Vertro Delivers Strong Q4 – Expects EBITDA Profits/Increased Cash Quarterly in 2010

March 26, 2010 at 4:09 pm Leave a comment

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?

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