Q3 Results Better Than Anticipated – International Results Stronger Than Expected

November 16, 2009 at 4:33 pm Leave a comment

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.

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