Inuvo’s Appbar and the Tiered Revenue Share With Google
A key understanding that some new INUV investors may not appreciate about the ALOT business that was acquired in the merger with Vertro is the tiered structure of Google Adsense contracts. The ALOT Appbar, HomePage and search businesses are monetized through the Google Adsense program, where Google pays partners like Inuvo’s ALOT a certain percentage of the click revenue generated from each click on an ad served with search results on their websites. We have discussed this in the past with the understanding that this revenue share can be as high as 75 – 80% flowing through to ALOT/Inuvo. However, the percentage of revenue shared with ALOT is determined by the volume produced on a monthly basis. Thus, ALOT may receive a lower percentage (70%?) of the revenue clicked if they produce $1 million in revenue for Google, but they might get paid a higher percentage (80% range?) if they produce $3 million in click revenue. Of course, these percentages are never disclosed, but we can ascertain the range from filings by companies with similar contracts and anecdotal evidence that it is most likely in this range. So we are using these numbers as an example only, but investors should understand that ALOT/Inuvo can earn a significantly higher percentage revenue share when the company is producing at a level that exceeds these breakpoints as measured each month.
While the company does not publish such aspects of its contract with Google, we have compared quarterly revenue reports where management indicated they did not achieve the higher tier vs. those quarters that they did achieve the higher revenue tier and deduced that this higher tier kicks in somewhere in the $3m range as measured on a monthly basis. If we apply our estimated 75 – 80% revenue share to the $3 million total revenue generated, this would put ALOT/Inuvo’s reportable share of that revenue in the $2.25m – $2.4 m range at the $3m tier. While Inuvo management did not break out the monthly revenues between the ALOT products and Inuvo’s ValidClick/Publisher Network in the recent monthly update press releases, we know that the ALOT revenues accounted for about 42% of the overall revenue generated in Q2 and management indicated that much of the growth they reported in August was driven by strength in ALOT’s performance. So, if assume that ALOT revenue could be as much as 50% of the reported August revenue figure, it would mean that ALOT has likely achieved the higher revenue sharing tier in August. We believe that is the case and this could indicate a better revenue figure for the quarter than many are expecting, as the company earns a higher percentage payout on any given click of an ad and note that this has a tendency to snowball, pushing each month going forward to a higher level, as the increased earnings translate into an ability to spend more to grow the user base and revenues at an accelerating rate. The ALOT Appbar business should benefit even more in Q4 as this snowball-like momentum will likely allow the company to achieve the higher revenue share tier in all three months of the fourth quarter.
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