Archive for February, 2010
As the dust settles following the EC and DOJ approval of the alliance between MSFT and YHOO, much is being said about the larger implications related to search engine market share and the likely impact on Google, Microsoft and Yahoo. What seems to have been overlooked is the potential impact on the earnings of America Online (NYSE: AOL) Infospace (Nasdaq: INSP) and even the smaller players like Vertro (Nasdaq: VTRO) and Answers.com (Nasdaq: ANSW), all members of the “Google Search Network” that provide Adsense revenue that ranges from AOL’s $550 million on the high end to Vertro’s $30 million per year on the low end.
When MSFT begins its siege in earnest, it seems logical that an assault on Google’s Adsense network might be on tap. Not unlike Google’s launch of Google Doc’s which began a broadside attack on MSFT’s primary earnings engine, a strike on the largest revenue growth vehicle (Google Adsense revenue grew much faster than the rest of the company in Q4 2009) in the Google arsenal seems all but certain. While MSFT obviously has the war chest to simply acquire strategic members of the Google Network, it seems even more likely that they would seek to lure all of them away with higher rev share agreements and/or minimum search revenue guarantees that will accomplish the dual goals of increasing MSFT’s search market share while striking at the heart of Google’s biggest revenue growth machine. In either case, it would seem that those companies who are producing large revenues through their participation in the Google Search Network may be among the biggest winners of the new MSFT/YHOO war with Google as the bidding should certainly result in higher payouts and/or a generally higher value accruing to each company for any given search advertising revenue stream.
Vertro management released key metrics related to Vertro’s Q4 performance after the market close on Monday afternoon. Overall the numbers were quite positive and indicated that the company continues to show steady growth in number of toolbar users, number of Home Page users and the number of total searches across the ALOT platform. Estimated revenue continued its upward trajectory as well, with an “upper single digit sequential increase” likely to push revenue into the $8 million + range. The most important aspect of the release was that Vertro CEO Peter Corrao reiterated that the company should acheive EBITDA profitability in Q4, which, given the timing of this release indicates that Vertro’s first profitable quarter is in the bag.
GrooveVC members should fully appreciate what is happening here because the year end toolbar user base numbers are impacted in two significant ways by a seasonal anomaly. Vertro’s live toolbar user count measure is based on the “unique user count” from the final two weeks of each quarter, meaning that it measures how many people use their toolbar at least once during that two week period. It is widely understood that consumer internet usage plummets starting sometime about a week before Christmas and usually does not pick up again until after New Year’s Day as consumers normal routines are impacted by holiday travel, shopping and vacations. So, not only is it likely that a significant percentage of Vertro’s toolbar user base will not be included in this count because they did not use their toolbar as they normally might during a normal two week period, but Vertro’s marketing machine is also running at a very low rate of its normal productivity (adding new toolbar users) because internet traffic generally is so much lower. As such, the measure used by Vertro to determine quarter end live users will be impacted substantially by this phenomenon each year. To give investor’s a fair and accurate reading of how the business is actually performing, Vertro management released a YTD toolbar count to give us a better “apples to apples” comparison with prior quarters.
The metrics released revealed a couple of positive developments – 1) the “region one” ALOT user base as of Feb. 7 is up more than 20% since Sept. 30. This is key because we know that the value of a “region one” user is approximately 10x the value of of a user from the “rest of the world”, both in terms of the average monetization rate and in the typical cost of acquisition. To go from 3,3 million region one users on Sept. 30 to 4 million region one users on Feb. 7 suggests very strong growth and/or improving attrition figures for the most important segment of the Alot user base. 2) Alot Home Page unique users in region one increased more than 15% sequentially, which is on top of the impressive sequential growth achieved between Q2 and Q3. The growth in region one usage, both toolbar and homepage, suggest that the company’s model is working quite well. If Vertro can grow in 2010 at even half the sequential gains we have enjoyed in 2009, we should see revenue growth that will bring recognition from investor’s that should drive Vertro’s share price much higher.
As of January 31, 2009, GrooveVC Community participants have now increased to a level (1382) that our research suggests could be adding over $12,000 per day to Vertro’s bottom line during the month of February 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 1,382 Groove participants would be adding more than $1,000,000 to VTRO’s revenue during the first quarter of 2010.
GrooveVC has typically reported the total percentage of shares owned by our members who report each month. We will no longer solicit or distribute that information while Vertro remains the focus stock for two reasons 1) we have a very small percentage of our community members who were volunteering the information and 2) we have no control over the buying, selling or voting of the shares owned by community members and do not want to give the impression that we do. A community member (attorney) with relevant securities experience has sugested the nature of our online community is such that we may bear some risk that we could be deemed a “control group” and thus subject to the 13(d) filing requirements if our member’s holdings were to exceed 5% of Vertro’s outstanding shares. While we are confident that our sharing of information and ideas would not rise even close to that level as defined by the regs, out of an abundance of caution, we will discontinue the practice of soliciting this information from our members at this time. Our final note on shareholdings is simply that our members now hold more than they did last month, the reported holdings are still below 5% and and we are not aware of any sales activity since the last report.
The number of active GrooveVC community members continues to increase each month and we expect that the revenue generated by our searching/shopping should be increasing commensurably. While we have no means of measuring the actual revenue by or impact of our members, anecdotal evidence suggests that we should have an impact on Q4 of 2009 that is well into the six figure range. If our community continues to grow and our members continue to use Alot.com daily to search/shop online, it is conceivable that we could be adding revenues for Vertro at a seven figure clip in the very near future. Keep searching/shopping and spreading the word. We believe your patience will be rewarded soon.