Executives
Denise Garcia – Integrated Corporate Relations
Peter Corrao – President and CEO
Jim Gallagher – CFO
Rob Roe – General Manager
Analysts
Ryan Bergan – Craig-Hallum
John Gillam - Point Clear Strategic Capital
Vertro, Inc. (VTRO) Q4 2010 Earnings Call March 9, 2011 5:00 PM ET
Operator
Good day ladies and gentlemen and thank you for standing by. Welcome to the Vertro Inc. fourth quarter and full-year 2010 financial results conference call. At this time all participant lines are in a listen-only mode. Later, we’ll conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference is being recorded.
I would now like to turn the call over to Denise Garcia from ICR.
Denise Garcia
Thank you and good afternoon everyone. Welcome to Vertro’s fourth quarter and full-year 2010 financial results conference call. Joining me on the call today are President and CEO Peter Corrao, CFO Jim Gallagher, and General Manager Rob Roe.
I’d like to remind everyone that today’s comments include forward-looking statements. These statements are subject to risks and uncertainties that may cause actual results and events to differ materially from those expressed in the forward-looking statements. These risks and uncertainties will be outlined at the end of the conference call and are also detailed in our filings with the SEC.
Before handing over to Peter, let me review how we measure our financial performance. In addition to the standard GAAP measurements, we utilize certain profitability-based metrics to evaluate our period-to-period and year-over-year performance.
They are EBITDA, earnings before interest, income taxes, depreciation and amortization, adjusted EBITDA, adjusted income or loss and adjusted income or loss per share. A description of our reasons for utilizing these measures, as well as our definition of them and their reconciliation to the corresponding GAAP measurements can be found in the earnings release we issued today.
Certain of the ALOT user metrics we will be discussing this afternoon are broken out by region 1 and rest of world. As a reminder, region 1 comprises English-speaking users in the US, Canada, UK, Ireland, Australia, and New Zealand.
To comply with the SEC guidance on fair and open disclosure, we have made this conference call publicly available via audio webcast through the Investor Relations section of our website at www.vertro.com, and a replay of the call will be available for 90 days .
I’d now like to turn the call over to our President and CEO, Peter Corrao. Peter?
Peter Corrao
Thank, Denise. Good afternoon, everyone, thanks for joining today. Q4 rounded out what was an important year for us. We enjoyed significant year-over-year growth and all of our key financial and non-financial metrics.
Before summarizing our full-year results, I want to focus on our results in the fourth quarter. On February 10 we hosted a call with investors to discuss certain preliminary financial and non-financial metrics for Q4 of '10. On the call, we estimated Q4 revenue of $9.6 million and sequential quarterly increases in both EBITDA and adjusted EBITDA. On the completion of our audit, revenue for Q4 '10 was $9.6 million, a 20% increase over Q4 of '09 revenue of $8 million and a 2% sequential decrease from revenues of $9.8 million in Q3 of '10.
There were two primary reasons for the sequential decline in revenue, which we detailed on our last call but I'll summarize again here. The first and most significant was an issue of spend with region 1 on a distribution partner that resulted in decline in our region 1 users in Q4.
The second was a softer-than-expected revenue per search from our monetization partners of the holiday season. We've now refocused our customer acquisition team on building our region 1 user base.
Q4 of 2010 EBITDA was $600,000, a 50% increase over EBITDA of $400,000 in both Q4 of '09 and Q3 of '10. Q4 of '10 adjusted EBITDA was $900,000, a 200% increase over Q4 adjusted EBITDA of $300,000 and a 125% increase over Q3 of '10 adjusted EBITDA of $400,000.
While we continue to refine our product portfolio, making adjustments along the way as we did in Q4, we believe we're executing on the right strategy of focusing of the ALOT product portfolio as we closed the books for the new year.
Some highlights for the full year of '10 are we increased revenue 30% year over year from $27.6 million in 2009 to $35.9 million in 2010. We turned 2009 EBITDA and adjusted EBITDA from loss of $7.2 million and $6.4 million respectively to a gain of $1.6 million and $2.2 million in 2010.
We increased cash and cash equivalents from $4.8 million on December 31 of 2009 to $6.5 million on December 31 of 2010.
We reduced operating expenses, excluding customer acquisition spending, from $12.7 million in 2009 to $9.8 million in 2010, a decrease of 23% year over year. We increased search periods conducted by our users over 53% year over year from 776 million in 2009 to 1.2 billion queries in 2010. We grew our toolbar user base by 103% during the year from 4.7 million on January 1 of 2010 to 9.5 million on December 31 of 2010. We grew our homepage user base by 83% over the year from 4.1 million unique users in January of 2010 to 7.5 million unique users in December of 2010.
We diversified our international user base with particular success in Brazil and India. By the end of the year, almost half of our toolbar users came from outside of region 1 compared to only 14% on January of 2010. We launched our new ALOT app bar, which I'll talk more about in detail on the call, and we regained compliance with two NASDAQ non-compliance notices.
So we're proud of all these achievements. We're going to spend some time talking about our strategy for the year ahead at the end of this call, but first I'm going to turn the call over to Jim, who will walk you through our key financial metric.
Jim Gallagher
Thanks, Peter and good afternoon, everyone. As Peter discussed, we delivered solid year-over-year financial metrics from both a top- and a bottom-line perspective. Over the year, we strengthened our balance sheet, built up some real impressive global user growth, and made significant progress in liquidating our legacy European operation.
First thing I want to address is the change in cash and cash equivalents, which went from $7.1 million in Q3 to $6.5 million in Q4. This decrease is primarily the result of higher-than-usual payments made in Q4 of 2010. We believe a better metric for investors to focus on is our working capital, which actually increased from $3.8 million in Q3 to $4.2 million in Q4. We continue to believe that we have sufficient cash for ongoing operations. As we anticipate adding to the balance sheet in 2011, we are exploring ways to put the cash to work, which Peter will address in more detail later in the call.
In Q4 2010, our financial results included a net non-reoccurring income tax benefit of approximately $400,000, which resulted from the expiration statutes relating to tax provisions that had been established in prior years offset by current accrual. This net tax benefit flowed through shareholder equity and resulted in us ending 2010 with shareholder equity of $4.7 million.
You'll remember that one of the NASDAQ non-compliance notices that we received related to us achieving and maintaining a minimum of $2.5 million in shareholder equity. The tax benefit in Q4, coupled with the increased income from operations has enabled us to quickly build a nice cushion above the $2.5 million shareholder equity requirement.
Peter discussed earlier the year-over-year reductions in operating expense, excluding customer acquisition spend, which we achieved in 2010. We are pleased with what we have achieved, an average of about $2.5 million per quarter which was below our forecast of $3 million per quarter. As we progress through 2011, we expect to maintain operating expense, excluding customer acquisition spend, at approximately the same level.
Overall, we believe we're in good financial position for 2011. We have a significant global user base, monetization agreements in place with the leading search engines, an increase in non-search revenue, and we believe our fixed costs are at a substantially low level. With that, I'm going to hand the call back to Peter to talk about our strategic outlook for the year ahead. Peter?
Peter Corrao
Thanks, Jim. So before taking questions, I want to spend a bit of time talking about our strategy for 2011. We've got four key strategic goals for the year. The first is user growth in our region 1 and rest-rest-of-the-wolrd markets. Today our products are available in eight languages and marketed in 22 countries. Our goal in 2011 is to continue to explore new markets while substantiating and growing our existing region 1 and rest-of-the-world markets.
Our second goal is continue our transition to ALOT app bar and our app strategy. Now due to the challenges we faced in Q4, we deliberately sold the roll-out of the app bar but we remain excited and committed to our app strategy as we move through 2011. Central to this strategy is the availability of high-quality web apps like our proprietary radio app, which this quarter was a finalist in MediaPost's Appy Awards.
I discussed in detail on our Q3 call how higher-quality apps consistently prove more attractive to our user base, helping us with retention, increasing our customer usage, and ultimately delivering what we expect to be increased monetization and lower customer acquisition costs. Over the course of 2011, we'll be looking to increase the number of these high-quality apps that we make available to our users.
We're also focused on revenue diversification. We talked last quarter about our success in generating non-search revenue through channels such as display advertising and affiliate marketing. Further building on this success with the increased channel partnerships, app developers attempting new forms of advertising are a key part of our 2011 strategy.
Lastly, but no less important, is our fourth goal which is technical development. Continuing to update and enhance our product will be a key focus in 2011 as it is every year. With every new browser and software release, we'll work diligently to make updates to our products and attempt to ensure optimum performance for our users.
Finally, we expect to increase our cash position. As we do so, we may begin to explore acquisitions to help us deliver on our app strategy of accelerating and accomplishing our goals. We also announced a share repurchase program on February 15 and expect to use existing cash or cash earned from operations to purchase our stock if the right market conditions present themselves to us.
So I'm excited about our business. We've got growth potential across region 1 and the rest of the world still, we've got our new ALOT app bar product rolling out to users, we're having some real success in diversifying our revenue beyond search, and we believe we can keep our fixed costs at minimum levels by executing our 2011 strategy with our small but focused team here in New York. I want to thank our employees, our shareholders, and our millions of loyal ALOT users for a great year.
With that said, let me turn the call back over to the operator for a Q&A session. So operator, let me turn it back to you.
Question-and-Answer Session
Operator
Thank you ,sir. (Operator Instructions) Our first questioner in queue is Ryan Bergan with Craig-Hallum. Please go ahead.
Ryan Bergan – Craig-Hallum
Hi, thanks for taking my questions. Could you please talk about the efforts you're taking or undergoing to backfill the region 1 distribution partners after the partner in Q4 left?
Peter Corrao
Sure, that's a good question, Ryan, thanks for asking. So importantly I want to point out that the partner we lost, and we put some dimensions around it on our last call, was the only partner of that size we have that was a download distribution partner. So from a concentration standpoint, we don't have anybody else nearly that size available to lose, so we don't see any risk going in the future for another failed partnership like that.
Now having said that, we're strictly going back and refocusing our pay-per-click efforts and our display efforts, mostly back on Q1, and the reason for simply focusing in there is that's where most of our loss came that resulted in Q4 having the slight decline over Q3 in terms of revenue. So really it's just getting back to our knitting, focusing on paper-click display. We've got some other, smaller bundle distribution partners that we're introducing to the mix now over the last month or so, and we'll continue to focus there, but we think that we can get that growth and momentum going again without another partner of that size, and furthermore importantly, we don't have anybody that size to lose in the mix today. So we don't see much risk going forward.
Ryan Bergan – Craig-Hallum
Do you have a view into the number of region 1 users you have, either at the end of February or even at the end of January?
Peter Corrao
Yeah, we don't comment on our current region 1 users until we get the numbers out, and especially with the whole month of March left still, Ryan. But you know we had ground to make up from Q4, we're working hard throughout the quarter of 1 to make up that ground, and we'll report it as soon as we get to the end of the quarter.
Ryan Bergan – Craig-Hallum
You talked again about one of your four goals for the 2011 is the revenue diversification. Could you kind of delve a little bit deeper into that and kind of talk more about the affiliate marketing and the other strategies you're taking there to diversify the revenue?
Peter Corrao
Sure. So we've used in the past a couple of different examples and I'll break it up into what most of that revenue is. We've got various and sundry different PPA partners, and a partner we've used as an example in the past and everybody sees on our toolbars and homepages regularly, is an example, and we've got several like this, is our relationship with eBay. So in that relationship, eBay delivers a deal of the day to us, we post that deal of the day to our consumers on outbound messaging, and then separately that app, which is a really good one, is available to all of our 10 million toolbar users and 8+ million home-base users that they can go accept that app in from the store and drag it in. You might know that relationship and others like it are only less than a year old for us, and we're now driving substantial revenue through partnerships like that.
So we're addressing a bigger market of more clients like the eBays of the world, they're looking to find their way to our consumers, and then our consumers are taking their deals of the day and their various offers and responding to them, and to the extent that we can do a good job of delivering our consumer to the e-tailer or the retailer, we end up getting great rev shares from a lot of these partners and it's been a good situation for us.
The second piece that we have is continuation on our clicks. So we've got many sites, weather might be an example, where we take a feed from others, that feed is available inside of our apps, and we actually and purposely send our consumer off to their site. And in those examples, when our consumer goes to their site, our partners in those arrangements are paying us for letting our consumer go in there where their model is, and usually their model is a CPM model around display advertising, and we're happy to send our clients off to them if their good partners and take that revenue.
And then the third piece, which has only begun really in Q4 of last year and has started to take off this year, is our app ads. So we've created a situation where several of our ads, two important ones are our map apps and our radio app, which are two of our top four most-clicked apps, now carry by country, by language, a display ad with them at the bottom of the app that's pre-configured in to it. As you know we've got thousands of apps available to our consumers, those two as the tests are now running two of our biggest ones with app ads and are delivering substantial revenue for us. So we're excited about that. We want to make sure we don't hurt the user experience. So far, good, and as soon as we've convinced ourselves that our users are satisfied to see those display ads at the bottom of our apps, you could count on us converting more and more of our apps over the carrying an app ad, which either get CPA or CPM from.
So to summarize, CPA is one, Ryan, app ads is another, and CPC sell-throughs is the third
Ryan Bergan – Craig-Hallum
You talked about your expectation to increase cash in 2011. Do you have an expectation of where you think you could finish at other than Q1?
Peter Corrao
Cash – you know what, Ryan? You cut off a bit. You said “expectation for cash” then we didn't hear you.
Ryan Bergan – Craig-Hallum
Sorry. You said you expect cash to increase in 2011. Do you have an idea where your cash balance may finish exiting Q1?
Peter Corrao
No, we'll have it when we get there, but for now we're not predicting Q1.
Ryan Bergan – Craig-Hallum
Okay, then finally just a housekeeping – what was cash flow from operations and CapEx in Q4?
Peter Corrao
Hang on, Jim will get that for us in just a second.
Ryan Bergan – Craig-Hallum
Thank you.
Jim Gallagher
The cash flow from operations before looking at swings in the assets and liabilities was about $3.5. CapEx itself was a couple hundred thousand, it wasn't significant.
Ryan Bergan – Craig-Hallum
Thanks for taking my questions.
Peter Corrao
Thank you, Ryan.
Operator
(Operator Instructions) Alright, we do have a question from John Gillam with Point Clear. Please go ahead.
John Gillam - Point Clear Strategic Capital
Good afternoon gentlemen, congratulations on a good quarter. I apologize, you may have addressed this earlier in the call, I missed the first part of the call. I wanted to see if you could give us an update on the share repurchase, the stock buyback? Where are we on that and just wanted to see if there was any chance that we might extend that if we have purchased a significant amount of the amount that's been approved by the board so far.?
Jim Gallagher
Jim, back on the 15 of February we did announce that, and it is our intention to move forward on that at this point. There's nothing that's really gone into effect. There's a lot of blackout periods and things like that that we're coming upon. So there's nothing that's substantially happened at this point, but we're putting ourselves in a position to take advantage of that, and again, are though process there is to really do it where it makes sense in terms of building value, that is, building shareholder value.
Peter Corrao
Right, and let me add to that, John. There's no reason yet to extend it with the board, because we haven't yet spent the million dollars that we just announced, right?
John Gillam - Point Clear Strategic Capital
Right.
Peter Corrao
But to the extent we're to run that out, our board is wide open to make a decision in cash flow operations coming in to extend it if we need to, but a little cart before the horse since we just announced it, but there's – hard to say there's a willingness to do it again when we've just now done it, right? But I'm sure there would be.
John Gillam - Point Clear Strategic Capital
Right, right. I've gotcha. Alright, thank you.
Peter Corrao
Sure.
Operator
(Operator Instructions) At this time presenters, I'm showing no additional questioners in the queue. I'd like to turn the program back over to Denise Garcia for closing remarks.
Denise Garcia.
Thank you. This conference call contained certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Words or expressions such as plan, will, intend, anticipate, believe, or expect, or variations of such words and similar expressions are intended to identify such forward-looking statements, including one, our ability to successfully execute upon our corporate strategies. Two, our ability to distribute and monetize our international products at rates sufficient to meet our expectations. Three our ability to develop and successfully market new products and services. And four, the potential acceptance of new products in the market.
These statements are based on management’s current expectations and are subject to uncertainty and changes in circumstances. Actual results may vary materially from the expectations contained in the forward-looking statements. Key risks are described in Vertro’s reports filed with the US SEC including its Annual Report on Form 10-K for 2010. In addition, past performance cannot be relied upon as a guide to future performance.
That concludes our call today. Thank you for listening.
Operator
Thank you. Ladies and gentlemen this does conclude today's program. Thank you for your participation and have a wonderful day. Attendees, you may now disconnect.
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