of our online loyalty marketing service, partially offset by a decrease in credit card processing fees. The increase in cost of revenues as a percentage of Classmates Media revenues was primarily due to the absence of revenues from post-transaction sales, which have minimal costs of revenues.
Classmates Media cost of revenues decreased by $1.0 million, or 4% to $24.8 million for the nine months ended September 30, 2010, compared to $25.8 million for the nine months ended September 30, 2009. Classmates Media cost of revenues as a percentage of Classmates Media revenues increased to 16.7% for the nine months ended September 30, 2010, compared to 14.7% for the prior-year period. The decrease of $1.0 million was primarily due to a $1.4 million decrease in credit card processing fees, partially offset by a $0.3 million increase in overhead-related costs and a $0.3 million increase in the cost of points earned by members of our online loyalty marketing service. The increase in cost of revenues as a percentage of Classmates Media revenues was primarily due to significantly lower revenues from post-transaction sales, which have minimal costs of revenues.
Classmates Media Sales and Marketing Expenses. Classmates Media sales and marketing expenses decreased by $4.6 million, or 24%, to $14.4 million for the quarter ended September 30, 2010, compared to $19.0 million for the quarter ended September 30, 2009. Classmates Media sales and marketing expenses as a percentage of Classmates Media revenues decreased to 29.3% for the quarter ended September 30, 2010, compared to 32.4% for the prior-year period. The decrease of $4.6 million was largely the result of a $3.8 million decrease in marketing costs to acquire new online social networking members and a $0.7 million decrease in personnel- and overhead-related costs as a result of reduced headcount.
Classmates Media sales and marketing expenses decreased by $10.7 million, or 19%, to $47.1 million for the nine months ended September 30, 2010, compared to $57.8 million for the nine months ended September 30, 2009. Classmates Media sales and marketing expenses as a percentage of Classmates Media revenues decreased to 31.7% for the nine months ended September 30, 2010, compared to 33.0% for the prior-year period. The decrease of $10.7 million was largely the result of a $9.7 million decrease in marketing costs to acquire new online social networking members and a $2.5 million decrease in personnel- and overhead-related costs as a result of reduced headcount, partially offset by a $1.5 million increase in costs to acquire new online loyalty marketing members.
Classmates Media Technology and Development Expenses. Classmates Media technology and development expenses increased by $0.1 million, or 2%, to $6.1 million for the quarter ended September 30, 2010, compared to $6.0 million for the quarter ended September 30, 2009. Classmates Media technology and development expenses as a percentage of Classmates Media revenues increased to 12.4% for the quarter ended September 30, 2010, compared to 10.2% for the prior-year period.
Classmates Media technology and development expenses decreased by $3.0 million, or 15%, to $17.2 million for the nine months ended September 30, 2010, compared to $20.2 million for the nine months ended September 30, 2009. Classmates Media technology and development expenses as a percentage of Classmates Media revenues increased slightly to 11.6% for the nine months ended September 30, 2010, compared to 11.5% for the prior-year period. The $3.0 million decrease was
39
primarily due to a $3.3 million decrease in personnel- and overhead-related costs as a result of reduced headcount.
Classmates Media General and Administrative Expenses. Classmates Media general and administrative expenses decreased by $0.7 million, or 8%, to $8.1 million for the quarter ended September 30, 2010, compared to $8.8 million for the quarter ended September 30, 2009. Classmates Media general and administrative expenses as a percentage of Classmates Media revenues increased to 16.5% for the quarter ended September 30, 2010, compared to 15.0% for the prior-year period. The decrease of $0.7 million was primarily due to a $0.4 million insurance reimbursement related to the resolution of the investigation of the Attorney General for New York and a $0.3 million favorable non-income tax settlement.
Classmates Media general and administrative expenses decreased by $1.7 million, or 6%, to $26.5 million for the nine months ended September 30, 2010, compared to $28.2 million for the nine months ended September 30, 2009. Classmates Media general and administrative expenses as a percentage of Classmates Media revenues increased to 17.9% for the nine months ended September 30, 2010, compared to 16.1% for the prior-year period. The decrease of $1.7 million was primarily due to a $4.2 million decrease in personnel- and overhead-related costs and a $0.3 million favorable non-income tax settlement in the third quarter of this year. These decreases were partially offset by a $1.0 million increase in professional services and consulting fees, $0.7 million of expenses related to a potential transaction in the first quarter of the year that failed to consummate, a $0.6 million charge, net of insurance reimbursement, related to the resolution of the investigation of the Attorney General for New York, and a $0.4 million increase in a reserve for a pending legal settlement.
Communications Segment Results
The following table presents the Communications segment's operating expenses and income from operations as a percentage of Communications revenues for the quarters and nine months ended September 30, 2010 and 2009.
|
Quarter Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2010 | 2009 | 2010 | 2009 | |||||||||||
Revenues |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||
Operating expenses: |
|||||||||||||||
Cost of revenues |
24.6 | 22.6 | 23.9 | 22.3 | |||||||||||
Sales and marketing |
10.5 | 21.2 | 12.8 | 19.3 | |||||||||||
Technology and development |
8.4 | 9.1 | 7.7 | 8.7 | |||||||||||
General and administrative |
17.2 | 16.3 | 17.4 | 14.9 | |||||||||||
Total operating expenses |
60.7 | 69.2 | 61.8 | 65.2 | |||||||||||
Segment income from operations |
39.3 | % | 30.8 | % | 38.2 | % | 34.8 | % | |||||||
Communications Revenues. Communications revenues decreased by $10.5 million, or 21%, to $40.2 million for the quarter ended September 30, 2010, compared to $50.7 million for the quarter ended September 30, 2009. The decrease was primarily due to a $9.2 million decrease in services revenues as a result of a 29% decrease in our average number of dial-up Internet access pay accounts from 1.1 million for the quarter ended September 30, 2009 to 0.8 million for the quarter ended September 30, 2010, partially offset by an increase in ARPU from $9.43 for the quarter ended September 30, 2009 to $9.58 for the quarter ended September 30, 2010. The decrease in Communications revenues was also due to a $1.4 million decrease in advertising revenues resulting from the decrease in pay accounts and a decrease in search revenues following our transition to a new
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search provider in the first quarter of this year. We expect that Communications pay accounts and services revenues will continue to decline.
Communications revenues decreased by $35.4 million, or 22%, to $127.4 million for the nine months ended September 30, 2010, compared to $162.8 million for the nine months ended September 30, 2009. The decrease was primarily due to a $30.6 million decrease in services revenues as a result of a 28% decrease in our average number of dial-up Internet access pay accounts from 1.2 million for the nine months ended September 30, 2009 to 0.9 million for the nine months ended September 30, 2010, partially offset by an increase in ARPU from $9.50 for the nine months ended September 30, 2009 to $9.55 for the nine months ended September 30, 2010. The decrease in Communications revenues was also due to a $4.8 million decrease in advertising revenues resulting from the decrease in pay accounts and a decrease in search revenues following our transition to a new search provider in the first quarter of this year.
Communications Cost of Revenues. Communications cost of revenues decreased by $1.6 million, or 14%, to $9.9 million for the quarter ended September 30, 2010, compared to $11.5 million for the quarter ended September 30, 2009. Communications cost of revenues as a percentage of Communications revenues increased to 24.6% for the quarter ended September 30, 2010, compared to 22.6% for the prior-year period due to a higher percentage of revenues being generated from our broadband services which have higher costs of revenues than our dial-up services. The decrease of $1.6 million was primarily related to a $0.8 million decrease in customer support and billing-related costs. In addition, Communications cost of revenues decreased as a result of a $0.4 million decrease in telecommunications costs associated with our dial-up Internet access services primarily due to a decrease in the number of dial-up Internet access pay accounts and a decrease in hourly usage per pay account and a $0.3 million decrease in costs associated with our broadband services. We expect cost of revenues as a percentage of revenues to continue to increase as revenues continue to decrease.
Communications cost of revenues decreased by $5.9 million, or 16%, to $30.4 million for the nine months ended September 30, 2010, compared to $36.3 million for the nine months ended September 30, 2009. Communications cost of revenues as a percentage of Communications revenues increased to 23.9% for the nine months ended September 30, 2010, compared to 22.3% for the prior-year period due to a higher percentage of revenues being generated from our broadband services which have higher costs of revenues than our dial-up services. The decrease of $5.9 million was primarily due to a $2.4 million decrease in customer support and billing-related costs due to a decrease in the number of dial-up Internet access pay accounts and a $1.7 million decrease in telecommunications costs associated with our dial-up Internet access services primarily due to a decrease in the number of dial-up Internet access pay accounts and a decrease in hourly usage per pay account. In addition, Communications cost of revenues decreased as a result of a $1.0 million decrease in personnel-related costs as a result of reduced headcount and a $0.6 million decrease in costs associated with our broadband services.
Communications Sales and Marketing Expenses. Communications sales and marketing expenses decreased by $6.5 million, or 61%, to $4.2 million for the quarter ended September 30, 2010, compared to $10.7 million for the quarter ended September 30, 2009. Communications sales and marketing expenses as a percentage of Communications revenues decreased to 10.5% for the quarter ended September 30, 2010, compared to 21.2% for the prior-year period. The decrease in expenses reflects the Company's decision to reduce sales and marketing expenses. The decrease of $6.5 million was primarily attributable to a $3.5 million decline in advertising and promotion costs related to our dial-up Internet access services, a $1.7 million decrease in distribution costs, a $0.5 million decrease in customer service costs related to our dial-up Internet access services, a $0.5 million decrease in personnel- and overhead-related costs as a result of reduced headcount, and a $0.4 million decrease in advertising and promotion costs related to our broadband services.
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Communications sales and marketing expenses decreased by $15.1 million, or 48%, to $16.4 million for the nine months ended September 30, 2010, compared to $31.4 million for the nine months ended September 30, 2009. Communications sales and marketing expenses as a percentage of Communications revenues decreased to 12.8% for the nine months ended September 30, 2010, compared to 19.3% for the prior-year period. The decrease in expenses reflects the Company's decision to reduce sales and marketing expenses. The decrease of $15.1 million was primarily attributable to a $7.8 million decline in advertising and promotion costs related to our dial-up Internet access services, a $4.2 million decrease in distribution costs, a $1.7 million decrease in customer service costs related to our dial-up Internet access services, and a $1.2 million decrease in personnel- and overhead-related expenses as a result of reduced headcount.
Communications Technology and Development Expenses. Communications technology and development expenses decreased by $1.2 million, or 27%, to $3.4 million for the quarter ended September 30, 2010, compared to $4.6 million for the quarter ended September 30, 2009. Communications technology and development expenses as a percentage of Communications revenues decreased to 8.4% for the quarter ended September 30, 2010, compared to 9.1% for the prior-year period. The decrease in expenses was the result of a decrease in personnel- and overhead-related costs as a result of reduced headcount.
Communications technology and development expenses decreased by $4.4 million, or 31%, to $9.8 million for the nine months ended September 30, 2010, compared to $14.2 million for the nine months ended September 30, 2009. Communications technology and development expenses as a percentage of Communications revenues decreased to 7.7% for the nine months ended September 30, 2010, compared to 8.7% for the prior-year period. The decrease of $4.4 million was the result of a decrease in personnel- and overhead-related expenses as a result of reduced headcount.
Communications General and Administrative Expenses. Communications general and administrative expenses decreased by $1.3 million, or 16%, to $6.9 million for the quarter ended September 30, 2010, compared to $8.2 million for the quarter ended September 30, 2009. Communications general and administrative expenses as a percentage of Communications revenues increased to 17.2% for the quarter ended September 30, 2010, compared to 16.3% for the prior-year period. The decrease of $1.3 million was primarily due to a $1.0 million decrease in personnel- and overhead-related costs as a result of reduced headcount and a $0.2 million decrease in bad debt expense. The increase as a percentage of revenues was largely attributable to continued declines in revenues due to continuing declines in the number of dial-up Internet access pay accounts.
Communications general and administrative expenses decreased by $2.1 million, or 9%, to $22.2 million for the nine months ended September 30, 2010, compared to $24.3 million for the nine months ended September 30, 2009. Communications general and administrative expenses as a percentage of Communications revenues increased to 17.4% for the nine months ended September 30, 2010, compared to 14.9% for the prior-year period. The decrease of $2.1 million was due a $2.0 million decrease in personnel- and overhead-related costs as a result of reduced headcount and a $0.8 million decrease in professional services and consulting fees. The decrease was partially offset by $0.7 million of expenses related to a potential transaction in the first quarter of 2010 that failed to consummate. The increase as a percentage of revenues was largely attributable to continued declines in revenues due to continuing declines in the number of dial-up Internet access pay accounts.
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Liquidity and Capital Resources
On August 26, 2008, we completed the acquisition of 100% of the capital stock of FTD Group, Inc. The FTD acquisition was funded, in part, with the net proceeds from (i) a $60 million senior secured credit agreement with Silicon Valley Bank (the "UOL Credit Agreement") and (ii) $375 million of term loan borrowings under senior secured credit facilities with Wells Fargo Bank, National Association, as Administrative Agent (the "FTD Credit Agreement"). In connection with the FTD Credit Agreement, FTD Group, Inc. received a $50 million revolving line of credit. In April 2010, we paid $14.7 million to retire our credit facility with Silicon Valley Bank.
Our total cash and cash equivalent balances decreased by $25.8 million, or 22.4%, to $89.7 million at September 30, 2010, compared to $115.5 million at December 31, 2009. Our summary cash flows for the nine months ended September 30, 2010 and 2009 were as follows (in thousands):
|
Nine Months Ended September 30, |
||||||
---|---|---|---|---|---|---|---|
|
2010 | 2009 | |||||
Net cash provided by operating activities |
$ | 95,421 | $ | 104,275 | |||
Net cash used for investing activities |
$ | (21,050 | ) | $ | (17,176 | ) | |
Net cash used for financing activities |
$ | (98,440 | ) | $ | (72,146 | ) |
Nine Months Ended September 30, 2010 compared to Nine Months Ended September 30, 2009
Net cash provided by operating activities decreased by $8.9 million, or 9%, for the nine months ended September 30, 2010, compared to the nine months ended September 30, 2009. Net cash provided by operating activities is driven by our net income adjusted for changes in working capital and non-cash items, including, but not limited to, depreciation and amortization, stock-based compensation, impairment of goodwill, intangible assets and long-lived assets, deferred taxes, and tax benefits (shortfalls) from equity awards. Net income, adjusted for non-cash items, decreased by $23.3 million to $105.1 million for the nine months ended September 30, 2010, compared to the prior-year period. The decrease was offset by a $14.5 million increase in the change in working capital for the nine months ended September 30, 2010, compared to the prior-year period. Changes in working capital can cause variation in our cash flows provided by operating activities from quarter to quarter due to seasonality, timing and other factors.
Net cash used for investing activities increased by $3.9 million, or 23%, for the nine months ended September 30, 2010, compared to the nine months ended September 30, 2009. The increase was due to $2.2 million in purchases of rights, content and intellectual property related to acquiring and developing new features for our domestic social networking business and a $1.9 million increase in capital expenditures. We currently anticipate expending between $6 million to $8 million on purchases of rights, content and intellectual property in 2010, primarily for the purpose of acquiring and developing such new features.
Capital expenditures for the nine months ended September 30, 2010 were $19.1 million. We currently anticipate that our total capital expenditures for 2010 will be in the range of $30 million to $32 million. The actual amount of future capital expenditures may fluctuate due to a number of factors including, without limitation, potential future acquisitions and new business initiatives, which are difficult to predict and which could change significantly over time. Additionally, technological advances may require us to make capital expenditures to develop or acquire new equipment or technology in order to replace aging or technologically obsolete equipment.
Net cash used for financing activities increased by $26.3 million, or 36%, for the nine months ended September 30, 2010, compared to the nine months ended September 30, 2009. The increase in net cash used for financing activities was primarily due to an increase in common stock repurchases of
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$13.9 million, including $11.0 million under our common stock repurchase program, in the quarter ended September 30, 2010, an increase in payments on term loans of $11.9 million and an increase in the payment of dividends and dividend equivalents of $0.7 million for the nine months ended September 30, 2010, compared to the prior-year period.
The payment of dividends and dividend equivalents is a cash outflow from financing activities. In February, April and July 2010, United Online, Inc.'s Board of Directors declared quarterly cash dividends of $0.10 per share of common stock. The dividends were paid on February 26, 2010, May 28, 2010 and August 31, 2010, respectively, and totaled $9.1 million, $9.4 million and $9.3 million, respectively, including dividend equivalents paid on outstanding restricted stock units. In October 2010, United Online, Inc.'s Board of Directors declared a quarterly cash dividend of $0.10 per share of common stock. The record date for the dividend is November 12, 2010 and the dividend will be paid on November 30, 2010. The payment of future dividends is discretionary and is subject to determination by United Online, Inc.'s Board of Directors each quarter following its review of our financial performance and other factors. In accordance with the terms of the FTD Credit Agreement, cash flows at FTD will, in general, not be available to United Online, Inc. or our segments other than the FTD segment.
Future cash flows from financing activities may also be affected by our repurchases of our common stock. United Online, Inc.'s Board of Directors authorized a common stock repurchase program (the "Program") that allows us to repurchase shares of our common stock through open market or privately negotiated transactions based on prevailing market conditions and other factors through December 31, 2010. From August 2001 through September 30, 2010, we repurchased a total of $150.2 million of our common stock under the Program and at September 30, 2010, the remaining amount available under the Program was $49.8 million.
Cash flows from financing activities may also be negatively impacted by the withholding of a portion of shares underlying the restricted stock units and stock awards we award to employees. We currently do not collect the applicable required employee withholding taxes from employees upon vesting of restricted stock units and upon the issuance of stock awards. Instead, we automatically withhold, from the restricted stock units that vest and the stock awards that are issued, the portion of those shares with a fair market value equal to the amount of the required employee withholding taxes due. We then pay the applicable withholding taxes in cash. The withholding of these shares, although accounted for as a common stock repurchase, does not reduce the amount available under the Program. Similar to repurchases of common stock under the Program, the net effect of such withholding will adversely impact our cash flows from financing activities. The amounts remitted in the nine months ended September 30, 2010 and 2009 were $8.2 million and $5.2 million, respectively, for which we withheld 1.4 million shares and 0.9 million shares of common stock, respectively, that were underlying the restricted stock units which vested and stock awards that were issued. The amount we pay in future quarters will vary based on our stock price and the number of restricted stock units vesting and stock awards being issued during the quarter.
Based on our current projections, we expect to continue to generate positive cash flows from operations, at least in the next twelve months. We may use our existing cash balances and future cash generated from operations to fund, among other things, both contractual payments and optional prepayments on the outstanding balances under the FTD Credit Agreement; dividend payments, if declared by United Online, Inc.'s Board of Directors; the development and/or acquisition of other services, businesses or technologies; the repurchase of our common stock underlying restricted stock units and stock awards to pay the required employee withholding taxes due on vested restricted stock units and stock awards issued; the repurchase of our common stock under the Program; future capital expenditures and future acquisitions of intangible assets, including rights, content and intellectual property.
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Under the terms of the FTD Credit Agreement, there are significant limitations on our ability to use cash flows generated by the FTD segment for the benefit of United Online, Inc. or the Communications and Classmates Media segments. The FTD Credit Agreement also includes provisions which may require us to make debt prepayments in the event that we generate excess cash flow, as defined in the FTD Credit Agreement, on an annual basis. The assessments of future excess cash flow for FTD, on a standalone basis, require us to forecast its respective cash flows from operations less certain cash outflows, including, but not limited to, those related to capital expenditures and income taxes. The determination of excess cash flow obligations requires us to make significant estimates regarding our cash flows from operations, capital expenditures, income taxes, and other items. Actual results could differ from our current projections and we could be required to pay materially different amounts under the excess cash flow provisions of the FTD Credit Agreement. The degree to which our assets are leveraged and the terms of our debt could materially and adversely affect our ability to obtain additional capital as well as the terms at which such capital might be offered to us. With respect to the UOL Credit Agreement, in April 2010, we paid $14.7 million to retire such credit facility. We currently expect to have sufficient liquidity to fulfill our debt service obligations, at least in the next twelve months.
If we need to raise additional capital through public or private debt or equity financings, strategic relationships or other arrangements, this capital might not be available to us in a timely manner, on acceptable terms, or at all. Our failure to raise sufficient capital when needed could severely constrain or prevent us from, among other factors, developing new or enhancing existing services or products, repurchasing our common stock, acquiring other services, businesses or technologies or funding significant capital expenditures and/or purchases of intangible assets, and have a material adverse effect on our business, financial position, results of operations, and cash flows as well as impair our ability to pay future dividends and our ability to service our debt obligations. If additional funds were raised through the issuance of equity or convertible debt securities, the percentage of stock owned by the then-current stockholders could be reduced. Furthermore, such equity or any debt securities that we issue might have rights, preferences or privileges senior to holders of our common stock. In addition, trends in the securities and credit markets may restrict our ability to raise any such additional funds, at least in the near term.
Contractual Obligations
Contractual obligations at September 30, 2010 were as follows (in thousands):
|
Total | Less than 1 Year |
1 Year to Less than 3 Years |
3 Years to Less than 5 Years |
More than 5 Years |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Debt, including interest |
$ | 360,783 | $ | 23,615 | $ | 96,807 | $ | 240,361 | $ | | |||||||
Member redemption liability |
24,074 | 19,278 | 4,796 | | | ||||||||||||
Operating leases |
42,147 | 12,350 | 15,342 | 8,854 | 5,601 | ||||||||||||
Services and promotional contracts |
5,420 | 3,986 | 1,434 | | | ||||||||||||
Telecommunications purchases |
10,883 | 5,837 | 5,046 | | | ||||||||||||
Media purchases |
48 | 48 | | | | ||||||||||||
Floral-related purchases |
5,578 | 4,828 | 750 | | | ||||||||||||
Other long-term liabilities |
2,903 | 1,977 | 263 | 253 | 410 | ||||||||||||
Total |
$ | 451,836 | $ | 71,919 | $ | 124,438 | $ | 249,468 | $ | 6,011 | |||||||
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