Archive for March, 2012

Inuvo Update

Since our last update in February, the Inuvo – Vertro merger has been completed.  On the first trading day following the announcement that the merger had been completed, Inuvo’s stock closed at $1.06.  Since that time, the stock has gradually traded lower almost daily, with the exception of a two day period following the announcement of a buy rating for the combined entity from institutional brokerage Craig-Hallum. Currently, the stock is trading in the range of 75 cents – 80 cents per share, valuing the entire company in the $15 million range.  We find the lack of interest in the shares at this price curious, but not that surprising given its size, lack of institutional following (covered only by one firm) and perceived risk related to a merger of equals in this space.  Throw into the mix the lack of promotional activity by the combined management teams as they worked to complete the deal and some Vertro shareholders who were not in favor of the combination and its easy to understand how the shares could drift lower, even to these levels.

We believe the shares are quite cheap at these levels and that members of the Groove community would do well to add to their positions.  Additionally, we note the opportune timing for community members to focus on the third aspect our mantra of 1) investing in a company’s stock 2)using its products/services and 3) telling and showing friends/business associates how to do 1,2 and 3.  Right now, members who have followed our advice bought at $1.05, then doubled down in the 68 cents – 70 cents range should have an average price in the 85 cents range. Not only does the current malaise give an opportunity to lower our average price per share, but it gives us the chance to bring other investors into our community with a similar cost basis. Each investor we can bring in at these levels will be more likely to become a heavy user of ALOT / Inuvo’s services and quick to recruit others to do the same as we get a few months down the road and they are enjoying strong double digit percentage gains in their investment with an eye toward substantially more as we bring greater numbers into the fold. The potential value of each new user is so much greater with Inuvo than it could have been under the Vertro/ALOT standalone business.  While we know that each new community member / Inuvo product user could add substantially to the company’s bottom line simply by using the ALOT Appbar and home page daily with the understanding of how quickly that drives revenue gains for the company, we now have an additional application (Bargain Match) that can both add value (rebates and discounts) for each user while creating a much greater revenue stream for Inuvo.  The Craig-Hallum report mentioned above pointed out that early test results suggested that the average life time value of an ALOT user who also used the Bargain Match browser app could be as much as 5x the value of that same user without the Bargain Match browser extension.  When any hint of that starts to show up in the reported numbers for Inuvo, the sub $1 price range will be hard to remember except for all the pats on the back from friends and associates that you tipped off to what is happening here.  By Christmas time, those who buy at today’s prices will be enjoying substantial returns on their investment and they will likely be increasingly dedicated users of Inuvo’s ALOT Appbar and the Bargain Match service who will be quick to spread the word among their contacts about why they should buy the stock, use the service and tell THEIR friends.

While it may take some time for the numbers to begin to reflect what we believe is taking place here (the first full quarter report for the combined company will be for Q2 which is usually in mid to late August), we believe that understanding of the following factors will lead savvy investors to start building positions in Inuvo over the next few weeks and months in anticipation of the heady numbers that the new Inuvo will produce:

1) Search Spend – each of Inuvo and Vertro spent millions each quarter buying Google and Yahoo/Bing search ads to promote either the Appbar or Inuvo’s owned and operated websites (Yellowise, Bargain Match, Kowabunga, etc.).  Vertro has been known in the space as one of the most efficient at the science of buying web traffic that will convert to users who will on average generate $1.60 for every $1 spent on advertising.  Inuvo spent heavily to achieve similar results, but they outsourced much of this functionality and thus their margins were frequently less than half that achieved by Vertro due to the costs of compensating a third party to handle this function.  This is one of the key aspects of the value that we expect to see created due to this merger and many seem to be missing it – when all of that ad spending is brought back in-house, the Vertro team could simply match the performance of the outsourced team and the margins on the former Inuvo search spend will improve dramatically as they are not “splitting the profits” with a third-party.  We believe that the Vertro team may add value beyond what the outsourced team could do that will expand even further on those margins.  Even more importantly, some of the key Inuvo products can be marketed as part of the SAME SPEND that is used to drive ALOT Appbar downloads – meaning the BargainMatch browser could gain the exposure that comes from the $6m ALOT quarterly ad spend and get substantially more installs than it would have gotten with Inuvo’s $1m spend to market it, and that $1m ad spend can now be added to the ALOT spend or removed from the cost structure altogether.

2) Google Display Advertising – while most of the attention for Vertro’s ALOT Appbar and homepage business usually focused on text search ads, the company has seen enormous growth in the value provided by its relationship with Google for display ads.  Recent conversations with Inuvo management indicated that this piece of the business has been a pleasant surprise and substantially better than their most optimistic expectations.  We are particularly encouraged by this, as we have known that the way the company’s search deals have been structured that we should not expect to see Google text ads on Yellowise and other “Owned and Operated” Inuvo sites in the near term, but we do now expect that all of the sites will be able to leverage the higher ad generating potential of the Google display ads.

3) We think the company will achieve the cost cutting goal of $2.7m (double-check) and possibly improve on that, noting that the combined company now has fewer than 50 total employees.

Recent discussions with management suggest that the Appbar business generally was doing, “very well” and the combination of the improvement in that business and the cost cutting measures, we are hopeful that we might ultimately see a time in this calendar year where we have an Appbar user base and revenue stream that approaches the levels we achieved in 2009, but with additional revenue streams from display and Inuvo O & O sites that would push total revenue  higher than the old Vertro ever experienced, all done with an employee base and cost structure that will be lower than what the standalone Vertro had back in Q3 2009 when it set the high revenue/user mark for this business.  While we are not expecting any fireworks in the earnings reports for Q4 ’11 and Q1 2012 due to management’s focus on getting the deal done and then the integration of the two firms, we believe that management has moved efficiently to integrate people and other assets so that shareholders will experience the full benefit of this combination in Q2.  Any weakness in Inuvo’s share price related to quarterly reports covering the periods of transition and/or selling by Vertro shareholders is a great opportunity for adding to your position and bringing others into the fold.

March 22, 2012 at 1:19 pm 1 comment

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