WRONG – GrooveVC Challenges theStreet.com Analysts on Vertro
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.
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