ATRN Q4 Conference Call Update
We have received quite a bit of correspondence from Groove members since the release of ATRN’s Q4 numbers and this has grown substantially following the conference call. I think it would be fair to say that the majority of ATRN shareholders represented here were very disappointed that we did not get more transparency with regard to non financial metrics through the end of Q1. The combination of the late filing, lack of notice prior to the late filing and the unwillingness of management to discuss Q1 metrics has lead many to trim their holdings, with many removing all but the number of shares that represent the dollar value of their gains. We continue to believe that ATRN shares do not come close to reflecting the potential value of Kazaa, but understand that the happenings of the past couple of weeks have caused many to give increasing weight to the execution risk side of the risk/reward measure.
A quick review of the things we learned from the Q4 release/conference call about each division –
Atrinsic Interactive – Management did not indicate that this business was growing again, instead suggesting that revenues for Q1 would be more likely to be in line to marginally higher, specifically objecting to use of the word “trough” to describe the Q4 results. This changes our valuation of that division as we would have expected it to command a market valuation similar to others that have sold over the last couple of years, but the nature of the situation with ATRN’s financial position and the declining revenue base with AI leads us to believe it may be worth $5 million or less vs. the $10m+ potential we previously believed based on an expected turnaround in that division suggested in an early Q4 conference with AI management. Comparable deal valuations still point much higher than that, but the totality of the circumstances here begs for the lower valuation until we hear from management that this segment is growing again.
Kazaa/Subscription – The growth in Kazaa subs was substantial and very important to put into context, as this growth was achieved in the middle of a major restructuring effort that management concedes has required them to be “very tight” with working capital. It also occurred prior to the roll out of mobile access and many of the other value adding features the company introduced towards the end of Q1. Even more important, they did this while not making a substantial increase in their marketing spend, as COO Mr. Musci described the increase as driven almost equally by lower attrition rates, increased organic (word of mouth/GrooveVC style marketing) sign ups and lower SAC in addition to a small increase in marketing spend. Further, ATRN management did indicate that subscription revenue “picked up significantly” in the last month of the quarter. Unfortunately, any potential for a positive marketplace reaction to this aspect of the Q4 numbers was likely muted by management’s unwillingness to update the subscriber counts through the end of Q1.
In summary, we may have to make a downward adjustment of our valuation for ATRN’s non Kazaa assets, but we still believe Kazaa alone is worth substantially more than the current ATRN market cap. ATRN management’s discussion of the Q4 results leads us to believe that they may not deliver blow out numbers for Q1, but all indications suggest that March was a very strong month for Kazaa and we should start to see this momentum manifested in the Q2 numbers.
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