ATRN Q4 Update – The Good, the Bad & the Ugly
A quick update on ATRN’s Q4 numbers as reported Thursday night
1) The Good – Kazaa subscriber counts increased dramatically during a time when the company’s stated intention was to slow marketing expenditures to focus on a large restructuring effort. We had expected to see subscriber numbers flat to slightly higher given management’s focus on the consolidation of the far flung Kazaa operations and continued build out of the Kazaa service. The near 20% Q over Q growth in Kazaa subscribers was much larger than we had hoped for and suggests to us that Kazaa is thriving despite difficulties within other segments of Atrinsic. Of course, we have a pretty good idea where several thousand of those new subscribers came from, as our late September intro of ATRN as a focus stock means that most Groove subscribers are probably included in the Q4 count, though I would be surprised if our subs equaled even half of that gain. The good news for ATRN management and shareholders is that those subscribers should not attrit any time soon and they will start to impact the overall company LTV metric in a positive way now that we have been here for six months now. Kazaa is the reason we are holders of the stock and we hope to see if Kazaa’s subscriber acquisition momentum has carried over in Q1 ’11.
2) The Bad – the Atrinsic Interactive segment’s revenue decline was a disappointment. Our takeaway from multiple conference calls over the last four months was that this segment had turned a corner during Q4 and that we would see revenue start to level off. Even if this turn is just pushed forward a month or so, we still find the size of the revenue decline in Q4 to be a negative surprise. Absent a significant rebound in Q1, we would need to adjust our potential sale valuation unless Thursday’s conference call makes it clear that this business is growing again vs. contracting further.
Also, while the cash balance at year end was higher than we expected, working capital was slightly lower than we expected and we were disappointed that the cash burn rate was not reduced more significantly.
3) The Ugly – waiting until the 11th hour (literally) on the SEC filing deadline day to file, with no previous indication that the results could be delayed and scheduling the conference call to discuss the results a full week later. The market hates uncertainty and this approach breeds uncertainty, particularly when aspects of the numbers that are reported are less than stellar. This is ugly and at this point appears to fully validate the issues we addressed with #’s 2 and 3 on our “BOD Wish List” last month. The saving grace would be if the reason for the delay in the conference call were to incorporate a positive development that could not be finalized by April 1. In the absence of such positive company developments discussed on Thursday and/or some other compelling reason for the delayed filings and conference call, the net result could be a significant loss of management credibility with shareholders to a degree that only extreme fundamental changes in management’s investor relations approach or changes in management personnel could address.
One positive recent development has been the continued and growing interest in ATRN by short sellers. The impact of the message board shenanigans that might cause some traders and less experienced investors to sell their shares is a small price to pay to have the increased liquidity and frenzied buying on each positive development that accompanies their presence, not to mention the comfort to longs of knowing that there is such a large number of shares that will be purchased (covered) in the future. We hope that the sell off related to the negative financial aspects of last week’s release allows them to regain some confidence in their endeavor.
At the end of the day, the upside in ATRN is, was and will be all about Kazaa. The Q4 numbers posted last week were not nearly as disappointing to us as the manner in which they were presented. though we are withholding our judgment on the management team at ATRN until Thursday’s conference call. On Thursday we expect to learn why management chose the unorthodox approach of reporting at the last minute and scheduling a conference call a full week later in addition to the story behind the numbers and an update on Q1. Additionally,we have been expecting ATRN to raise additional capital to enable a bigger marketing push for the Kazaa service, be it through the sale of non strategic assets, an IPO of some portion of the Kazaa business or some other method and we hope to learn more about the direction management is leaning in that regard.
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