Archive for September, 2009
– Higher stock price should increase institutional and retail interest
– Backdoor share repurchase as all “odd lots” will be paid in cash/repurchased
– Lower number of shares following reverse split will increase EPS
-Extremely low float will make VTRO more difficult to sell short
As most of our members are probably aware, Vertro’s shareholders approved a resolution allowing the BOD to implement a 1-for-10 reverse split any time prior to December 31, 2009. This resolution was offered to allow the company the flexibility to take steps to maintain its Nasdaq listing in the event that the company were to receive a non compliance notice as a result of its stock price trading below $1.00 per share. This Nasdaq requirement had been suspended in late 2008 due to the “extraordinary market conditions” that resulted in many listed company shares trading below $1 for an extended period of time. The rule was reinstated in late July and the company received a notice of non-compliance on Sept. 15.
While we are very bullish on Vertro’s prospects – we expect the company to report double digit sequential revenue growth for Q3, and we also expect some upward pressure on the shares due to purchases by new Groove members; we do not know if these factors would be enough to cause the shares to move beyond the $1 minimum within the timeframe that will likely be needed to regain compliance with the Nasdaq rule before the shareholder approved reverse split deadline passes.
Reverse splits are often greeted with great skepticism by investors due to the fact that many companies have undertaken a reverse split when their company’s fortunes are flagging – it often seems to be the last ditch effort of companies that have real operational and/or financial issues that have put them into the “death spiral” that usually leads to delisting and ultimately, bankruptcy. Such companies will do a reverse split to forestall the inevitable delisting, but it does nothing to solve the real issues and they often see their shares continue to fall, sometimes even faster. Because of this, it is not uncommon to see short sellers target companies when they implement a reverse split. As such, one might think that Vertro could be in danger of losing its Nasdaq listing even if the reverse split is implemented. With the current trading range well below $1 one could surmise that a wave of selling following the reverse split could push the shares back below $1.00 after a reverse split, causing the company to fail in its bid to regain compliance with the Nasdaq.
We do not believe there is risk of such a scenario. Management has indicated that the low point for their cash position will be in the $4 – $5 million range. If the company completes the 1 for 10 reverse split, there will only be approximately 3.5 million shares outstanding. If short sellers or others try to push the shares below $1, the company need only implement a stock buyback/repurchase program and set a price in the low $1‘s to take as many shares as they can. Conceivably, the entire float minus insider holdings could be repurchased at levels about $1.00 without exhausting the company’s available cash resources, so we could see that ultra low float reduced even further. With the company likely only a few months away from reporting their first profit in years, Groove VC shareholders could be rewarded quite handsomely when the Q4 profit report is released, as the reduced number of shares outstanding following such a buyback would significantly increase the profit per share figures.
The more likely outcome if Vertro management decides to move forward with the reverse split is that there will be greater demand for Vertro shares, as more institutions and funds would be able to buy Vertro shares and we would likely see greater retail interest as well. Any post split increase in demand could have an disproportionate impact on the stock price as the very small supply of shares would make it difficult to meet the increased demand without the price moving higher.
In summary, we feel that a Vertro reverse split could ultimately be a positive catalyst for the shares.
Today our blog got more visits in two hours between 2:00pm and 4:00 pm eastern than we have had for any total DAY since the first day we went live with the GrooveVC website. Is it a coincidence that the minutes and hours after that saw the stock run up more than 100%? Is the Groove Theory catching on or is it a big short squeeze?
Short Squeeze – Did some opportunistic deep pocketed traders decide to take advantage of a mispriced stock that has no debt, a cash hoard and recent management confirmation that they will be profitable going forward? Our level II analysis showed some pretty heavy intraday short selling over the last couple of weeks – big shorts coming in to beat back all intraday rallies, with what appeared to be well executed short covering in the last 30 minutes. Today’s action was exactly the same, except with about six minutes to go in the trading day, someone caught the shorts red handed and hit them with over a million shares on the buy side. The action in the after hours trading session suggests some pretty intense short covering with the stock trading up another 40% on over a hundred thousand shares traded.
GrooveVC Theory Catching On – Is it more likely that some prudent investors simply recognized what is happening here? We have a company that can truly be MADE BY SHAREHOLDERS who decide to invest and become “engaged“ shareholders – simply use Vertro‘s Google search for all your searching/shopping and take the time to help friends, coworkers and family members get set up (simple set up of a home page or download the toolbar) to do the same. Our experiment to test the productivity of an engaged shareholder suggests that just a few hundred shareholders could have a seven figure impact on Vertro’s bottom line, no small thing for a company with a $10 million market cap (at today’s close the cash adjusted market cap would be just over $12 million). But the bigger picture remains what will happen when others start to see what is happening and join in – with just a few thousand engaged shareholders, you get the potential for EARNINGS that exceed the $10 million level, the recognition that a “Google Network” Nasdaq technology company growing at triple digit rates should receive and the hyper growth earnings multiple ranges where such companies usually trade. This of course leads to higher stock prices, more recognition, likely even more users and the cycle continues……
Vertro was the second biggest gainer on the Nasdaq during the regular session today with a 69% gain and the largest gainer during the after hours session where it tacked on another 30%. Maybe tomorrow we will start to get a little of that recognition.
The following GrooveVC update was posted in the new GrooveVC message board forums on September 11 and copied to subscribers of the GrooveVC newsletter at that time. We are posting it to the Groove Blog so those who visit us through WordPress can access it:
In what we (and apparently investors in general) see as a very positive development, Vertro management released an update on several key metrics for Q3 to date:
1) Revenue – top line growth for July and August suggests that we should see double digit sequential growth for Q3 over Q2.
2) Expenses – management appears to executing with operating expenses running exactly where they told us they would be – $1 million per month.
3) Toolbar Base Growth – the net addition of 400,000 new users since June 30 is a most impressive feat, when you consider that our net new users in Q2 was only 300,000 and that we spent $5.8 million on advertising to achieve that net 300,000 user growth vs. $4 million ad spend for Q3 to date. Thus, our $4 million ad spend in July and August produced 33% more net new toolbar users than our $5.8 million ad spend in Q2 achieved. This tells us one of two things, we are either achieving a higher conversion rate (i.e. more toolbar downloads per dollar spent) or our attrition rate is slowing markedly. Either or a combination of both is very bullish for Vertro’s outlook. While we expect that Vertro’s ad spend in September will bring us in line or even slightly ahead of last quarter’s ad spend of $5.8 million the Q-to-date trend is very impressive.
4) ALOT home page user growth – Amazing. Do not miss the importance of this metric. ALOT home page users on average will search more often, click more often and click higher paying ads than toolbar users. ALOT has put together an extremely user friendly home page application and it is apparently catching on in a big way. The August monthly unique user figure is more than double the average monthly unique users of the Alot home page in Q2.
5) ALOT portfolio search figures – August searches from all three ALOT offerings (toolbar, homepage and desktop) showed a nearly 25% increase over June searches. This is also an extraordinary growth rate from two months ago and further evidences the momentum that we see for ALOT heading in to Q4.
Following the release of this report from management, Vertro’s stock rose 38% on trading volume of just over 3.15 million shares vs. an average daily trading volume closer to 250,000 shares. While volatility is to be expected following such a large spike in volume, we feel that the increase in the stock price is warranted and leaves much room for upside as the Vertro story begins to get more attention from investors.
The following GrooveVC Update was sent to all “GrooveVC Community Updates” email subscribers at midnight on Sept. 8. We will share these community statistics, news and research updates through our blog 24 – 48 hours after we release it to email subscribers. To gain real time access to these updates, please click through to our home page http://www.groovevc.com and see the box entitled “Get into the Groove” just below the GrooveVC logo. Enter your email address there, answer a few questions and you will receive these updates in real time. Here is the Sept. 9 update –
Dear Groove VC Community Members,
A quick note to update you on our progress and a few things community participants might find to be of interest.
As of August 31, 2009 GrooveVC Community participants have now increased to a level (130) that our research suggests should be adding in excess of $1,400 per day on average to Vertro’s bottom line if the averages are in line with what we experienced with control group #2 in the experiment we undertook during the due diligence process. Of course, by early Q4 we are hoping to have participation that will push the daily revenue figure up to 7x or 8x that level so that we can have a seven figure impact on Q4.
Another thing community members might find to be of interest is the reported share holdings. We hope that each GrooveVC community participant will invest a few thousand dollars in Vertro stock so that they will search and shop like an “owner” and also so that they may participate in the upside we expect to result from our participation. As of month’s end, community members have reported purchases of just under 700,000 shares, which would amount to approximately 2% of the outstanding shares.
As many of you probably noticed, there was a small run up in the price of Vertro stock in the first couple of days after our report came out. We feel like this was probably due in large part to the buying of members of our community. Do not be discouraged with the volatility – we fully expect the shares to trade in a fairly wide range until the company reports its first profitable quarter, which we expect to be Q4.
Also, do not grow weary of searching for/shopping all your purchases through Alot and remember that there are many others out there who are now doing the same thing. Please continue to encourage your contacts to join us and keep spreading the word to friends and business associates – the sooner we get more involved, the sooner our aggregate “searching/shopping” power will have a material impact on Vertro’s financials. We need to be “fully engaged” beginning October 1 and throughout Vertro’s fourth quarter so as to have the biggest impact. Do not forget, when Vertro reports those fourth quarter numbers that ARE going to be impacted in a big way by our participation – the attention that will be thrust upon Vertro by the investment community will make expanding our ranks much easier. There will be ALOT of people who will begin to understand that they should buy the stock, download the toolbar and make money from their searching/shopping. Those people who join us when the stock is trading 200 or 300% higher than it is today will still be able to enjoy exponential gains as more and more investor/consumers pile in to the stock and start to use the service. Obviously, one of the great things for current community members is we will already be sitting on large gains when the stock really begins to move.
When you look at the numbers from our two control groups and consider the size of Vertro (current market cap around $8.5 million), its easy to see that we really only need a few hundred people involved to have a material impact on Vertro’s fourth quarter. When you consider the impact we could have if we could get enough momentum to add a few thousand “engaged” users, its easy to see how this stock could move up exponentially in a very short time frame. It is very doable, but only if the “early adopters” make it happen in Q4. Keep up the good work!