Archive for March, 2010
Vertro’s business has turned the corner. Yesterday’s report on Q4 2009 came in line with our revenue expectations, but delivered slightly higher profits than we were expecting. Even more importantly, the management’s discussion of Vertro’s prospects going forward was quite bullish for Vertro shareholders on many fronts:
– the company expects to achieve EBITDA profitability in each quarter
– the company no longer expects cash to trough in Q2, the 12/31/09 cash balance of $4.8 million is trough
– the company delivered more corporate expense reductions, with monthly operating expenses (minus ad spend) falling below $900k
– management mentioned several items that will result in even lower opex in the latter half of 2010
– management expects to see Q1 flat with Q4 – historical trends/seasonality always have Q1 results falling well below Q4 results
– management expects high single digit sequential revenue growth in Q2 and beyond.
– international testing turned up several markets where ROI even stronger than core Region One market
– Q4 Retention rates for Region One exceeded the previous record set in Q3
The key takeaway from yesterday’s conference call was management’s bullishness on the current business trends. While they did not give specific guidance, for Q1, they did indicate that they expected revenue to be flat with Q4 and that the current run rate and toolbar/home page numbers suggest a trend that would allow high single digit to low double digit gains in Q2 over Q1. This suggests very strong momentum, given that prior year’s Q1 results usually fall substantially below Q4 results. Additionally, management indicated that we will see even further expense reductions as there still remain a few vestiges from the old Miva corporate cost structure that will go away in June/July.
All indications suggest that Vertro is now a business that will be able to sustainably operate with less than $900k per month in operating expenses + advertising spend. They have perfected a model for advertising spend that delivers a customer who generates a given range of revenue that trends suggest is improving each period as the company adds new value added features to their toolbar and homepage offerings. As of Q4 2009, this amount of revenue exceeds the amount required for operating expenses + advertising expenses required to grow the business at a sustainable high single digit quarterly sequential growth rate. Thus, the company’s base model of acquiring toolbar/homepage users is now profitable based on simple monetization as a Google search partner. The company has only just begun to explore the additional revenue opportunities available to them from affiliate revenue (ie. all those toolbar buttons to Expedia, Priceline, Quicken.com, LendingTree.com, can be tagged with Vertro affiliate ID’s and generate revenue to Vertro for each visitor or sale generated) and other corporate sponsors who see tremendous value in being able to market to consumers who have chosen specific buttons/widgets/links to appear on the top of their web browser or their home page. Vertro now offers over 200 micro segmented products and is a leader at engaging these audiences.
The numbers investors need to look at are these – for the next twelve months (starting April 1) Vertro can deliver sequential revenue growth in the high single digits to low double digits. If we conservatively go for the middle part of that range – a 10% sequential growth rate and know that it grows from a base of around $8 million (Q1 to be flat with Q4) then we would be looking at revenue for Q2 of 2010 of $8.8 million with the next 3 quarters at $9.68 million, $10.65 million and $10.65 million (Q1 flat w/ Q4 again) for a total of approximately $40 million over the 12 months starting next week. Of course this assumes little to no contribution from affiliate revenue, stronger retention rates or increases in zero cost toolbar/home page adoption from organic/viral sources, etc. Non-advertising operating expenses could reasonably be expected to average in the $800k per month range for a total of $9.6 million over these 12 months and we can likely expect to see advertising expenses run slightly higher than last year’s $21 million – lets say they are $22 million. You then get a top line of $40 million and total expense structure of $31.6 million for the 12 months April 1 2010 through March 31 2011, resulting in $8.4 million in EBITDA over the next 12 months.
In summary, Vertro is a company that expects to see their expenses decline over the next 6 months, while revenue increases from the already profitable base established in Q4 of 2009. Vertro’s current business trends suggest that the company will be solidly profitable in 2010, while they continue to build a base of toolbar/homepage users that use the products longer and more frequently than in the past and who are increasingly valuable beyond the Google search revenue that they consistently generate. Vertro’s cash/debt adjusted market cap as of yesterday’s close was in the $8.5 million range. How often do we get the opportunity to invest in a Nasdaq listed technology company with sustainable growth rates in excess of 30% per year that legitimately has the potential to deliver EBITDA over the next 12 months that exceeds its current market valuation?
As it appears we may finally have a resolution to the long running feud between China and Google over the next few days, we thought it would be a good time to take a look at what impact a Google pullout from China might have on Google’s Network Partners, It appears that most of the larger members of the Google Partner Network have little to no exposure in China. This is a good thing for Google, as they are already taking a great deal of heat from partners, affiliates and agencies based on China. However, both America Online (NYSE: AOL) and Vertro (NASD: VTRO) have some search business in China.
America Online is one of Google’s largest search partners and some portion of their international revenue is earned in China. While last year’s wave of restructurings pulled most of their employees from China, they still have a revenue generating chinese portal. Could this be an opportunity for the new MSFT/YHOO combination to serve ads for AOL? AOL’s contract with Google expires in December of this year, so any opportunity for the new YHOO/MSFT partnership to get their foot in the door could be significant.
Vertro does not break out its China revenue, but we know China was one of the first test markets for its non english speaking country international toolbar tests last year. While just over 25% of its active ALOT toolbars are broken out as “rest of world” (non “region one”), we also know that China is just one portion of that figure and Vertro’s ALOT toolbar has a significant number of active toolbars in India and Brazil as well. Additionally, Vertro management has indicated that the toolbars in this “rest of world” category monetize at about 1/10th of the revenue an average toolbar in region one (US, UK and Western Europe), so all “rest of world” revenue combined contributes less than 5% of Vertro’s revenue and we know that China represents only a portion of this figure. Additionally, Vertro already has a relationship with Yahoo Search Marketing to provide Pay Per Click ads for its news and image search functionalities, so it would not be that difficult to transition to showing YHOO (and very soon YHOO/MSFT) ads for China toolbars.
On Friday morning, theStreet.com published a story entitled “Stocks Facing Delisting Deadlines”, that featured several stocks including Vertro. The article included many inacuracies and generally gave the false impression that Vertro’s stock is likely to be delisted from the Nasdaq. As one might expect from such a poorly researched and written piece, it did investors a further disservice by giving poor advice – rating the stock a SELL at today’s price.
To set the record straight, Vertro’s trailing twelve months of reported revenue is approximately $45 million (vs. the $103.3 million quoted in the article). However, even the $45 million revenue figure is skewed higher because it includes Q4 of 2008 (since Vertro does not report Q4 of 2009 until next week). It is important to note that Q4 2008 still includes revenue from the Miva Media operations that were sold in Q1 of 2009, operations which added quite a bit to the revenue line, but also dragged the company down with an enormous expense structure. Vertro (back then a division of Miva called Miva Direct) had to scale back its own marketing spend to give Miva the financial flexibility it needed to complete the sale process for the Miva Media operations. The Miva Direct (Vertro) business had been very profitable for several years, but the model requires a heavy and consistent expenditure for advertising each month. The company had to reduce this ad spend towards the end of the third quarter of 2008 and continued this lower spending level until March 2009 when the Miva Media sale closed.
Of course, the lower ad spend resulted in fewer new toolbar users, which caused a commensurate reduction in the revenue earned over the next few months. The combination of this lower ad spend, lower revenue due to fewer toolbar/home page users, expense overhang from the winding down of the parts of the Miva Media business that were not sold and the generally higher expense structure that was in place for the larger Miva business caused the company’s 2009 financial results to fall well short of what those same operations were able to deliver in prior periods where they were not burdened by the issues surrounding the company throughout and following the sale of the Miva Media division.
In 2007, when Miva Direct was able to base its advertising spend on the single factor of what drives the greatest ROI, the company spent $31.1 million on advertising and earned $52 million in revenue. Given a normalized post Miva Media sale operating environment where all corporate expenses (around 900k per month) were included in the Miva Direct (now Vertro) P & L, the company would have delivered EBITDA in the $10 million range for that year. Even in 2008, where the advertising spend reductions began in Q3, the company would still have earned $5 million in EBITDA for the full year. Vertro’s full year results for 2009 will be reported next week and they will surely reflect a year in transition – essentially the company spent 2009 rebuilding its user base while right sizing every aspect of its business from number of employees (began 2009 with 129 employees, now 48), leased office space, director compensation to audit expenses – nearly every significant part of the expense structure has been right sized and the company (and sharholders) will be able to benefit from this in a material way in fiscal year 2010.Further, we expect the company to report an increased cash balance (adding to the $6 million in cash on the books) for Q4 over Q3,a trend we expect to see continue through 2010 which will give Vertro management the flexibility to again focus their advertising expenditures on returning the greatest ROI.
In conclusion, we feel that theStreet.com completely missed the forest for the trees with their sell rating on Vertro. We challenge the writers of this piece to revisit their SELL rating after completing a little due diligence. We submit to our readers that any entry price in the 36 cent range (the price that theStreet.com encouraged its readers to sell Vertro) will bring them strong double digit and possibly triple digit returns before the end of 2010.
Vertro CEO Peter Corrao’s presentation last week at the AGC conference revealed a number of items that seem to have been overlooked by investors. Because Vertro’s stock still trades in penny stock land and has no significant exposure to retail analysts, the company’s stock remains well off the beaten path and well below most investor’s radar screens. As such, items of significance like the nuggets dropped during the AGC conference call are often overlooked. We want to highlight these items for the GrooveVC investing community because they reinforce our belief that Vertro the company is doing much better than Vertro the stock and we believe that corporate events occuring over the next 90 days will do much to bring the Vertro story to the attention of investors. The key takeaways were:
1) First mention of impact of “organic/viral” marketing.
2) Range of sequential revenue growth from Q3 to Q4 raised to “high single digits to low double digits” vs. previously just “high single digits”.
3) Multiple clues that allow us to infer that Q1 revenue tracking well vs. rumors of a revenue shortfall including:
– Breakdown of 12/31/2009 toolbars by region.
– VTRO management’s expectation that VTRO will achieve EBITDA profitability in EACH QUARTER of 2010 vs. EBITDA profitability for the full year 2010.
– VTRO management’s expectation that VTRO will achieve high single digit to low double digit sequential growth in search queries from Q4 to Q1 2010.
We already noted on the monthly update that Mr. Corrao’s presentation included the first official mention of the growing impact of “organic/viral” toolbar/home page users and their characteristic stickiness and tendency to use Alot search more than a user from their paid marketing channels. Very interesting – a group of users who sign up for the Alot toolbar and/or home page that requires no marketing spend by Vertro, they continue as active users longer than the user acquired through VTRO’s traditional marketing channels and they use the Alot search functionality more often than that typical user acquired through normal marketing channels. Does this sound familiar to anyone out there in the GrooveVC community?
The second important point Mr. Corrao mentioned was that they expect sequential growth from Q3 to Q4 to be in the “high single digits to low double digits.” This extends the range of “high single digits” previously given and leads us to believe that we should see (at a minimum) 8% or better revenue growth from Q3 to Q4.
The third key takeaway from the conference was a series of comments/disclosures that lead us to believe that Q1 revenue is tracking well vs. historical trends and in direct contradiction of rumors of a Q1 revenue shortfall that seems to have contributed to a recent decline in Vertro’s stock price. The first of these was the disclosure of the breakdown of the toolbar numbers by region. We know that historically, “Region One” toolbar/home page users have generated 10x the revenue that we should expect from a toolbar/home page user in the non Region one or “rest of world” category.The presentation slide showing the year end toolbar numbers revealed that 3.3 million of the 4 million “active” toolbars were Region One users.. Given that we started Q4 2009 with 3.3 million Region one users and we know that the seasonal factors previously discussed causes the year end user figures to be skewed downward, it gives us further reason to believe that VTRO’s Q1 has the potential to deliver revenue in line with or better than Q4. This is particularly true when the slide also indicates that the Region One toolbar figures were already up over 20% (to 4 million) by Feb. 7, 2010.
Mr. Corrao mentioned that they are now expecting high single digit to low double digit growth in search queries for Q1 over Q4. This is a key detail because historical trends suggest a fairly consistent correlation between search queries and revenue generated by those queries and also because The Alot business has historically shown a slight decrease in revenue sequentially from Q4 to Q1. While we believe that Mr. Corrao likely wanted to avoid setting a precedent of making revenue projections this far ahead of the quarter’s end, we also believe that his mention of a likely range of sequential growth in search queries was intended to let us know that 1) revenue has not fallen off a cliff since Q4 and is most likely tracking for sequential gains and 2) this information should be considered in the context of the prior years’ trends (2008 & 2009) where Q1 revenue falls below the revenue earned during the seasonally strong Q4 period that is positively impacted by the heavy shopping / searching of consumers that usually occurs during the lead up to Christmas. The combination of the big consumer push in the weeks leading up to Christmas, followed by the veritable drought in new toolbar acquisitions that occurs during the weeks just before and after the holiday season usually results in Q1 results falling behind those of the previous quarter. If VTRO has figured out how to deliver sequential revenue growth in Q1 2010 over Q4 2009, this would suggest to us a stronger underlying growth trend altogether and give us more reason to believe that VTRO can deliver high single digit to low double digit sequential growth consistently going forward.
In summary, Mr. Corrao’s presentation at the AGC conference was quite bullish for Vertro shareholders. While this seems to have had little to no impact on Vertro’s trading price, we believe recognition that Vertro’s model allows for sustainable revenue growth with expanding margins will be coming in the near future and we expect that potential to be reflected in the stock price over the next few months.
As of February 28, 2009, GrooveVC Community participants have now increased to a level (1524) that our research suggests could be adding over $13,000 per day to Vertro’s bottom line during the month of March 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 1,524 Groove participants would be adding more than $1,000,000 to VTRO’s revenue during the first quarter of 2010.
Each month we report the number of active community participants so that we can see the potential impact of our viral marketing campaign, which allows each person that our members introduce to this concept to get a feel for how important each new searcher/shopper can be in the big picture. While we have no way to track actual searching or toolbar/homepage usage by our participants, we do believe that the metrics from our original control groups are quite reasonable and may even understate the impact that our users can/will have on Vertro’s results going forward. We believe that the active community members have grown to a point where we are now having a material impact on Vertro’s numbers each month. This may be best evidenced by Vertro CEO Peter Corrao’s recent comments at the AGC West Coast Conference earlier this week, where he mentioned the impact of “organic/viral” marketing at an investor conference for the first time. He made a point during the conference to point out that organic/viral marketing was a growing part of the company’s growth when he said that”we are doing more and more ” viral/organic marketing and emphasized the value of this channel because “..they tend to be stickier and stay with the product longer…. and they do not cost us anything.”
Congratulations to all GrooveVC community participants. Your consistent use of the Alot.com toolbar and home page for searching/shopping has reached the point where its signficant enough to be mentioned to potential investors as an important channel and driver of Vertro growth going forward. Given the growth we have experienced the last few months, we should expect to see our efforts having an even greater impact on Vertro’s results in the first quarter of 2010 than we did in Q4. As the results of Q4 are reported sometime over the next few weeks and investors get to digest Vertro’s first profitable (EBITDA) quarter, we should start to see an increasing recognition of Vertro’s potential from investors, which should give us an even bigger opportunity to increase our ranks among investors who will be able to see our actual impact on Vertro’s financials. Let us be diligent in spreading the word to other friends and business associates over the last few weeks of this quarter and enjoy the ride in April and May as more and more investors discover Vertro. Keep searching/shopping with Alot.com and spreading the word!