Archive for October, 2009
We have received numerous inquiries from our Groove community members related to Wednesday’s decline of over 15% in the trading price of Vertro stock. We are not aware of any company specific information that would have such an impact on Vertro’s shares and we are not aware of any information that would suggest a material change in Vertro’s business that is negative. We believe it is likely that the marketplace is reacting to analyst downgrades of several other small cap companies in the search/advertising space (LOCM, VCLK) who reported good earnings Tuesday after the close, but gave fourth quarter guidance that was below investor’s or analyst’s expectations.
In our September 9th report, we reminded Groove community members – “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”. This kind of volatility is to be expected with a microcap technology stock trading below $1. Wednesday’s selloff in Vertro shares leaves the company’s cash adjusted market cap somewhere in the $5 – $8 million range. While we fully expect to see continued volatility in the shares, we feel that any continued weakness that allows purchases in the current price range represents an excellent opportunity to buy the stock at a valuation that does not come close to reflecting the value of Vertro’s assets in an acquisition scenario, the likelihood that the company will report positive EBITDA in Q4, the impact that Groove member’s usage of the Alot products can have on Vertro’s fourth quarter, nor the potential for the company to earn over $3 million in FY2010. Vertro shares in this price range are cheap by just about any measure and this is a great opportunity for us to get more friends, family and business contacts into the Groove at a price that should allow them to see good appreciation early in their Groove community participation. Members enjoying strong stock gains will be more likely to recruit others and more likely to use the Alot toolbar, Home Page and/or desktop search for all of their searching/shopping online. Keep searching/shopping and spreading the word.
This past week we got an opportunity for a brief call with Vertro CEO Peter Corrao. During the call we were able to ask several of the questions our community members have submitted over the last few weeks. Of course, there were a number of questions and topics he could not discuss prior to the Q3 report that will be released in a few weeks, but there were some interesting answers to the submitted questions and a number of good takeaways that helped us to have a better feel for the general direction of this business and how GrooveVC members may be able to have an impact on Vertro’s results going forward.
Q- How is the company’s expansion into China/India progressing?
A- the company continues to test these markets with their ad spend set to maintain a constant presence there equal to about 10% of the total toolbar base. Over several months we will be able to determine if the return on investment is similar to what was described in the first paragraph for the overall toolbar base performance. As mentioned on the previous conference call, these toolbars only cost about 10% of what we would typically spend to acquire a toolbar in our core English speaking markets, but they only monetize at about 10% or so of what we normally see from toolbars in the core markets. Vertro is continuing to spend a small percentage of our ad budget to maintain a constant level of these toolbars over a several month period to determine if we can match or beat the ROI we currently earn in our core markets. Should that prove to be the case, the company can quickly ramp up the ad spend to grow this segment rather quickly, which could open up several promising options that would further improve the monetization of this segment.
Q- Will the Alot Home Page eventually offer a local or directory search option?
A- In the same way that Home Page users can choose from among “web search, images, news, shopping, etc.”, Vertro intends to offer a local version and is currently reviewing several partner options for this service.
Q- Will Alot Home Page and/or Toolbar users eventually be able to set up their Home Page or toolbar options on their iPhones and/or other mobile devices?
A- While they were very obviously not wanting to discuss specifics, they did indicate that several initiatives were already underway on this front.
Q- How long does it take on average for Vertro to recoup the marketing cost of acquiring a toolbar user?
A- Alot has historically been able to (on average) recoup the amount they spend to acquire a toolbar user within 6 months.Thus, if they spent an average of $1 to acquire the average toolbar user, they would expect on average to see those toolbars generate $1 in revenue over their first 6 months. The revenue generated typically declines thereafter and the average has been that they provide about half that much over the remaining average life. Thus, using these nice round $1 example above, the average toolbar costs $1 to acquire, Vertro recoups that $1 in six months and the user ultimately generates around $1.50 in revenue before they stop using it.
Though he could only discuss trends through the August 31 period results that the company released to the public on September 10, the trend of higher usage rates (i.e. more searches, more clicks) and lower attrition rates have resulted in the company being able to recoup that $1 within five months versus the six months they have historically required. This is a very bullish trend that the Groove hopes to be able to impact further going forward, as we add new users who will search/shop Alot first and often. In the aggregate, the growing GrooveVC community members’ usage of the Alot toolbar can impact the average revenue and usage rates, lower the attrition rates and ultimately have an impact on the average lifetime values, helping to increase them from levels that would be expected based on historical data.
Since Google kicked off the online advertising sector earnings season with a bang last week, we have received numerous inquiries from GrooveVC members as to our expectations for Vertro’s third quarter. It is tempting to say that Q3 is irrelevant since the GrooveVC movement started with only five weeks left in the quarter and it is unlikely that our involvement will have any material impact on Vertro’s Q3 financials. As stated at the outset, the impact of the Groove VC consumer/investors will be manifested over several months, not days, so we would expect any significant impact to begin with the fourth quarter. However, there are several key items we will be watching for in the Q3 report, some of which may be impacted marginally by the GrooveVC community’s involvement, they are:
1) Revenue – expecting number in the range of $7 million – $7.2 million, which would be a strong double digit sequential growth rate over the Q2 figures. We would love to see Vertro hit the top end of that range, which would be 20% sequential growth and suggest more momentum heading into a fourth quarter where we expect to see this growth rate accelerate to a strong 25-30% Q over Q growth, as several trends align to create a “break out” quarter for Vertro including:
a. a “replenished” toolbar base that looks much more like the active user figures of past periods where Vertro posted higher revenue figures.
b. a recovery in CPC’s and a general feeling that the online advertising space has turned a corner (per Google CEO Eric Schmidt).
c. participation by Groove members – we fully expect to have a significant impact on Vertro’s quarterly numbers going forward and this should be reflected for the first time in the fourth quarter reports. If our active community members’ searching/clicking and revenue generation is on par with our due diligence user figures, we should add nearly $500k to the revenue line for Vertro
d. Improving metrics for Average CPC, lower attrition and a steadily increasing lifetime value (LTV) – each metric impacted by GrooveVC Members who will be more likely to use Alot search more often, search for higher paying terms, shop more sites for any given search and thereby cause incremental improvements in attrition and LTV.
2) Update on China/India testing – we should be close to knowing if the ROI trend remained strong enough for the company to move more aggressively into these markets (they currently have less than 10% of their ad spend and toolbar base in these countries).
3) Cash Management – Vertro management showed good discipline in the most recent quarter to maintain the cash balance while growing the business and we hope to see more of the same, with $4 – $5 million still on the balance sheet.
4) Cost cutting measures – Q3 will be the first quarter Vertro will report where they are out from under the majority of the “expense overhang” from the Miva Media operations. We are hoping to see that management was able to reduce operating expenses (ex advertising spend) to the $3 million range as we move to a sustainable sub – $1 million per month opex structure.
We have received numerous questions about the recent Form 4’s filed to report share sales by three Vertro Directors. The market action since the Form 4’s were filed seems to reflect a negative perception of the Board member’s actions. We feel that is important to make it clear that 1) the director’s who filed form 4’s never actually held the stock reported as being sold and 2) the majority of the directors chose to pay their tax liability in cash out of pocket – which is essentially buying more stock. The net takeaway should actually be positive here – more than half the board chose to invest more out of pocket cash into Vertro.
These sales were related to the vesting of restricted stock units, which is a taxable event for each individual director. In the same way that the IRS requires individuals to withhold a certain percentage of their paychecks to cover their tax liability, an amount must be set aside to pay the tax liability for the vesting of these restricted stock units. Each member of the Board of Directors may choose to either pay the withholding amount in cash out of pocket or they can have the company “withhold” (and sell) part of their stock grant in the amount necessary to cover the tax liability. Thus, these directors were not really selling shares that they own, they are instead giving up the right to receive a percentage of the shares granted to them in an amount sufficient to cover their tax liability.
In taking a look at the situation with the recent Form 4 filings, we also took a broader look at the BOD and their compensation overall. The last proxy indicates very large cash payments and restricted stock issuances to our board members. Obviously these payments were vestiges of a time when this was a much larger (market cap, revenues, operations, geographies,liability exposure, etc.) company. We are confident that steps will be taken to ensure that Vertro’s board compensation scheme is adjusted to be more in line with what would be expected for a company of our current size/profile – $8 million market cap (cash adjusted), substantially less operational complexity and much less overall liability than the old Miva. Additionally, we hope to see a much greater emphasis placed on measures that would better align shareholder’s and director’s interests. In particular, we hope to see the cash payments reduced substantially and a much bigger emphasis placed on restricted stock/options.
GrooveVC 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 September 30, 2009 GrooveVC Community participants have now increased to a level (541) that our research suggests could be adding over $4,ooo per day to Vertro’s bottom line during the fourth quarter if the averages are in line with what we experienced with control group #2 in the experiment we undertook during the due diligence process. During a quarter where management is projecting marginal EBITDA profitability, the importance of the Groove revenue stream should not be understated. If the numbers above prove out, the searching/shopping of 500+ Groove participants would be adding more than $400,000 to VTRO’s bottom line during the fourth quarter.
The reported share holdings of community members is now well over 1 million shares and approaching 4% of Vertro’s outstanding shares. We should note that the majority of the new Groove participants have chosen not to disclose their holdings.
We have grown our ranks by more than 400% over the past 30 days through simple word of mouth/viral marketing. Please continue to encourage your contacts to join us and keep spreading the word to friends and business associates – the earlier in Q4 that we get more people involved, the greater the impact our aggregate “searching/shopping” power will have on Vertro’s financials. Do not forget, when Vertro reports those fourth quarter numbers that will be impacted in a big way by our participation – the attention that will be thrust upon Vertro by the investment community should make expanding our ranks much easier.
The GrooveVC concept seems to be gaining traction, if the trend in new participants (more added in last two weeks of September than in the first 6 weeks of our existence) and the inquiries we have received from several notable small cap technology investors and hedge fund managers is any indication. Keep up the good work!