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UNITED ONLINE INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge) Forward-Looking Statements
This Quarterly Report on Form 10-Q and the documents incorporated herein by
reference contain forward-looking statements within the meaning of the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995, as
amended, based on our current expectations, estimates and projections about our
operations, industry, financial condition, performance, results of operations,
and liquidity. Statements containing words such as "may," "believe,"
"anticipate," "expect," "intend," "plan," "project," "projections," "business
outlook," "estimate," or similar expressions constitute forward-looking
statements. These forward-looking statements include, but are not limited to,
statements about new business initiatives, products, services, features,
applications, and functionality; future financial performance; revenues; segment
metrics; operating expenses; market trends, including those in the markets in
which we compete; liquidity; cash flows and uses of cash; dividends; capital
expenditures; depreciation and amortization; tax payments; foreign currency
exchange rates; hedging arrangements; our ability to repay indebtedness, pay
dividends and invest in initiatives; our products and services; pricing;
competition; and strategies. Potential factors that could affect the matters
about which the forward-looking statements are made include, among others, the
factors disclosed in the section entitled "Risk Factors" in this Quarterly
Report on Form 10-Q and additional factors that accompany the related
forward-looking statements in this Quarterly Report on Form 10-Q and our other
filings with the Securities and Exchange Commission. Readers are cautioned not
to place undue reliance on these forward-looking statements, which reflect
management's analysis only as of the date hereof. Any such forward-looking
statements are not guarantees of future performance or results and involve risks
and uncertainties that may cause actual performance and results to differ
materially from those predicted. Reported results should not be considered an
indication of future performance. Except as required by law, we undertake no
obligation to publicly release the results of any revision to these
forward-looking statements that may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
Overview
United Online, through its operating subsidiaries, is a leading provider of
consumer products and services over the Internet under a number of brands,
including FTD, Interflora, Memory Lane, Classmates, StayFriends, MyPoints, and
NetZero.
United Online, Inc. is a Delaware corporation, headquartered in Woodland
Hills, California, that commenced operations in 2001 following the merger of
dial-up Internet access providers NetZero, Inc. ("NetZero") and Juno Online
Services, Inc. ("Juno"). In 2004, our Internet access revenues began to decline
and we began diversifying our business to include other consumer Internet
offerings in an effort to provide new growth opportunities for the Company. In
November 2004, we acquired Classmates Online, Inc. (whose name was changed to
Memory Lane, Inc. in February 2011), a provider of online nostalgia services,
and in April 2006, we acquired MyPoints.com, Inc. ("MyPoints"), a provider of
online loyalty marketing services. In August 2008, we acquired FTD Group, Inc.
(together with its subsidiaries, "FTD"), a provider of floral, gift and related
products and services to consumers and retail florists, as well as to other
retail locations offering floral, gift and related products and services under
the FTD and Interflora brands.
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We report our businesses in three reportable segments:
Segment Products and Services
FTD Floral, gift and related products and services for consumers,
retail florists and other retail locations
Content & Media Online nostalgia products and services and online loyalty
marketing services
Communications Internet access services and devices, including dial-up, 4G
mobile broadband, and DSL, and email, Internet security and web
hosting services
We generate revenues from three primary sources:
º •
º Products revenues. Products revenues in our FTD segment are derived
primarily from selling floral, gift and related products to consumers
via our Internet websites and telephone numbers and, to a lesser
extent, to our floral network members. Products revenues in our
Content & Media segment are derived from the sale of yearbook copies
and related shipping and handling fees. Products revenues in our
Communications segment are derived from the sale of 4G mobile
broadband devices and the related shipping and handling fees.
º •
º Services revenues. Services revenues in our FTD segment are derived
from membership fees, order-related fees and services, and
subscription and other fees generated from independent members of the
FTD and Interflora networks, which we also refer to as our floral
network members. Our floral network members include independent
traditional retail florists and other retailers. Services revenues in
our Content & Media and Communications segments are derived from
selling subscriptions to consumers who are typically billed in advance
for the entire subscription term.
º •
º Advertising revenues. Advertising revenues are derived from a wide
variety of advertising, marketing and media-related initiatives in
each of our operating segments.
Segment Services
FTD
FTD is a leading provider of floral, gift and related products and services
to consumers and retail florists, as well as to other retail locations offering
floral, gift and related products and services, in the U.S., Canada, the U.K.,
and the Republic of Ireland. The business uses the highly recognized FTD and
Interflora brands, both supported by the Mercury Man logo. FTD is a floral and
gift mass marketer, which we refer to as FTD's consumer business, and a provider
of floral network services, which we refer to as FTD's floral network business.
These businesses are complementary, as the majority of floral orders generated
by the consumer business are fulfilled and hand-delivered by the members of the
FTD floral network, with the remaining orders delivered via direct shipment from
third-party suppliers. FTD does not currently own or operate any retail
locations with the exception of one retail location in the U.K. FTD does not
maintain significant physical inventory and generally does not bear the cost of
warehousing its consumer product offerings, and FTD generally receives payment
from consumers before paying florists or other third parties to fulfill product
orders.
Consumer Business. FTD is a leading marketer of flowers and gift items to
consumers. FTD operates in the U.S. and Canada, primarily through the
www.ftd.com and www.ftd.ca websites and the 1-800-SEND-FTD telephone number, and
in the U.K. and the Republic of Ireland, primarily through the
www.interflora.co.uk and www.interflora.ie websites and various telephone
numbers. FTD also operates mobile websites for these same markets that are
optimized for mobile phones with Internet
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connections. While floral arrangements and plants are FTD's primary offerings,
FTD also markets and sells gift items, including jewelry, chocolates, stuffed
animals, wine, fruit, bath and beauty products, and other gift baskets.
Floral Network Business. FTD provides a comprehensive suite of products and
services that promote revenue growth and enhance the operating efficiencies of
its floral network members, including services that enable such members to send,
receive and deliver floral orders. Floral network members include traditional
retail florists, as well as other retailers offering floral and related products
and services, that are located primarily in the U.S., Canada, the U.K., and the
Republic of Ireland. The large networks of floral network members provide an
order fulfillment vehicle for our consumer business and allow FTD to offer
same-day delivery capability (subject to certain limitations) to populations
throughout the U.S., Canada, the U.K., and the Republic of Ireland.
Content & Media
Our Content & Media segment provides online nostalgia products and services
under the Memory Lane, Classmates, StayFriends, and Trombi brands. Our Content &
Media services also include online loyalty marketing under the MyPoints brand.
Online Nostalgia Services. We operate our nostalgia services as a platform
to enable users to locate and interact with acquaintances from their past, with
high school affiliations as the primary focus. Led by our Classmates.com website
that serves the U.S. and Canada, our nostalgia services comprise a large and
diverse population of users, with approximately 55 million registered accounts
at March 31, 2012.
Domestic. Visitors to the Classmates website can experience a substantial
amount of nostalgic content free of charge. Members with free accounts can use
our search feature to locate individuals in our database or in our collection of
yearbooks; post information and view information posted by other members; tag
yearbook photos; and organize reunions and engage in other reunion-related
activities. To learn who has visited his or her profile or yearbook or engage in
the other premium features, a member is required to purchase an All-Access Pass,
which is generally available for terms ranging from three months to two years.
Revenues from our Classmates website are derived primarily from the sale of
these subscriptions and, to a lesser extent, from advertising fees and other
transactions on our website, including the sale of yearbook copies.
International. In addition to our Classmates website, we operate five
international websites that offer nostalgia services, primarily as a social
networking platform to reconnect friends and acquaintances from high school. We
operate StayFriends in Germany, Sweden, Austria, and Switzerland
(www.stayfriends.de, www.stayfriends.se, www.stayfriends.at, and
www.stayfriends.ch, respectively), and Trombi in France (www.trombi.com).
Similar to the Classmates website, each international website includes free and
pay memberships, although the features of our international pay services differ
from those of the Classmates pay services.
Online Loyalty Marketing. Our online loyalty marketing service, MyPoints,
connects advertisers with its members by allowing members to earn rewards points
for engaging in online activities. MyPoints is a free service for consumers who
register and provide certain identifying information to receive direct email
marketing and other online loyalty promotions. The MyPoints website
(www.mypoints.com) serves as a shopping portal for our advertising clients and
direct sales partners. Members earn points for responding to email offers,
taking market research companies' surveys, shopping online at the MyPoints
website, searching the Internet through a MyPoints branded toolbar, playing
MyPoints branded online games, and engaging in other online activities. In
addition to these online point earning opportunities, MyPoints also offers a
member credit card with opportunities to earn points through both online and
offline shopping. Rewards points are redeemable primarily in the
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form of third-party gift cards currently from over 75 merchants, including,
among others, leading retailers, theaters, restaurants, airlines, and hotels.
Communications
Our principal Communications pay service is dial-up Internet access, offered
under the NetZero and Juno brands. We also offer 4G mobile broadband, DSL,
email, Internet security services, and web hosting services. In total, we had
0.7 million Communications pay accounts at March 31, 2012, of which 0.5 million
were Internet access accounts and 0.2 million were pay accounts subscribed to
our other Communications services, including email, Internet security and web
hosting services. Most of our Communications revenues are derived from dial-up
Internet access pay accounts.
Internet Access Services. Our Internet access services consist of dial-up
and, to a much lesser extent, our 4G mobile broadband service and DSL service.
Our dial-up Internet access services are provided on both a free and pay basis,
with the free services subject to hourly and other limitations. Basic pay
dial-up Internet access services include Internet access and an email account.
In addition, we offer accelerated dial-up Internet access services which can
significantly reduce the time required for certain web pages to load during
Internet browsing when compared to our basic dial-up Internet access services.
Our accelerated dial-up Internet access services are also bundled with
additional benefits, including pop-up blocking, antivirus software and enhanced
email storage, although we also offer each of these features and certain other
value-added features as stand-alone pay services. Our dial-up Internet access
services are available in more than 12,500 cities across the U.S. and Canada.
In March 2012, we began offering 4G mobile broadband service under the
NetZero brand as part of a wholesale agreement with Clearwire Corporation
("Clearwire"). We offer consumers the option to access the service by purchasing
either a NetZero USB modem to connect a single device such as a PC or a Mac®
computer, or purchasing a NetZero personal hotspot that can connect up to eight
Wi-Fi enabled devices simultaneously. NetZero USB modem and NetZero hotspot
customers are able to connect to the NetZero 4G mobile broadband service within
the Clearwire coverage area using a variety of devices, including a PC, Mac®
computer, iPad® mobile digital device, and other tablets, netbooks and
smartphones. The NetZero 4G mobile broadband service is generally available for
use in the home, at the office or on the go by customers across the U.S. within
the Clearwire coverage area.
Our DSL broadband Internet access service consists of digital subscriber
lines (also known as "DSL") service that we purchase from third parties and
resell under our own brands. This service is primarily used as a means to retain
members who are leaving our dial-up Internet access services. Since we have
conducted very limited marketing of our DSL service to the general public, we
have experienced limited adoption of our DSL service.
Key Business Metrics
We review a number of key business metrics to help us monitor our
performance and trends affecting our businesses, and to develop forecasts and
budgets. These key measures are:
FTD Segment Metrics
Consumer Orders. We monitor the number of consumer orders for floral and
gift products during a given period. Consumer orders are orders delivered during
the period that originated in the U.S. and Canada, primarily from the
www.ftd.com and www.ftd.ca websites and the 1-800-SEND-FTD telephone number, and
in the U.K. and the Republic of Ireland, primarily from the www.interflora.co.uk
and www.interflora.ie websites and various telephone numbers. The number of
consumer orders is not adjusted for non-delivered orders that are refunded after
the scheduled delivery. Orders originating with a florist or other retail
location for delivery to consumers are not included. The number of consumer
orders received may fluctuate significantly from period to period due to
seasonality resulting
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from the timing of key holidays; general economic conditions; fluctuations in
marketing expenditures on initiatives designed to attract new and retain
existing customers; changes in pricing for our floral, plant and gift products
or competitive offerings; new or terminated partnerships; and changing consumer
preferences, among other factors.
Average Order Value. We monitor the average value for consumer orders
delivered in a given period, which we refer to as the average order value.
Average order value represents the average U.S. Dollar amount received for
consumer orders delivered during a period. For orders placed outside the U.S.
(principally in the U.K. and the Republic of Ireland), this average U.S. Dollar
amount is determined after translating the local currency amounts received into
U.S. Dollars. Average order value includes merchandise revenues and shipping and
service fees paid by the consumer, less discounts and refunds (net of
refund-related fees charged to floral network members). Average order values may
fluctuate from period to period based on the average foreign currency exchange
rates; product mix; changes in merchandise pricing, shipping and service fees;
levels of refunds issued; and discounts, among other factors.
Content & Media and Communications Segment Metrics
Pay Accounts. We generate a significant portion of our revenues from our
pay accounts and they represent one of the most important drivers of our
business model. A pay account is defined as a member who has paid for a
subscription to a Content & Media or Communications 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 are not considered subscriptions and thus, are not included in the pay
accounts metric. A pay account does not equate to a unique subscriber since one
subscriber could have several pay accounts. In addition, at any point in time,
our pay account base includes a number of accounts receiving a free period of
service as either a promotion or retention tool, such as the subscribers
receiving our free NetZero 4G 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 metrics that affect our revenues from our
pay accounts base include the number of pay accounts and ARPU. A pay account
generally becomes a free account following the expiration or termination of the
related subscription.
ARPU. We monitor ARPU, which is a monthly measure calculated by dividing
services revenues generated from the pay accounts of our Content & Media or
Communications segment, as applicable, for a period (after translation into U.S.
Dollars) by the average number of segment pay accounts for that period, divided
by the number of months in that period. The average number of pay accounts is
the simple average of the number of pay accounts at the beginning and 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 the average foreign
currency exchange rate between the U.S. Dollar and the Euro.
Churn. To evaluate the retention characteristics of our membership base, we
also monitor the percentage of pay accounts that terminate or expire, which we
refer to as our average monthly churn rate. Our average monthly churn rate is
calculated as the total number of pay accounts that terminated or expired in a
period divided by the average number of pay accounts for that period, divided by
the number of months in that period. Our average monthly churn percentage may
fluctuate from period to period due to our mix of subscription terms, which
affects the timing of subscription expirations, and other factors. We make
certain normalizing adjustments to the calculation of our churn percentage for
periods in which we add a significant number of pay accounts due to
acquisitions. For our
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Communications segment pay accounts, we do not include in our churn calculation
those accounts canceled during the first 30 days of service unless the accounts
have upgraded from free accounts, although a number of such accounts will be
included in our account totals at any given measurement date. Subscribers who
cancel one pay service but subscribe to another pay service are not necessarily
considered to have canceled a pay account depending on the services and, as
such, our segment churn rates are not necessarily indicative of the percentage
of subscribers canceling any particular service.
Active Accounts. We monitor the number of active accounts among our
membership base. Content & 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 online
nostalgia websites (excluding The Names Database) at least once during the
period; and the monthly average for the period of all online loyalty marketing
members who have earned or redeemed points during such period. Communications
segment active accounts include all Communications segment pay accounts as of
the date presented combined with the number of free dial-up Internet access and
email accounts that logged on to our services at least once during the preceding
31 days. Content & Media segment and Communications segment active accounts for
the six-month, nine-month and annual periods, as applicable, 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 table below sets forth, for the periods presented, as applicable, our
consolidated revenues, segment revenues, consumer orders, average order value,
average currency exchange rates, pay accounts, segment churn, ARPU, and segment
active accounts.
Revenues and operating results from our FTD segment are impacted by seasonal
holiday timing variations and fluctuations in foreign currency exchange rates.
As such, we believe that comparisons of our FTD segment's revenues and operating
results for any period with those of the immediately preceding period or, in
some instances, the same period of the preceding fiscal year, may be of limited
relevance in evaluating its historical financial performance and predicting its
future financial performance.
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The pay accounts and ARPU metrics for our Content & 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.
Quarter Ended
March 31, December 31, September 30, June 30, March 31,
2012 2011 2011 2011 2011
Consolidated:
Revenues (in
thousands) $ 242,292 $ 217,921 $ 182,694 $ 255,565 $ 241,505
FTD:
Segment revenues (in
thousands) $ 176,447 $ 143,304 $ 108,747 $ 176,299 $ 158,899
% of consolidated
revenues 73 % 66 % 60 % 69 % 66 %
Consumer orders (in
thousands) 1,997 1,615 1,104 2,167 1,742
Average order value $ 62.91 $ 62.31 $ 63.46 $ 60.45 $ 63.28
Average currency
exchange rate: GBP
to USD 1.58 1.57 1.61 1.63 1.61
Content & Media:
Segment revenues (in
thousands) $ 39,445 $ 45,665 $ 44,070 $ 47,427 $ 48,313
% of consolidated
revenues 16 % 21 % 24 % 19 % 20 %
Pay accounts (in
thousands) 3,293 3,484 3,780 4,007 4,260
Segment churn 3.9 % 4.1 % 3.9 % 3.8 % 3.9 %
ARPU $ 2.54 $ 2.60 $ 2.64 $ 2.60 $ 2.47
Segment active
accounts (in
millions) 11.3 10.3 11.9 12.5 13.6
Average currency
exchange rate: EUR
to USD 1.31 1.35 1.41 1.44 1.37
Communications:
Segment revenues (in
thousands) $ 26,760 $ 29,295 $ 30,260 $ 32,279 $ 34,698
% of consolidated
revenues 11 % 13 % 17 % 13 % 14 %
Pay accounts (in
thousands):
Access 498 535 577 622 675
Other 249 259 266 272 279
Total pay accounts 747 794 843 894 954
Segment churn 3.4 % 3.4 % 3.4 % 3.5 % 3.8 %
ARPU $ 8.99 $ 9.09 $ 9.14 $ 9.28 $ 9.33
Segment active
accounts (in
millions) 1.5 1.5 1.6 1.7 1.7
Financial Statement Presentation
Revenues
Products Revenues
FTD
Products revenues consist of merchandise revenues and related shipping and
service fees, less discounts and refunds, for FTD consumer orders as well as
revenues generated from sales of branded and non-branded hard goods, software
and hardware systems, cut flowers, packaging and promotional products, and a
wide variety of other floral-related supplies to floral network members.
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Content & Media
Products revenues consist of revenues generated from the sale of yearbook
copies and related shipping fees.
Communications
Products revenues consist of revenues generated from the sale of 4G mobile
broadband devices and the related shipping and handling fees.
Services Revenues
FTD
FTD services revenues consist of fees charged to its floral network members
for access to the FTD and Interflora brands and the Mercury Man logo; access to
the floral networks; credit card processing services; e-commerce website
services; online advertising tools; and clearing-house services, order
transmission, and after-hours telephone answering and order taking services.
Content & Media and Communications
Content & Media services revenues primarily consist of amounts charged to
pay accounts for online nostalgia services. Communications services revenues
consist of amounts charged to pay accounts for dial-up Internet access, 4G
mobile broadband, DSL, email, Internet security, web hosting, and other
services, with substantially all of such revenues associated with Internet
access. Our Content & Media and Communications services revenues are primarily
dependent on two factors: the average number of pay accounts for a period and
ARPU. In general, we charge our pay accounts in advance of providing a service,
which results in the deferral of services revenue to the period in which the
services are provided. Communications services revenues also include revenues
generated from the resale of telecommunications to third parties.
Advertising Revenues
We provide advertising opportunities to marketers with both brand and direct
response objectives through a full suite of display, search, email, and
text-link opportunities across our various properties and the Internet. We also
offer audience-based media solutions, targeting technologies, website
sponsorships and website integrations in order to provide effective solutions.
FTD
FTD generates advertising revenues primarily from inclusion of
advertisements on order confirmation emails to consumers, for which revenue is
recognized when the advertisement is run, and from referrals of customers to
third-party websites and services, for which revenue is recognized when the
related performance criteria is met.
Content & Media
Our online nostalgia services generate advertising revenues primarily from
display advertisements on our websites. Advertising inventory on our online
nostalgia websites includes text and graphic placements on the user home page,
profile page, class list page, and most other pages on our websites.
Our online loyalty marketing service revenues are derived from advertising
fees, consisting primarily of fees based on performance measures, that are
generated when emails are transmitted to members, when members respond to
emails, when members complete online transactions, and when
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members engage in a variety of other online activities, including, but not
limited to, games, Internet searches and market research surveys.
Communications
Our Communications services generate advertising revenues from search
placements, display advertisements and online market research associated with
our Internet access and email services. Advertising revenues also include
intercompany commissions from our Content & Media segment which are included in
reported segment results and are eliminated upon consolidation.
Cost of Revenues
FTD
FTD cost of revenues includes product costs; shipping and delivery costs;
costs associated with taking orders; printing and postage costs; costs related
to FTD's product quality guarantee; systems installation, training and support
costs; data center costs; depreciation of network computers and equipment;
license fees; costs related to customer billing and billing support for floral
network members; fees associated with the storage and processing of customer
credit cards and associated bank fees; and domain name registration fees.
Content & Media
Content & Media cost of revenues includes costs of points earned by members
of our online loyalty marketing service; data center costs; personnel- and
overhead-related costs associated with operating our networks and data centers;
depreciation of network computers and equipment; amortization of content
purchases; license fees; costs related to providing customer support; costs
related to customer billing and billing support for our pay accounts; fees
associated with the storage and processing of customer credit cards and
associated bank fees; domain name registration fees; and costs associated with
the sale of yearbook copies and the related shipping costs.
Communications
Communications cost of revenues includes telecommunications and data center
costs; personnel- and overhead-related costs associated with operating our
networks and data centers; depreciation of network computers and equipment;
license fees; costs related to providing customer support; costs related to
customer billing and billing support for our pay accounts; fees associated with
the storage and processing of customer credit cards and associated bank fees;
domain name registration fees, and the costs associated with the sale of 4G
mobile broadband devices, including the related shipping and handling costs.
Sales and Marketing
Sales and marketing expenses include expenses associated with promoting our
brands, products and services and with generating advertising revenues. Expenses
associated with promoting our brands, products and services include advertising
and promotion expenses; fees paid to distribution partners, third-party
advertising networks and co-registration partners to acquire new pay and free
accounts; personnel and overhead-related expenses for marketing, merchandising,
customer service, and sales personnel; and telemarketing costs incurred to
acquire and retain pay accounts and up-sell pay accounts to additional services.
Expenses associated with generating advertising revenues include sales
commissions and personnel-related expenses. We have expended significant amounts
on sales and marketing, including branding and customer acquisition campaigns
consisting of television, Internet, sponsorships, print, and outdoor
advertising, and on retail and other performance-based distribution
relationships. Marketing and advertising costs to promote our products and
services are expensed in the
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period incurred. Advertising and promotion expenses include media, agency and
promotion expenses. Media production costs are expensed the first time the
advertisement is run. Media and agency costs are expensed over the period the
advertising runs.
Technology and Development
Technology and development expenses include expenses for product
development, maintenance of existing software, technology and websites, and
development of new or improved software and technology, including
personnel-related expenses for our technology group in various office locations.
Costs incurred by us to manage and monitor our technology and development
activities are expensed as incurred. Costs relating to the acquisition and
development of internal-use software are capitalized when appropriate and
depreciated over their estimated useful lives, generally three to five years.
General and Administrative
General and administrative expenses, which include unallocated corporate
expenses, consist of personnel-related expenses for executive, finance, legal,
human resources, facilities, internal audit, investor relations, internal
customer support personnel and personnel associated with operating our corporate
network systems. In addition, general and administrative expenses include, among
other costs, professional fees for legal, accounting and financial services;
insurance; occupancy and other overhead-related costs; office relocation costs;
non-income taxes; gains and losses on the sale of assets; and reserves or
expenses incurred as a result of settlements, judgments, fines, penalties,
assessment, or other resolutions related to litigation, arbitration,
investigations, disputes, or similar matters. General and administrative
expenses also include expenses resulting from actual or potential transactions
such as business combinations, mergers, acquisitions, and financing
transactions, including expenses for advisors and representatives such as
investment bankers, consultants, attorneys, and accounting firms.
Amortization of Intangible Assets
Amortization of intangible assets includes amortization of acquired pay
accounts and free accounts; certain acquired trademarks and trade names;
acquired software and technology; acquired customer and advertising contracts
and related relationships; acquired rights, content and intellectual property;
and other acquired identifiable intangible assets. In accordance with the
provisions set forth in Accounting Standards Codification ("ASC") 350,
Intangibles-Goodwill and Other, goodwill and indefinite-lived intangible assets
are not being amortized but are tested for impairment at a reporting unit level
on an annual basis and between annual tests if an event occurs or circumstances
change that would indicate the fair value of a reporting unit is below its
carrying value.
Restructuring and Other Exit Costs
Restructuring and other exit costs consist of costs associated with the
realignment and reorganization of our operations and other employee termination
events. Restructuring and other exit costs include employee termination costs,
facility closure and relocation costs, and contract termination costs. The
timing of associated cash payments is dependent upon the type of exit cost and
can extend over a 12-month period. The Company records restructuring and other
exit cost liabilities in accrued liabilities in the consolidated balance sheets.
Interest Income
Interest income consists primarily of earnings on our cash and cash
equivalents and interest on long-term receivables from FTD's technology system
sales.
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Interest Expense
Interest expense consists of interest expense on our credit facilities,
including accretion of discounts and amortization of debt issue costs, loss on
extinguishment of debt, and interest expense relating to capital leases and our
interest rate cap.
Other Income (Expense), Net
Other income (expense), net, consists of gains and losses on foreign
currency exchange rate transactions; realized and unrealized gains and losses on
certain forward foreign currency exchange contracts; equity earnings on
investments in subsidiaries; and other non-operating income and expenses.
Results of Operations
The following tables set forth, for the periods presented, selected
historical statements of operations and segment information data. The
information contained in the tables below should be read in conjunction with
Liquidity and Capital Resources, Contractual Obligations, and Other Commitments
included in this Item 2 as well as "Quantitative and Qualitative Disclosures
About Market Risk" included in Part I, Item 3 of this Quarterly Report on
Form 10-Q, and the unaudited condensed consolidated financial statements and
notes thereto included in Part 1, Item 1 of this Quarterly Report on Form 10-Q.
Unaudited condensed consolidated information was as follows (in thousands):
Quarter Ended
March 31,
2012 2011
Revenues $ 242,292 $ 241,505
Operating expenses:
Cost of revenues 131,165 121,203
Sales and marketing 46,759 48,135
Technology and development 11,586 12,543
General and administrative 24,287 28,729
Amortization of intangible assets 7,309 7,745
Restructuring and other exit costs (71 ) 534
Total operating expenses 221,035 218,889
Operating income 21,257 22,616
Interest income 238 549
Interest expense (3,458 ) (5,041 )
Other income, net 204 1,539
Income before income taxes 18,241 19,663
Provision for income taxes 6,722 7,482
Net income $ 11,519 $ 12,181
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Information for our three reportable segments, which excludes depreciation
and amortization of intangible assets, was as follows (in thousands):
FTD Content & Media Communications
Quarter Ended Quarter Ended Quarter Ended
March 31, March 31, March 31,
2012 2011 2012 2011 2012 2011
Revenues $ 176,447 $ 158,899 $ 39,445 $ 48,313 $ 26,760 $ 34,698
Operating expenses:
Cost of revenues 111,956 100,370 8,248 9,038 7,687 9,172
Sales and marketing 28,714 29,352 14,119 15,406 3,908 3,333
Technology and development 2,797 2,889 4,409 5,593 1,944 1,843
General and administrative 8,900 7,715 5,395 8,153 2,864 3,191
Restructuring and other exit
costs - - (63 ) - (8 ) 534
Total operating expenses 152,367 140,326 32,108 38,190 16,395 18,073
Segment income from
operations $ 24,080 $ 18,573 $ 7,337 $ 10,123 $ 10,365 $ 16,625
Quarter Ended March 31, 2012 compared to Quarter Ended March 31, 2011
Consolidated Results
Revenues
Quarter Ended
March 31, Change
2012 2011 $ %
(in thousands, except percentages)
Revenues $ 242,292 $ 241,505 $ 787 - %
Revenues as a percentage of total segment
revenues:
FTD 72.7 % 65.7 %
Content & Media 16.3 % 20.0 %
Communications 11.0 % 14.3 %
The increase in consolidated revenues was due to a $17.5 million increase in
revenues from our FTD segment, partially offset by an $8.9 million decrease in
revenues from our Content & Media segment and a $7.9 million decrease in
revenues from our Communications segment.
Cost of Revenues
Quarter Ended
March 31, Change
2012 2011 $ %
(in thousands, except percentages)
Cost of revenues $ 131,165 $ 121,203 $ 9,962 8 %
Cost of revenues as a percentage of total
segment cost of revenues:
FTD 87.5 % 84.6 %
Content & Media 6.4 % 7.6 %
Communications 6.0 % 7.7 %
The increase in consolidated cost of revenues was due to an $11.6 million
increase in cost of revenues associated with our FTD segment and a $0.6 million
increase in depreciation and amortization expense. These increases were
partially offset by a $1.5 million decrease in cost of revenues associated
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with our Communications segment and a $0.8 million decrease in cost of revenues
associated with our Content & Media segment.
Sales and Marketing
Quarter Ended
March 31, Change
2012 2011 $ %
(in thousands, except percentages)
Sales and marketing $ 46,759 $ 48,135 $ (1,376 ) (3 )%
Sales and marketing expenses as a
percentage of total segment sales and
marketing expenses:
FTD 61.4 % 61.0 %
Content & Media 30.2 % 32.0 %
Communications 8.4 % 6.9 %
The decrease in consolidated sales and marketing expenses was due to a
$1.3 million decrease in sales and marketing expenses associated with our
Content & Media segment and a $0.6 million decrease in sales and marketing
expenses associated with our FTD segment. These decreases were partially offset
by a $0.6 million increase in sales and marketing expenses associated with our
Communications segment.
Technology and Development
Quarter Ended
March 31, Change
2012 2011 $ %
(in thousands, except percentages)
Technology and development $ 11,586 $ 12,543 $ (957 ) (8 )%
Technology and development expenses as a
percentage of total segment technology and
development expenses:
FTD 30.6 % 28.0 %
Content & Media 48.2 % 54.2 %
Communications 21.2 % 17.8 %
The decrease in consolidated technology and development expenses was
primarily due to a $1.2 million decrease in technology and development expenses
associated with our Content & Media segment, partially offset by a $0.2 million
increase in depreciation expense.
General and Administrative
Quarter Ended
March 31, Change
2012 2011 $ %
(in thousands, except percentages)
General and administrative $ 24,287 $ 28,729 $ (4,442 ) (15 )%
General and administrative expenses as a
percentage of total segment general and
administrative expenses:
FTD 51.9 % 40.5 %
Content & Media 31.4 % 42.8 %
Communications 16.7 % 16.7 %
The decrease in consolidated general and administrative expenses was due to
a $2.8 million decrease in general and administrative expenses associated with
our Content & Media segment, a
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$2.3 million decrease in unallocated corporate expenses, excluding depreciation,
amortization of intangible assets and restructuring and other exit costs, and a
$0.3 million decrease in general and administrative expenses associated with our
Communications segment. These decreases were partially offset by a $1.2 million
increase in general and administrative expenses associated with our FTD segment.
Amortization of Intangible Assets
Quarter Ended
March 31, Change
2012 2011 $ %
(in thousands, except percentages)
Amortization of intangible assets $ 7,309 $ 7,745 $ (436 ) (6 )%
The decrease in consolidated amortization of intangible assets was due to a
$0.3 million decrease in amortization of intangible assets due to certain
intangible assets associated with our Communications and Content & Media
segments becoming fully amortized in prior periods.
Restructuring and Other Exit Costs
Quarter Ended
March 31, Change
2012 2011 $ %
(in thousands, except percentages)
Restructuring and other exit costs $ (71 ) $ 534 $ (605 ) (113 )%
Consolidated restructuring and other exit costs for the quarter ended
March 31, 2011 were related to employee termination costs.
Interest Income
Quarter Ended
March 31, Change
2012 2011 $ %
(in thousands, except percentages)
Interest income $ 238 $ 549 $ (311 ) (57 )%
The decrease in consolidated interest income was primarily due to a decrease
in interest on long-term receivables from FTD's technology system sales.
Interest Expense
Quarter Ended
March 31, Change
2012 2011 $ %
(in thousands, except percentages)
Interest expense $ 3,458 $ 5,041 $ (1,583 ) (31 )%
The decrease in consolidated interest expense was primarily due to lower
interest rates as a result of the June 2011 refinancing of FTD's credit
agreement.
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Other Income, Net
Quarter Ended
March 31, Change
2012 2011 $ %
(in thousands, except percentages)
Other income, net $ 204 $ 1,539 $ (1,335 ) (87 )%
The decrease in consolidated other income, net, was primarily due to a
$1.1 million non-income tax refund at our FTD segment during the quarter ended
March 31, 2011.
Provision for Income Taxes
Quarter Ended
March 31,
2012 2011
(in thousands,
except percentages)
Provision for income taxes $ 6,722 7,482
Effective income tax rate 36.9 % 38.1 %
The decrease in our effective income tax rate was primarily due to an
increase in foreign income, which has a lower overall tax rate, as a percentage
of total pre-tax income, partially offset by an increase in non-deductible
executive compensation.
FTD Segment Results
FTD Revenues
Quarter Ended
March 31, Change
2012 2011 $ %
(in thousands, except percentages
and average order value)
Products $ 146,164 $ 129,086 $ 17,078 13 %
Services 30,224 29,791 433 1 %
Advertising 59 22 37 168 %
Total FTD Revenues $ 176,447 $ 158,899 $ 17,548 11 %
Consumer orders 1,997 1,742 255 15 %
Average order value $ 62.91 $ 63.28 $ (0.37 ) (1 )%
Excluding the unfavorable impact of foreign currency exchange rates of
$1.1 million due to a weaker British Pound versus the U.S. Dollar, FTD revenues
increased by $18.6 million, or 12%, compared to the prior-year period. The
increase was primarily due to a 15% increase in consumer orders for the quarter
ended March 31, 2012, compared to the prior-year period. The increase in
consumer orders was driven primarily by the timing of the U.K. Mother's Day
holiday, which occurred in the first quarter in 2012 but occurred in the second
quarter in 2011. In 2011, approximately $14 million in revenues related to the
U.K. Mother's Day holiday shifted into the second quarter. The increase was also
driven by an increase in consumer order volume in the U.S. and the U.K. for the
Valentine's Day holiday, partially offset by a 1% decrease in average order
value for the quarter ended March 31, 2012, compared to the quarter ended
March 31, 2011, due to an increased percentage of orders generated in the U.K.
versus the U.S., as orders in the U.K. generally have lower average order values
than the U.S.
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FTD Cost of Revenues
Quarter Ended
March 31, Change
2012 2011 $ %
(in thousands, except percentages)
FTD cost of revenues $ 111,956 $ 100,370 $ 11,586 12 %
FTD cost of revenues as a percentage of FTD
revenues 63.5 % 63.2 %
Excluding the favorable impact of foreign currency exchange rates of
$0.7 million, FTD cost of revenues increased by $12.3 million, or 12%, compared
to the prior-year period primarily due to higher consumer order volume. Cost of
revenues as a percentage of revenues was negatively impacted by a greater
percentage of orders generated in the U.K., as compared to the U.S., which
generally have lower margins.
FTD Sales and Marketing
Quarter Ended
March 31, Change
2012 2011 $ %
(in thousands, except percentages)
FTD sales and marketing $ 28,714 $ 29,352 $ (638 ) (2 )%
FTD sales and marketing expenses as a
percentage of FTD revenues 16.3 % 18.5 %
The decrease in FTD sales and marketing expenses was primarily due to the
absence of television advertising in the first quarter of 2012, partially offset
by increased marketing expenditures in the U.S. in addition to increases in the
U.K. related to the timing of the U.K. Mother's Day holiday.
FTD Technology and Development
Quarter Ended
March 31, Change
2012 2011 $ %
(in thousands, except percentages)
FTD technology and development $ 2,797 $ 2,889 $ (92 ) (3 )%
FTD technology and development expenses as
a percentage of FTD revenues 1.6 % 1.8 %
FTD technology and development expenses remained relatively consistent for
the quarter ended March 31, 2012, compared to the quarter ended March 31, 2011.
FTD General and Administrative
Quarter Ended
March 31, Change
2012 2011 $ %
(in thousands, except percentages)
FTD general and administrative $ 8,900 $ 7,715 $ 1,185 15 %
FTD general and administrative expenses as a
percentage of FTD revenues 5.0 % 4.9 %
The increase in FTD general and administrative expenses was primarily
attributable to transaction costs related to a then-pending acquisition and
increased legal and personnel-related expenses.
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Content & Media Segment Results
Content & Media Revenues
Quarter Ended
March 31, Change
2012 2011 $ %
(in thousands, except percentages and ARPU)
Products $ 551 $ - $ 551 N/A
Services 25,786 32,529 (6,743 ) (21 )%
Advertising 13,108 15,784 (2,676 ) (17 )%
Total Content & Media Revenues $ 39,445 $ 48,313 $ (8,868 ) (18 )%
ARPU $ 2.54 $ 2.47 $ 0.07 3 %
Average pay accounts 3,389 4,380 (991 ) (23 )%
The decrease in Content & Media services revenues was a result of a 23%
decrease in our average number of pay accounts for the quarter ended March 31,
2012, compared to the quarter ended March 31, 2011, partially offset by a 3%
increase in ARPU. The increase in ARPU was primarily attributable to an overall
decrease in the percentage of pay accounts on discounted plans and a higher
percentage of domestic pay accounts on shorter-term subscription plans, which
have higher ARPUs, partially offset by a higher percentage of international pay
accounts, which have lower ARPUs. In addition, Content & Media advertising
revenues decreased due to a decrease in advertising revenues generated by our
online loyalty marketing service due to a number of factors, including the loss
of a major customer during the second half of 2011 as well as a decrease in
segment active accounts. These decreases were partially offset by $0.6 million
in Content & Media products revenues generated in the quarter ended March 31,
2012. We anticipate that Content & Media pay accounts and revenues will continue
to decline year over year, at least in the near term.
Content & Media Cost of Revenues
Quarter Ended
March 31, Change
2012 2011 $ %
(in thousands, except percentages)
Content & Media cost of revenues $ 8,248 $ 9,038 $ (790 ) (9 )%
Content & Media cost of revenues as a
percentage of Content & Media revenues 20.9 % 18.7 %
The decrease in Content & Media cost of revenues was primarily due to a
$0.5 million decrease in credit card-related fees due to a decrease in pay
accounts and a $0.4 million decrease in the cost of points earned by members of
our online loyalty marketing service due to a decrease in advertising revenues.
Content & Media Sales and Marketing
Quarter Ended
March 31, Change
2012 2011 $ %
(in thousands, except percentages)
Content & Media sales and marketing $ 14,119 $ 15,406 $ (1,287 ) (8 )%
Content & Media sales and marketing
expenses as a percentage of Content & Media
revenues 35.8 % 31.9 %
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The decrease in Content & Media sales and marketing expenses was the result
of $2.6 million in marketing costs related to television advertising supporting
the launch of the Memory Lane website in the quarter ended March 31, 2011, a
$1.5 million decrease in personnel- and overhead-related costs and a
$0.3 million decrease in marketing costs to acquire new online loyalty marketing
members. These decreases were partially offset by a $3.1 million increase in
marketing costs primarily related to online marketing costs to acquire new
online nostalgia members.
Content & Media Technology and Development
Quarter Ended
March 31, Change
2012 2011 $ %
(in thousands, except percentages)
Content & Media technology and development $ 4,409 $ 5,593 $ (1,184 ) (21 )%
Content & Media technology and development
expenses as a percentage of Content & Media
revenues 11.2 % 11.6 %
The decrease in Content & Media technology and development expenses was the
result of a decrease in personnel- and overhead-related expenses as a result of
reduced headcount.
Content & Media General and Administrative
Quarter Ended
March 31, Change
2012 2011 $ %
(in thousands, except percentages)
Content & Media general and administrative $ 5,395 $ 8,153 $ (2,758 ) (34 )%
Content & Media general and administrative
expenses as a percentage of Content & Media
revenues 13.7 % 16.9 %
The decrease in Content & Media general and administrative expenses was
primarily due to $2.3 million of reserves for legal settlements recorded in the
quarter ended March 31, 2011 and a $0.6 million decrease in personnel- and
overhead-related costs.
Content & Media Restructuring and Other Exit Costs
Quarter Ended
March 31, Change
2012 2011 $ %
(in thousands, except percentages)
Content & Media restructuring and other
exit costs $ (63 ) $ - $ (63 ) N/A
Content & Media restructuring and other exit costs for the quarter ended
March 31, 2012 related to the reversal of accrued employee termination benefits.
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Communications Segment Results
Communications Revenues
Quarter Ended
March 31, Change
2012 2011 $ %
(in thousands, except percentages and ARPU)
Products $ 297 $ - $ 297 N/A
Services 21,068 27,879 (6,811 ) (24 )%
Advertising 5,395 6,819 (1,424 ) (21 )%
Total Communications Revenues $ 26,760 $ 34,698 $ (7,938 ) (23 )%
ARPU $ 8.99 $ 9.33 $ (0.34 ) (4 )%
Average number of dial-up
Internet access pay accounts 468 650 (182 ) (28 )%
The decrease in Communications services revenues was primarily due to a 28%
decrease in our average number of dial-up Internet access pay accounts for the
quarter ended March 31, 2012, compared to the quarter ended March 31, 2011, as
well as a 4% decrease in ARPU. The decrease in ARPU is attributable to a higher
percentage of pay accounts on lower-priced or discounted subscription plans or
services. The decrease in Communications advertising revenues was primarily due
to the decrease in active accounts. These decreases were partially offset by
$0.3 million of products revenues related to the sale of 4G mobile broadband
devices. We anticipate that Communications pay accounts and revenues will
continue to decline year over year.
Communications Cost of Revenues
Quarter Ended
March 31, Change
2012 2011 $ %
(in thousands, except percentages)
Communications cost of revenues $ 7,687 $ 9,172 $ (1,485 ) (16 )%
Communications cost of revenues as a
percentage of Communications revenues 28.7 % 26.4 %
The decrease in Communications cost of revenues was due to a $0.7 million
decrease in telecommunications, customer support and billing-related costs due
to a decrease in dial-up Internet access accounts, a $0.4 million decrease in
costs associated with our DSL service, and a $0.4 million decrease in costs
associated with our advertising network. These decreases were partially offset
by $0.4 million of costs associated with our 4G mobile broadband service. We
anticipate that Communications cost of revenues will increase in 2012 as
compared to 2011 due to the costs that will be incurred in connection with the
4G mobile broadband service.
Communications Sales and Marketing
Quarter Ended
March 31, Change
2012 2011 $ %
(in thousands, except percentages)
Communications sales and marketing $ 3,908 $ 3,333 $ 575 17 %
Communications sales and marketing expenses
as a percentage of Communications revenues 14.6 % 9.6 %
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The increase in Communications sales and marketing expenses was attributable
to $2.1 million in sales and marketing costs associated with the launch of our
4G mobile broadband service. This increase was partially offset by a
$0.9 million decrease in personnel- and overhead-related expenses primarily as a
result of reduced headcount and a $0.7 million decrease in advertising,
promotion and distribution costs primarily related to our dial-up Internet
access services. We anticipate that Communications sales and marketing costs
will increase in 2012 as compared to 2011 due to the promotion of the 4G mobile
broadband service.
Communications Technology and Development
Quarter Ended
March 31, Change
2012 2011 $ %
(in thousands, except percentages)
Communications technology and development $ 1,944 $ 1,843 $ 101 5 %
Communications technology and development
expenses as a percentage of Communications
revenues 7.3 % 5.3 %
The increase in Communications technology and development expenses was
primarily due to an increase in personnel- and overhead-related expenses.
Communications General and Administrative
Quarter Ended
March 31, Change
2012 2011 $ %
(in thousands, except percentages)
Communications general and administrative $ 2,864 $ 3,191 $ (327 ) (10 )%
Communications general and administrative
expenses as a percentage of Communications
revenues 10.7 % 9.2 %
The decrease in Communications general and administrative expenses was
primarily due to a $0.2 million decrease in personnel- and overhead-related
costs as a result of reduced headcount.
Communications Restructuring and Other Exit Costs
Quarter Ended
March 31, Change
2012 2011 $ %
(in thousands, except percentages)
Communications restructuring and other
exit costs $ (8 ) $ 534 $ (542 ) (101 )%
Communications restructuring and other exit costs for the quarter ended
March 31, 2011 were primarily related to employee termination costs.
Unallocated Corporate Expenses
Quarter Ended
March 31, Change
2012 2011 $ %
(in thousands, except percentages)
Unallocated corporate expenses $ 6,306 $ 8,653 $ (2,347 ) 27 %
The decrease in unallocated corporate expenses, excluding depreciation and
amortization of intangible assets, was primarily due to a $2.2 million decrease
in personnel- and overhead-related costs.
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Liquidity and Capital Resources
In connection with the FTD acquisition in August 2008, UNOLA Corp., which
was then an indirect wholly-owned subsidiary of United Online, Inc., and which
subsequently merged into FTD Group, Inc., entered into a $425 million senior
secured credit agreement with Wells Fargo Bank, National Association, as
Administrative Agent (the "2008 Credit Agreement"), consisting of (i) a term
loan A facility of $75 million, (ii) a term loan B facility of $300 million, and
(iii) a revolving credit facility of up to $50 million. On June 10, 2011, FTD
Group, Inc. entered into a new credit agreement (the "Credit Agreement") with
Wells Fargo Bank, National Association, as Administrative Agent for the lenders,
to refinance the 2008 Credit Agreement. The Credit Agreement provides FTD
Group, Inc. with a $315 million senior secured credit facility consisting of
(i) a $265 million seven-year term loan (the "Term Loan") and (ii) a $50 million
five-year revolving credit facility (the "Revolving Credit Facility" and
together with the Term Loan, the "Credit Facilities"), and certain other
financial accommodations, including letters of credit.
On June 10, 2011, FTD Group, Inc. repaid in full all outstanding
indebtedness under the 2008 Credit Agreement. No penalties were paid in
connection with such repayment. The repayment of obligations under the 2008
Credit Agreement was financed with the proceeds of the $265 million of term loan
borrowings under the Credit Agreement and FTD's available cash. No funds were
borrowed under the Revolving Credit Facility at closing.
The obligations under the Credit Agreement are guaranteed by FTD's parent,
UNOL Intermediate, Inc. ("Holdings"), and certain of the wholly-owned domestic
subsidiaries of FTD Group, Inc. (the "Subsidiary Guarantors"). In addition, the
obligations under the Credit Agreement are secured by a lien on substantially
all of the assets of FTD Group, Inc., Holdings and the Subsidiary Guarantors
(collectively, the "Loan Parties"), including a pledge of all (except with
respect to foreign subsidiaries, in which case such pledges are limited to 66%)
of the outstanding capital stock of certain direct subsidiaries of the Loan
Parties.
The interest rates on both the Term Loan and the Revolving Credit Facility
are either a base rate plus 2.5% per annum, or LIBOR plus 3.5% per annum (with a
LIBOR floor of 1.25% in the case of the Term Loan and step downs in the LIBOR
margin on the Revolving Credit Facility depending on FTD's net leverage ratio).
In addition, there is a commitment fee equal to 0.50% per annum (with step-downs
in the commitment fee depending on FTD's net leverage ratio) on the unused
portion of the Revolving Credit Facility. The Credit Agreement contains
customary representations and warranties, events of default, affirmative
covenants, and negative covenants, that require, among other things, FTD to
maintain compliance with a maximum net leverage ratio and a minimum fixed-charge
coverage ratio, and impose restrictions and limitations on, among other things,
capital expenditures, investments, dividends, asset sales, and incurrence of
additional debt or liens by Holdings, FTD Group, Inc. and their subsidiaries.
The Credit Agreement also provides for an additional $100 million in borrowing,
subject to certain conditions, including compliance with covenants and approval
by the lender group.
Our total cash and cash equivalents balance increased by $1.6 million, or
1%, to $137.7 million at March 31, 2012, compared to $136.1 million at
December 31, 2011. Our summary cash flows for the quarters ended March 31, 2012
and 2011 were as follows (in thousands):
Quarter Ended
March 31,
2012 2011
Net cash provided by operating activities $ 16,875 $ 27,739
Net cash used for investing activities $ (4,660 ) $ (8,301 )
Net cash used for financing activities $ (11,978 ) $ (15,316 )
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Quarter Ended March 31, 2012 compared to Quarter Ended March 31, 2011
Net cash provided by operating activities decreased by $10.9 million, or
39%, for the quarter ended March 31, 2012, compared to the quarter ended
March 31, 2011. Net cash provided by operating activities is driven by our net
income adjusted for non-cash items and changes in working capital, including,
but not limited to, depreciation and amortization, stock-based compensation,
loss on extinguishment of debt, deferred taxes, and tax benefits (shortfalls)
from equity awards. The decrease in net cash provided by operating activities
was due to a $6.1 million decrease in net income, adjusted for non-cash items
primarily related to deferred taxes as well as a $4.7 unfavorable change in
working capital. Changes in working capital can cause variation in our cash
flows provided by operating activities due to seasonality, timing and other
factors.
Net cash used for investing activities decreased by $3.6 million, or 44%,
for the quarter ended March 31, 2012, compared to the quarter ended March 31,
2011. The decrease was primarily due to a $2.9 million decrease in purchases of
property and equipment and a $0.7 million decrease in purchases of rights,
content and intellectual property related to our online nostalgia services.
Capital expenditures for the quarter ended March 31, 2012 totaled
$4.2 million. We currently anticipate that our total capital expenditures for
2012 will be in the range of $25 million to $30 million. The actual amount of
future capital expenditures may fluctuate due to a number of factors, including,
without limitation, potential future acquisitions and new business initiatives,
which are difficult to predict and which could change significantly over time.
Additionally, technological advances may require us to make capital expenditures
to develop or acquire new equipment or technology in order to replace aging or
technologically obsolete equipment.
Net cash used for financing activities decreased by $3.3 million, or 22%,
for the quarter ended March 31, 2012, compared to the quarter ended March 31,
2011. Repurchases of common stock for the quarter ended March 31, 2012 decreased
by $4.1 million, compared to the quarter ended March 31, 2011. Additionally, we
repaid $0.7 million on the outstanding Credit Agreement in the quarter ended
March 31, 2012.
The payment of dividends and dividend equivalents is a cash outflow from
financing activities. In January 2012, United Online, Inc.'s Board of Directors
declared a quarterly cash dividend of $0.10 per share of common stock. The
dividend was paid on February 29, 2012 and totaled $9.3 million, including
dividend equivalents paid on nonvested restricted stock units. In April 2012,
United Online, Inc.'s Board of Directors declared a quarterly cash dividend of
$0.10 per share of common stock. The record date for the dividend is May 14,
2012 and the dividend will be paid on May 31, 2012. The payment of future
dividends is discretionary and is subject to determination by United
Online, Inc.'s Board of Directors each quarter following its review of our
financial performance and other factors.
Future cash flows from financing activities may also be affected by our
repurchases of our common stock. United Online, Inc.'s Board of Directors
authorized a common stock repurchase program (the "Program") that allows us to
repurchase shares of our common stock through open market or privately
negotiated transactions based on prevailing market conditions and other factors.
From August 2001 through December 31, 2010, we repurchased a total of
$150.2 million of our common stock under the Program, leaving $49.8 million of
authorization remaining under the Program. In February 2011, the Board of
Directors extended the Program through December 31, 2011 and increased the
amount authorized to $80 million. In December 2011, the Board of Directors
extended the Program through December 31, 2012. We did not make any repurchases
under the Program during the year ended December 31, 2011 or the quarter ended
March 31, 2012 and, at March 31, 2012, the authorization remaining under the
Program was $80.0 million.
Cash flows from financing activities may also be negatively impacted by the
withholding of a portion of shares underlying the restricted stock units and
stock awards we grant to employees. In
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general, we currently do not collect the applicable required employee
withholding taxes from employees upon vesting of restricted stock units and upon
the issuance of stock awards. Instead, we automatically withhold, from the
restricted stock units that vest and the stock awards that are issued, the
portion of those shares with a fair market value equal to the amount of the
required employee withholding taxes due. We then pay the applicable withholding
taxes in cash. The withholding of these shares, although accounted for as a
common stock repurchase, does not reduce the amount available under the Program.
Similar to repurchases of common stock under the Program, the net effect of such
withholding will adversely impact our cash flows from financing activities. The
amounts remitted in the quarters ended March 31, 2012 and 2011 were $2.1 million
and $6.2 million, respectively, for which we withheld 0.4 million and
0.9 million shares of common stock, respectively, that were underlying the
restricted stock units which vested and stock awards that were issued. The
amount we pay in future periods will vary based on our stock price and the
number of applicable restricted stock units vesting and stock awards being
issued during the period.
Based on our current projections, we expect to continue to generate positive
cash flows from operations, at least in the next twelve months. We may use our
existing cash balances and future cash generated from operations to fund, among
other things, both contractual payments and optional prepayments on the
outstanding balance under the Credit Agreement; dividend payments, if declared
by United Online, Inc.'s Board of Directors; the development and/or acquisition
of other services, businesses or technologies; the repurchase of our common
stock underlying restricted stock units and stock awards to pay the required
employee withholding taxes due on vested restricted stock units and stock awards
issued; the repurchase of our common stock under the Program; future capital
expenditures; and future acquisitions of intangible assets, including rights,
content and intellectual property.
Under the terms of the Credit Agreement, FTD Group, Inc., a subsidiary of
United Online, Inc., is generally restricted from transferring funds and other
assets to United Online, Inc., with certain exceptions including an annual
basket of $15 million (subject to adjustment based on excess cash flow
calculations) which may be used to make cash dividends, loans and advances to
United Online, Inc., provided certain terms and conditions specified in the
Credit Agreement are satisfied. These restrictions have resulted in restricted
net assets (as defined in Rule 4-08(e)(3) of Regulation S-X) of FTD Group, Inc.
and its subsidiaries totaling $260.1 million at March 31, 2012. The Credit
Agreement also includes provisions which require us to make debt prepayments in
the event that we generate consolidated excess cash flow, as defined in the
Credit Agreement, on an annual basis commencing in April 2013 for fiscal year
2012. The degree to which our assets are leveraged and the terms of our debt
could materially and adversely affect our ability to obtain additional capital
as well as the terms at which such capital might be offered to us. We currently
expect to have sufficient liquidity to fulfill our debt service obligations, at
least in the next twelve months. FTD Group, Inc. was in compliance with all
covenants under the Credit Agreement at March 31, 2012.
If we need to raise additional capital through public or private debt or
equity financings, strategic relationships or other arrangements, this capital
might not be available to us in a timely manner, on acceptable terms, or at all.
Our failure to raise sufficient capital when needed could severely constrain or
prevent us from, among other factors, developing new or enhancing existing
services or products, repurchasing our common stock, acquiring other services,
businesses or technologies or funding significant capital expenditures and/or
purchases of intangible assets, including rights, content and intellectual
property, and have a material adverse effect on our business, financial
position, results of operations, and cash flows as well as impair our ability to
pay future dividends and our ability to service our debt obligations. If
additional funds were raised through the issuance of equity or convertible debt
securities, the percentage of stock owned by the then-current stockholders could
be reduced. Furthermore, such equity or any debt securities that we issue might
have rights, preferences or
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privileges senior to holders of our common stock. In addition, trends in the
securities and credit markets may restrict our ability to raise any such
additional funds, at least in the near term.
Contractual Obligations
Contractual obligations at March 31, 2012 were as follows (in thousands):
1 Year to 3 Years to
Less than Less than Less than More than
Total 1 Year 3 Years 5 Years 5 Years
Debt, including interest $ 349,515 $ 15,346 $ 30,436 $ 34,303 $ 269,430
Member redemption
liability 21,927 17,511 4,416 - -
Noncancelable operating
leases 35,952 13,056 15,113 5,050 2,733
Services and promotional
contracts 7,997 5,621 2,352 24 -
Telecommunications
purchases 3,395 3,176 219 - -
Media purchases 2,484 2,484 - - -
Floral-related purchases 6,155 6,155 - - -
Other liabilities 3,000 194 2,166 190 450
Total $ 430,425 $ 63,543 $ 54,702 $ 39,567 $ 272,613
Commitments under letters of credit at March 31, 2012 were scheduled to
expire as follows (in thousands):
1 Year to
Less than Less than
Total 1 Year 3 Years
Letters of credit $ 1,309 $ 1,051 $ 258
Letters of credit are maintained pursuant to certain of our lease
arrangements. The letters of credit remain in effect at declining levels through
the terms of the related leases. Standby letters of credit are maintained by FTD
to secure credit card processing activity and additional letters of credit are
maintained related to inventory purchases.
Other Commitments
In the ordinary course of business, we may provide indemnifications of
varying scope and terms to customers, vendors, lessors, sureties and insurance
companies, business partners, and other parties with respect to certain matters,
including, but not limited to, losses arising out of our breach of such
agreements, services to be provided by us, or from intellectual property
infringement claims made by third parties. In addition, we have entered into
indemnification agreements with our directors and certain of our officers and
employees that will require us, among other things, to indemnify them against
certain liabilities that may arise by reason of their status or service as
directors, officers or employees. We have also agreed to indemnify certain
former officers, directors and employees of acquired companies in connection
with the acquisition of such companies. We maintain director and officer
insurance, which may cover certain liabilities, including those arising from our
obligation to indemnify our directors and certain of our officers and employees,
and former officers, directors and employees of acquired companies, in certain
circumstances.
It is not possible to determine the maximum potential amount of exposure
under these indemnification agreements due to the limited history of prior
indemnification claims and the unique facts and circumstances involved in each
particular agreement. Such indemnification agreements may not be subject to
maximum loss clauses.
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Off-Balance Sheet Arrangements
At March 31, 2012, we had no off-balance sheet arrangements that have, or
are reasonably likely to have, a current or future material effect on our
consolidated financial condition, results of operations, liquidity, capital
expenditures, or capital resources.
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