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Recently, United Online (NASDAQ: UNTD) made the move to spin off its largest segment, FTD Companies (NASDAQ: FTD), a provider of floral products and services. Immediately following the transaction, management conducted a 1-for-7 reverse stock split in which it reduced its number of shares. Although the reverse stock split does not have a discernable impact on the company’s fundamentals, the spinoff likely will.
Certainly, the question of the significance of the spinoff is important for the Foolish investor who is interested in buying shares or who currently owns shares. As such, it is a matter that deserves some in-depth analysis. However, before we can begin to fully comprehend the impact the spinoff will have on the company, we need to gain a better understanding of the entity as a whole.
Earnings on the decline
For the company's third quarter of 2013, revenue fell by 1.7% to $174.7 million compared to the $177.8 million it reported in the same quarter a year ago. This decrease in revenue is slightly more dramatic than the 1.2% the company reported for its first three quarters of this year compared to the same three quarters a year ago, with revenue falling from $651.9 million to $643.8 million.
The primary driver behind the company's revenue shortfall lately has been its Content and Media segment, which saw revenue for its third quarter fall by 11.8% from $36.6 million last year to $32.2 million this year. For its three most recent quarters, revenue in this segment fell by an even more drastic 14% to $98 million from $114 million.
Now, admittedly, this wasn't the only segment to report a revenue decline. The company's Communications segment also contributed to the company's disappointing results. For the third quarter of this year, revenue declined by 3.4% from $25.2 million to $24.4 million. Just as was the case with the company's Content and Media segment, its year-to-date results were worse, falling by 6.1% from $78.8 million to $73.9 million.
In addition to revenue declining, the company also saw its bottom line suffer, with net income falling from $5.1 million in the third quarter last year to a net loss of $47.6 million this year. Though, in all fairness, much of this hit to earnings for the quarter relate to an impairment of intangible assets in the amount of $50.2 million that was booked under the company's Content and Media segment. Similarly, this hit affected year-to-date performance, with net income falling from $25.5 million last year to a net loss of $30.9 million this year.
In light of all of these negative metrics, perhaps only one positive thing came to light for shareholders; free cash flow. Despite the fact that the company has seen its free cash flow fall by 8.5% year-to-date as it paid more for capital expenditures and received less from operating activities, it did see a modest uptick of 9.8% in its free cash flows for its third quarter as cash from operating activities increased and capital expenditures fell by 9.3%. Despite all this though, the company's situation appears strange to say the least.
On November 1st, the company announced that its spinoff of FTD Companies had been completed. This transaction by the company has served to reverse its acquisition of the company back in 2008 in an attempt to diversify and grow its business. It is true that FTD Companies has had relatively poor performance since United Online acquired it, but the move is essentially a reversal of the move to purchase FTD Companies in 2008.
Interestingly enough, while the other two segments of United Online discussed above had negative performance, FTD Companies actually saw its revenue increase by a modest 1.8% from $116.4 million to $118.5 million. On a year-to-date comparison, this (now former) segment performed even better, with revenue rising by 3.3% from $359.2 million last year to $371 million in its first three quarters of this year.
In comparison, 1-800-Flowers.Com (NASDAQ: FLWS), a direct competitor of FTD Companies, saw revenue of $169 million for its most recent fiscal quarter, a decrease of 1.1% from the $170.8 million it reported in the same quarter a year ago. For its three most recent fiscal quarters, the company saw revenue that is far higher than FTD Companies at $614.6 million.
In addition to getting rid of a division, FTD, that makes up the bulk of United Online's revenues and which has seen positive income from operating activities of $11.5 million (albeit, after suffering a 19.3% decline from the $14.2 million it saw in the same quarter of last year), whereas the rest of its segments are suffering from lower income, the company's income from operating activities for the first three quarters of this year has done reasonably well. This is illustrated by the fact that the company's income from operating activities has declined by only 2.5% from $60.9 million to $59.4 million. In the meantime, the company's Communications segment has declined by 16.8% from $27.7 million to $23 million, while its Content and Media segment has fallen from income from operations in the amount of $21.9 million to a loss of $29.7 million.
When United Online purchased The FTD Companies it made the move as an attempt to diversify their business and gain a position in the growing e-commerce market. The recently completed spinoff of this division, which until the spinoff was United Onlines’ best performing business-line, is a reversal of this move and an attempt to allow the two separate companies to refocus their efforts on growing their individual businesses. Time will tell if this moves is successful but one thing is for sure: Foolish investors now have two unique businesses with differing growth prospects going forward to choose from. As always, investors should do their own research before making any investment decisions.
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