PlanetOut Now Represents an Attractive Value Play

| About: PlanetOut Inc. (LGBT)

Bill Gates and several other smart money investors have quietly acquired a major stake in a beaten-down microcap media company that is in the early stages of a turnaround.

San Francisco, Calif.-based PlanetOut Inc. (Nasdaq: LGBT) announced on July 10 the closing of a $26 million equity investment. Investors in the struggling media and entertainment company’s private placement financing included Cascade Investment, the investment vehicle of the Bill Gates family, Special Situations Funds, SF Capital Partners, PAR Investment Partners and well-regarded media investment banker Allen & Co.

This equity financing represented a “partial re-capitalization” for the increasingly cash-thin PlanetOut. The vertical media company, which focuses on the gay and lesbian community, has used this capital to pay off its indebtedness from previous acquisitions. This financing also gives PlanetOut sufficient capital for executing its turnaround plan.

Founded in 2000, PlanetOut has its roots in a collection of gay and lesbian websites, such as, and, which collectively reach 5.5 million monthly visitors. Through several acquisitions over the past two years, the company has transformed into a big player in the gay and lesbian magazine and travel and events businesses as well. Print properties include The Advocate and Out magazines.   

Even before PlanetOut’s acquisition binge, the company had a rocky ride in the public markets. PlanetOut went public at $9 a share in the fall of 2004, and after hitting $10 a share on its first day of trading, action in the stock has been largely downhill since. After opening 2007 at the $5 level, things began to turn dire for PlanetOut in April after it announced another earnings warning in a string of misses. This was followed by a weak first quarter report in May and the disclosure by management that the turnaround of PlanetOut would take more than a year and that it was in need of additional capital.

The stock hit an all-time low of $0.86 a share on May 22 on concerns that equity holders would be wiped out in a restructuring. While equity holders were significantly diluted, PlanetOut completed its July equity financing on as favorable of terms as could be hoped for a small company in its position. Under the financing arrangement, investors bought common stock at $1.15 a share, which at the time was almost a 17% discount to the market price. There were no warrants or preferred securities issued.

Even after the stock’s snap-back rally to the $1.75 level since this financing announcement, PlanetOut shares are still down nearly 30% since May and 60% year-to-date. Significant additional gains could be ahead over the coming quarters if PlanetOut chief executive Karen Magee can whip the underperforming name into shape. Magee, a former senior vice president with Time Warner Inc. (NYSE: TWX), joined PlanetOut as CEO last June. A new CFO came onboard last March.   
Clearly, Magee has lots of work to do, but a good asset base to work with and low investor expectations. For the second quarter ended June 30, PlanetOut posted revenue of $18.5 million, a 14% increase from a year ago, and an adjusted EBITDA (earnings before interest, taxes, depreciation & amortization) loss of $3.3 million. This compares to an adjusted EBITDA profit of $2.0 million in the year ago period. Subscription revenue declined 9.5% to $5.7 million and advertising revenue dipped 8.2% to $6.7 million. Transaction revenue shot up nearly 126% to $6.1 million, although this year-over-year growth was acquisition-driven and not organic. PlanetOut ended June with approximately $7 million in cash on hand and $18 million in assorted obligations. 

PlanetOut continues to guide for $70-$75 million in 2007 revenue and a full-year EBITDA loss of $7-$9 million. Without the proceeds from its July financing, PlanetOut would have been running on fumes by year-end. Digging below the surface, though, if it wasn’t for a recent sharp downturn in PlanetOut’s travel & events unit, the company would potentially already be operating in the range of cash flow breakeven. The travel & events business has run into marketing issues and lower than expected demand for its specialty cruises, but with hard work and a little luck, this segment should rebound.   

At a recent price of $1.75 a share and based on over 40 million shares outstanding after its financing, PlanetOut has a market value of $70 million and an even lower enterprise value. This is an inexpensive valuation for a media company in a growing market that should do over $70 million in revenue this year and now has a revitalized balance sheet with smart money backers to boot. We don’t expect a quick turnaround, and more negative headlines are certainly possible, but the stock should be a winner from current levels with just modest and steady operational improvements over the next year.

Bottom-line, PlanetOut represents an attractive “value find” for medium-risk oriented investors looking for a turnaround play to hold for at least several quarters.

Disclosure: Author has no position in stocks mentioned