Classmates withdraws IPO

A closely watched offering from Classmates Media, one of the first social networking companies to plan a public offering, was withdrawn last week amid concerns about unfavorable market conditions.

In a statement released last week, Classmates’ parent company, United Online, said it “has determined that proceeding with the initial public offering under current market conditions would not be in the best interests of its stockholders.”

Classmates Media, which operates the Classmates.com networking site, reported revenue of $139 million in 2006, up from $85 million in 2005, according to its prospectus. It is still operating in the red, however, reporting a loss of $2.1 million in 2006, compared to a loss of $8.2 million in 2005. The Woodland Hills, Calif.-based company filed to go public in August, and was looking to raise $125 million. It planned to trade on the Nasdaq under the symbol CLAS.

United Online expects to record transaction-related costs of about $4.5 million to $5.5 million in connection with its decision to withdraw the offering. The company, which operates free Internet services Netzero and Juno as well as the online loyalty marketing service MyPoints (which also was to be spun out in the planned IPO), purchased Classmates in 2004 for $100 million.

Before that, Classmates raised $14 million in venture funding from ARCH Venture Partners, BEV Capital and Madrona Venture Group.

Classmates has withdrawn its IPO as the popularity of social networking websites like Facebook and News Corp.’s MySpace.com has skyrocketed.

Classmates boasts that it has more than 50 million users, only slightly less than Facebook’s 57 million users. Classmates also increased its revenue 44% to $140.1 million in first nine months of 2007.

Unlike Facebook and MySpace, which are free for users, Classmates has a two-tier membership structure with a paid subscription option. A paid subscription includes more services, like a digital guestbook that alerts members when their profiles are viewed. Classmates reports that it has boosted the number of its paying members to about 3 million as of Sept. 30.

Sam Snyder, an analyst at IPO research firm Renaissance Capital, says that investors are concerned that paid membership growth is not sustainable, particularly while rivals offer similar services for free. The company also retains many of its paid members through automatic subscription renewals, which are now the subject of a Federal Trade Commission probe. In its IPO prospectus, Classmates stated that any change to its renewal policies could hurt its renewal rates.

Scott Sweet, managing director of research firm IPO Boutique, says that users spend significantly more time on MySpace and Facebook than on Classmates.

The average visitor spent about 8.3 minutes on Classmates.com in October, compared with 195.6 minutes on Facebook.com and 192.9 minutes on MySpace.com, according to comScore Media Metrix.