Archive for December, 2010
A quick update on Vertro – as the stock has fallen back down to a near term support level in the five range and we have received multiple notes about a blog piece suggesting that investors should sell Vertro short and that the stock should fall below $3 in the near future. The piece based this negative outlook on several premises most of which reflected a lack of understanding of many of the fundamental aspects of Vertro’s ALOT business. It appears to be designed to scare investors into believing several erroneous conclusions that the author has reached, particularly that Vertro might lose its contract with Google, that Vertro’s profit margins will fall due to a drop in revenue per toolbar user and that Vertro’s business will be eroded due to competition with Conduit. Of course, we already know that the Google deal was extended for two more years about 24 hours after the piece was published and I think that most are aware that Vertro’s revenue per toolbar user has been falling since the company started marketing their toolbars in “non region one” markets. The scare tactic here is the suggestion that Vertro’s profitability will be impacted by the falling revenue per toolbar user. Apparently, the author has failed to read the press releases from Vertro this year, nearly all of which mention their international growth, how that growth will affect revenue per user and caution investors that toolbar users in these “non region one” markets generate substantially lower revenue per user. The most important thing to understand about this international expansion has been discussed repeatedly in the quarterly conference calls – that the company only pursues these users when margins are as good or better than their “region one” margins, so while the revenue per user should continue to fall as the mix moves towards a majority of the users being outside of “region one”, profitability should actually increase. The other items mentioned including Nasdaq compliance issues, competition with Conduit.com and the author’s interaction with the company operator suggest a lack of understanding that goes well beyond Vertro’s business model to just fundamental business and finance concepts that should cause any serious investor to take pause in according much if any credence to the author’s opinion of Vertro’s prospects.
There are a few interesting things coming up over the next few days that could have a positive impact on Vertro’s stock price. First of all, Thursday afternoon after the market closes we will get an idea of what the reported short interest was on November 30, the first report that will reflect the reported short interest since the stock has become so heavily traded each day. While we know it will come nowhere close to reflecting the true short interest (because naked short interest is not reported and we believe naked short interest in Vertro is substantial), we do expect it to reflect a much higher short interest than we have previously seen with Vertro.
The second interesting thing that occurs on Thursday after the market closes is that Vertro management will be making a presentation at the LD Micro conference in LA. This will be the first conference in Vertro’s history where they will be able to present with a stock price in excess of $5. This is a big deal because many institutions are restricted from establishing a position in a stock trading below $5. So for the first time, Vertro management gets to tell the Vertro growth story with a stock that is over $5 and trading an average of 150k shares per day, which is much more liquid than at any time in the company’s history. Additionally, along with the generally bullish growth story that is reflected in Vertro’s reported 2010 YTD numbers, they can also mention that as of November 30 they have achieved more than 110% growth in live toolbar users since the beginning of the year, over 100% growth in unique home page users since the beginning of the year and eye popping international growth that suggests that Vertro might make more money in untapped international markets than they do in their current market mix. All in all its a pretty compelling story that should resonate with investors looking for consistent growth in a difficult economy. We believe there will be increasingly more investors seeking to establish an ownership stake in Vertro, which makes it a great time to own a few shares as others scramble to buy up the ever shrinking public (non insider or institutionally held) float.
A couple of other things that might draw some attention to Vertro over the next few days – the opening of PC App stores by Google and Apple. Vertro’s announcement of an App marketplace for PCs last month did not receive much press, as it was among the first of its kind. With tech titan Google opening its own app store for PCs yesterday and rumors swirling that Apple will launch its own Mac App Store on Monday December 13 (while others suggest its still 30 days out), the market for PC apps generally will go mainstream this week and this can only bring more positive attention to the Vertro story.
Vertro management released ALOT’s Cyber Monday results yesterday with the total revenue coming in at an estimated $118,000. Congratulations to all GrooveVC members who have continued to use ALOT.com’s toolbar/appbar and home page for all of their searching and shopping, as we were able to help Vertro beat last year’s record revenue day by 11.4%. Perhaps even more impressive than the Cyber Monday revenue figure was the revenue of $114,000 that Vertro achieved on November 22, a day of no special consequence in terms of expected web traffic or retail sales increases. This represents a 7.5% improvement over the $106,000 record set on Cyber Monday last year, which suggests to us that the holiday rush started earlier this year or that their regular daily averages are running much higher this year, either of which should be a good sign for shareholders. Conspicuously absent from this press release was any indication of Cyber Monday being a record revenue day for Vertro. If we were to extrapolate that regular Monday figure of $114,000 across the 92 day quarter, it would equal revenue in Q4 of approximately $10.5 million. We are not quite ready to make this leap, given that Vertro has traditionally experienced a slow down starting a few days before Christmas and running until after the New Year, even though it appears that Vertro’s international expansion will mute that effect somewhat. However, the strength of that “average Monday” does help us to remain comfortable with our $10.3 million earnings estimate for Q4 and continue to be optimistic about Vertro’s Q4.
The recent volatility in Vertro’s share price leads us to believe that there are now a number of short term traders “playing” Vertro’s stock. This is not necessarily a bad thing, as it simply means that there are more potential shareholders/toolbar users involved in the story and it also means there are likely more short sellers involved. New shareholders/toolbar users represent new revenue for the company that did not have an acquisition cost, in addition to representing a toolbar user who is likely to produce more than the $1.50 – $1.60 in revenue average contributed by the toolbar user acquired through the company’s marketing machine. New short sellers represent future buyers of stock, as all will eventually have to buy to cover their short position. The increase in share volume traded each day makes the stock more appealing to instituational investors, whom we expect to play an increasing role in the Vertro story in 2011. Altogether, we believe that the introduction of short term traders to the Vertro story is a net positive for long term shareholders who can stand the day to day volatility.
A couple of thoughts regarding the Cyber Monday report. There have been numerous articles over the past few days about the major jump in online sales for retailers, with some reporting gains of as much as 20%. Let us not forget that Vertro is primarily in the search business, with over 90% of its trailing twelve month revenue coming from search. While the company has recently done a great job of increasing its non-search revenue (rose to nearly 15% of total revenue in Q3), very little of this is actually the kind of ecommerce revenue that you see measured and reported on Cyber Monday. The majority of the non search revenue is driven by display ads along with a few CPC deals, so the amount of retail/ecommerce type revenue for Vertro is essentially negligible. That is not to say that Cyber Monday should not be one of the better days of the year for Vertro, it should because there is an increased usage of the internet generally which should be applicable to Vertro’s 10 million strong toolbar base as well. However, we should not look to the gains of the online retailers for comparables to measure Vertro’s progress. It would be interesting and a much better comp to see if Google, Yahoo or Bing grew their search revenue more than 11.5% on Cyber Monday vs. the prior year.
Keep searching/shopping with your ALOT appbar/toolbars and keep spreading the word. The volatility in Vertro’s stock is making it possible for newcomers to buy their shares at prices that should allow for hefty gains over the next 6 – 12 months, so keep up the good work.