Classmates.com Parent Updates IPO Prospectus

by Mark Walsh, Nov 27, 2007, 7:00 AM

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The parent of pioneering social networking site Classmates.com has filed an updated prospectus indicating that it plans to raise up to $144 million in an initial public offering.

Classmates Media--the social networking arm of United Online, which also includes loyalty marketing service MyPoints.com--plans to sell 12 million shares priced at $10 to $12 each. The bulk of the proceeds will go toward general operations, while $50 million is earmarked to repay a loan to United Online.

Classmates stands to benefit from the hype surrounding social networking sites of late, but faces a chilly market for Internet-related IPOs. Online measurement firm comScore on Monday announced that it was pulling its planned IPO "due to the unwillingness of management and other selling shareholders to sell under current capital market conditions."

Separately, Internet Brands--which operates a network of e-commerce sites including CarsDirect--recently reduced the size of its offering to $18.8 million from $45 million. Internet companies have accounted for less than 1% of the total amount raised through IPOs during the last six months, according to data compiled by IPO Monitor.

Started in 1995, Classmates is a forerunner to social networking sites such as MySpace and Facebook, now gaining much greater attention because of their rapid growth and open structure. Unlike Web 2.0 social sites, Classmates derives revenue mainly by charging for membership. As of the end of September, the site had 50 million registered members, of which only 3 million were paid accounts.

Unlike its younger rivals, Classmates is also profitable. For the first nine months of 2007, the company reported net income of $1.65 million on revenue of $140.1 million. For all of last year, it posted a loss of $1.9 million on sales of $139.4 million.

In the risk factors section of its amended IPO filing, Classmates disclosed that it remains under investigation by the Federal Trade Commission in connection with its membership renewal practices. The company says that any change in its renewal practices as a result of the investigation could increase its churn rate, or the monthly total of paid users who decide not to renew their subscriptions.

Classmates also warns that it needs to expand member interaction to all its social networking sites in order to be successful. The vast majority of activity is within the site's high school communities, according to the prospectus. In addition to MySpace and Facebook, the company lists LinkedIn, Reunion.com and Military.com as competitors.

United Online CEO Mark Goldston will also be chief executive of Classmates Media, and will receive 2.8 million stock options at the IPO price. United Online will maintain a controlling interest in the company following the offering, holding 80% of outstanding shares.

Other Internet companies going public earlier this year have seen mixed results. Salary.com and Tech Target were up 28% and 12%, respectively, from their offering prices--while Limelight Networks was down 51%.

Overall, 316 IPOs have been filed this year--a 24% increase over 2006, according to data collected by Renaissance Capital at IPOHome.com.

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