Classmates.com's Growth Spurt Has Legs, Says CEO

by Mark Walsh, Feb 28, 2008, 7:45 AM

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Despite pulling its planned initial public offering in December, Classmates.com is anything but a social networking has-been, according to Mark Goldston, chairman and CEO of parent United Online.

Speaking Wednesday at the Jeffries 4th Annual Internet Conference, Goldston said Classmates had signed up one million new paid subscribers in 2007, equal to three years worth of previous paid membership growth. Furthermore, the subscriber gains came amid fierce competition from fast-growing free social networking sites such as MySpace and Facebook.

"So it's really important to note that in the face of that hailstorm, we not only flew through it, but flew through with flying colors," said Goldston, who added that member growth had been achieved without increasing churn. The company's businesses also include online loyalty rewards site MyPoints and the NetZero and Juno Internet access services.

Goldston noted that fourth-quarter sales for Classmates had increased 27% to $53.3 million and that the site now generated 42% of the company's overall revenue--up from 19% in 2005. The company's ultimate goal is for Classmates to make up 50% of revenue.

Overall 2007 revenue for United Online fell to $513.5 million from $522.7 million a year ago, while net income increased to $57.8 million from $42.3 million--or to 83 cents a share from 64 cents a share.

In December it cancelled its proposed IPO of Classmates, which would have raised more than $117 million, citing market conditions. Elaborating on that decision Wednesday, Goldston said: "We saw the whites of people's eyes, and the reality of it was, the financial markets were in horrible shape." Unable to go public at a valuation in the $700 million to $900 million range, the company held off. "We decided not to sell 20% of that company (Classmates) at too cheap a price and hang onto it until the market clears," he said.

Analysts at the time, however, also questioned whether Classmates, started in 1995, would be able to maintain subscriber growth through 2008. A Cowen & Co. research report predicted the site's subscriber growth would peak in mid-2008, followed by a steady decline for the next several years.

Goldston expressed confidence, however, that Classmates still has strong growth potential. Even if the sites tripled its 50 million-member base (of which 3.1 million are paid) to 150 million overnight, it would still leave another 36 million U.S. high school graduates as potential members.

That's not counting growing interest among Baby Boomers. "Social networking is just now becoming something older folks like me are starting to do," Goldston said. "There's still a ton of room to grow."

To that end, he spotlighted some of the initiatives the company is undertaking this year, including integrating Classmates with MyPoints. Both have similar user demographics, including an average age of 39, 65% women, and a household income of $75,000. At the same time, overlap between the two is less than 5%. "So the potential for 8 million-member MyPoints to acquire members from 50 million-member Classmates at zero customer acquisition cost is a huge opportunity for these two companies," Goldston said.

He also pointed to new features aimed at encouraging greater engagement and user interaction on Classmates. These include new services that allow members to more easily find others with similar interests and to form subgroups within broader categories such as high school and college alumni and those with military ties.

A "digital guestbook" feature added recently that requires members to pay to find out who is checking their profile also helped to increase paying subscribers during the fourth quarter, Goldston said.

Looking abroad, Classmates also plans to expand in Europe, where Goldston said the service is already the No. 1 social networking site in Germany and Sweden and second in France. While Goldston didn't specify which or how many countries Classmates would enter in 2008, he assured: "We want to go into more European countries."

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