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United Online: We're in the black now

The discount ISP, created from a merger between NetZero and Juno Online, says an 8 percent growth in subscribers has given the company its first profitable quarter.

United Online Thursday said subscriber growth helped the discount Internet service provider reach its first profitable quarter despite an overall slowdown among its competitors.

The company, created by the merger of NetZero and Juno Online, reported a third-quarter profit of $1.5 million, or 3 cents a share, based on generally accepted accounting principles (GAAP). The quarter ended Sept. 30. That's compared with a loss of $2.7 million, or 7 cents a share, in the previous quarter ended June 30.

Profitability was reached in part because of a streamlined cost structure and its success in attracting people who want to pay less for Internet access, according to analysts. Company executives have been saying that cost-cutting and efficient operations would help United become profitable once its revenue increased.

"The profits are really coming from lower telecom costs and from lower churn, which translates into a lower cost for customer acquisition," First Albany analyst Youssef Squali said. Churn rate is the rate at which customers drop their subscriptions.

Revenue for the quarter increased 7 percent from the previous quarter to $58.1 million.

Earnings before interest, taxes, depreciation and amortization (EBITDA) hit $9 million, up 27 percent from last quarter's $7.1 million. Free cash flow declined to $7.7 million from last quarter's $12.3 million as a result of a $3.8 million payment for employee bonuses.

Excluding one-time charges, United reported a pro forma net income of $6.5 million, or 15 cents a share, beating Wall Street analysts' estimate of 11 cents a share, according to a survey of analysts by First Call.

The company pointed to subscriber growth as the highlight of the quarter. It said the number of subscribers grew 141,000, or 8 percent, to 1.85 million, most of them subscribing to the company's dial-up service. Including people who use United's free ISP offering, total active users reached 4.8 million.

United reported growth despite industrywide woes with dial-up subscribers. Last month, rival ISP EarthLink said its dial-up subscriber base declined 5.2 percent from the previous year to 3.97 million. Market leader America Online last quarter reported near-stagnant growth, with subscriptions rising from 35.1 million to 35.3 million sequentially.

United expects it will add 260,000 to 300,000 new paid subscribers once its $8.4 million acquisition of Kmart's BlueLight ISP business is completed. United will then have between 2.1 million and 2.15 million paid subscribers by the end of the calendar year.

United charges $9.95 a month for Internet access, in contrast to AOL's $23.90 and MSN and EarthLink's $21.95.