Inuvo Update – Buying the Sell-Off

Last week, Inuvo reported a fairly solid Q1 that included three months of the old Inuvo and one month of the old Vertro’s operating results.  Since that time, Inuvo shares have traded lower on very little volume.  Two months ago, we wrote in an Inuvo update to the GrooveVC community that we would not be surprised to see some weakness in Inuvo shares until the company reports its second quarter results – the first report that will include a full three months of the combined Vertro and Inuvo operations. The last few trading sessions are a great example of exactly what we were talking about, as Inuvo has traded at new 52 week lows on several occasions leading up to Monday’s new multi-year low on very low volume. We believe the sell off is unwarranted, particularly in light of the reported results and comments from management that suggest that the key drivers of Inuvo’s growth (ALOT search and Inuvo’s Partner Programs segment that includes display advertising and Bargain Match) are “on fire” and the third party Publisher Network has stabilized and appears to be well positioned to return to growth in the near future. Additionally, the company is in the very early stages of rolling out two initiatives that could evolve to be significant drivers of revenue growth – the Kowabunga local deals launch this week and the improved local search offering that will be monetized by Google ads and managed in house.  We are also intrigued by the potential for the “mobilization” of the company’s app portfolio that was discussed on last week’s conference call.

We continue to believe that any weakness in Inuvo’s share price is a great opportunity for adding to your position and bringing others into the fold. The brief sell off on very low volume Monday is a great example of this – as some investors were able to pick up shares at prices that should allow for 200%+ gains over the next 12 months. The time to buy and bring others into the fold is now, as we believe the Inuvo story will increasingly attract other investors as the strength and scale of the combined Inuvo/Vertro becomes clearer beginning with the reported results for the current quarter.

GrooveVC Community Update – Travelzoo Reports / Inuvo Conference Call

Travelzoo reported earnings before the market opened this morning, beating analysts estimates by 2 cents per share and setting records for Q1 non GAAP earnings per share of 42 cents.  TZOO shares fell in trading, which some commentators attributed to top line revenue coming in below analyst’s estimates of $42 million. While the company did in fact miss the target analyst’s had set, the $39.1m achieved was still a Q1 record for the company and the discussion on the conference call was quite positive.  It is increasingly apparent that TZOO management is setting itself apart in the Deals space, pursuing a strategy for measured growth that still allows the company to maintain profitability vs. the two larger players in the space who continue to pursue a “growth at all costs” strategy that led one of them to lose $2 for every $1 in revenue generated.  Such a strategy is not sustainable over the  long term and Travelzoo is positioning itself to accelerate its own growth as the shake out in the deals space removes more and more of the competition and causes even the well funded players to rein in the unsustainable loss making business practices that have made the competitive environment that much more challenging for Travelzoo.  Travelzoo is the industry leader in terms of average revenue per local deal published and the company’s focus on quality deals leaves in well positioned for growth in the “post-growth at any cost period” the space appears to be entering.  Travelzoo management refused to comment on recent reports that the company was in the process of hiring investment bankers to sell the company.

GrooveVC community participants who bought this stock on our initial recommendation last month are still up about 10% despite today’s pullback. Overall, the Q1 report was very good and the conference call was very encouraging in terms of confirming that Travelzoo management seems to be on the right track for growing the business in a way that creates the greatest long term value for shareholders.

Inuvo held a conference call this week to update shareholders on the company’s progress since the closing of the Inuvo/Vertro merger on March 1.  Most of the heavy lifting was done by CEO Peter Corrao, who sounded quite bullish on the company’s prospects.  The combined company’s assets have been organized into three reporting segments -

1) Software Search – the ALOT appbar and home page, which should comprise approximately 45% of the combined company’s revenue.  From all indications on the call, this business is growing rapidly and management expects to see very strong Q over Q growth in live users.

2) Publisher Network – has two pieces that together generate about 40% of the combined company’s revenue.  The first piece is the approximately 1700 websites who get Yahoo’s PPC search results that are provided through the Inuvo platform. The second piece is the company owned sites like Yellowise that get the same PPC search feed.

3) Partner Programs – the smallest of the three currently expected to generate only about 15% of revenue, but expected to grow rapidly from its very small current revenue base.  This segment includes the rapidly growing display advertising business that not exist one year ago, but now generates close to $400k per month in revenue; the soon to be launched Kowabunga Rural/Suburban daily deals service and the Bargain Match shopping App. Inuvo management’s excitement about the growth of the display ad business was tangible and their mention of March’s $50k revenue month for the Bargain Match App that was marketed alongside the Appbar (meaning no additional ad spend for Bargain Match to reach that level) suggests to us that the Bargain Match App could develop into a major revenue generator for the company.  It will be interesting to see what this team can do to increase distribution of that App between now and year end and even more interesting to see how much revenue it could generate during the holiday shopping season.  Of course, we will be watching with great interest as the company launches its Kowabunga Daily Deals program to see what the revenue potential will be.

Key takeaways from the call included the company’s ALOT user base had rebounded back to 7.3m live users as of the call date, the company is seeing very positive trends for the ALOT business generally as the daily ALOT product downloads had increased to what is now 100,000 per day as April downloads were tracking towards 3 million. the company went live this week with a new “local.alot.com” local search service designed to leverage Inuvo’s Yellowise directory database with ALOT’s Google PPC advertising contract and Inuvo management believes that the emerging mobile market will be a big part of the company’s future and it is structuring further development of the App centric aspects of its business accordingly.

We remain very bullish on Inuvo’s prospects and believe that Groove community participants would do well to add shares at these levels and continue to bring friends and associates into the fold.  The period between now and August (when the first quarterly report for the combined companies will be released) could provide a window of opportunity that will not be seen again when the Inuvo story begins to be better understood by investors following that report of that first full quarter of the Inuvo/Vertro combination.  The current market cap of Inuvo still falls well below the range of valuations we saw for either the standalone Vertro or Inuvo over the 18 months prior to the merger announcement and we believe that there is over 100% upside possible for Inuvo shares before the end of this calendar year.

Groove VC Community Update – Travelzoo and Inuvo

A quick update on our two focus stocks:

INUV – Inuvo management presented at the Wall Street Analyst forum in New York City yesterday.  I believe we will see more of this in the near future as our management team winds up the most difficult aspects of the merger integration and begins to seek an audience with investors again after the long silent period due to the merger.  Inuvo has a great story to tell and we believe that it will only get better as the company gets more post merger operating days behind it.  Looking forward to the conference call management has scheduled for next week to update investors on their progress.

TZOO – nice article out by one of our own last night -

http://seekingalpha.com/article/490581-taking-priceline-profits-and-going-to-the-travel-zoo

Keep an eye on TZOO today – there is much discussion making the rounds about the company being acquired and the stock is trading up over 30% on heavy premarket volume that may exceed its average daily trading volume before the regular market session opens.  The trading today should be quite interesting, as there appears to be a short position that exceeds the actual public float.  We should get a short interest update from Nasdaq after the close today, but the combination of the tightly wound float and confirmation from reliable sources that the company is in talks for a sale of all or part of the company could unleash an epic short squeeze.  The premarket session trading suggests that this might already by underway.  I suspect that it might be a little easier to get friends, coworkers, acquaintances, etc. to consider joining our efforts and take a hard look at what is happening at Travelzoo after today’s action.

Keep spreading the word and keep using those ALOT Appbars, Bargain Match, Fly.com and buying those Kowabunga and Travelzoo deals!   Don’t forget to make sure everyone is signed up for all of the Travelzoo newsletters too!  Keep Groovin’ Baby!!!

Inuvo Update

Since our last update in February, the Inuvo – Vertro merger has been completed.  On the first trading day following the announcement that the merger had been completed, Inuvo’s stock closed at $1.06.  Since that time, the stock has gradually traded lower almost daily, with the exception of a two day period following the announcement of a buy rating for the combined entity from institutional brokerage Craig-Hallum. Currently, the stock is trading in the range of 75 cents – 80 cents per share, valuing the entire company in the $15 million range.  We find the lack of interest in the shares at this price curious, but not that surprising given its size, lack of institutional following (covered only by one firm) and perceived risk related to a merger of equals in this space.  Throw into the mix the lack of promotional activity by the combined management teams as they worked to complete the deal and some Vertro shareholders who were not in favor of the combination and its easy to understand how the shares could drift lower, even to these levels.

We believe the shares are quite cheap at these levels and that members of the Groove community would do well to add to their positions.  Additionally, we note the opportune timing for community members to focus on the third aspect our mantra of 1) investing in a company’s stock 2)using its products/services and 3) telling and showing friends/business associates how to do 1,2 and 3.  Right now, members who have followed our advice bought at $1.05, then doubled down in the 68 cents – 70 cents range should have an average price in the 85 cents range. Not only does the current malaise give an opportunity to lower our average price per share, but it gives us the chance to bring other investors into our community with a similar cost basis. Each investor we can bring in at these levels will be more likely to become a heavy user of ALOT / Inuvo’s services and quick to recruit others to do the same as we get a few months down the road and they are enjoying strong double digit percentage gains in their investment with an eye toward substantially more as we bring greater numbers into the fold. The potential value of each new user is so much greater with Inuvo than it could have been under the Vertro/ALOT standalone business.  While we know that each new community member / Inuvo product user could add substantially to the company’s bottom line simply by using the ALOT Appbar and home page daily with the understanding of how quickly that drives revenue gains for the company, we now have an additional application (Bargain Match) that can both add value (rebates and discounts) for each user while creating a much greater revenue stream for Inuvo.  The Craig-Hallum report mentioned above pointed out that early test results suggested that the average life time value of an ALOT user who also used the Bargain Match browser app could be as much as 5x the value of that same user without the Bargain Match browser extension.  When any hint of that starts to show up in the reported numbers for Inuvo, the sub $1 price range will be hard to remember except for all the pats on the back from friends and associates that you tipped off to what is happening here.  By Christmas time, those who buy at today’s prices will be enjoying substantial returns on their investment and they will likely be increasingly dedicated users of Inuvo’s ALOT Appbar and the Bargain Match service who will be quick to spread the word among their contacts about why they should buy the stock, use the service and tell THEIR friends.

While it may take some time for the numbers to begin to reflect what we believe is taking place here (the first full quarter report for the combined company will be for Q2 which is usually in mid to late August), we believe that understanding of the following factors will lead savvy investors to start building positions in Inuvo over the next few weeks and months in anticipation of the heady numbers that the new Inuvo will produce:

1) Search Spend – each of Inuvo and Vertro spent millions each quarter buying Google and Yahoo/Bing search ads to promote either the Appbar or Inuvo’s owned and operated websites (Yellowise, Bargain Match, Kowabunga, etc.).  Vertro has been known in the space as one of the most efficient at the science of buying web traffic that will convert to users who will on average generate $1.60 for every $1 spent on advertising.  Inuvo spent heavily to achieve similar results, but they outsourced much of this functionality and thus their margins were frequently less than half that achieved by Vertro due to the costs of compensating a third party to handle this function.  This is one of the key aspects of the value that we expect to see created due to this merger and many seem to be missing it – when all of that ad spending is brought back in-house, the Vertro team could simply match the performance of the outsourced team and the margins on the former Inuvo search spend will improve dramatically as they are not “splitting the profits” with a third-party.  We believe that the Vertro team may add value beyond what the outsourced team could do that will expand even further on those margins.  Even more importantly, some of the key Inuvo products can be marketed as part of the SAME SPEND that is used to drive ALOT Appbar downloads – meaning the BargainMatch browser could gain the exposure that comes from the $6m ALOT quarterly ad spend and get substantially more installs than it would have gotten with Inuvo’s $1m spend to market it, and that $1m ad spend can now be added to the ALOT spend or removed from the cost structure altogether.

2) Google Display Advertising – while most of the attention for Vertro’s ALOT Appbar and homepage business usually focused on text search ads, the company has seen enormous growth in the value provided by its relationship with Google for display ads.  Recent conversations with Inuvo management indicated that this piece of the business has been a pleasant surprise and substantially better than their most optimistic expectations.  We are particularly encouraged by this, as we have known that the way the company’s search deals have been structured that we should not expect to see Google text ads on Yellowise and other “Owned and Operated” Inuvo sites in the near term, but we do now expect that all of the sites will be able to leverage the higher ad generating potential of the Google display ads.

3) We think the company will achieve the cost cutting goal of $2.7m (double-check) and possibly improve on that, noting that the combined company now has fewer than 50 total employees.

Recent discussions with management suggest that the Appbar business generally was doing, “very well” and the combination of the improvement in that business and the cost cutting measures, we are hopeful that we might ultimately see a time in this calendar year where we have an Appbar user base and revenue stream that approaches the levels we achieved in 2009, but with additional revenue streams from display and Inuvo O & O sites that would push total revenue  higher than the old Vertro ever experienced, all done with an employee base and cost structure that will be lower than what the standalone Vertro had back in Q3 2009 when it set the high revenue/user mark for this business.  While we are not expecting any fireworks in the earnings reports for Q4 ’11 and Q1 2012 due to management’s focus on getting the deal done and then the integration of the two firms, we believe that management has moved efficiently to integrate people and other assets so that shareholders will experience the full benefit of this combination in Q2.  Any weakness in Inuvo’s share price related to quarterly reports covering the periods of transition and/or selling by Vertro shareholders is a great opportunity for adding to your position and bringing others into the fold.

Inuvo / Vertro Update

Inuvo/Vertro Update

The management teams from Inuvo and Vertro issued press releases earlier this week indicating that the record date (Janaury 27, 2012) had been set and that each company will hold its respective special meeting of shareholders to vote on the merger.  As participants of the GrooveVC community are likely aware, we are very much in favor of this merger and want to encourage everyone to vote.  A failure to vote is counted as a “no” and we want to be sure that we get enough votes to approve the deal.  Due to management’s focus on getting the deal closed and SEC limitations related to the merger, there has been little PR activity over the last few weeks.  However, with Monday’s release there was several good points presented making the case for a combined company that will be much stronger than either Vertro or Inuvo independently -

1) The inclusion of the BargainMatch® application within the ALOT Appbar will be expected to provide a new revenue stream for the combined company while offering enhanced consumer value, promoting greater user life time value. The inclusion of the Kowabunga® daily deals application within the ALOT Appbar could have a similar impact. A key concept will be to market Inuvo owned and operated applications to ALOT’s existing install base.
2) Increased investment in the Inuvo publisher network should provide the combined company the opportunity to strengthen the strategic relationships that generate a majority of Inuvo’s Internet traffic. Additionally, these same publisher relationships offer the promise of new revenue streams as the combined company expands the types of media available to existing publishers.
3) Content available today on the BargainMatch, Yellowise® and Kowabunga websites is expected to be re-purposed to create an improved user experience for the ALOT install base via the ALOT home page and, as a result, the combined company would be able to explore additional monetization options and other direct and/or indirect advertising relationships the combined company retains.
4) The companies have many overlapping operating, public company and third-party expenses that, once eliminated, would be expected to have a positive material impact on EBITDA and free cash flow of the combined company. The combined company is expected to achieve greater than $2.4M annually in savings from elimination of such overlapping costs, which will begin to impact operations shortly after the close of the transaction.

We believe that the current trading range of both Vertro and Inuvo shares do not reflect the assets or potential growth prospects of either business.

Time to Double Down on Inuvo/Vertro

In October, we named Inuvo as our new focus stock and we encouraged investors to buy the stock (it was trading at $1.05 at the time) based on a number of factors (that can be reviewed here).  Subsequent to that report, a merger was announced between Inuvo and Vertro, which happened to be our other focus stock.  The terms of the merger (exchange of each Vertro share for 1.546 shares of Inuvo) have resulted in the two stocks being essentially linked, with Vertro shares mirroring any move in Inuvo’s stock.  This is not suprising and is exactly what would be expected in a merger that is structured this way.

We fully expected that year end tax loss selling could drive Inuvo (and thus Vertro) lower, given that it was trading near 52 week lows and most holders who had bought over the last year or so were holding at a loss. However, we have been surprised at how low the Inuvo shares were pushed by the year end selling.  With no catalysts this first week of the New Year, the trading in the shares has been almost non-existent and the stock closed yesterday only slightly above the new 52 week low of 67 cents that was set during the trading session.  We believe that the selling in Inuvo and Vertro shares has been way overdone and that the stocks are trading well below their intrinsic value.  At yesterday’s closing price of 68 cents per share, the post close cash adjusted market cap of the combined companies is slightly below $10 million (+/- 20 million post close shares x 68 cents minus $4 million Vertro cash). We believe this will prove to be a short term aberration,  that investors who bought on our original recommendation should “double down” at today’s prices and consider committing even more capital.

The cash adjusted sub $10m market cap for the combined Inuvo/Vertro does not come close to reflecting the potential value that can be created for shareholders when this merger is complete. Vertro and Inuvo each traded at market caps substantially higher than this as stand alone companies and Inuvo by itself had a market cap of over $17 million prior to the merger announcement. Given the strengths of each company, the much improved balance sheet of Inuvo following the deal, the improved access to growth capital, the significant ($2m +) cost reductions for redundancies, the reduction in revenue concentration risk and most importantly the very significant operating synergies that will result from this combination; we believe the combined Inuvo/Vertro will prove to be substantially more valuable to shareholders than either had been or could be as a stand alone company.  As such, we fully expect investors who buy at today’s prices to more than double their money over the next 6 months and potentially enjoy much greater returns 12 – 18 months out.

Groove Community Update – Inuvo/Vertro

A quick update for Groove community members on our focus stocks – Inuvo and Vertro.  Given the announced merger, the two have begun to trade in tandem as would be expected.  While there continues to be some discount from the Inuvo price x 1.546 for Vertro shares, they have remained fairly consistent in mirroring the moves of Inuvo’s stock price.  Hopefully, Groovers have taken advantage of the recent opportunity to buy Inuvo shares in the same price range ($1.05)  as it was when we made our original recommendation.   We believe the weakness in Inuvo shares is being driven by broader market volatility and year end tax loss selling; and we expect to see buyers of Inuvo stock in that $1.00 price range enjoying substantial returns 6 – 9 months from now.

It’s nice to see that the folks at Inuvo have been busy working to get their new apps out in advance of the Christmas shopping season rush that begins this week, we have noted the following over the last few days  -

1) Kowabunga’s new interactive geo-specific ad unit is now live, see an example by clicking below  -

http://www.groovevc.com/firststeps.html

2) Vertro’s Appbar has added a Kowabunga App to the shopping options for its 8 million+ Appbar users -

http://www.alot.com

3) Inuvo’s BargainMatch browser extension has been accepted into Mozilla’s Add-ons directory -

http://finance.yahoo.com/news/Inuvo-Announces-Approval-bw-1211237731.html?x=0&l=1

We believe that Inuvo has built a very nice stable of apps that offer the potential for significant upside to Inuvo’s historic revenue run rate if the company can just get consumers to try them.  The BargainMatch browser extension in particular offers significant utility and value for consumers who shop online and we think those who give it a try will keep it and use it.  Getting accepted into Mozilla’s add-on directory is a nice win for the Inuvo team and what we hope to be the start of a series of deals to get the BargainMatch tool into the hands of more consumers.

Q3 Earnings Update for Inuvo/Vertro

Last week, both Vertro and Inuvo reported third quarter earnings. As expected, Q3 was difficult for both companies, but in each report and the conference calls that followed, investors were given reason to be optimistic on the prospects of each and for the potential of the combined enterprise.  Our thoughts on the reports are below:

Vertro – as we discussed when in our “Time to Buy Vertro Again” blog post in September, we knew that Q3 would be challenging and fully expected to see a significant decline in revenue and other metrics from Q2 levels due to the changes in search engine results pages (SERPs) required by Google. These changes in SERP caused them to significantly pare down ad spending in June and July while the impact of these changes were assessed.  As has been the case historically, such a reduction results in fewer new customers acquired and fewer searches, impressions and clicks.  The timing of these changes and the reduction in ad spend causes a “double whammy” of sorts for Vertro’s revenue – 1) fewer searches, clicks and impressions means lower revenue generally and 2) Vertro’s contract with Google has breakpoints at which the company earns a higher percentage of the ad revenue and the declines discussed above led to the company’s falling below these breakpoints in each month of Q3.  We note that the company’s ad spend was $5.2m, just like the prior quarters spend, but management indicated that the bulk of the ad spend occurred very late in Q3 which means we took the hit for this spend as an expense in Q3, but we should see the increased searches, impressions and clicks as a result of this spend during Q4 if historical trends hold true.  Management shared the following notes about the trends in the final month of Q3 and early Q4:

1) Attrition rates improved across key markets, on a worldwide basis, due to better targeting as well as product enhancements.
2) Management believes that average daily revenue reached its bottom in Q3 and current rates are 20% above that low point.
3)  The introduction of the new Homepage has resulted in significant improvements in revenue per install, with increases in revenue achieving average rates above 30%.

These trends and the other factors discussed above lead us to believe that the business has (in the words of Vertro CEO Peter Corrao) “..turned a corner and is poised for markedly improved results”.

Inuvo – Q2 and Q3 were transitional quarters for Inuvo and the changes made during this period led us to believe that the company would not only survive, but thrive going forward.  As such and for all the other reasons stated in our initial due diligence report, we added Inuvo as a focus stock on the first trading day of Q4 (October 3, 2011).  Obviously, much has changed about the outlook given the pending merger with Vertro, but we believe that these changes are positive and we fully expected Q3 to be challenging.  We were quite pleased with the discussion of QTD improvements on the Q3 earnings conference call and found several reasons for optimism -

1) We believe that the GrooveVC community is having a positive impact on Inuvo and the numbers for Q4 to date are the best evidence – management indicated that they have experienced an uptick since the start of October that pushed their revenue for the month to $2.9m, substantially higher than the prior month’s $2.2m.   While it is difficult to know with certainty how much of this gain was related to the adaptation of Yellowise, BargainMatch and Kowabunga into the daily use flow by Groove community members, we do not believe that the timing of Inuvo’s revenue rebound is a coincidence and we fully expect to see the company report revenue at this higher run rate going forward. We note that management also indicated that revenue for November through the day prior to the call were running at about the same daily rate.

2) Recent headcount/expense reductions were implemented with a stated goal of creating an expense structure that allows for positive adjusted EBITDA at the revenue level reported for September ($2.2m) which we expect to represent a revenue trough. We believe that this will allow the company to operate profitably going forward as best evidenced by management’s comments that the company was able to achieve adjusted EBITDA in October of approximately $170k with trends looking for similar for the first week of November.

We expected weak Q3 numbers and felt that a poor Q3 was being priced into the shares.  Of course, given the merger we expect there to be significant volatility in the stock price until the deal closes and also would not be surprised to see weakness related to end of year tax loss selling.  We note that the stock has already traded back down to the price at which we initially suggested that Groove members take a position ($1.05 on October 3) and we believe that any such end of year weakness makes for a tremendous buying opportunity, as we expect the results for a Inuvo/Vertro combination will be much stronger than either could achieve individually and believe that the combined company’s stock price will move considerably higher over the next 12 months.

Local.com Example For Inuvo / Vertro Investors

As many of you are probably aware, we narrowed the “new focus stock” recommendations from our community down to two companies before naming Inuvo as the focus stock.  We believed that both finalists were significantly undervalued based on their prospects and that each would benefit tremendously from consumer’s and investor’s growing fascination with daily deals and coupons. Local.com was the other company and our decision to choose Inuvo ultimately came down to geography and our focus on community involvement to drive gains in operating results. When the decision was made, Local.com’s Daily Deals business was exclusively offered on the west Coast, Chicago and in Utah. Given the wide geographic distribution of our participants, many would have been unable to participate in the local deal offerings that are among the major reasons the two were chosen. Inuvo through its BargainMatch and Kowabunga Daily Deals properties offer daily deals nationwide, with the latter scheduled to roll out daily deals in many “secondary” markets not addressed by any of the daily deal companies sometime of the next couple of months.  Thus, we chose INUV as our focus stock, but it is apparent that quite a few of our participants also have significant positions in Local.com.

Since the Inuvo/Vertro merger was announced, I think many of us have been eagerly awaiting the Local.com Q3 earnings report for reasons beyond our ownership of the shares.  Early in Q3, LOCM signed a deal with Google to offer Google’s Pay Per Click ads on its “owned and operated” web properties.  Though LOCM only starting using the Google feed on August 1 and the switch from Yahoo/Bing ads to Google ads was on the SERP landing page only, LOCM announced a large increase in revenue per visit.  They essentially replaced the one ad unit on the right margin that usually had a Yahoo/Bing feed with a 3 ad Google feed.  Live for only 2 of the three months in the quarter, the Google ad unit drove a 30% increase in revenue per thousand visitors for LOCM for Q3.

We believe that this is a great example of the potential of the Vertro/Inuvo merger.  Vertro’s “Google Network” contract will allow the Bargain Match, Yellowise and BabytoBee sites to be monetized using the Google Ad feed, which may drive even larger gains for Inuvo’s consumer facing properties (all of whose revenues are driven largely by search).  We believe that the disparity between what Inuvo likely earns on its Bing/Yahoo feed and what they would earn with PPC ads provided by a “Google Network” member like Vertro will be even larger than the difference between what LOCM was earning from its Yahoo contract and what they earn now from their Google contract. Investors need to understand what it means to be part of the “Google Network” – these are the highest traffic volume websites that partner with Google – AOL, INSP, IACI and Vertro. An advertiser can typically choose any site to include or exclude in his ad campaigns, but that is not true for the “Google Network”, which is an all or nothing choice for each advertiser.  The practical impact of this setup leads there to be more advertisers running ads, bidding on ads, etc. for any given keyword searched for a Network partner, which drives higher RPC for the Google Network partners vs. a standard Google AdWords partner. Thus, we would expect to see each of these web properties go from mildly profitable at the operating level to being wildly profitable and/or experiencing large revenue gains the first quarter that the Google Network feed is introduced to the mix.

BargainMatch and Investor’s New Appetite for Coupon Services

One of the things we believe is most overlooked about Inuvo and its Bargain Match service is the coupon component. Certainly, much of the sizzle relates to its ability to notify consumers of cash back opportunities at over 1900 merchants and do so without changing the flow of their shopping patterns (ie by just putting the little green sale tag beside each website in your Google search results that offers cash back), but Bargain Match is also one of the most comprehensive resources for coupons online. Mouseover that little green tag in the search results and you will see not only what % cash back they offer, but also all of the coupons that merchant offers to online shoppers. For instance, when I entered the term “iphone accessories” into my Google search engine, 6 of the 10 websites on the Google results page offered the little green tag and when I mouseover the green tag, I can see five or six different coupon offers each from the official Apple Store, Best Buy, At&t, Buy.com, CellPhoneShop.net, etc. and it has a simple “click to activate” button beside each one that will take you to the site, where one more click will apply the coupon code to your shopping cart. I clicked through on the “CellPhoneShop.net” website and the coupons allowed me to get $10 off my $50 order in addition to applying 13% cash back to my BargainMatch (or ALOT Cash Back Rewards for Appbar users) account. The price on the items were actually better than at my local At&t store for the same items before the discount and it included free shipping, so it is a win-win-win deal for the consumer. With over 1900 merchants including almost every major retailer you can think of, the Bargain Match service essentially offers the best coupon site online in addition to the cash back feature it is best known for.

One of the reasons I chose to focus on the coupon aspect of the Bargain Match service is not the recent “return of the coupon” to widespread consumer consciousness that could be attributed to the difficult economy or perhaps to the proliferation of the daily deal sites like Groupon, Living Social and Kowabunga (yeah, thats right), rather we have chosen to call it to your attention because of the investment community’s recent and growing fascination with coupons. Within the last 30 days, the following funding deals have grabbed our attention -

1) Coupons.com – earlier this month raised $30 million from highly regarded VC Greylock Partners, on top of the $200 million raised in June. The valuation on these placements puts the company’s enterprise value in excess of $1 billion
Link – http://www.businessinsider.com/coupons-com-billion-dollar-valuation-2011-6

2) CouponCabin.com – last week Coupon Cabin raised $54 million from venture capitalists. While we have not been able to verify the total valuation, we do know that the $54 million investment was for a minority stake, so the implied valuation for this round would be in excess of $108 million.
link- http://venturebeat.com/2011/10/20/couponcabin-54m-funding/

3) CouponTrade.com – 2011 startup received $2.4m funding earlier this month – http://www.portfolio.com/views/blogs/daily-brief/2011/10/20/coupon-cabin-grabs-54-million-in-funding

4) Coupon Express – just this week a Pink Sheets listed company that just changed its name from PSI Corp completed a convertible issue raising another $1.5 million that appears to push their enterprise value to $12m+

We note the first two deals as indicators that big VC money has recently warmed to the potential value of web based coupon offerings. We offer the last two as examples of startups and/or “me too” companies jumping on the coupon bandwagon that already have valuations that exceed the entire current market cap of Inuvo. While three of the four companies above are a slightly different kind of couponing service (grocery store or daily deal focused),we note that the deals offered on the $100m+ valuation CouponCabin are in many cases the same deals offered through BargainMatch, except that Coupon Cabin does not offer the cash back component on top of the coupons that BargainMatch offers. Certainly, Coupon Cabin has one key advantage in that it has been around since 2003, while the BargainMatch service has only been around for about a year and the browser extension has only had a few months to build up its user base. Given time, exposure and better distribution; we believe that the high consumer value and utility of the BargainMatch service could allow it to be one of the leaders in the coupon space, generate significant revenue (Q4 will be first full quarter of BM browser extension) gains for Inuvo and hopefully gain some recognition among investors of the potential value of this company.