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TABLE OF CONTENTS

Table of Contents


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 June 30, 2015
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   77-0575839
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer Identification No.)

21255 Burbank Boulevard, Suite 400
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 website, 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 o   Accelerated filer ý   Non-accelerated filer o   Smaller reporting company o
        (Do not check if a smaller
reporting company)
   

        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 14,774,031 shares of the Registrant's common stock outstanding at July 31, 2015.


Table of Contents


UNITED ONLINE, INC.

INDEX TO FORM 10-Q

For the Quarter Ended June 30, 2015

 
   
   
  Page  

PART I.

     

FINANCIAL INFORMATION

    4  



 


Item 1.


 


Unaudited Condensed Consolidated Financial Statements:


 

 


4

 



 

 

 


Unaudited Condensed Consolidated Balance Sheets at June 30, 2015 and December 31, 2014


 

 


4

 



 

 

 


Unaudited Condensed Consolidated Statements of Operations for the Quarters and Six Months Ended June 30, 2015 and 2014


 

 


5

 



 

 

 


Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the Quarters and Six Months Ended June 30, 2015 and 2014


 

 


6

 



 

 

 


Unaudited Condensed Consolidated Statement of Stockholders' Equity for Six Months Ended June 30, 2015


 

 


7

 



 

 

 


Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014


 

 


8

 



 

 

 


Notes to Unaudited Condensed Consolidated Financial Statements


 

 


9

 



 


Item 2.


 


Management's Discussion and Analysis of Financial Condition and Results of Operations


 

 


26

 



 


Item 3.


 


Quantitative and Qualitative Disclosures About Market Risk


 

 


47

 



 


Item 4.


 


Controls and Procedures


 

 


48

 


PART II.


 

 

 


OTHER INFORMATION


 

 


49

 



 


Item 1.


 


Legal Proceedings


 

 


49

 



 


Item 1A.


 


Risk Factors


 

 


49

 



 


Item 2.


 


Unregistered Sales of Equity Securities and Use of Proceeds


 

 


49

 



 


Item 3.


 


Defaults Upon Senior Securities


 

 


50

 



 


Item 4.


 


Mine Safety Disclosures


 

 


50

 



 


Item 5.


 


Other Information


 

 


50

 



 


Item 6.


 


Exhibits


 

 


50

 


SIGNATURES


 

 


51

 

        In this document, "United Online," the "Company," "we," "us" and "our" refer to United Online, Inc. and its subsidiaries.

        This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the United States Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the "safe harbor" created by those sections. Forward-looking statements are 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.

2


Table of Contents

These forward-looking statements include, but are not limited to, statements about the expected benefits of our acquisitions or divestitures; our strategies; our pursuit of long-term growth initiatives; our future financial performance and results, revenues, segment metrics, operating expenses, market trends, liquidity, cash flows and uses of cash, dividends, capital expenditures, depreciation and amortization, tax payments, foreign currency exchange rates, and hedging arrangements; our ability to invest in initiatives; our plans for services and products, pricing, and marketing efforts; competition; litigation and investigations and potential settlements thereof; and the impact of accounting pronouncements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance, time frames or achievements to be materially different from those set forth or contemplated in the forward-looking statements, including, among others, the factors disclosed in the section entitled "Risk Factors" in this Quarterly Report on Form 10-Q and in the section entitled "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2014 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 our estimates and assumptions only as of the date hereof. Such forward-looking statements are not guarantees of future performance or results and reported results should not be considered an indication of future performance. We undertake no obligation to update these forward-looking statements to reflect the impact of events or circumstances arising after the date hereof, unless required by law.

3


Table of Contents

PART I—FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

        


UNITED ONLINE, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

 
  June 30,
2015
  December 31,
2014
 

Assets

             

Current assets:

             

Cash and cash equivalents

  $ 75,010   $ 78,795  

Accounts receivable, net of allowance

    12,062     14,509  

Inventories, net

    5,989     5,416  

Deferred tax assets, net

    232     265  

Other current assets

    8,593     7,780  

Total current assets

    101,886     106,765  

Property and equipment, net

    22,698     22,781  

Deferred tax assets, net

    1,435     1,523  

Goodwill

    63,001     63,014  

Intangible assets, net

    8,224     9,447  

Other assets

    1,285     1,366  

Total assets

  $ 198,529   $ 204,896  

Liabilities and Stockholders' Equity

             

Current liabilities:

             

Accounts payable

  $ 11,210   $ 12,298  

Accrued liabilities

    18,920     30,829  

Member redemption liability

    7,018     7,287  

Deferred revenue

    31,858     32,838  

Deferred tax liabilities, net

    34     33  

Total current liabilities

    69,040     83,285  

Member redemption liability

    10,923     11,360  

Deferred revenue

    2,041     1,915  

Deferred tax liabilities, net

    1,715     857  

Other liabilities

    7,395     5,766  

Total liabilities

    91,114     103,183  

Commitments and contingencies

             

Stockholders' equity:

             

Common stock

    1     1  

Additional paid-in capital

    219,789     215,302  

Accumulated other comprehensive loss

    (3,441 )   (3,158 )

Accumulated deficit

    (108,934 )   (110,432 )

Total stockholders' equity

    107,415     101,713  

Total liabilities and stockholders' equity

  $ 198,529   $ 204,896  

   

The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.

4


Table of Contents


UNITED ONLINE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

 
  Quarter Ended
June 30,
  Six Months Ended
June 30,
 
 
  2015   2014   2015   2014  

Revenues

  $ 50,064   $ 54,600   $ 99,971   $ 109,969  

Operating expenses:

                         

Cost of revenues

    16,869     17,120     34,148     36,447  

Sales and marketing

    11,741     12,959     24,559     27,966  

Technology and development

    6,204     6,886     13,156     14,838  

General and administrative

    10,706     16,320     23,244     34,355  

Amortization of intangible assets

    525     1,383     1,007     2,764  

Restructuring and other exit costs

    822     331     967     2,587  

Total operating expenses

    46,867     54,999     97,081     118,957  

Operating income (loss)

    3,197     (399 )   2,890     (8,988 )

Interest income

    91     99     181     191  

Other income, net

    2     55     70     68  

Income (loss) before income taxes

    3,290     (245 )   3,141     (8,729 )

Provision for income taxes

    933     2,005     1,643     3,908  

Net income (loss)

  $ 2,357   $ (2,250 ) $ 1,498   $ (12,637 )

Income allocated to participating securities

    (96 )       (66 )    

Net income (loss) attributable to common stockholders

  $ 2,261   $ (2,250 ) $ 1,432   $ (12,637 )

Basic net income (loss) per common share

  $ 0.15   $ (0.16 ) $ 0.10   $ (0.90 )

Shares used to calculate basic net income (loss) per common share

    14,663     14,130     14,547     14,014  

Diluted net income (loss) per common share

  $ 0.15   $ (0.16 ) $ 0.10   $ (0.90 )

Shares used to calculate diluted net income (loss) per common share

    14,787     14,130     14,645     14,014  

   

The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.

5


Table of Contents


UNITED ONLINE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME (LOSS)

(in thousands)

 
  Quarter Ended
June 30,
  Six Months Ended
June 30,
 
 
  2015   2014   2015   2014  

Net income (loss)

  $ 2,357   $ (2,250 ) $ 1,498   $ (12,637 )

Other comprehensive income (loss):

                         

Cash flow hedges:

                         

Changes in net gains (losses) on derivatives, net of tax
provision of $0 and $0 for the quarters ended June 30,
2015 and 2014 and $0 and $19 for the six months ended
June 30, 2015 and 2014, respectively

    (10 )   1     7     28  

Derivative settlement (gains) losses reclassified into
earnings, net of tax (provision) benefit of $0 and $(5) for
the quarters ended June 30, 2015 and 2014 and $0 and $1
for the six months ended June 30, 2015 and 2014,
respectively

    25     (8 )   39     2  

Other hedges:

                         

Changes in net gains on derivatives, net of tax provision of
$0 and $5 for the quarters ended June 30, 2015 and 2014
and $0 and $3 for the six months ended June 30, 2015
and 2014, respectively        

        8         4  

Foreign currency translation

    108     (71 )   (329 )   106  

Other comprehensive income (loss)

    123     (70 )   (283 )   140  

Comprehensive income (loss)

  $ 2,480   $ (2,320 ) $ 1,215   $ (12,497 )

   

The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.

6


Table of Contents


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 December 31, 2014

    14,289   $ 1   $ 215,302   $ (3,158 ) $ (110,432 ) $ 101,713  

Exercise of stock options

    112         1,341             1,341  

Issuance of common stock through ESPP

    94         936             936  

Vesting of restricted stock units

    240                      

Repurchases of common stock

            (1,310 )           (1,310 )

Stock-based compensation

            3,520             3,520  

Other comprehensive loss

                (283 )       (283 )

Net income

                    1,498     1,498  

Balance at June 30, 2015

    14,735   $ 1   $ 219,789   $ (3,441 ) $ (108,934 ) $ 107,415  

   

The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.

7


Table of Contents


UNITED ONLINE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 
  Six Months Ended
June 30,
 
 
  2015   2014  

Cash flows from operating activities:

             

Net income (loss)

  $ 1,498   $ (12,637 )

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

             

Depreciation and amortization

    7,428     10,138  

Stock-based compensation

    3,520     4,902  

Provision for doubtful accounts receivable

    18     (54 )

Deferred taxes, net

    903     1,188  

Tax shortfalls from equity awards

        (7 )

Excess tax benefits from equity awards

        (56 )

Other, net

    278     159  

Changes in operating assets and liabilities:

             

Accounts receivable, net

    2,298     5,745  

Inventories, net

    (925 )   2,567  

Other assets

    (986 )   533  

Accounts payable and accrued liabilities

    (12,213 )   1,566  

Member redemption liability

    (707 )   (1,473 )

Deferred revenue

        (869 )

Other liabilities

    564     (2,509 )

Net cash provided by operating activities

    1,676     9,193  

Cash flows from investing activities:

             

Purchases of property and equipment

    (5,293 )   (5,142 )

Purchases of rights, content and intellectual property

    (398 )   (481 )

Purchases of investments

        (36 )

Proceeds from sales of investments

    127     15  

Net cash used for investing activities

    (5,564 )   (5,644 )

Cash flows from financing activities:

             

Proceeds from exercises of stock options

    1,287      

Proceeds from employee stock purchase plan

    936     826  

Repurchases of common stock

    (1,310 )   (2,358 )

Excess tax benefits from equity awards

        56  

Net cash provided by (used for) financing activities

    913     (1,476 )

Effect of foreign currency exchange rate changes on cash and cash equivalents

    (810 )   41  

Change in cash and cash equivalents

    (3,785 )   2,114  

Cash and cash equivalents, beginning of period

    78,795     68,314  

Cash and cash equivalents, end of period

  $ 75,010   $ 70,428  

   

The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.

8


Table of Contents


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" or the "Company"), through its operating subsidiaries, provides consumer services and products over the Internet under a number of brands, including NetZero, Juno, MyPoints, Classmates, StayFriends, and Trombi.

        Effective in the first quarter of 2015, the Company modified how it reports segment information to the Company's Chief Operating Decision Maker ("CODM") because the information regularly reviewed by the CODM had changed. As a result of the changes, the Company now reports three operating segments to the CODM, including the Communications segment, as well as separately reporting the operating results of the Commerce & Loyalty and Social Media segments (which in prior periods were reported to the CODM together as the Content & Media segment). This change has been reflected through a retroactive revision of prior-period segment information to conform to the newly-defined segment information.

        As discussed above, the Company reports its business in three reportable segments: Communications, Commerce & Loyalty and Social Media. The Company's primary Communications service is Internet access. The Company's Commerce & Loyalty segment promotes commerce and user engagement through its loyalty marketing service and provides a complete web, browser and mobile shopping experience through a portfolio of apps, browser extensions and online portals. The Company's Social Media segment provides social networking services and products. 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.

        The Company's corporate headquarters are located in Woodland Hills, California, and the Company also maintains offices in Seattle, Washington; Erlangen, Germany; Berlin, Germany; San Francisco, California; Schaumburg, Illinois; Fort Lee, New Jersey; and Hyderabad, India.

Basis of Presentation

        The Company's unaudited condensed consolidated financial statements for the quarters and six months ended June 30, 2015 and 2014 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 Quarterly Reports on Form 10-Q and Article 10 of Regulation S-X issued by the Securities and Exchange Commission (the "SEC"). Accordingly, such financial statements 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 at December 31, 2014 was derived from the Company's audited consolidated financial statements, filed on March 2, 2015, with the SEC in the Company's Annual Report on Form 10-K for the year ended December 31, 2014, but does not include all of the disclosures required by GAAP.

9


Table of Contents


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)

        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, 2014 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, goodwill, definite-lived intangible assets and other long-lived assets, member redemption liability, income taxes, and legal contingencies.

        The Company believes that its existing cash and cash equivalents and cash generated from operations will be sufficient to fund its working capital requirements, capital expenditures and other obligations through at least the next 12 months.

Accounting Policies

        Refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2014 for a discussion of the Company's significant accounting policies.

Recent Accounting Pronouncements

        In April 2014, the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-08, Presentation of Financial Statements and Property, Plant and Equipment: Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The core principle of the guidance raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the new definition of a discontinued operation. The amendments in this ASU are effective prospectively for disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. Early adoption is permitted but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. The Company adopted the standard with no material impact on its consolidated financial statements.

        In May 2014, the FASB issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments in this ASU will be effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. The amendments should be applied retrospectively. In July 2015, the FASB approved a one-year deferral of the effective date with early adoption permitted. The Company intends to adopt the standard effective January 1, 2018 and is currently assessing the impact of this update on its consolidated financial statements.

10


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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)

        In June 2014, the FASB issued ASU No. 2014-12, Compensation—Stock Compensation: Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The core principle of the guidance requires that a performance target that affects vesting and that could be achieved after the requisite service period should be treated as a performance condition. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Early adoption is permitted. Entities may apply the amendments in ASU No. 2014-12 either: (a) prospectively to all awards granted or modified after the effective date; or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. The Company does not expect this update to have a material impact on its consolidated financial statements.

        In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205- 40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. The update provides GAAP guidance on management's responsibility in evaluating whether there is substantial doubt about a company's ability to continue as a going concern and about related footnote disclosures. The amendments in this update are effective for annual periods ending after December 15, 2016, and for annual periods and interim periods thereafter. Early adoption is permitted. The Company does not expect this update to have a material impact on its consolidated financial statements.

        In April 2015, the FASB issued ASU No. 2015-05, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement. The update provides GAAP guidance on evaluating the accounting for fees paid by a customer in a cloud computing arrangement. The amendments in this update also provide a basis for evaluating whether a cloud computing arrangement includes a software license. The amendments in this update are effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted. The Company is currently assessing the impact of this update on its consolidated financial statements.

        In June 2015, the FASB issued ASU No. 2015-10, Technical Corrections and Improvements. The update contains amendments that will affect a wide variety of topics in the Codification. The amendments in this update represent changes to clarify the Codification, correct unintended application of guidance, or make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. The Company does not expect this update to have a material impact on its consolidated financial statements.

        In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. The amendments in this Update more closely align the measurement of inventory in GAAP with the measurement of inventory in International Financial Reporting Standards (IFRS). The amendments in this Update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The amendments in this Update should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The Company is currently assessing the impact of this update on its consolidated financial statements.

11


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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. SEGMENT INFORMATION

        Effective in the first quarter of 2015, the Company modified how it reports segment information to the Company's CODM as the information regularly reviewed by the CODM had changed. As a result of the changes, the Company now reports three operating segments to the CODM, including the Communications segment, as well as separately reporting the operating results of the Commerce & Loyalty and Social Media segments (which, in prior periods, were reported to the CODM together as the Content & Media segment). This change has been reflected through a retroactive revision of prior-period segment information to conform to the newly-defined segment information.

        Segment revenues and segment income (loss) from operations (which excludes depreciation and amortization of intangible assets) were as follows (in thousands):

 
  Quarter Ended June 30, 2015  
 
  Communications   Commerce & Loyalty   Social Media   Total  

Services revenues

  $ 16,415   $   $ 16,619   $ 33,034  

Products revenues

    1,005         992     1,997  

Advertising and other revenues

    5,788     8,260     1,244     15,292  

Total segment revenues

  $ 23,208   $ 8,260   $ 18,855   $ 50,323  

Segment income from operations

  $ 6,382   $ 56   $ 4,680   $ 11,118  

 

 
  Quarter Ended June 30, 2014  
 
  Communications   Commerce & Loyalty   Social Media   Total  

Services revenues

  $ 17,409   $   $ 19,082   $ 36,491  

Products revenues

    1,444         932     2,376  

Advertising and other revenues

    7,342     7,355     1,247     15,944  

Total segment revenues

  $ 26,195   $ 7,355   $ 21,261   $ 54,811  

Segment income from operations

  $ 8,434   $ 87   $ 2,566   $ 11,087  

 

 
  Six Months Ended June 30, 2015  
 
  Communications   Commerce & Loyalty   Social Media   Total  

Services revenues

  $ 33,391   $   $ 33,194   $ 66,585  

Products revenues

    2,775         1,497     4,272  

Advertising and other revenues

    11,306     15,405     2,923     29,634  

Total segment revenues

  $ 47,472   $ 15,405   $ 37,614   $ 100,491  

Segment income from operations

  $ 11,459   $ 3   $ 8,885   $ 20,347  

12


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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. SEGMENT INFORMATION (Continued)


 
  Six Months Ended June 30, 2014  
 
  Communications   Commerce & Loyalty   Social Media   Total  

Services revenues

  $ 34,777   $   $ 38,592   $ 73,369  

Products revenues

    3,441         1,348     4,789  

Advertising and other revenues

    13,651     15,954     2,565     32,170  

Total segment revenues

  $ 51,869   $ 15,954   $ 42,505   $ 110,328  

Segment income (loss) from operations

  $ 13,953   $ (1,535 ) $ 4,332   $ 16,750  

        A reconciliation of segment revenues to consolidated revenues was as follows (in thousands):

 
  Quarter Ended
June 30,
  Six Months Ended
June 30,
 
 
  2015   2014   2015   2014  

Segment revenues:

                         

Communications

  $ 23,208   $ 26,195   $ 47,472   $ 51,869  

Commerce & Loyalty

    8,260     7,355     15,405     15,954  

Social Media

    18,855     21,261     37,614     42,505  

Total segment revenues

    50,323     54,811     100,491     110,328  

Corporate revenues

        6         100  

Intersegment eliminations

    (259 )   (217 )   (520 )   (459 )

Consolidated revenues

  $ 50,064   $ 54,600   $ 99,971   $ 109,969  

        A reconciliation of segment operating expenses (which excludes depreciation and amortization of intangible assets) to consolidated operating expenses was as follows (in thousands):

 
  Quarter Ended
June 30,
  Six Months Ended
June 30,
 
 
  2015   2014   2015   2014  

Segment operating expenses:

                         

Communications

  $ 16,826   $ 17,761   $ 36,013   $ 37,916  

Commerce & Loyalty

    8,204     7,268     15,402     17,489  

Social Media

    14,175     18,695     28,729     38,173  

Total segment operating expenses

    39,205     43,724     80,144     93,578  

Depreciation

    2,820     3,426     5,794     6,814  

Amortization of intangible assets

    842     1,667     1,634     3,324  

Unallocated corporate expenses

    4,259     6,399     10,029     15,700  

Intersegment eliminations

    (259 )   (217 )   (520 )   (459 )

Consolidated operating expenses

  $ 46,867   $ 54,999   $ 97,081   $ 118,957  

13


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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. SEGMENT INFORMATION (Continued)

        A reconciliation of segment income (loss) from operations (which excludes depreciation and amortization of intangible assets) to consolidated operating income (loss) was as follows (in thousands):

 
  Quarter Ended
June 30,
  Six Months Ended
June 30,
 
 
  2015   2014   2015   2014  

Segment income (loss) from operations:

                         

Communications

  $ 6,382   $ 8,434   $ 11,459   $ 13,953  

Commerce & Loyalty

    56     87     3     (1,535 )

Social Media

    4,680     2,566     8,885     4,332  

Total segment income from operations

    11,118     11,087     20,347     16,750  

Corporate revenues

        6         100  

Depreciation

    (2,820 )   (3,426 )   (5,794 )   (6,814 )

Amortization of intangible assets

    (842 )   (1,667 )   (1,634 )   (3,324 )

Unallocated corporate expenses

    (4,259 )   (6,399 )   (10,029 )   (15,700 )

Interest income

    91     99     181     191  

Other income, net

    2     55     70     68  

Income (loss) before income taxes

  $ 3,290   $ (245 ) $ 3,141   $ (8,729 )

        Depreciation expense by segment was as follows (in thousands):

 
  Quarter Ended
June 30,
  Six Months Ended
June 30,
 
 
  2015   2014   2015   2014  

Communications

  $ 696   $ 732   $ 1,464   $ 1,481  

Commerce & Loyalty

    374     337     726     916  

Social Media

    1,593     2,250     3,280     4,212  

Unallocated corporate

    157     107     324     205  

Total depreciation expense

  $ 2,820   $ 3,426   $ 5,794   $ 6,814  

        Amortization of intangible assets by segment was as follows (in thousands):

 
  Quarter Ended
June 30,
  Six Months Ended
June 30,
 
 
  2015   2014   2015   2014  

Commerce & Loyalty

  $ 71   $ 71   $ 143   $ 142  

Social Media

    771     1,596     1,491     3,182  

Total amortization expense

  $ 842   $ 1,667   $ 1,634   $ 3,324  

14


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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. SEGMENT INFORMATION (Continued)

        Geographic revenues are attributed to countries based on the principal location of the Company's entities from which those revenues were generated. Geographic information for revenues was as follows (in thousands):

 
  Quarter Ended
June 30,
  Six Months Ended
June 30,
 
 
  2015   2014   2015   2014  

United States

  $ 43,969   $ 46,494   $ 88,123   $ 93,974  

Germany

    5,109     6,632     9,813     12,958  

Europe, excluding Germany

    986     1,474     2,035     3,037  

Consolidated revenues

  $ 50,064   $ 54,600   $ 99,971   $ 109,969  

        Geographic information for long-lived assets, which consist of property and equipment and other assets, was as follows (in thousands):

 
  June 30,
2015
  December 31,
2014
 

United States

  $ 20,922   $ 20,988  

Germany

    2,848     2,928  

Other

    213     231  

Total long-lived assets

  $ 23,983   $ 24,147  

        Segment assets are not reported to, or used by, the Company's CODM to allocate resources to, or assess performance of, the segments and therefore, total segment assets have not been disclosed.

3. BALANCE SHEET COMPONENTS

Inventories, Net

        Inventories, net, consisted of the following (in thousands):

 
  June 30,
2015
  December 31,
2014
 

Work-in-process

  $   $ 411  

Finished goods

    5,989     5,005  

Total

  $ 5,989   $ 5,416  

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. BALANCE SHEET COMPONENTS (Continued)

Other Current Assets

        Other current assets consisted of the following (in thousands):

 
  June 30,
2015
  December 31,
2014
 

Prepaid expenses

  $ 3,391   $ 3,334  

Income taxes receivable

    2,555     881  

Prepaid insurance

    610     1,319  

Other

    2,037     2,246  

Total

  $ 8,593   $ 7,780  

Accrued Liabilities

        Accrued liabilities consisted of the following (in thousands):

 
  June 30,
2015
  December 31,
2014
 

Reserve for legal settlements

  $ 8,368   $ 8,178  

Employee compensation and related liabilities

    8,180     13,376  

Non-income taxes payable

    549     593  

Income taxes payable

    411     6,345  

Accrued restructuring and other exit costs

    328     206  

Customer deposits

    133     179  

Separation payments for an executive officer

        859  

Other

    951     1,093  

Total

  $ 18,920   $ 30,829  

Other Liabilities

        Other liabilities consisted of the following (in thousands):

 
  June 30,
2015
  December 31,
2014
 

Income taxes payable

  $ 3,733   $ 3,571  

Other

    3,662     2,195  

Total

  $ 7,395   $ 5,766  

16


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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. BALANCE SHEET COMPONENTS (Continued)

Accumulated Other Comprehensive Loss

        The components of accumulated other comprehensive loss were as follows (in thousands):

 
  Gains (Losses)
on Cash Flow
Hedging
Instruments,
Net of Tax
  Gains on
Other
Hedging
Instruments,
Net of Tax
  Foreign
Currency
Translation
  Accumulated
Other
Comprehensive
Loss
 

Balance at December 31, 2014

  $ (49 ) $ 168   $ (3,277 ) $ (3,158 )

Other comprehensive income (loss) before reclassifications

    7         (329 )   (322 )

Amounts reclassified from accumulated other comprehensive loss

    39             39  

Other comprehensive income (loss)

    46         (329 )   (283 )

Balance at June 30, 2015

  $ (3 ) $ 168   $ (3,606 ) $ (3,441 )

        All amounts reclassified from accumulated other comprehensive loss were related to losses on derivatives classified as cash flow hedges. These reclassifications impacted technology and development expenses in the consolidated statement of operations.

4. GOODWILL, INTANGIBLE ASSETS AND OTHER LONG-LIVED ASSETS

Goodwill

        The changes in goodwill by reportable segment were as follows (in thousands):

 
  Communications   Commerce &
Loyalty
  Social
Media
  Total  

Balance at December 31, 2014:

                         

Goodwill (excluding impairment charges)

  $ 13,227   $ 49,122   $ 88,449   $ 150,798  

Accumulated impairment charges

    (5,738 )   (26,606 )   (55,440 )   (87,784 )

Goodwill at December 31, 2014

    7,489     22,516     33,009     63,014  

Foreign currency translation

            (13 )   (13 )

Balance at June 30, 2015:

                         

Goodwill (excluding impairment charges)

    13,227     49,122     88,436     150,785  

Accumulated impairment charges

    (5,738 )   (26,606 )   (55,440 )   (87,784 )

Goodwill at June 30, 2015

  $ 7,489   $ 22,516   $ 32,996   $ 63,001  

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. GOODWILL, INTANGIBLE ASSETS AND OTHER LONG-LIVED ASSETS (Continued)

Intangible Assets, Net

        Intangible assets, net, consisted of the following (in thousands):

 
  June 30, 2015  
 
  Gross Value   Accumulated
Amortization
  Net  

Pay accounts and free accounts

  $ 103,217   $ (101,913 ) $ 1,304  

Customer contracts and relationships

    7,900     (7,900 )    

Trademarks and trade names

    26,082     (25,868 )   214  

Software and technology

    8,488     (7,363 )   1,125  

Rights, content and intellectual property

    15,095     (9,514 )   5,581  

Total

  $ 160,782   $ (152,558 ) $ 8,224  

 

 
  December 31, 2014  
 
  Gross Value   Accumulated
Amortization
  Net  

Pay accounts and free accounts

  $ 103,203   $ (101,575 ) $ 1,628  

Customer contracts and relationships

    7,900     (7,900 )    

Trademarks and trade names

    26,082     (25,725 )   357  

Software and technology

    8,494     (6,996 )   1,498  

Rights, content and intellectual property

    14,706     (8,742 )   5,964  

Total

  $ 160,385   $ (150,938 ) $ 9,447  

        Amortization expense related to intangible assets for the quarter and six months ended June 30, 2015 was $0.8 million and $1.6 million, respectively. Amortization expense related to intangible assets for the quarter and six months ended June 30, 2014 was $1.7 million and $3.3 million, respectively.

        Estimated future intangible assets amortization expense at June 30, 2015 was as follows (in thousands):

 
   
   
  Year Ending December 31,    
 
 
   
  Jul-Dec
2015
   
 
 
  Total   2016   2017   2018   2019   2020   Thereafter  

Estimated amortization of intangible assets

  $ 8,224   $ 1,692   $ 2,783   $ 1,853   $ 902   $ 543   $ 300   $ 151  

5. DERIVATIVE INSTRUMENTS

        The fair and notional values of outstanding derivative instruments were as follows (in thousands):

 
   
  Fair Value of
Derivative Instruments
  Notional Value of
Derivative Instruments
 
 
  Balance Sheet Location   June 30,
2015
  December 31,
2014
  June 30,
2015
  December 31,
2014
 

Derivative assets

  Other current assets   $ 124   $ 149   $ 835   $ 1,594  

Derivative liabilities

  Accrued liabilities   $   $ 18   $   $ 867  

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. FAIR VALUE MEASUREMENTS

Financial Assets and Derivative Instruments

        The following table presents information about financial assets and derivative instruments that were required to be measured at fair value on a recurring basis (in thousands):

 
  Estimated Fair Value  
 
  June 30, 2015  
Description
  Level 1   Level 2   Total  

Assets:

                   

Money market funds

  $ 30,759   $   $ 30,759  

Time deposits

        5,574     5,574  

Derivative assets

        124     124  

Total

  $ 30,759   $ 5,698   $ 36,457  

Liabilities:

                   

Derivative liabilities

  $   $   $  

Total

  $   $   $  

 

 
  Estimated Fair Value  
 
  December 31, 2014  
Description
  Level 1   Level 2   Total  

Assets:

                   

Money market funds

  $ 42,741   $   $ 42,741  

Time deposits

        8,041     8,041  

Derivative assets

        149     149  

Total

  $ 42,741   $ 8,190   $ 50,931  

Liabilities:

                   

Derivative liabilities

  $   $ 18   $ 18  

Total

  $   $ 18   $ 18  

7. STOCKHOLDERS' EQUITY

Common Stock Repurchases

        In May 2001, the Company'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. From time to time since then, the Board of Directors has increased the amount authorized for repurchase under this Program and has extended the Program, which is currently extended through December 31, 2015. From August 2001 through December 2014, the Company had repurchased $150.2 million of its common stock under the Program. There were no repurchases under the Program during the six months ended June 30, 2015 and, at June 30, 2015, the authorization remaining under the Program was $80.0 million.

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. STOCKHOLDERS' EQUITY (Continued)

        Shares withheld upon the vesting of restricted stock units and upon the issuance of stock awards to pay minimum statutory employee withholding taxes are considered common stock repurchases, but are not counted as purchases against the Program. Upon vesting of most restricted stock units or issuance of stock awards, we currently do not collect the minimum statutory withholding taxes from employees. Instead, we automatically withhold, 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 minimum statutory employee withholding taxes due, which is accounted for as a repurchase of common stock. We then pay the minimum statutory employee withholding taxes in cash. The amounts remitted in the six months ended June 30, 2015 and 2014 were $1.3 million and $2.4 million, respectively, for which the Company withheld 0.1 million and 0.2 million shares of common stock, respectively, that were underlying the restricted stock units that vested.

8. STOCK-BASED COMPENSATION PLANS

Stock-Based Compensation

        The following table summarizes the stock-based compensation that has been included in the following line items within the unaudited condensed consolidated statements of operations (in thousands):

 
  Quarter Ended
June 30,
  Six Months Ended
June 30,
 
 
  2015   2014   2015   2014  

Operating expenses:

                         

Cost of revenues

  $ 49   $ 30   $ 119   $ 88  

Sales and marketing

    146     119     298     299  

Technology and development

    241     224     619     589  

General and administrative

    1,179     1,658     2,484     3,926  

Total stock-based compensation

  $ 1,615   $ 2,031   $ 3,520   $ 4,902  

Restricted Stock Units

        The following table summarizes activity for restricted stock units (in thousands):

Nonvested at December 31, 2014

    805  

Granted

    240  

Vested

    (333 )

Forfeited/canceled

    (108 )

Nonvested at June 30, 2015

    604  

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. STOCK-BASED COMPENSATION PLANS (Continued)

Stock Options

        The following table summarizes activity for stock options (in thousands):

Outstanding at December 31, 2014

    947  

Granted

    452  

Exercised

    (112 )

Forfeited/canceled

    (257 )

Outstanding at June 30, 2015

    1,030  

9. INCOME TAXES

        The Company's provision for income taxes for the quarter ended June 30, 2015 differed from the U.S. federal statutory tax rate of 34% primarily due to a provision for income taxes related to the Company's foreign operations, an income tax accrual related to certain goodwill assets, and a tax benefit related to a release of reserves for uncertain tax positions taken in prior periods. For the quarter and six months ended June 30, 2015, the Company utilized the actual effective tax rate (discrete method) in determining the domestic income tax expense, rather than the annual effective tax rate method, as allowed under ASC 740-270-30-36, Income Taxes—Interim Reporting.

        The Company's tax provision has an unusual relationship to pre-tax loss primarily due to the existence of a full deferred tax asset valuation allowance. This circumstance generally results in a zero net tax provision since the income tax expense or benefit that would otherwise be recognized is offset by the change in the valuation allowance. However, the tax expense recorded in the quarter and six months ended June 30, 2015 included an accrual of a non-cash tax expense of approximately $0.3 million in connection with the tax amortization of certain goodwill assets that is not available to offset existing deferred tax assets (termed "naked credits"). Specifically, the Company does not consider the deferred tax liabilities related to certain goodwill assets when determining the need for a valuation allowance.

        In March 2015, the Company reached an audit settlement with the Internal Revenue Service related to tax years 2009 through 2012 and, in connection with such settlement, the Company remitted approximately $6.4 million to the Internal Revenue Service in the quarter ended June 30, 2015, for which the Company had previously established a reserve.

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. NET INCOME (LOSS) PER COMMON SHARE

        The following table sets forth the computation of basic and diluted net income (loss) per common share (in thousands, except per share amounts):

 
  Quarter Ended
June 30,
  Six Months Ended
June 30,
 
 
  2015   2014   2015   2014  

Numerator:

                         

Net income (loss)

 
$

2,357
 
$

(2,250

)

$

1,498
 
$

(12,637

)

Income allocated to participating securities

    (96 )       (66 )    

Net income (loss) attributable to common stockholders

  $ 2,261   $ (2,250 ) $ 1,432   $ (12,637 )

Denominator:

                         

Weighted-average common shares

   
14,663
   
14,130
   
14,547
   
14,014
 

Add: Dilutive effect of non-participating securities

    124         98      

Shares used to calculate diluted net income (loss) per common share

    14,787     14,130     14,645     14,014  

Basic net income (loss) per common share

  $ 0.15   $ (0.16 ) $ 0.10   $ (0.90 )

Diluted net income (loss) per common share

  $ 0.15   $ (0.16 ) $ 0.10   $ (0.90 )

        The diluted net loss per common share computations exclude stock options and restricted stock units that are antidilutive. Weighted-average antidilutive shares for the quarter and six months ended June 30, 2015 were 0.5 million and 1.1 million, respectively. Weighted-average antidilutive shares for the quarter and six months ended June 30, 2014 were 2.0 million and 1.8 million, respectively.

11. RESTRUCTURING AND OTHER EXIT COSTS

        Restructuring and other exit costs were a result of management's decision to streamline operations, prioritize resources for growth initiatives and increase profitability. The following tables summarize restructuring and other exit costs (in thousands):

Accrued restructuring and other exit costs at December 31, 2014

  $ 206  

Restructuring and other exit costs

    967  

Cash paid for restructuring and other exit costs

    (845 )

Accrued restructuring and other exit costs at June 30, 2015

  $ 328  

 

 
  Six Months Ended June 30, 2015  
 
  Communications   Commerce &
Loyalty
  Social
Media
  Corporate   Total  

Restructuring and other exit costs:

                               

Employee termination costs

  $ 933   $ (2 ) $ 2   $ 34   $ 967  

Total restructuring and other exit costs

  $ 933   $ (2 ) $ 2   $ 34   $ 967  

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. RESTRUCTURING AND OTHER EXIT COSTS (Continued)


 
  Six Months Ended June 30, 2014  
 
  Communications   Commerce &
Loyalty
  Social
Media
  Corporate   Total  

Restructuring and other exit costs:

                               

Employee termination costs

  $ 170   $ 1,093   $ 364   $ 951   $ 2,578  

Facility closure and relocation costs

    9                 9  

Total restructuring and other exit costs

  $ 179   $ 1,093   $ 364   $ 951   $ 2,587  

12. CONTINGENCIES—LEGAL MATTERS

        In June 2011, Memory Lane, Inc., a California corporation, filed a complaint in United States District Court, Central District of California, against Classmates International, Inc., Classmates Online, Inc. and Classmates, Inc. (then known as Memory Lane, Inc.) ("Classmates"), alleging false designation of origin under the Lanham Act, 15 U.S.C. section 1125, and state and common law unfair competition. The complaint included requests for an award of damages and for preliminary and permanent injunctive relief. Notwithstanding the request for preliminary injunctive relief, no motion for such relief was filed. Classmates responded to the complaint in September 2011. In October 2011, the plaintiff amended its complaint to, among other things, dismiss Classmates International, Inc. and add United Online, Inc. as a defendant. In February 2014, the jury issued a verdict for the defendants, concluding that the defendants did not infringe plaintiff's trademark and the court entered judgment in favor of the defendants. In March 2014 plaintiff filed a notice of appeal of the judgment in favor of defendants. The plaintiff's appeal brief was filed in November 2014. Classmates' opposition brief was filed in December 2014. Plaintiff's reply brief was filed on March 2, 2015. Classmates' reply brief was filed on April 15, 2015.

        In March 2014, Modern Telecom Systems LLC filed a complaint in the United States District Court for the Central District of California, Southern Division, against Juno Online Services, Inc. and NetZero, Inc. alleging infringement of certain patents relating to the commercial operation of their dial-up internet services. The complaint sought an injunction, damages and other relief. On July 7, 2015, United Online, Inc. and Modern Telecom Systems LLC entered into a settlement agreement with respect to this matter and on July 9, 2015 the parties filed a stipulation of dismissal of all claims and counterclaims in this action, with prejudice. Under the terms of the settlement agreement, United Online, Inc. agreed to pay $95,000 to Modern Telecom Systems LLC, which was paid in July 2015.

        The Company cooperated with certain governmental authorities in connection with their respective investigations of its former post-transaction sales practices and certain other current or former business practices.

    In 2010, Classmates, Inc. ("Classmates"), and Florists' Transworld Delivery, Inc. and FTD.COM Inc. (together, the "FTD Parties") 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: Alabama, Alaska, Delaware, Florida, Idaho, Illinois, Kansas, Maine, Maryland, Michigan, Nebraska, New Mexico, New Jersey, North Dakota, Ohio, Oregon, Pennsylvania, South Dakota, Texas, Vermont, Washington and Wisconsin (the "Multistate Work Group"). The inquiry concerned certain post-transaction sales practices in which these

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. CONTINGENCIES—LEGAL MATTERS (Continued)

      companies previously engaged with certain third-party vendors and certain auto-renewal practices of Classmates, Inc. In the second quarter of 2012, the Company received an offer of settlement from the Multistate Work Group. The Company rejected the Multistate Work Group's 2012 offer and has since had ongoing discussions with the Multistate Work Group regarding a negotiated resolution. In addition, there have been a series of offers and counter-offers between the parties. In May 2015, Classmates and the FTD Parties entered into settlement agreements with each member of the Multistate Work Group. Under the terms of the settlement agreements, Classmates and the FTD Parties denied all wrong-doing and agreed to certain injunctive relief and to two areas of monetary relief: (1) a payment from Classmates and the FTD Parties in the aggregate amount of $8 million to be distributed amongst the states in the Multistate Work Group (with approximately $5.18 million to be paid by Classmates and approximately $2.82 million to be paid by the FTD Parties); and (2) Classmates funding a $3 million restitution program covering eligible consumers in the states in the Multistate Work Group, with any restitution not paid to consumers being paid to such states. The Classmates portion of the payments described above relating to the settlement agreements was paid by Classmates in July 2015.

        In November 2013, we consummated the separation of our company into two independent, publicly-traded companies: United Online, Inc., which continues to operate our current business segments, and FTD Companies, Inc., which includes the domestic and international operations of our former FTD segment (the "FTD Spin-Off Transaction"). Prior to the completion of the FTD Spin-Off Transaction, the Company and FTD Companies, Inc. entered into a Separation and Distribution Agreement (the "Separation Agreement"). The Separation Agreement addresses, among other things, the control and settlement of certain litigation matters that relate to the Company (and certain subsidiaries) and FTD Companies, Inc. (and certain subsidiaries), including the matters related to the Multistate Work Group. The Separation Agreement also provides for the allocation of liabilities and expenses between the Company and FTD Companies, Inc. with respect to these matters. It also establishes procedures with respect to claims subject to indemnification, insurance claims and related matters. The Separation Agreement was amended in May 2015, and the amendment is being filed as Exhibit 2.1 to this Quarterly Report on Form 10-Q.

        The Company cannot predict the outcome of these or any other legal actions or governmental investigations or their potential implications for its business. In addition, the Company, at times, has negotiated resolutions related to certain legal actions and governmental investigations. There are no assurances that additional legal actions or governmental investigations will not be instituted in connection with the Company's current or former business practices.

        The Company records a liability when it believes that it is both probable that a loss will be incurred, and the amount of loss can be reasonably estimated. The Company evaluates, at least quarterly, developments in its legal matters that could affect the amount of liability that has been previously accrued, and makes adjustments as appropriate. Significant judgment is required to determine both probability and the estimated amount. The Company may be unable to estimate a possible loss or range of possible loss due to various reasons, including, among others: (i) if the damages sought are indeterminate; (ii) if the proceedings are in early stages; (iii) if there is uncertainty as to the outcome of pending appeals, motions, or settlements; (iv) if there are significant factual issues to be determined or resolved; and (v) if there are novel or unsettled legal theories presented. In such instances, there is considerable uncertainty regarding the ultimate resolution of such matters, including

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. CONTINGENCIES—LEGAL MATTERS (Continued)

a possible eventual loss, if any. At June 30, 2015, the Company had reserves totaling $8.4 million for estimated losses related to legal matters, including the Multistate Work Group matter. With respect to the legal matters described above, excluding the Multistate Work Group's inquiry of Classmates and the Modern Telecom Systems complaint, the Company has determined, based on its current knowledge, that the amount of possible loss or range of loss, including any reasonably possible losses in excess of amounts already accrued, is not reasonably estimable. However, legal matters are inherently unpredictable and subject to significant uncertainties, some of which are beyond the Company's control. As such, even though the Company intends to vigorously defend itself with respect to its legal matters, there can be no assurance that the final outcome of these matters will not materially and adversely affect the Company's business, financial condition, results of operations, or cash flows.

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ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Overview

        United Online, through its operating subsidiaries, provides consumer services and products over the Internet under a number of brands, including NetZero, Juno, MyPoints, Classmates, StayFriends, and Trombi.

        Effective in the first quarter of 2015, we modified how we report segment information to our Chief Operating Decision Maker ("CODM") as the information regularly reviewed by the CODM had changed. As a result of the changes, we now report three operating segments to the CODM, including the Communications segment, as well as separately reporting the operating results of the Commerce & Loyalty and Social Media segments (which, in prior periods, were reported to the CODM together as the Content & Media segment). This change has been reflected through a retroactive revision of prior-period segment information to conform to the newly-defined segment information.

        Our three reportable segments consist of the following:

Segment
  Services and Products
Communications   Internet access services and devices, including dial-up, mobile broadband, DSL, email, Internet security, web hosting, and voice services

Commerce & Loyalty

 

Loyalty marketing service, shopping through apps, browser extensions, and online portals

Social Media

 

Social networking services and products

        We generate revenues from three primary sources:

    Services revenues.  Services revenues in our Communications and Social Media segments are derived from selling subscriptions to consumers, who are typically billed in advance for the entire subscription term.

    Products revenues.  Products revenues in our Communications segment are derived from the sale of mobile broadband devices and mobile phones, as well as the related shipping and handling fees. Products revenues in our Social Media segment are derived from the sale of yearbooks and yearbook reprints, including the related shipping and handling fees.

    Advertising and other revenues.  Advertising and other revenues are primarily derived from various advertising, marketing and media-related initiatives in all of our segments. Commerce & Loyalty segment revenues include fees generated when emails are transmitted to members, when members respond to emails and when members complete online transactions. Commerce & Loyalty segment revenues also include revenues from the sale of physical gift cards and electronic gift codes.

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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 include the following:

        Pay Accounts.    We generate a significant portion of our revenues from our pay accounts, which represent one of the most important drivers of our business model. A pay account is defined as a member who has paid for a subscription to a Communications or Social Media service, and whose subscription has not terminated or expired. A subscription provides the member with access to our service for a specific term (for example, a month or a year) and may be renewed upon the expiration of each term. One-time purchases of our services, with the exception of our free and prepaid mobile broadband service, are not considered subscriptions and thus, are not included in the pay accounts metric. A pay account does not equate to a unique subscriber because one subscriber could have several pay accounts. In addition, at any point in time, our pay account base includes customers who previously purchased prepaid mobile broadband service and have been inactive for 90 days or less, as well as a number of accounts receiving a free period of service as either a promotion or retention tool, such as the subscribers receiving our free mobile broadband service, 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 business metrics that affect our revenues from our pay accounts base include the number of pay accounts and the average monthly revenue per pay account. A pay account generally becomes a free account following the expiration or termination of the related subscription.

        ARPU.    We monitor average monthly revenue per pay account ("ARPU"), which is calculated by dividing services revenues generated from the pay accounts of our Communications or Social Media 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 the 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 for the Social Media segment, 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 for a period 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, our churn calculation does not include accounts canceled during the first 30 days of service other than dial-up accounts that have upgraded from free accounts, but the calculation does include customers who previously purchased prepaid mobile broadband service and, at any time during the period, reached 90 consecutive days of inactivity. A number of such accounts nevertheless will be included in our pay 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.

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        Active Accounts.    We monitor the number of active accounts among our membership base. Communications segment active accounts include all Communications segment pay accounts as of the date presented combined with the number of free dial-up Internet access and email accounts that logged on to our services at least once during the preceding 31 days. Social Media segment active accounts are defined as the sum of all pay accounts as of the date presented; the monthly average for the period of all free accounts who have visited our domestic or international social networking websites (excluding schoolFeed, the Names Database and Yearbook app), at least once during the period. Segment active accounts for six-month, nine-month and annual periods are calculated as a simple average of the quarterly active accounts for each respective segment.

        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 unless the account uses the same member identifier. As a result, total active accounts may not represent total unique users.

        The pay accounts, churn and ARPU metrics for the Communications segment may fluctuate significantly from period to period due to various factors, including, but not limited to, the number of mobile broadband pay accounts, which have a higher churn rate and ARPU.

        The pay accounts and ARPU metrics for the Social Media segment may fluctuate significantly from period to period due to various factors, including, but not limited to, the extent to which discounted pricing is offered in prior and current periods, the percentage of pay accounts being represented by international pay accounts, which, on average, have lower-priced subscription plans compared to U.S. pay accounts, and the churn rate.

        Gross Merchandise Sales.    Gross merchandise sales is the total dollar value of Commerce & Loyalty member purchases during the reporting period, excluding applicable taxes and net of refunds, directly on the MyPoints site, on third-party sites accessed through the MyPoints portal, or on other Commerce & Loyalty properties. We include the purchases and refunds that are reported by our partners on or before the 15th calendar day following the end of the reporting period, to allow our partners to report purchases completed within the reporting period. We consider this metric to be an important indicator of member engagement with our Commerce & Loyalty properties.

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        The following table sets forth our key business metrics:

 
  Quarter Ended   Six Months Ended
June 30,
 
 
  June 30,
2015
  March 31,
2015
  December 31,
2014
  September 30,
2014
  June 30,
2014
 
 
  2015   2014  

Consolidated:

                                           

Revenues (in thousands)

  $ 50,064   $ 49,907   $ 54,414   $ 52,862   $ 54,600   $ 99,971   $ 109,969  

Communications:

                                           

Segment revenues (in thousands)

  $ 23,208   $ 24,264   $ 26,001   $ 25,295   $ 26,195   $ 47,472   $ 51,869  

% of consolidated revenues

    46 %   49 %   48 %   48 %   48 %   47 %   47 %

Pay accounts (in thousands):

                                           

Internet access

    274     294     301     314     328     274     328  

Other

    179     184     189     193     197     179     197  

Total pay accounts

    453     478     490     507     525     453     525  

Segment churn

    3.0 %   3.1 %   2.8 %   2.8 %   3.0 %   3.0 %   3.1 %

ARPU

  $ 11.54   $ 11.56   $ 11.14   $ 10.91   $ 10.72   $ 11.63   $ 10.62  

Segment active accounts (in millions)

    1.0     1.0     1.0     1.1     1.1     1.0     1.1  

Commerce & Loyalty:

                                           

Segment revenues (in thousands)

  $ 8,260   $ 7,145   $ 9,098   $ 7,166   $ 7,355   $ 15,405   $ 15,954  

% of consolidated revenues

    16 %   14 %   17 %   14 %   13 %   15 %   15 %

Gross merchandise sales (in thousands)

  $ 54,436   $ 50,669   $ 68,284   $ 47,793   $ 47,155   $ 105,105   $ 94,853  

Social Media:

                                           

Segment revenues (in thousands)

  $ 18,855   $ 18,759   $ 19,524   $ 20,623   $ 21,261   $ 37,614   $ 42,505  

% of consolidated revenues

    38 %   38 %   36 %   39 %   39 %   38 %   39 %

Pay accounts (in thousands)

    2,369     2,386     2,406     2,485     2,519     2,369     2,519  

Segment churn

    3.0 %   3.1 %   3.2 %   2.8 %   3.0 %   3.0 %   3.1 %

ARPU

  $ 2.32   $ 2.31   $ 2.44   $ 2.49   $ 2.49   $ 2.31   $ 2.49  

Segment active accounts (in millions)

    8.8     8.8     8.3     8.9     9.2     8.8     9.7  

Average currency exchange rate: EUR to USD

    1.11     1.13     1.25     1.33     1.37     1.12     1.37  

Results of Operations

        The following tables set forth selected historical consolidated statements of operations and segment information data, which 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 and the unaudited condensed consolidated financial statements and Notes thereto included elsewhere in this Quarterly Report on Form 10-Q.

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Quarter and Six Months Ended June 30, 2015 compared to Quarter and Six Months Ended June 30, 2014

Consolidated Results

        Unaudited condensed consolidated statement of operations information was as follows (in thousands):

 
  Quarter Ended
June 30,
  Six Months Ended
June 30,
 
 
  2015   2014   2015   2014  

Revenues

  $ 50,064   $ 54,600   $ 99,971   $ 109,969  

Operating expenses:

                         

Cost of revenues

    16,869     17,120     34,148     36,447  

Sales and marketing

    11,741     12,959     24,559     27,966  

Technology and development

    6,204     6,886     13,156     14,838  

General and administrative

    10,706     16,320     23,244     34,355  

Amortization of intangible assets

    525     1,383     1,007     2,764  

Restructuring and other exit costs

    822     331     967     2,587  

Total operating expenses

    46,867     54,999     97,081     118,957  

Operating income (loss)

    3,197     (399 )   2,890     (8,988 )

Interest income

    91     99     181     191  

Other income, net

    2     55     70     68