Inuvo – Vertro Merger Update
Yesterday’s conference call provided many more details related to the Vertro-Inuvo merger. New Executive Chairman Richard Howe, CEO Peter Corrao and CFO Wally Ruiz participated on the call. We were quite pleased with the presentation and were left with the impression that this merger has the potential to create substantial value for shareholders of both companies. The combination of the two companies will create significant scale with operations reaching 132 million unique internet users per month, generating 240 million search queries per month, 2.5 billion page views annually and producing 20 million revenue generating clicks per month. The merger also reduces the company’s reliance on a single revenue provider – in the past both Inuvo and Vertro looked to Yahoo and Google respectively for upwards of 90% of their revenue. Following the merger’s close, the largest revenue contributor is projected to be Google with a revenue contribution of approximately 40 – 45% of total revenue.
The key takeaways from the call were that Inuvo has recently undergone a significant restructuring where they reduced headcount by about 20 employees. This comes on the heels of a very similar reduction in headcount that occurred at Vertro just a few months ago. Thus, the combined entity will actually be quite lean from the very start, with a total headcount in the 55 – 60 range. In addition to the cost savings that will result from these reductions, management believes that the combined entity will be able to save an additional $2.4 million per year in overall cost reductions. Most importantly, CEO Peter Corrao indicated that the combined companies (that will be known as Inuvo going forward) are expected to be cash flow positive from day one and that Inuvo expects to be EBITDA profitable in each quarter of 2012. Perhaps the most impressive takeaway for us was the fact that none of these projections built in significant contributions from Bargain Match or Kowabunga revenue being generated from the ALOT Appbar user base and no contributions from replacing Yahoo/Bing ads with Google ads on Inuvo web properties. We believe that Kowabunga and Bargain Match will be the major factors that drive Inuvo’s growth in 2012 and believe it may significantly increase and accelerate the ALOT operations’ marketing push as the company begins to experience very large and consistent increases in the lifetime value of appbar users. While we understand and agree with management’s goal of reducing their reliance on a single revenue source, we fully expect to see some of the Inuvo properties offering the Google ad feed at some point in 2012 and believe this will contribute significantly to the growth of the properties where that occurs.
In summary, we are quite bullish on the prospects for the combination of Vertro and Inuvo. We believe that management has wisely chosen to be cautious in managing expectations and they have accordingly made very conservative projections for the combined entity. We believe that investors would do well to establish positions in Inuvo/VTRO during Q4 before the deal is consummated and take advantage of any weakness related to tax loss selling and/or broader market weakness to build a position before investors begin to recognize what we expect to emerge as an explosive growth story in 2012.
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