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Thursday, Mar 28, 2024

ISP Hurt By Hang-Ups

On Nov. 3, United Online Inc. Chief Executive Francis Lobo announced his resignation on a conference call with analysts. He said he would leave the company this month to pursue another business opportunity. The next day, Howard Marks, a tech investor and former chairman of video-game company Activision, now part of Activision Blizzard Inc. in Santa Monica, announced the formation of Concerned Stockholders of United Online, or CSU. With control of 4.8 percent of United Online shares – more than the combined shares of the board – the group wants to dump the directors in a move it feels will boost shareholder value. Lobo’s exit could open another identity crisis at a company with a long history of them. Based in Woodland Hills, United Online started out as an Internet service provider. It still owns NetZero, a provider of low-cost wireless Internet access, as well as several similar companies such as Juno Online Services and Bluelight Internet Services. As the Internet matured, the company moved into e-commerce, buying websites such as Classmates.com, a social hub for alumni, and FTD.com, a flower vending site. In 2013, FTD Cos. Inc. was spun off as a separate company. Lobo was hired and steered the company into customer loyalty programs and mobile broadband services. But with the former executive at AOL Inc. in New York now gone, his strategies have turned into question marks. “Francis’ leaving has already had an impact in the form of scrapping the mobile virtual network operator project,” said Daniel Kurnos, analyst for Benchmark Co. in New York who was on the conference call. “Investors were also making a bet on management, which they can no longer do.” In August, United Online sold its Classmates site to public records business Intelius Inc. in Bellevue, Wash. for $30 million. And in its latest quarterly filing with the Securities and Exchange Commission, the company announced a plan to do the same with StayFriends, another social networking site. United Online has hired German investment bank ACXIT Capital Management to find a buyer for the U.K.-based site. The company’s current strategy, gleaned from its filings, is to focus on its commerce and loyalty segments, which include MyPoints, a program that allows members to earn and redeem points for their online activities, and two new mobile commerce products, Swappable and List+. Chairman Howard Phansteil will take over as interim principal executive officer after Lobo leaves. United Online did not respond to requests for comment. Activist investor Concerned Stockholders of United Online believes the current board of the company is not properly motivating management to produce results, which has contributed to its flagging stock price. The organization plans to elect a new board at the company’s annual shareholder meeting, expected to be held in June. “A new and revitalized board can be effective at setting up incentive systems to produce the best possible results from management,” CSU said in a statement. Marks, the former Activision chairman, is no stranger to the role of activist investor. He launched a similar campaign in January for Envivio Inc., a software-based video processing company in San Francisco, which greatly improved its stock price. Through a spokesman, Marks said he plans to publish a presentation detailing how to improve the value at United Online. He declined further comment to the Business Journal. Kurnos, the analyst, believes a lot is riding on who the current board selects as chief executive. Yet, he said with United Online’s portfolio of assets and a comfortable amount of cash, the company’s daily activities might not change immediately. “Regardless of the outcome, as long as United doesn’t significantly overpay for an acquisition, there is still a significant amount of intrinsic value in the existing businesses plus the cash on hand,” he said. “However, this market loves to punish uncertainty, and until United finds a new CEO, the situation will probably remain a challenging one for investors.” Ben Kuo, founder and editor of online newsletter SocalTECH in Westlake Village, noted that the company hasn’t kept pace with technology’s advances. “United Online has had a number of businesses, which have been facing some intense pressure due to major shifts in the market,” Kuo said. “Classmates was made obsolete by Facebook some number of years ago, and StayFriends also has similar pressures. And its other businesses, NetZero and Juno, are from the dial-up era. In my opinion, they have a major challenge in adapting to what essentially is a completely new world.” For the most recent quarter, United Online reported net income of $26 million ($1.69 a share), compared with net income of $206,000 (1 cent a share) in the same period a year earlier. However, revenue dropped 9 percent to $36.3 million, and most of the income came from the one-time sale of Classmates. As the company has sold off its websites, revenue has declined and profits have fallen. Last year, revenue totaled $217 million, down from $366 million in 2010. Net income dropped from $3.99 a share to a loss of 38 cents a share during the same period. But the prospect of an asset sale and payout goosed the stock above $18 in 2013 for the FTD deal and $16 earlier this year for the Classmates divestiture. Shares closed Nov. 11 at $10.30 on the Nasdaq. In addition, United Online itself has become a potential acquisition target, with zero debt and almost $100 million in cash. In regard to its own purchasing power, the stockholders group has asked the board to refrain from using the cash for any major acquisitions until the board meeting next year. Meanwhile, the company faces a slew of uncertainty issues, ranging from top management to markets to finances. Marks specializes in this type of corporate uncertainty and has turned around other companies in similar situations. He bought shares of Activision when the company was facing bankruptcy in 1991. From there, he transformed the troubled business into one of the leading video-game publishers, responsible for hits such as “Guitar Hero” and “Call of Duty.” He also founded and is co-chair of StartEngine Crowdfunding, the largest seed accelerator in Los Angeles. But he may not be able to rely on his extensive experience to pull off a successful campaign. “With such a smaller shareholder base behind him and outgoing management pushing for an acquisition, he certainly faces an uphill battle,” said Kurnos, the analyst at Benchmark.

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