Archive for November, 2009
Vertro takeover rumors pop up from time to time and most recently it was rumored to have received a bid from a Nasdaq listed company based in Israel. While I give very little credence to rumors that appear to be conceived, born and do most of their growing up in message board forums, we have recently had a number of members in our online community ask questions about Vertro’s value to other companies in an acquisition scenario so we thought it might be a good time to address them.
The most recent deal rumor alluded to a company based in Israel – just a little digging turns up two companies whose profiles suggest that they could presumably have some interest in a combination with Vertro. The two companies are:
1) Answers.com which is a search/answers engine company that includes the properties Answers.com, WikiAnswers® and ReferenceAnswers. Like Vertro, Answers.com derives nearly all of its revenue from Google Adsense (89% of revenue for the 9 months ended Sept. 30) and expects to do around $20 million in revenue in 2009. Answers.com has a market cap of about $65 million, has nearly one third of that in cash ($21 million+) and has no material debt.
2) Incredimail which is a desktop software company best known for its Incredimail email application and its “HiYo” graphic add on application for Instant Messaging. Like Vertro, Incredimail (MAIL) derives nearly all of its revenue from Google Adsense (75% of its revenues in the most recently reported quarter). MAIL has revenue for the 9 months ended Sept.30 of $19.7 million – virtually identical to Vertro.
Could they buy Vertro?
1) Answers.com – Though Answers.com actually produces lower top line revenue than Vertro, ANSW’s business model requires a much lower advertising spend to produce their revenue, which results in a higher bottom line profit. One could easily argue the merits of one business model over the other (ANSW argues lower costs, higher current profitability, Vertro argues its model more predictable than ANSW given ANSW’s reliance on organic traffic from third parties), but the bottom line today is that investors have awarded ANSW with a much higher valuation than Vertro. ANSW currently sports a market cap of around $65 million and because they have about 1/3 of that in cash, they could afford to buy a company like Vertro. If Vertro were willing to sell at the rumored price range of $40 – $45 million, ANSW could do an all stock deal or possibly even do a half cash / half stock deal.
2) Incredimail – though MAIL produces identical top line revenue to Vertro, MAIL’s business model also produced net income of $5.9 million during that period. MAIL has a market cap of just over $80 million, no material debt and over $30 million in cash on its balance sheet. Thus, they could easily do an all stock deal in the range of $40 – $45 million that would presumably give Vertro holders around one third of the combined company’s shares. Of course, MAIL’s cash position would also allow them to do a half cash / half stock deal that would not deplete their considerable cash position.
Why would they want to buy Vertro?
1) Answers.com would want to buy Vertro because it would more than double their Google Adsense revenue and likely give them a higher percentage payout on its existing Google generated revenue. Most of the larger Google parnter relationships have tiered structures that award higher click revenue with higher percentage payouts. Answers.com’s current level of revenue generation for Google likely puts them in a lower earning bracket than Vertro. Adding Vertro’s $30m annual Google run rate to ANSW’s $20m annual run rate makes a formidable $50m Google Ad partner that would both earn higher rates for the duration of the existing contracts, but also have a much better bargaining position when it comes time to execute a new contract.
Also, Answers.com could conceivably use its resources to help Vertro get more toolbar downloads with a lower ad spend, thus adding to the profitability of its business model. Conversely, Vertro’s toolbars and homepages could feature Answers.com content, giving ANSW the potential for exposure to 5.5 million new consumers.
2) MAIL would want to buy Vertro to double their Google Ad revenue and take control of what is likely a higher revenue share. While no one dicloses their Ad share with Google, we know that Vertro’s toolbar division has long been one of the higher producers among “Google Network” partners and it’s revenue share likely reflects that – we believe its in the 80% range. MAIL has only recently scaled its search revenues to this level and they are still operating under an agreement reached when they were producing at much lower level. Thus, buying VERTRO would likely allow MAIL to get a higher payout across its existing revenue base in addition to the acquired revenue base and also allow them to negotiate the next contract as a $50m + producer.
Additionally, In the Q & A session of its most recent quarterly call, the CEO of MAIL indicated that the company was actively pursuing acquistion candidates and described the best target as a B2C company with a downloadable application that is synergistic to Incredimail and one that would be close enough to profitability for MAIL to easily make them more profitable. Vertro’s Alot portfolio is a B2C downloadable application that would be highly synergistic with Incredimail – the millions of consumers that are introduced to the toolbar and home page each quarter could just as easily be offered one of the Incredimail products as an opt in or opt out part of the package. Thus, if MAIL wanted to keep up the $6 million in ad spend each quarter, they could concievably add tens of thousands (maybe hundreds of thousands) of new mail clients without increasing that ad spend. Additionally, it seems that MAIL could easily offer the ALOT toolbar and/or Home Page to new Incredimail customers, possibly adding enough new users through that channel to allow them to reduce the Vertro ad spend each quarter. In September, Vertro completed its first breakeven/profitable month and they should achieve their first breakeven full quarter in the current Q4. If Vertro is able to achieve this level with the current cost structure, an acquiror would enjoy even greater profitability as they removed some of the executive management/board comp packages and other duplicative costs of being a publicly traded company, Vertro could go from expecting to earn $3 – $4 million in 2010 to actually earning $6 – $7 million instead.
For some time now, a question that has been tossed around frequently among our community members is why there has not been more insider buying of Vertro shares while they are trading so low. One thing to keep in mind is that Miva/Vertro has a long standing company policy that prevents officers/directors/employees from making open market purchases except during prescribed “windows”. These windows are set to make sure that they do not run afoul of SEC restrictions on transactions during times when they could be aware of material nonpublic information.
Vertro’s policies regarding officer/director transactions has never been disclosed to the public, so it is difficult to know when the window is actually open. While most company policies allow for a trading window shortly after the quarterly results are released to the public, there are other restrictions that could impact insider’s ability to buy and sell shares. For instance, many companies will restrict the amount of shares that can be purchased on any given trading day, with the restriction usually tied to some percentage of the average daily trading volume.
Back to the original question – why aren’t Vertro insiders buying shares with the stock trading this low? The answer is likely that they were restricted from doing so by company policy. However, we are now seeing a number of Form 4’s being filed with the SEC indicating that our CEO, Chief Legal Counsel and one director have been buying shares starting one week after the earnings report. The CEO and Chief Legal Counsel purchases came on successive days, which leads me to believe that they are likely running into some restrictions on how many shares they can buy on any given day when the trading volume has been as low as it has been the last few weeks. In any case, we believe there will be more purchases from directors/officers in the days to come and we feel this is extremely bullish.
Last month a member of our GrooveVC community posted an interesting concept in the GrooveVC forums under the title – “How to Make $10k Out of Nothing at All – Search Alot, Shop Alot & Invest the Difference” . Given its focus on matters of personal/consumer finance, it seems that his ideas could be beneficial to many if not most of our members. Visitors to our blog far outpace the number of members who visit our forums, so I thought I would post the article on the blog so that more members will get exposure to it. Here is an excerpt with a link to the full article at the bottom:
Download the Alot toolbar or use the Alot home page to shop all consumer financial goods/services in your budget – your auto insurance policies, your homeowners insurance policy, your life insurance needs (shop for best term products), your credit cards (shop for lower rate, lower fees or better rewards), shop rates for home equity lines of credit or consolidation loans to lower your interest rates and/or improve cash flow, shop online banking offers for better rates on emergency balances and interest earning checking accounts and even shop your investment accounts – there are discount stock brokers who can provide all the service you need to buy stocks, bonds, CDs or mutual funds at a much lower cost structure than the brokerage arm of your retail bank.
Since making my first investment in Vertro about a month ago at 30 cents per share, I have done my own experiment using the Alot search to find better rates on all the consumer finance products/services that are components of my typical clients’ financial profile. I have been pleasantly surprised to find how much money can be saved using the various services that run keyword advertisements through Alot when I search for terms related to home, life and auto insurance, credit cards and consolidation loans. Some of the services actually do alot of the work for you, getting quotes from multiple sources so that you can choose the best fit. These services make it easy to shop multiple providers and usually result in a substantial savings over existing policies or services. Between the lower premiums on home, term life and auto insurance, the lower credit card rates and/or money saved by consolidating with a home equity loan or other consolidation loan and better interest earned with the online banking products, we saved or improved each clients bottom line by close to $1,000 per year.
If we take that $1,000 and invest in Vertro stock at today’s prices, I believe it is entirely possible that these clients can see that investment grow to $10,000 within the next year. The Groove’s due diligence report lays out the case for a 10 bagger better than I can, but the stock doesn’t have to grow by 10x to make this a good approach – the $1,000 in savings is real and even a nice double digit return per year is better than most investments in this market. .The main thing that makes me believe in the possibility that this investment can double, triple and even grow 10x is the money that Vertro makes while each new client shops those items. I used the keyword spy service (Thanks for the link Steve) to find out how much Vertro makes on clicks for these keywords and I was surprised – many of them pay over $25 per click to be the top ad. If you assume that the others pay even half that to be on the list and assume that each client shops at least nine or ten of the options for each search before deciding which offers the best deal, Vertro can probably make nearly $500 while the client shops and saves his $1,000. Its a win/win proposition – use their service to save $1,000, invest the $1,000 in their stock and watch the stock price go up each quarter as the money you made them with your searching (and hundreds of others made them with their searching) begins to have an impact on the earnings they report.
For the Rest of the article, please click below:
1) Vertro management delivered in a big way in Q3, as they:
– beat our revenue goal handily, coming in at $7.4 million vs. our expected range of $7 – $7.2 million
– closed the gap to EBITDA profitability more than we expected
– ended the quarter with higher cash balances than we expected
– reduced monthly expenses down to the $900k range
– reiterated their expectation to hit EBITDA profitability in the current quarter.
2) We were able to confirm on the conference call that Vertro management believes that the reduction in monthly non advertising opex to the $900k range is sustainable going forward and that there remain opportunities for further expense reductions. This is very important as it reduces the breakeven level by $300k or more per quarter sooner than expected. We had hoped that management would be able to reduce expenses to this level but thought it might be well into 2010 before they could achieve it.
3) We were pleased to note the large increase in International Search Queries. The eye popping sequential growth in search queries suggests that the company’s efforts in these markets are gaining traction and that their new home page offering in these “non Region One” markets has the potential to have a material impact on their results going forward.
4) The Home Page product continues to impress us with its growth and apparent ability to drive greater usage. We felt the Q3 results offered a unique insight into the additional value that the home page offering can drive due to the fact that we got to see what would happen when Vertro went from marketing just the toolbar option in “non Region One” markets to offering the home page as an option during the toolbar download process. Despite the fact that Vertro’s ad spend in these markets remained constant between Q2 and Q3, they were able to increase international search queries by over 150%. We believe this could be a game changer for Vertro in that it will allow them to better monetize their ad spend for any given market and this will likely enable them to further their international expansion.
We are adjusting our revenue expectations for Q4 to reflect seasonal trends. This highlights one of the difficulties of forecasting Vertro performance at this early stage of its development. The company has only completed two quarters as a stand alone business – all Q reports before Q2 of 2009 have results from the old Miva Media business and much of the detail given related to those operations. In the same way that we all know that online shopping will have its busiest three weeks of the year between the week of Thanksgiving and December 15, we also know that online traffic generally falls off dramatically from Dec. 15 – through Christmas and to some degree all the way through the New Years holiday. The Vertro toolbar marketing program is a very precise CPA machine that can be started and stopped on a dime, but it simply cannot produce the same volume of toolbar downloads when general internet usage falls off a cliff like it does during at the end of the holiday season. The machine is still on, it just cannot produce the same number of new toolbars at the price we require and since it is a “cost per action” machine, substantially lower traffic counts equal substantially fewer “actions” (toolbar downloads) which means that the advertising spend will be lower for that period. We believe it will be lower by about 10% – 12%. We also know that revenue is impacted in a big way by the number of toolbar downloads / ad spend each quarter, so we are reducing our revenue growth expectations to low double digit sequential growth to reflect this seasonality.
We continue to believe that Q4 will be a “breakout” quarter for Vertro. After delivering their first profitable month in September, we believe that Vertro will easily achieve EBITDA profitability in Q4 and that GrooveVC users will help to drive revenue to levels higher than analysts are currently projecting ($8.3 million) for the fourth quarter.
GrooveVC Community Notes on Vertro’s Pre-Release of Q3 Financial Information
1) Top line revenue of $7.4 million – We were hoping to see strong double digit revenue growth and thought our estimate range of $7 million – $7.2 million might be too aggressive. Vertro topped the high end of that range with $7.4 million in revenue, a sequential growth rate of 23% in an economic environment where the leaders of this space were lauded for mid to low single digit sequential revenue growth (Google 7.5%. Yahoo 1%). This bodes well for the fourth quarter when you consider that the other large players in this space acknowledged stronger ad spending trends going into the fourth quarter.
2) Expense Management – we had hoped to see management achieve expense reductions from the old Miva levels that would allow them to operate at or slightly below $1 million per month + ad spend. The $2.6 million opex not including advertising indicates that the company was able to reduce expenses significantly below the $1 million per month level and we know there remains potential for further expense reductions going forward. While maintaining discipline in other operational expenses, the company maintained a consistent $2 million per month advertising spend which we feel is important for maintaining strong revenue growth.
3) Cash Position – Vertro management continues to be very disciplined with their cash management, projecting cash levels of $6.3 million to end the quarter, well above the $4 – $5 million we were expecting.
4) We applaud management for their efforts to provide greater transparency for investors by releasing pertinent financial details early.
5) We further applaud management for accomplishing so much in such a short time – Q3 represents only the second full quarter since they were able to shed the money losing Miva operations and focus entirely on the Alot services and it appears that they have achieved Vertro’s first breakeven/profitable month during September.
In our several discussions with Vertro management since the GrooveVC due diligence process began, we encouraged them to consider releasing key financial data earlier – as soon as is practicable, so that investors generally can be confident that they have all the information that is available. Of course, we also prefer the earlier release so that our consumer/investors’ can see as soon as possible how their consistent use of the Alot services (searching/shopping) is having an impact on Vertro’s results. As previously discussed in much greater detail in this forum, our due diligence indicates that an “engaged” (investor in VTRO using it like they own it) user of the Alot toolbar or home page will deliver significantly higher revenue than a typical user who found the services through Vertro’s traditional marketing channels; because the engaged user will proactively think to first use Alot to research all of his/her significant purchases online before choosing which product or service to use. Given the number of currently active participants in the GrooveVC community and the range of revenue each could be expected to generate based on the experiment we undertook during the due diligence process, it is quite likely that our users have pushed Vertro into at least breakeven results and possibly its first profitable month earlier than analysts or even management expected.
While it would be speculative to suggest that all active community participants use the Alot service like control group #2 from our experiment, it is interesting to note that the average click revenue during that experiment (the amount that would go to Vertro at 80% of the total click revenue paid by the advertiser) was approximately $8.91 per day and the total number of participants that joined GrooveVC throughout September and the number of days they would have been contributing members would have resulted in a revenue contribution of approximately $96,923 to Vertro. Granted, these are averages taken from a small control group and extrapolated to a larger user base, but you could assume a fairly large margin of error and still reach the same conclusion – the GrooveVC participants can, will and are playing a significant and growing role in helping to push Vertro solidly into the black.
We believe the Q3 results make this point quite well and that management’s release of the key financial information for the months of July/August and the early release of the full third quarter numbers was for the purpose of allowing investors to see that the company was either profitable or at least breakeven for the month of September. In Vertro’s interim release in mid September, the company indicated that July and August revenue had totaled $4.8 million, operating expenses of $2 million and advertising expenses of $4 million for the period. Yesterday’s release of quarterly totals included $7.4 million in revenue, $8.6 million in total expenses broken down to $6 million in advertising, $200k in noncash compensation expense and $2.4 million in operating expenses. When you subtract the July/August numbers from the full quarter numbers you get $2.6 million in revenue for September and $2.6 million in expenses for September – breakeven. However, the $200k in noncash compensation expense is included in that $2.6 million for September and it should really be spread evenly across the three months of the quarter, meaning that September expenses would be $2.4 million plus $66,667 (one third of the $200k noncash comp expense) or $2.467 million would be the total expenses for September vs. the $2.6 million in revenue – the company’s first profitable month. When you consider that they should be able to maintain and even improve upon this expense structure going forward and that there are a number of positive trends coming together (lower toolbar attrition, higher home page usage, more searches, more clicks, higher overall CPCs, higher toolbar LTV’s, more Groove use it like you own it searchers, etc.) to drive revenue growth, it is not too difficult to see Vertro turning into a very lean money making machine sooner rather than later.
A quick note to update you on our progress and a few things community participants might find to be of interest.
As of October 31, 2009, GrooveVC Community participants have now increased to a level (722) that our research suggests could be adding over $6,400 per day to Vertro’s bottom line during the fourth quarter if the weekly click revenue averages are in line with what we experienced with control group #2 in the experiment we undertook during the due diligence process. If the numbers above prove out, the searching/shopping of 720+ Groove participants would be adding more than $500,000 to VTRO’s bottom line during the fourth quarter.
The reported share holdings of community members is now over 1.5 million shares, which is slightly more than 4.2% of Vertro’s total outstanding shares. We should note that the majority of Groove community participants have chosen not to disclose their holdings.
We have now been active for a little over two months and our ranks and percentage ownership in Vertro have grown significantly. We have added 180 new community participants over the past 31 days and the momentum we currently see may allow us to achieve our original goal of having 1,000 active community participants by the end of 2009. As discussed in our original due diligence report on Vertro, if we can get 1,000 investors/consumers to use one of the Alot services (toolbar, home page or desktop) to search/shop all of their purchases online, we could (based on the numbers achieved in our experiment) add several million dollars to Vertro’s bottom line over the course of calendar year 2010.
In the meantime, we fully expect to see the hundreds of currently active users make a significant impact on Vertro’s fourth quarter revenue and earnings as our existing members continue to use Alot for all of their searching/shopping and continue to show friends, relatives and business associates how invest in and use Alot. While the soon to be reported third quarter will be impacted very little by our community (given that we only began in the last few weeks of the third quarter), we do expect to see some impact on the metrics reported, particularly in any updates that include the month of October.
A special thanks this month to the Alot development team for adding a tool to help us spread the word – see the “tell a friend” button just below the big ALOT icon and to the right of the “add content” and “tutorial” buttons on your Alot home page. Move your cursor over the “tell a friend” button and see how easy they have made it to use social networks, bookmarking services and email to spread the word about Alot.
Keep searching/shopping and spreading the word!