Vertro Results Much Stronger Than Anticipated

November 5, 2010 at 3:24 pm Leave a comment

After the close yesterday, Vertro reported earnings, revenues and cash that were significantly higher than even the high end of our expected range.  This was easily the strongest quarter reported since GrooveVC named Vertro as our focus stock.  Revenue of $9.8 million was significantly higher than the top end of our expected range of $9.2 – $9.4m and we believe this resulted from several very positive trends that we have discussed in this forum before –

1) ALOT users (on average) are keeping their toolbars longer and interacting with their ALOT toolbar/HomePages (search and other revenue generating transactions) more often

2) Management continues to find new ways to monetize the existing user base, including many new CPA deals and the introduction of CPM based display ads

3) An ever increasing base of virally (zero cost to VTRO) acquired toolbar and Home Page users who use ALOT for all of their searching and online shopping. We believe that several thousand consumer/investors (who are more likely to remember to always use ALOT for searching because they own part of it) will play a continuing role in quarterly reports that seem to have a disconnect with the historical relationship between a quarter’s ad spend and its reported revenue.

Management continues to impress with their ability to grow the company while strictly managing non advertising operating expenses, achieving 15% revenue growth with a quarterly total opex of only $2.2m.  While management’s response to the question about the sustainability of that level suggested that there was a one time benefit related to reduced lease obligations, we remain confident that Vertro will continue to be able to perform at a sub $1 million per month level.  Cash from operations improved to $1.5 million and we were able to add $1.2 million to our cash balance to a total of $7.1 million at September 30. Management had indicated on the Q2 call that they intended to spend heavily on advertising in Q3 to build up their user base in advance of the Q4 holiday season, which is typically the strongest part of the year for web traffic and transactions. While they did increase ad spend to $6.7m, their extremely disciplined management of other operating expenses combined with the breakout in revenue allowed Vertro to book a GAAP profit of 5 cents per share for the quarter.  Our own expectations were for the company to be breakeven or at best to earn something ($50k top end of our estimate) that could be rounded up to 1 cent per share. GAAP earnings of 5 cents per share was not among the potential outcomes that we could forsee and we applaud management for delivering in such grand fashion.

Vertro as currently constituted has existed for a little over a year and during most of that time they have operated well below the radar of Wall Street and most main street investors. That changed this week.  Between the influx of new “investor/consumers” following the Vertro article published by Seeking Alpha on Monday and the eye popping results posted Thursday after the market closed, the days of Vertro operating in obscurity are likely gone. If the number of unsolicited requests for information from hedge funds and accredited investors we have received this week are any indication of the interest the company itself has received, Vertro will soon be well known among small cap investors and fund managers.  Additionally, the spike in traffic that the GrooveVC sites enjoyed on Monday actually increased on Wednesday with the highest day being Thursday, suggesting to us that GrooveVC community members are redoubling their efforts to get the word out.  We believe that the timing could not be better for such a revival, as the volatility in the stock might even allow some new members to buy stock below today’s closing price of $5, which is just 5x our estimates for 2011. We believe that investors at these prices will be able to  double their money over the next 6 – 12 months, as institutions, mutual funds and more retail investors vie for some of the 2.9m shares in the public float.

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Vertro Q3 Earnings Preview Time to Double Down on Vertro & Shop ALOT on Cyber Monday

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