Atrinsic Q3 Update

November 18, 2010 at 11:51 am Leave a comment

Atrinsic reported Q3 earnings this week with few surprises.  The company was able to reduce the cash burn in Q3 and presented a restructuring plan that will be undertaken when the merger with Kazaa is complete.  When we first introduced Atrinsic as a focus stock for the GrooveVC community, we indicated that we expected the company to burn cash for a few more quarters before they would be able to turn the corner to profitability.  We continue to believe that will be the case, but feel the company’s loss of $3.6 million in Q3 represents the majority of that cash burn. The cost reduction measures already in place should significantly reduce the cash burn for Q4 2010 and make the loss in Q1 2011 nominal.  ATRN management’s announced restructuring initiative should reduce their fixed operating costs 30 – 50% from Q3 levels and we believe most of these measures will be in place by the end of Q4. Atrinsic has recieved $2.7 million of the $3.5M IRS receivable that was on the balance sheet at the end of Sept. 30 putting the company’s current cash position north of $6 million.

ATRN management believes the company will be able to achieve a 30 – 50% reduction in fixed operating costs (reduction of $2-$3 million from Q3 levels) with a post Kazaa closing restructuring plan that involves consolidating offices currently located in Los Angeles, Canada and Australia into the company’s home office in New York City and reducing headcount to around 60 from 144 at the start of 2010.  We were pleased to see the company’s aggressive cost reduction efforts and believe that the actions taken in Q4 will allow management to refocus its efforts on profitably growing the business. We were particularly pleased with management’s stated focus of getting a mobile offering in place for Kazaa by the end of the fourth quarter and a goal of offering Apps for the four major mobile smart phone platforms (RIMM, Apple, Android and Windows) in q1 2011, along with more competitive pricing and access plans. We believe this is key, as many of the players in this space have offered significantly lower price points than Kazaa for much of 2010 and some of them already include mobile options.

We continue to believe that online and mobile streaming music will be one of the big technology stories of 2011 as Google, Apple, MSFT, HP and others bring the streaming music concept and value proposition to the mainstream, doing much of the heavy lifting as far as marketing the concept. An NPD survey released this week indicated that downloaded music now accounts for 30 percent of music listening, while streaming music jumped to 29 percent from only 25 percent a few months earlier, indicating that more and more consumers are turning to streaming music services and recognize the value proposition vs. downloading. We believe that Kazaa is ideally situated to benefit substantially from this trend.  We believe that the Kazaa brand name, combined with more aggressive promotion, pricing and alternative billing options give Kazaa the potential to be one of the first profitable players in this space. Additionally, the company appears to be two weeks away from approving a reverse stock split that will allow the company to regain compliance with the Nasdaq minimum bid rule, two weeks beyond that from closing the Kazaa deal and likely just a few days beyond that of offering the Kazaa service through most mobile platforms. We note that the company’s current market cap as of yesterday’s close of $9.63 million reduced by the cash in the bank at quarter end leaves a value for the assets (Kazaa,, GatorArcade, Atrinsic Interactive) of just over $2 million. Whether Kaaza is one of the first to acheive profitability or not,  we believe that there will be many investors who will want a piece of the purest publicly traded play in streaming music and that investors who buy at today’s prices are essentially getting the Kazaa music business for free.


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