GrooveVC Note On Vertro Q3 PreRelease
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.
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