United Online (NASDAQ:UNTD) - Buy

Transcription

1 United Online (NASDAQ:UNTD) - Buy August 2, 2012 Research Update Creating Catalysts; UNTD to Spin FTD in Q1 13; Delivers Q2 Beat; Unlocking Value Key Statistics & Estimates Share Price Price Target Market Cap (MM) Enterprise Value (MM) Shares Outstanding (MM) Float (MM) Average Daily Volume 52-Week High 52-Week Low $4.20 $8.72 $380.1 $ $6.19 $3.63 Revenues Q1 Mar 241,505 A 242,292 A 240,445 E Q2 Jun 255,565 A 231,857 A 231,506 E Q3 Sep 182,694 A 173,607 E 175,189 E Q4 Dec 217,921 A 210,871 E 212,656 E FY Dec 897,685 A 858,628 E 859,796 E EPS Q1 Mar $ 0.25 A N/A A $ 0.21 E Q2 Jun $ 0.30 A N/A A $ 0.20 E Q3 Sep $ 0.23 A N/A E $ 0.13 E Q4 Dec $ 0.25 A N/A E $ 0.19 E FY Dec $ 0.89 A $ 0.62 E $ 0.72 E Valuation EV/EBITDA 2.8x 3.7x 3.1x P/E 7.4x 13.0x 10.4x Sources: Capital IQ and B.Riley & Co. Business Description UNTD is a leading provider of consumer products and services over the Internet, where the company's brands have attracted a large online audience that includes more than 60 million registered consumer accounts. UNTD operates in three segments: Communications, Content & Media (which primarily comprises the re-branded Memory Lane nostalgia site), and FTD. The company, with some 1,700 employees, is headquartered in Woodland Hills, CA. Analyst Certification & Additional Disclosures Included in Appendix A Any recommendation contained in this report may not be suitable for all investors. Contact B. Riley & Co., LLC for additional information on the securities mentioned herein. Copyright All rights reserved by B. Riley & Co., LLC Member FINRA & SIPC. Mike Crawford mcrawford@brileyco.com Investment Thesis UNTD at $4.20/sh, is trading with an EV of $513MM, just 3.2x and 6.4x trailing EBITDA and FCF, respectively. We believe this valuation fails to account for the solid e-commerce business that is FTD soon to be a standalone public company as well as optionality on a return to growth at Content & Media and/or Communications. Via new acquisition schoolfeed (a top 25 Facebook app with some 19MM registered members), digital yearbooks, and other mobile and Facebook apps, UNTD is attempting to engineer a nostalgia-driven reengagement with database members. At Communications, meanwhile, UNTD is attempting to forge a migration and ongoing business path from dial-up to low-cost mobile broadband with NetZero 4G. Either way, UNTD today is trading for less than the $747MM, 10x EV/EBITDA it paid to acquire FTD four years ago, and FTD is a stronger business under UNTD s wing. Cash flow remains strong as well, with over 2x dividend coverage in 2012 (on a 9.5% yielding dividend) despite the marketing investment to launch NetZero 4G. And now, investors should not have long to wait; UNTD is spinning off its FTD e-commerce business into a separately-traded public company an action that we believe will unlock significant shareholder value. Key Data Points Q2 revenue, EBITDA, and pro forma EPS all beat, with $232MM, $35MM, and $0.18, compared with our estimates of $230MM, $31MM and $0.14, and consensus of $232MM, $31MM, and $0.13, respectively. Reflecting continued sales and marketing impact from UNTD s nascent 4G mobile service, Q3 revenue and EBITDA guidance of $172MM-$178MM in revenue and $23MM-$27MM EBITDA compares with our prior projections of $178MM and $27MM. We lower our FY 13 model from the prior $883MM, $151MM, and $0.75 EPS to $860MM, $144MM, and $0.72, respectively now presuming a longer turn in both Communications and Content & Media. Valuation & Price Target Our price target remains based on a 6x EV/EBITDA multiple for UNTD s blended businesses and declines from $9.44 to $8.72 due to lower growth expectations for B. Riley & Co., LLC Santa Monica Blvd., Ste. 800, Los Angeles, CA Tel: (310) Fax: (310)

2 Hand Me the Keys No doubt fed up with UNTD s abysmal public market valuation, UNTD management handed over the keys to its board to unlock value by approving a plan to separate the conglomerate into two separately-traded public entities, sending FTD on its way to what will be a 2 nd encore performance in the public market. Recall, UNTD acquired FTD in 2008 after the company s first return to the public markets (Goldman Sachs-led IPO) following an earlier leveraged buyout by Leonard Green. In fact, UNTD acquired FTD for $747MM in August 2008, at a 10x EV/EBITDA valuation that included a premium for brand, scale, international operations, superior AOV (over $62 in 2011), and high (mid-teen) operating margin. In contrast, FTD s closest public comp FLOWERS (FLWS) trades today at 6x EV/EBITDA despite a mid single-digit EBITDA margin, lack of international operations, and high physical inventory risk associated not just with flowers but with its various gift baskets and other sundry items as well. FTD, on the other hand, is a pure e-commerce business and does not handle physical inventory. We believe FTD was somewhat of a neglected asset that had been milked for cash when UNTD acquired it, subsequently revitalized with concentrated re-branding and marketing campaigns that have been paying off in greater number of transactions and higher AOV pushed through the florist network to member dealers, leading to higher customer satisfaction. Accordingly, we believe FTD will be accorded if not the 10x multiple UNTD paid to acquire it something higher than the 6x multiple FLWS commands today once FTD spins off as a public company, likely in Q1 13. In Content & Media, UNTD is still swimming against the tide in its efforts to alter the flow of this business, but the segment did generate $38MM in revenue and $7.5MM in EBITDA in Q2, on pace for a $33MM operating cash flow contribution in FY 12. While this business remains underappreciated by investors, that sentiment could change in 2013 if schoolfeed and UNTD s other initiatives can increase monetization of what amounts to a massive registered user database. In less than a year, schoolfeed s free Facebook app that enables users to find and connect with their high school friends and acquaintances, and offers an online yearbook and class directory with news feed, interest groups, online games and virtual currency has generated 19MM registered members users that UNTD will now cross sell to try paid subscriptions or purchase digital content. UNTD paid $7.5MM cash on closing for Palo Alto-based schoolfeed, and will contribute up to $27.5MM more over the next four years depending upon the achievement of certain performance objectives. In Communications, UNTD still has some 709k paying accounts generating near $9/month revenues at what amounts to a 48% margin, before considering the company s $4MM net investment in NetZero 4G during the period, dragging Communications segment margin down to 33.6%. With some offsetting revenues starting to trickle in, and UNTD still progressing down its three-pronged marketing test strategy (comprising national TV, direct response TV and mail, and Internet), the company expects net broadband marketing impact of $3MM-$3.5MM in Q3 and $11MM-$13MM for FY 12 altogether. In other words, UNTD is placing a $12MM bet in 2012 that it can lead Communications from a cash cow to a growth path via marketing mobile broadband services. While management remained steadfast in its resolve not to give much data regarding NetZero 4G traction, we note that the company did record $936k in Communications products revenues in the quarter, the company s first full three-month period pushing 4G. Assuming a $75 ASP per access device sold, this implies UNTD corralled about 12,500 NetZero 4G users in the period. Management did disclose that while it is adding new subscribers daily, conversion rate is low given the high dollar hurdle for prospective Pg. 2

3 mobile broadband customers to buy the hardware. And once UNTD gets a subscriber to cross this chasm, the company faces the further task of converting free users to paying subscribers. At any rate, the size of the bet is not overly large, and UNTD seems to be taking a good approach to test the market. The company certainly knows how to deliver low-cost access to subscribers at a profit, and this looks like a bet that could pay off. In any event, investors soon will not have to worry about how Communications affects e- commerce, or what digital yearbooks have to do with Mothers Day flowers. We believe UNTD s plan to separate FTD a dominant, profitable e-commerce asset with over $600MM in revenues will unlock significant shareholder value, particularly so as investors have remained disinclined (so far as we can tell) to attach any value to Communications and Content & Media. Even at UNTD s $4.50/sh after-market price, UNTD is trading at just 3.4x trailing and 3.9x FY 12e EV/EBITDA. With moderate success in Communications and/or Content & Media turnaround, as we have currently modeled, projected EV/EBITDA falls back to 3.3x in FY 13. Indeed knock on wood next year investors could be getting two for the price of one, an FTD asset valued as high as UNTD s current EV today, plus a social content, media and communications business with over $250MM in revenue and some $65MM-$70MM in EBITDA that not only is not shrinking but which also could actually be growing. Pg. 3

4 United Online Inc. Model -- UNTD B. Riley & Co. (in $000's, except ratios) FY 2008 FY 2009a FY 2010(A) Q1a-Mar Q2a-Jun Q3a-Sep Q4a-Dec FY 2011(A) Q1a-Mar Q2a-Jun Q3e-Sep Q4e-Dec FY 2012(E) Q1e-Mar Q2e-Jun Q3e-Sep Q4e-Dec FY 2013(E) Revenues: Communications 257, , ,153 34,698 32,279 30,260 29, ,532 26,760 26,810 26,135 25, ,199 24,923 24,803 24,687 24,577 98,990 Content & Media 230, , ,644 48,313 47,427 44,070 45, ,475 39,445 37,986 36,199 40, ,845 37,567 37,705 37,843 41, ,282 FTD 548, , , , , , , , , , , , , , , , , ,524 Intersegment eliminations (1,836) (2,820) (405) (440) (383) (343) (1,571) (360) (466) (500) (500) (1,826) (500) (500) (500) (500) (2,000) Revenues 669, , , , , , , , , , , , , , , , , ,796 Cost of revenues 214, , , , ,942 82, , , , ,328 88, , , , ,800 86, , ,181 Gross Profit 454, , , , ,623 99, , , , ,529 85,453 99, , , ,706 88, , ,615 Operating expenses: Sales and marketing 173, , ,023 48,135 48,811 33,315 36, ,760 46,759 46,800 35,295 41, ,502 45,350 43,960 34,988 41, ,797 Product development 56,715 64,817 55,381 12,543 12,949 13,158 11,892 50,542 11,586 11,918 11,893 11,868 47,265 11,824 11,799 11,774 11,749 47,147 G&A and other unallocated corp expense 92, , ,573 26,292 26,039 25,552 24, ,357 24,287 23,249 22,423 22,413 92,372 22,641 22,631 22,621 22,611 90,504 Total operating expenses 321, , ,078 86,970 87,799 72,025 72, ,659 82,632 81,967 69,611 75, ,139 79,815 78,390 69,383 75, ,448 less: stk-based comp expense (36,527) (40,080) (27,043) (4,726) (4,495) (4,293) (3,699) (17,213) (3,454) (3,033) (3,244) (3,244) (12,974) (3,244) (3,244) (3,244) (3,244) (12,974) EBITA 169, , ,867 38,435 40,319 32,161 39, ,755 31,949 27,595 19,085 26, ,256 34,375 32,560 22,118 31, ,141 add back: stk-based comp expense 36,527 40,080 27,043 4,726 4,495 4,293 3,699 17,213 3,454 3,033 3,244 3,244 12,974 3,244 3,244 3,244 3,244 12,974 Amortization of intangible assets 18,415 34,844 32,110 7,907 7,598 7,571 7,541 30,617 7,309 7,537 7,537 7,537 29,920 7,480 7,480 7,480 7,480 29,920 Impairment of goodwill, intangible assets, and long-lived a 176, Restructuring charge, legal, etc ,121 2,815 2, ,926 7,952 (71) Total non-cash/non-recurring expenses 231,748 77,045 61,968 15,442 12,236 11,938 16,166 55,782 10,692 10,655 10,781 10,781 42,908 10,724 10,724 10,724 10,724 42,894 Operating Income (62,679) 146, ,899 22,993 28,083 20,223 23,674 94,973 21,257 16,940 8,304 15,847 62,348 23,651 21,836 11,394 20,365 77,247 Other income: Interest and other income, net 5,024 5,722 2,165 2, , , ,782 Interest expenses (13,715) (33,524) (24,940) (5,041) (10,776) (3,747) (3,511) (23,075) (3,458) (3,583) (3,472) (3,472) (13,985) (3,422) (3,422) (3,422) (3,422) (13,688) Income before income taxes (71,370) 119,158 92,124 20,040 17,756 17,296 20,985 76,077 18,241 14,137 5,612 13,155 51,145 20,925 19,110 8,668 17,638 66,341 Provision (benefit) for income taxes 23,287 48,144 36,228 7,482 2,694 5,380 8,120 23,676 6,722 5,592 2,245 5,262 19,821 8,370 7,644 3,467 7,055 26,536 Inc b4 cumul eff acct ch; b4 inc allocated to partic securities (94,657) 71,014 55,896 12,558 15,062 11,916 12,865 52,401 11,519 8,545 3,367 7,893 31,324 12,555 11,466 5,201 10,583 39,805 Cumul eff acct ch; inc allocated to participating securities (1,912) (4,627) (3,196) (555) (577) (467) (392) (1,991) (336) (294) (700) (700) (2,030) (700) (700) (700) (700) (2,800) Net income (96,569) 66,387 52,700 12,003 14,485 11,449 12,473 50,410 11,183 8,251 2,667 7,193 29,294 11,855 10,766 4,501 9,883 37,005 supplemental: pro forma NIB4IT 160, , ,092 35,482 32,776 29,895 37, ,859 28,933 24,792 16,393 23,936 94,053 31,648 29,833 19,391 28, ,235 supplemental: pro forma net income 95, ,085 96,029 22,089 26,773 20,287 22,291 79,115 19,152 15,965 9,836 14,361 56,432 18,989 17,900 11,635 17,017 65,541 Net income per share: Diluted EPS, GAAP $ (1.30) $ 0.79 $ 0.61 $ 0.14 $ 0.16 $ 0.13 $ 0.14 $ 0.57 $ 0.12 $ 0.09 $ 0.03 $ 0.08 $ 0.32 $ 0.13 $ 0.12 $ 0.05 $ 0.11 $ 0.40 Diluted EPS, pro forma excluding stk-based comp $ 1.29 $ 1.42 $ 1.10 $ 0.25 $ 0.30 $ 0.23 $ 0.25 $ 0.89 $ 0.21 $ 0.18 $ 0.11 $ 0.16 $ 0.62 $ 0.21 $ 0.20 $ 0.13 $ 0.19 $ 0.72 Weighted Diluted Shares Outstanding 74,209 84,137 87,061 87,820 88,625 88,812 89,251 88,627 89,894 90,505 90,705 90,905 90,502 91,085 91,285 91,485 91,685 91,385 Weighted Diluted Shares Out, pro forma 74,088 84,664 87,168 87,842 88,846 88,995 89,449 88,783 90,101 90,768 90,968 91,168 90,751 91,348 91,548 91,748 91,948 91,648 Common Size % of Revenues Gross margin 67.9% 57.9% 53.3% 50.0% 48.4% 54.7% 50.0% 50.3% 45.9% 45.9% 49.2% 47.1% 46.8% 46.1% 46.5% 50.4% 48.8% 47.8% Sales and marketing 25.9% 20.7% 19.3% 19.9% 19.1% 18.2% 16.7% 18.6% 19.3% 20.2% 20.3% 19.8% 19.9% 18.9% 19.0% 20.0% 19.5% 19.3% Product development 8.5% 6.5% 6.0% 5.2% 5.1% 7.2% 5.5% 5.6% 4.8% 5.1% 6.9% 5.6% 5.5% 4.9% 5.1% 6.7% 5.5% 5.5% G&A and other unallocated corp expense 13.8% 12.3% 11.1% 10.9% 10.2% 14.0% 11.2% 11.4% 10.0% 10.0% 12.9% 10.6% 10.8% 9.4% 9.8% 12.9% 10.6% 10.5% EBITDA margin 28.4% 25.1% 22.0% 18.5% 18.4% 21.7% 21.5% 19.8% 16.0% 14.9% 14.9% 15.9% 15.5% 16.8% 16.7% 16.1% 17.5% 16.8% Tax rate (as % of pretax income) -32.6% 40.4% 39.3% 37.3% 15.2% 31.1% 38.7% 31.1% 36.9% 39.6% 40.0% 40.0% 38.8% 40.0% 40.0% 40.0% 40.0% 40.0% Pro forma tax rate (as % of pro forma pretax income) 40.3% 38.8% 37.7% 37.7% 18.3% 32.1% 40.0% 40.0% 33.8% 35.6% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% Income (loss) from operations -9.4% 14.8% 12.5% 9.5% 11.0% 11.1% 10.9% 10.6% 8.8% 7.3% 4.8% 7.5% 7.3% 9.8% 9.4% 6.5% 9.6% 9.0% Net income (loss) -14.4% 6.7% 5.7% 5.0% 5.7% 6.3% 5.7% 5.6% 4.6% 3.6% 1.5% 3.4% 3.4% 4.9% 4.7% 2.6% 4.6% 4.3% Growth Y/Y Total revenue 30.4% 713.3% -7.1% -4.1% 5.3% -5.6% -6.3% -2.5% 0.3% -9.3% -5.0% -3.2% -4.4% -0.8% -0.2% 0.9% 0.8% 0.1% EPS 13.3% 364.0% -22.3% -9.6% 10.7% -7.6% -18.2% -19.1% -15.5% -41.6% -52.6% -36.8% -30.2% -2.2% 11.2% 17.3% 17.5% 15.0% Selected Balance Sheet Data Cash and investments 104, , , , , , , , , , , , , , , , , ,202 Accounts receivable 58,901 55,874 49,797 46,249 38,818 38,230 43,177 43,177 39,547 36,185 27,094 32,910 32,910 37,525 36,130 27,341 33,188 33,188 Inventory, primarily for NetZero 4G mobile broadband ,832 8,832 10,464 11,197 12,197 13,197 13,197 13,197 13,397 13,597 13,797 13,797 A/P + Accrued liabilities 126, , ,540 96,401 95,257 93, , , ,499 95,718 94, , , , , , , ,218 Debt 413, , , , , , , , , , , , , , , , , ,478 Shareholders' equity 344, , , , , , , , , , , , , , , , , ,887 Other Selected Financial Data Price $ 4.20 $ 4.20 $ 4.20 $ 4.20 $ 4.20 $ 4.20 $ 4.20 $ 4.20 $ 4.20 $ 4.20 $ 4.20 $ 4.20 $ 4.20 $ 4.20 $ 4.20 $ 4.20 $ 4.20 $ 4.20 Market cap 311, , , , , , , , , , , , , , , , , ,817 Net cash (308,963) (213,437) (157,820) (152,189) (150,783) (148,842) (125,019) (125,019) (122,903) (132,380) (119,468) (109,952) (109,952) (102,868) (87,657) (72,832) (63,276) (63,276) Enterprise value 620, , , , , , , , , , , , , , , , , ,093 EBITDA 190, , ,385 44,580 46,999 39,685 46, ,159 38,859 34,566 25,911 33, ,790 40,395 38,580 28,138 37, ,221 EBITDA (LTM) 190, , , , , , , , , , , , , , , , , ,221 EV/EBITDA EV/Sales Depreciation and amortization in period 39,773 59,673 58,645 14,052 14,278 14,434 14,596 57,360 14,219 14,508 14,364 14,364 57,454 13,500 13,500 13,500 13,500 54,000 Stock based compensation in period 36,527 40,080 27,043 4,726 4,495 4,293 3,699 17,213 3,454 3,033 3,244 3,244 12,974 3,244 3,244 3,244 3,244 12,974 capex in period 19,886 26,196 31,991 8,301 7,475 6,340 5,749 27,865 4,731 4,856 4,794 4,794 19,174 4,794 4,794 4,794 4,794 19,174 FCF before dividend* 166, , ,912 20,660 16,648 11,241 32,768 81,317 22,888 13,390 22,192 18,811 77,281 16,390 24,531 24,160 18,906 83,986 EV/FCF Dividend, LTM $ 0.70 $ 0.40 $ 0.40 $ 0.40 $ 0.40 $ 0.40 $ 0.40 $ 0.40 $ 0.40 $ 0.40 $ 0.40 $ 0.40 $ 0.40 $ 0.40 $ 0.40 $ 0.40 $ 0.40 $ 0.40 Dividend yield 16.7% 9.5% 9.5% 9.5% 9.5% 9.5% 9.5% 9.5% 9.5% 9.5% 9.5% 9.5% 9.5% 9.5% 9.5% 9.5% 9.5% 9.5% P/E, GAAP (3.8) Net cash and cash equivalents per share $ (4.16) $ (2.54) $ (1.81) $ (1.73) $ (1.70) $ (1.68) $ (1.40) $ (1.41) $ (1.37) $ (1.46) $ (1.32) $ (1.21) $ (1.21) $ (1.13) $ (0.96) $ (0.80) $ (0.69) $ (0.69)

5 Appendix A Disclosure for United Online I, Mike Crawford, certify that this report reflects my personal beliefs about this company and that no portion of my compensation was, is or will be directly or indirectly related to the specific recommendations or views discussed in this report. Disclosure B. Riley & Co., LLC does and seeks to do business with companies covered in its research reports. A portion of this analyst s compensation is based on the sales, trading and investment banking activities of B. Riley & Co., LLC. B. Riley & Co., LLC makes a market in the securities of the company covered in this report. This analyst, or a member of this analyst's household who is financially dependent on this analyst or vice versa, holds a long stock position in the security covered in this report. Initiated Coverage on 04/30/2007 with "Buy" Rating and Price Target of $18.00 Ratings Distribution as of August 1, 2012 % with Investment Banking Relationships Rating Number of Companies Percent of Total Rating Number of Companies Percent of Total Buy % Buy % Neutral % Neutral 0 0.0% Sell 4 2.7% Sell 0 0.0% Total % Total % Explanation of B. Riley & Co. LLC's Rating System Buy: We generally expect "Buy" rated stocks to materially outperform both the S&P 500 and Russell 2000 as well as other stocks in their sector. Further, we believe that the potential reward relative to the potential risk is particularly attractive. Neutral: We generally believe "Neutral" rated stocks will perform roughly in line with the S&P 500 and Russell 2000 over the intermediate and long term. Sell: We generally expect "Sell" rated stocks to materially underperform both the S&P 500 and Russell 2000 as well as other stocks in their sector. Further, we believe that the potential reward relative to the potential risk is particularly unattractive. Risks and Considerations Competition - The industry is highly competitive and many of the Company's competitors have greater resources. Dividend - The Company could choose to eliminate its dividend. Economy - Macro-economic issues such as increasing oil and gas prices and a possible drop in consumer spending could have a negative impact on the Company's business. Further Potential Risks - See the Company's SEC filings, particularly its 10-K filing, for a discussion of further potential risks.