Archive for January, 2010
After yesterday’s close, Google reported earnings for the fourth quarter of 2009. Vertro will apparently have the wind at its back as the numbers suggest that the market for online advertising continues to improve. Google reported a revenue increase of 17%.to $6.7 billion with 31 percent of that coming from the Adsense network. More importantly, Google reported that while its own sites experienced very strong growth of 16%, the Adsense network grew at even more impressive 21% clip. Even more bullish for investors in Vertro and other Google Adsense network companies, Google reported a 2% sequential growth in the average cost per click across all of its properties, which is particularly strong when you consider the strong CPC growth they had reported in Q3 and also that the higher growth rate (21%) for the Adsense network suggests that those site’s sequential CPC growth may have been even higher.
As most Vertro investors are aware, the vast majority of that Adsense revenue comes from the larger Google Network players including AOL, IACI’s Ask.com, Infospace and several others including Vertro. Of course, most of the other companies in the $25 million club (those who consistently generate over $25 million in Google Adsense revenue per year) are household names or at least own one or more well known consumer facing web properties. Vertro investors are set to enjoy not only the rebound in online advertiser’s budgets that are apparently driving CPC growth across the network, but also the recognition that will ultimately come for Vertro as a company that is a player in this space with a model that is working to drive growth that exceeds the revenue growth experienced by the larger players. Such recognition is usually accompanied by a marked increase in the multiple of earnings/revenues that investors are willing to pay for the company’s shares.
A note to update community participants on our progress and a few things you might find to be of interest.
As of December 31, 2009, GrooveVC Community participants have now increased to a level (1124) that our research suggests could be adding over $10,000 per day to Vertro’s bottom line during the month of January 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 1,124 Groove participants would be adding more than $900,000 to VTRO’s revenue during the first quarter of 2010.
When we first launched the GrooveVC website in late August of this year, we hoped that word of mouth/viral marketing would allow us to get enough participants over the first 60 – 90 days to have an impact on Vertro’s numbers in the fourth quarter. We believe that we achieved that goal by attracting over 500 investor/consumers by the beginning of the quarter and growing that number through the end of the quarter to more than 1,000 participants. Based on the average usage we expect from such “engaged” users, we believe that Vertro will exceed the analysts’ estimated revenue of $8.3 million for the quarter. Given that management had predicted results that will be slightly better than breakeven (EBITDA profitability), this additional revenue should push Vertro solidly into EBITDA profitability.
The reported share holdings of community members is now over 1.7 million shares or more than 4.75% of Vertro’s total outstanding shares.
We have now been active for a little over four months and our ranks and percentage ownership in Vertro continue to grow substantially each month. We have added over 239 active community participants over the past 31 days and easily eclipsed our goal of 1,000 active community participants by year end, with a total of 1,124.
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. We believe that we have now exceeded that milestone and want to take this opportunity to remind investors of the implications:
1) Additional revenue from GrooveVC searchers/shoppers should go straight to the bottom line. Given that Vertro management has predicted EBITDA profitability for Q4 and 2010, the revenue expected from normal operations should cover all expenses. Revenue generated by GrooveVC users is in addition to that already expected by management, so each click of an ad by a GrooveVC participant sends cash straight to the bottom line and straight to the bank. With 500 – 1000 additional searchers/shoppers using the Alot toolbar or homepage during the course of the fourth quarter, we are confident that Vertro will exceed management and the analyst’s revenue expectations for Q4. This impact will be even greater in Q1 of 2010 as we now BEGIN the quarter with over 1100 active participants and we expect that number and hence the contribution therefrom to continue to grow weekly.
2) The additional cash generated by this incremental revenue was also not part of management or the analyst’s expectations. As such, we fully expect that management will report higher cash balances than is currently expected and we also expect that cash will cease to be a major focus for investors. In each quarterly conference call of 2009, much was made of the “cash trough” as investors were concerned that the company would run out of cash before reaching the critical mass of toolbar/homepage users necessary to move their business model forward using operating cash flows. The figure in $4 – $5 million range has remained fairly constant, but management has had to move the cash trough date forward several times as the flow of business and circumstances dictated, with the most recent prediction was for that to happen in late Q1 of 2010. If management’s previously discussed intentions of keeping a constant ad spend in the $6 million range for Q1 – Q3 of 2010 are maintained, we would not be surprised to see cash balances GROW from this point forward. In light of the increased revenue and cash flow that we believe is being generated – at levels that are likely much higher than management or analyst’s could have anticipated, we believe that investor concerns related to cash burn rate or a “cash trough” below levels from Q4 might be a thing of the past.
3) The understanding by the investment community that Vertro is no longer a company on bankruptcy watch, the understanding that the Vertro business model is working and the fundamental change in how this company will be valued by investors (multiple of earnings, multiple of sales, takeover premium, etc.) should allow for substantial returns for investors at current prices.
4) GrooveVC originally picked Vertro as its focus stock when it was trading at 23 cents. Most of our early participants bought in the low to mid 20 cent range and likely the majority of our participants bought in the low to mid 30 cent range. At today’s prices, early investors have nearly a 100% return on investment and virtually all GrooveVC participants have double digit returns on their investment. Given such substantial gains during a period of great market volatility, (particularly with small cap investments), one might expect us to recommend taking some profits. Why not? Most investment clubs, newsletters and stock investing oriented communities would love to be able to point to their first stock pick and say investors doubled their money and then move on to the next one.
Quite the contrary, we believe that the current price (42 cents) of Vertro stock makes for a great buying opportunity, one that offers a strong potential for exponential gains. As discussed during our initial due diligence, the impact of our community will likely become material to Vertro’s results for the first time in the fourth quarter and should grow from there. As such, the first report that will be impacted in any substantial way by our community will be based on Q4 results. Given that the full report for Q4 is likely still at least a couple of months away and that our numbers have just now reached our target of 1,000 active participants – we believe that patience (wait and see how we do) and persistence (keep searching, shopping and showing your friends how to do the same) will be rewarded in a big way over the course of 2010. To be clear, we do not think it is a good time to sell Vertro shares and our recommendation for those sitting on 100% gains is to buy more. Further, anyone just learning about the GrooveVC community should feel comfortable that we are confident that investors buying at today’s prices will quite likely see an exponential return on their investment.
At the end of the day, investing is really all about measuring risk vs. reward. We believe that most of the reward for owning Vertro shares remains to be seen, but the risk has been reduced substantially as we believe the cash burn days are over, the expense structure from the Miva days will be behind us completely within the next 90 days and the 100% free, word of mouth viral marketing that the Groove brings to the table for Vertro has only just now reached a level where it should make a material difference on earnings and cash flow going forward.
Keep searching/shopping and spreading the word!