ATRN / Kazaa Update – Float, Short Interest, Kazaa IPO and BOD Wish List
A quick update on our pieces from earlier this month where we took the proxy + Yahoo Finance generated “public float” number from an article and combined it with known sub 5% holdings to construct a “Truly Available Public Float” figure in the 750k range. While we have not received updates from all community holders, the two largest have updated us and indicated that they now own slightly more than they did when we first calculated this number. As such we can still confidently submit that the “Truly Available Public Float” is well below 1 million shares and conservatively in the 800k – 900k share range.
Also of key interest should be the Nasdaq short interest report from the end of last week. We reported on March 10th that we could see a substantial short interest developing in the shares. The official Nasdaq report of the short interest as of March 15 indicated 329,000 shares sold short. We know that the stock sold off significantly on March 14th and 15th, so its likely that many short sellers were able to cover some portion of their position prior to the report and the action since that time suggests a substantially higher short position, likely approaching 500k. This is huge when you consider the truly available public float of 800k – 900k. There aren’t very many shares to go around and we look for the stock to move dramatically higher on any good news published by the company or even just industry related news that reflects positively on the company. As we get closer to the Pandora IPO and get more positive news on Spotify and other players in the space, we believe that investors will increasingly look for avenues to get exposure to the on demand streaming music space. Save for a Second Market excursion, ATRN/Kazaa’s 800k-900k publicly available shares remain the only pure play option.
The IPO of 20 – 40% of Kazaa, while ATRN holds the remaining shares would generate more than enough capital to market the new Kazaa service as aggressively as it should be and it would create an acquisition currency valued more in line with the stratospheric valuations accorded its industry peers. The 60 – 80% Kazaa stake retained by ATRN would ensure that its share price would reflect its stake in Kazaa, giving the Atrinsic Interactive business its own highly valued currency with which to make acquisitions and scale that business. We recognize that the Board may or may not choose to go the IPO route, but believe the recent valuation ranges for MOG, Rdio and Spotify will cause them to give serious consideration to the possibility of a Kazaa IPO.
The article makes a number of points we have espoused here and brings some new meat to the arguments, also crystallizing the primary thought behind item #1 on our ATRN Board of Director’s “wish list”. As our community becomes increasingly recognized as a hub for the sharing of information and collaborative thought development among shareholders large and small, our aggregate product consumption and stock buying power swells, giving us a much stronger platform from which to be heard. As such, we have taken a number of suggestions from the many shareholders who communicate regularly through this forum and compiled a “wish list” of items we would like to see prioritized by the ATRN Board of Directors:
1) Kazaa Value Realization – the IPO thesis in the article was well presented and makes a logical argument for a direct approach to dealing with this issue – Kazaa’s operations and the metrics it has achieved even while in the holding pattern of restructuring and product build out are among the best in the space and Kazaa is simply not being valued appropriately in the marketplace. Competitors MOG and Rdio’s recent funding valuations are more than double that of Kazaa and each’s key metrics (subscribers, revenue, ARPU, etc) run significantly less than half of Kazaa’s. A new report out last night on Spotify suggests a much smaller 2010 revenue figure for Spotify than what has previously been reported – totaling only US $78 million. While this would still be about 4x Kazaa’s estimated revenue for the same period, the recent $2 billion funding valuation puts Spotify’s valuation somewhere between 100x and 200x Kazaa’s current marketplace valuation. The bottom line is that management must seize the opportunity that investor’s current appetite for streaming music investments presents. This must be a focus of management from this point forward or the company (and shareholders) will miss a tremendous opportunity.
2) Shareholder Communication – this applies to existing shareholders as well as potential shareholders – management must take steps to open up the lines of communication. We believe the lack of focus on public relations has contributed to the issue presented in #1 above and management must improve in this regard. A good place to start would be updating the company website. Second would be to consistently inform existing shareholders of new developments and adherence to a consistent reporting schedule with open conference calls. We appreciate that management has had their collective nose to the grindstone building out a world class on demand streaming music service while they consolidated Kazaa’s far flung operations over the last six months. Now it is time to tell the world about it and take steps to keep shareholders aware and involved in the process.
3) New Leadership – If Kazaa is spun out in an IPO, we should seek someone with significant music industry and/or subscription business model experience to serve as Kazaa’s new CEO. If we get this right, it could quickly take care of issue #1 above. We need a rock star (figuratively, though we do appreciate Fifty Cents’ ability to drive shareholder value through his tweets) and the opportunity that the rebirth of Kazaa presents should allow us to get one. If the board chooses not to spin Kazaa in an IPO, the choice will carry even more weight. Now that the restructuring and service build out are complete, the time to make this happen is now.
Over the next couple of weeks, we expect to gain much more insight into how things are progressing with Kazaa and Atrinsic Interactive, as the company releases its Q4 results and (hopefully) updates shareholders on some YTD figures. Of course, we expect little in the way of fireworks from the Q4 report. Management has already indicated that they did not intend to aggressively market the Kazaa service during the restructuring of Q4 and we also know that the majority of the new service offerings did not go live until the middle of Q1. As such, we expect to see essentially flat subscriber figures and what will likely be a small decline in revenues and cash balances/working capital, but a significant reduction in the cash burn rate. More important will be management’s discussion of the outlook for 2011, where we hope to see material improvements in subscriber numbers.
To summarize – ATRN’s float remains well below 1 million shares and most likely in the 800k – 900k range, the short interest has likely swelled from the 329k of March 15 to the 500k range and ATRN’s BOD should spin off Kazaa in an IPO or communicate a different plan for the realization of the value of the Kazaa business. Groove community members should hold tight to those ATRN shares and consider purchasing more as the shares remain cheap and we expect that they will get increasingly more expensive in the weeks and months ahead as more positive company and industry news brings more investor attention to the ATRN / Kazaa story. Additionally, the increasingly significant short interest to true public float ratio could make the shares move substantially higher very quickly without the necessity of a material catalyst.
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