Classmates.com 2007 Annual Report Download - page 5

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PART I
ITEM 1. BUSINESS
Overview
United Online, Inc., a Delaware corporation headquartered in Woodland Hills, California, commenced operations in 2001 following the
merger of dial-up Internet access providers NetZero, Inc. and Juno Online Services, Inc.
We are a leading provider of consumer Internet and media services through a variety of brands including Classmates, MyPoints, NetZero,
and Juno. We report our business in two segments: Classmates Media and Communications. Our Classmates Media services are online social
networking and online loyalty marketing. Our primary Communications services are Internet access and email. Our Web properties, in
aggregate, attract a significant number of Internet users each month among our base of more than 60 million registered accounts. Our large
online audience enables us to offer a broad array of Internet marketing products and services for advertisers.
We have modified our segment reporting structure during 2007 to establish Classmates Media as a separate operating segment in the place
of the former Content & Media segment that no longer will be reported. The new Classmates Media segment includes our online social
networking and online loyalty marketing operations, which had formerly been part of the Content & Media segment. Web hosting and photo
sharing, which also had formerly been part of the Content & Media segment, have been moved to the Communications segment. In addition, we
have eliminated our historical practice of separately reporting certain unallocated corporate expenses. Under the new reporting structure,
corporate expenses are allocated to the operating segments.
Historically, our operations were focused on providing value-priced dial-up Internet access services in the United States and Canada. In
2004, our dial-up Internet access revenues began to decline and we began diversifying our business to include other Internet consumer offerings
in an effort to provide new growth opportunities for the Company. In November 2004, we acquired Classmates Online, Inc., or Classmates, a
provider of online social networking services, and in April 2006, we acquired MyPoints.com, Inc., or MyPoints, a provider of online loyalty
marketing services. Our strategy is to continue to leverage our resources and core competencies to further expand our businesses beyond dial-up
Internet access services, through internal development and acquisitions, while managing our declining dial-up Internet access services primarily
for profitability and cash flows.
Revenue growth within our Classmates Media segment in recent years has helped offset declining revenues within our Communications
segment. Classmates Media segment revenues increased from $84.9 million in 2005 to $139.4 million in 2006 and $193.4 million in 2007, and
expanded to 42.5% of total revenues in the fourth quarter of 2007. By comparison, Communications segment revenues declined from
$440.2 million in 2005 to $383.2 million in 2006 and $320.1 million in 2007, and decreased to 57.5% of total revenues in the fourth quarter of
2007. We expect our Classmates Media segment revenues and operating income to continue to grow, and our Communications segment
revenues and operating income to continue to decrease, at least in the near term.
We generate revenues from two sources: selling subscriptions through our consumer services, which we call billable services revenues, and
selling advertising on our services. Billable services revenues are derived from subscriptions that are typically billed in advance on a monthly
basis or for the entire subscription term, which enhances our cash flows and the predictability of future revenues. Billable services revenues
within our Classmates Media segment are derived from subscriptions to our social networking services, and substantially all of the billable
services revenues within our Communications segment are derived from subscriptions to our dial-up Internet access services. As part of our
diversification strategy, we have increased our focus on advertising as a means to monetize our large
3