Archive for April, 2010
Per Vertro’s recent press release detailing non-financial metrics for ALOT – Sequential Growth in Total Search Queries was 6.5% and the core “Region One” that monetizes at a much higher rate than the “rest of world” category showed an increase of approximately 8.5% in search queries over Q4. This growth was stronger than we anticipated and suggests improving retention rates. Q1 has traditionally fallen below Q4 levels due to the seasonal factors discussed here in the last update. We were hoping to show year over year improvement to the tune of a Q1 that was flat with Q4. Past results suggest a very strong correlation between the number of search queries and revenue generated, so we now expect that we will see some small sequential growth in revenue for Q1 over Q4.
The growth in the number of ALOT Homepage users remained strong with strong double digit sequential increases, the most important of which was a 14%+ increase in region one HomePage users. As we have previously discussed in this forum, ALOT HomePage users on average search more, consume more ads and use the service longer than the average toolbar user.
The 8-k related to the Miva legacy leases in Fort Myers were good news – the majority of the empty office space that remains part of the Vertro expense structure has now been leased removing that obligation from Vertro’s expense structure going forward. This expense savings is in addition to the more substantial improvements that will carve over $1 million out of Vertro’s expense structure starting in June.
The very strong metrics reported for Q1 and the quarter end toolbar and homepage numbers suggest that the growth of Vertro’s business could be accelerating. We last posted that investors could buy into the Vertro story at 1x forward EBITDA based on expected results for Q2 2010 through Q1 2011. It appears that we could now back that up a quarter and that Vertro may be able to achieve that level of EBITDA for twelve months of calendar year 2010. Of course, the stock price has increased about 30% since that report was posted. We still feel that the Vertro story is largely unknown among retail investors and expect that to change over the course of the next couple of quarters. As this occurs, and we see Vertro’s stock price gravitate toward a more traditional high growth stock multiple, investors at current levels should enjoy strong price appreciation from current levels.
We will be making some changes at the Groove starting this month. We will no longer report the number of active community members and use our due diligence experiment to extrapolate the potential revenue impact on Vertro’s numbers. Given that we have no meaningful way of tracking actual searches, clicks. revenue or the level of engagement of our community members, the fact that management itself is now highlighting the value/increasing role of viral marketing to investors (see AGC conference presentation) and the fact that we have exceeded our own targets for growing the community to a level that could make a meaningful impact on our focus companies, we feel that its time to focus our reports on company/industry specific insights. So that community members understand the context in which we are making this change, we should note that our measure of active community participants was substantially higher on March 31 than the 1562 active community members we had as of February 28th.
We are extremely pleased with Vertro management’s progress in executing their game plan. Though investors at our original entry price are enjoying gains of over 100%, we feel that it would be a mistake to take profits anywhere close to the current trading price of 48 cents, as this price does not reflect the growth of Vertro’s business or the increasing attention it will likely receive as a profitable and growing Nasdaq technology company. We continue to believe that Vertro investors will enjoy exponential gains this year.
GrooveVC community members should continue to use their Alot toolbar and Homepage for all searching/shopping and remember the significance of all your search activity going forward. April is the start of Vertro’s second quarter (Q2) and we believe that this is when we should see the company progress from what is essentially breakeven results to material profitability. Q1 is over and we should see the company report results that are breakeven or a small profit with a higher cash position than they ended Q4. As we begin Q2, we know that each time we use Alot, we are adding cash to the bottom line – cash that adds to the reported earnings, cash that can be used to buy back stock, cash that can be used to acquire new toolbar / home page users and accelerate the growth of this company and its stock price. This is where it starts to get really fun, as you can literally see at the end of each quarter how your own searching and shopping extended the profitability of Vertro. Even better, we should begin to see these gains in profitability cause this company to get more recognition from the investment community, which should in turn lead to substantial gains in valuation (stock price).
As we noted at the outset of the Groove, we intend to introduce other investment opportunities to our community. We want to be very clear that we do not recommend selling any Vertro stock at today’s levels to invest in these other opportunities. Vertro remains our focus one stock and its current valuation relative to its prospects for growth is still the best small cap opportunity we see. However, we indicated in our original report that we would begin introducing other opportunities after Vertro reported its Q4 2009 results. So keep searching and shopping using the ALOT toolbar, homepage and desktop service, keep telling your friends and business associates to do the same and enjoy the ride with Vertro. If you come across a small cap opportunity tech stock that could be positively impacted by the consumption and investment of an investment/consumption affinity group like the Groove – drop us a line. We intend to add a second stock to our focus list during Q2 of this year.