Inuvo Inc (INUV) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Vertro, Inc. Third Quarter 2010 Financial Results Conference Call.

At this time, all participant lines are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator instructions)

As a reminder, this conference is being recorded.

I would now like to introduce your host, Mr. Alex Vlasto, Vice President, Marketing and Communications. Sir, you may begin.

Thank you, and good afternoon, everyone. Welcome to Vertro's Third Quarter 2010 Financial Results Conference Call. Joining me 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 call and 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/loss; and adjusted income/loss per share.

A description of our reasons for utilizing these measures, as well as our definition of those and our reconciliation to the corresponding GAAP measurements can be found in the earnings release we issued today.

To comply with the SEC guidance on fair and open disclosure, we've made this conference call publicly available by audio webcast through the investor relations section of our website, and a replay of the call will be available for 90 days from today.

I'd now like to turn the call over to our President and CEO, Peter Corrao. Peter?

Thank, Alex.

Hey, good afternoon, everyone, and welcome to today's call. We appreciate having you on the call with us.

This is an exciting call for us for two different reasons. First, we're proud of our Q3 results and look forward to sharing the details with you. Second, we're today going to be unveiling some new developments with our ALOT product portfolio.

First, let's review Q3.

Q3 was a strong quarter for Vertro. We successfully capitalized on global customer acquisition opportunities, and in doing so, significantly increased our user base and the number of revenue-generating events that took place across our ALOT Toolbar and Home-based products.

On our last call, we announced our expectation of double-digit sequential quarterly revenue growth. The target we achieved in Q3 was 15% quarter-over-quarter growth and 32% year-over-year growth. The revenue growth came not only through increased search revenue but also through what we refer to as our non-search category, which includes areas such as display advertising and CPA advertising.

We saw strong growth in our non-search category in Q3, which is primarily a result of introducing new advertising formats and entering into additional CPA agreements.

International expansion has been a key strength for us this quarter. As an example, last month, we announced that our Brazilian toolbar user base had topped one million users, which we believe is a great achievement given that we only started testing in Brazil in December of 2009.

While we're excited by the growth that our international expansion efforts are delivering, I would caution you not to draw a direct comparison between international user growth and likely future revenues. This is because international users are typically less expensive for us to acquire but are also generally monetized at a lower rate than users in our core region one market.

To help put this into context, around half of our search queries in Q3 2010 came from users outside region one, and yet these users only contributed around 20% of our total revenue.

As a reminder, region one relates to English-speaking users in US, Canada, UK, Ireland, Australia, and New Zealand. The primary criteria used in evaluating our customer acquisition campaign is gross margin. If the margins in new international markets are equal to or greater than margins we see in region one, then we aggressively pursue them.

We think we have identified several international markets, including Brazil, that meet or exceed our region one margin targets, and as a result, we believe we continue to report strong international user growth over the coming quarters.

So we believe that we now have really hit our stride when it comes to distributing and monetizing our Toolbar and Home page products. We think we've found an effective formula for global user expansion and that this formula makes our core business highly scalable.

In addition to our ability to increase our global user base, we're also excited by the progress we've made increasing our non-search revenue in Q3, and we hope to be able to build on this success over coming quarters.

With that said, we believe there's still a key area of our business that remains relatively untapped from an optimization perspective, which is content. And that's where with -- the new product announcements I mentioned earlier come into play.

On previous calls, I've shared details of how we believe we've improved retention rates by providing users a higher quality content. By content, I mean the buttons or apps that are displayed on our Toolbar and Home page products. We believe that our user data validates that the better and more compelling our apps are, the more engaged our ALOT products become, and in turn, the more likely users are to keep and use the ALOT products for longer periods.

As a reminder, our apps currently fall into two categories.

First, we have apps that are built by our editorial team using our proprietary content management system. These apps offer differing levels of functionality. Some point directly to third-party websites, while others display constantly updating RSS feeds or enable users to conveniently search content-rich websites.

In addition to these apps created by our editorial team, we also have a smaller portfolio of apps that are created by our engineering team and offer a far richer experience for our users. Examples of these would be our Radio app that enables users to listen directly to tens of thousands of radio stations from around the world or our Share app, which provides a simple and elegant interface for sharing websites with friends and family. These apps are closer in form and function to the apps you would find on today's range of smart phones.

Unsurprisingly, it's these apps that are proving to be the most attractive to our user base. In certain tests where we've marketed these apps as part of our Toolbar and Home page offering, we've seen a better return on our market investment. The downside is that these apps can take consider time and resources to build. So without a significant increase in our operating expense, we would be unable to quickly scale the number of these high-quality apps that are available.

We believe that a solution to help augment our in-house content creation, it starts to create strategic alliances and work more closely with existing third-party app developers that are creating new apps or have existing high-quality apps that could be repurposed for the PC market through our ALOT platform.

A key benefit that we believe we could offer third-party developers is our marketing and distribution expertise. Marketing high-quality apps as part of our ALOT product offering can have a positive impact on our return on investment.

As such, if developers work with us to distribute their apps across our platform, we could commit a portion of our customer acquisition budget to the marketing and distributing their apps.

We believe that by focusing our customer acquisition budget on apps, the company will not only benefit through increased return on investment, but we will also create a powerful incentive for these third-party developers to build apps for our ALOT platform.

To help pave the way for this app-led strategy, we have this week launched our first phase of our new app, Marketplace, which you can see by visiting us at www.ALOT.com. When you get to this site, you'll see that it currently displays an initial portfolio of more than 60 apps targeting our core region-one users.

Our editorial team will be adding more US and international apps to this site over the coming weeks and months, and we intend to augment these apps with content created by third-party app developers. We are very proud of our new app, Marketplace, and I'd like to recognize all the hard work of our product engineering and content teams.

The launch of the first phase of our app Marketplace followed the release of the ALOT Appbar, which I introduced on our quarterly -- last quarterly call. The ALOT Appbar will be primarily product that consumers use to access and display the apps that they have selected from ALOT.com.

As I mentioned on our last call, we believe that the new ALOT Appbar offers significant improvements over our current Toolbar product. In addition to being more visually impactful and user friendly, the new product offers some valuable new functionality, including the convenient scrolling feature that enables users to easily display and interact with multiple apps without being constrained by the width of their browser.

We expect to continue providing a combination of toolbars and ALOT Appbars over the coming two or three quarters as we slowly transition our customer base. Importantly, though, we will continue to provide full support for our legacy toolbars as the migration to the ALOT Appbar gets underway.

We think that the ALOT Appbar and our new app, Marketplace, coupled with our strategy of leveraging third-party app developers, could help further increase our overall stickiness and viral appeal of the new ALOT products.

So before handing over to Jim, I want to take a moment to discuss our relationship with Google, who accounts for a significant portion of our revenue.

As previously disclosed, our agreement with Google was a two-year term but it's set to expire December 31 of this year, 2010. We believe we have a good working relationship with Google and that we drive quality traffic to their network.

I'd like to reiterate that our policy -- reiterate our policy that the companies do not comment on the status or substance of contract negotiations. The company expects to announce any renewal or material development with respect to our agreement with Google when renewal negotiations are completed, and any such announcement will be conducted in a Regulation FD-compliant manner.

Let me conclude by saying again that we're extremely pleased with our Q3 results. We've achieved 15% sequential quarterly revenue growth and 32% year-over-year revenue growth. We delivered our fourth consecutive quarter of EBITDA profitability. We added cash to our balance sheet and cured the very last of our NASDAQ issues that we face by implementing a reverse stock split on August 18, 2010.

Following our accelerated revenue growth in Q3, we expect more modest quarter-on-quarter revenue growth in Q4 and expect to deliver our fifth consecutive quarter of positive EBITDA and adjusted EBITDA.

We plan on continuing to increase our customer acquisition spending into Q4 but remain ever-mindful of the potential effects of seasonality during the Q4 holidays on this spending strategy.

We encourage investors and our stakeholders to try out ALOT Appbar and visit our new App Marketplace at ALOT.com. We look forward to keeping you posted and updated with these developments and exciting new ALOT products, as well as the results of our ongoing focus on our global expansion.

So with all of that said, let me now hand the call over to Jim to cover our financial results. Jim?

Thank you, Peter, and good afternoon, everyone.

As Peter said, we're pleased with what we believe was a solid third quarter of 2010. We increased our customer acquisition spend, which we discussed in our last earnings call, and continued through the quarter that enabled us to grow our user base and deliver revenues of $9.8 million, representing the increase of approximately 15% quarter over quarter and 32% year over year.

GAAP income from continuing operations was $0.4 million, or $0.05 per basic share, in Q3 2010 compared to GAAP income from continuing operations of $0.2 million, or $0.03 per basic share, in Q2 2010. GAAP income in Q3 2010 included a nonrecurring $0.2 million gain from deferred rent adjustments.

Adjusted income from continuing operations was $0.4 million, or $0.06 per basic share, in Q3 2010 compared to adjusted income from continuing operations of $0.5 million, or $0.08 per diluted share, in Q2. Both Q2 and Q3 2010 adjusted income included $0.02 million in non-cash compensation. Q3 2010 adjusted income also included non-recurring $0.02 million gain from deferred rent adjustments.

EBITDA was $0.4 million in Q3 compared to $0.2 million in Q2 2010. Both Q2 and Q3 2010 EBITDA included a $0.2 million non-cash compensation expense. Q3 2010, that also included a nonrecurring $0.2 million gain from deferred rent adjustments.

Adjusted EBITDA was $0.4 million in Q3 2010 compared to adjusted EBITDA of $0.5 million in Q2 2010. Q3 2010 adjusted EBITDA included $0.2 million non-cash compensation and nonrecurring $0.2 million gain from deferred rent adjustments. Q2 2010 adjusted EBITDA included $0.2 million non-cash compensation expense and $0.1 million in severance expenses.

Operating expenses were $8.9 million in Q3 2010 compared to $7.9 million in Q2 2010. The operating expenses in both Q2 and Q3 included $0.2 million of non-cash compensation, as well as customer acquisition costs of $5.2 million in Q2 2010 and $6.7 million in Q3 2010.

Excluding these customer acquisition costs, operating expenses for both Q2 and Q3 2010 remained relative -- remained below our previously stated target of $3 million per quarter.

In terms of liquidity, we ended Q3 with cash and cash equivalents of $7.1 million, or an increase of $1.2 million from June 30, 2010 cash of $5.9 million. The increase was primarily as a result of gains from operations and the results of approximately $0.2 million of what was previously restricted cash.

We continue to believe [we have] sufficient cash currently and for the next 12 months to execute our long-term growth strategy. We also continue to maintain our line of credit of up to $5 million with Bridge Bank although we have no immediate plans to draw on it.

Next, I would like to move on to discuss the current NASDAQ position.

On August 17, 2010, we announced and implemented a one-for-five reverse split of our common stock. Trading of our common stock on the NASDAQ capital markets on a split-adjusted basis began at the open of trading on August 18. As a result of completing the reverse stock split, on September 1, 2010, NASDAQ notified us that we had regained compliance with the minimum $1-per-share bid price requirement for continued listing.

We are pleased to have regained compliance with this requirement along with NASDAQ's $2.5 million stockholders' equity requirement, which was achieved back in June 2010 following gains from operation and the execution of a $0.25 million stock purchase agreement between the company and Red Oak Fund LP and Pinnacle Fund LLP.

We closed the third quarter with $3.5 million in stockholders' equity, up from the $2.8 million we reported at the end of Q2 2010. The increase is primarily the result of gains from operations and writing off certain liabilities from our discontinued operations. The writing off of liabilities came as part of an ongoing wrapping up of European entities.

We expect to benefit from additional write-offs over the coming quarters as we conclude the liquidation of the discontinued operations in Europe. While these write-ups don't impact cash, continuing operations, or EBIDTA, we believe that they will help provide a further cushion as it relates to NASDAQ requirements for a minimum $2.5 million in stockholders' equity.

Before opening up the calls for questions, I want to conclude by reinforcing Peter's comments regarding our Q3 results and our outlook for Q4.

We believe that we have a solid third -- we've achieved a solid third quarter in which we delivered our forecast in double-digit sequential quarterly revenue growth.

We saw strong user growth in both region one and other international markets, and we believe it will position us well to better capitalize on the Q4 2010 holiday season.

Further, our exaggerated Q3 growth, we expect more modest growth in Q4 2010 and expect to deliver our fifth consecutive quarter of positive EBITDA and adjusted EBITDA.

We believe our core business is highly scalable, and we're also excited about the potential that our new ALOT app-focused products Peter presented will deliver as we move into 2011 and beyond.

With that, let me turn the call back over to the operator to start the question. Cherniqa, would you like to pick up now?

Thank you. (Operator instructions)

Our first question is from Ryan Bergan with Craig-Hallum. Your question, please?

Good afternoon, and congratulations on the quarter, and thanks for taking my questions.

First, can you talk about how -- at least I get the sense that you don't expect the new Appbar to cannibalize the ALOT Toolbar as you wind down the ALOT Toolbar over the next few months. Why is that?

Yes, so that's a good question, Ryan, and good afternoon.

So, listen, we've got, as you know, a user base worldwide in Toolbars of 9 million and Home pages of 7 million, so clearly, we intend to maintain and completely support that product through its entire lifecycle. So no different expectations on what the revenues would be received from that user base. We have every reason to believe it will continue strong, and for some of our longer-time investors, you'll remember we had a [atrophine] product that we sunsetted now maybe two-and-a-half years ago that we still receive revenue from with virtually no marketing expense.

So we've got history of sunsetting a product, watching that product live a very, very long, again, coming on three-year tail, and realizing that that product revenue received per user available out there delivers comparable revenues to whatever it did back in its heyday. And again with continued support of the current ALOT Toolbar product, we're convinced that that will just continue.

Now, that leads us to the new product. We're going to treat the new product simply like we do in new market or new vertical that we enter into. We'll direct market that new product. We'll look to see how it performs on a margin basis. If it performs better than the existing product that's out there, we'll go like mad and launch like crazy. If it performs worse, then we'll even revert back and continue to market the old product.

So our intention is to continue to market both. In a direct marketing effort, pick up new products with the new ALOT Appbar, and 100% continue to support the old Toolbar product.

Then, lastly, -- hate to give you such a long answer, Ryan -- but we are not going to push on the existing user base a change to the new ALOT Appbar. We'll completely continue to satisfy our existing user and only introduce the new product to brand new users.

And then can you talk about the holiday season dynamics that you're expecting this year? I think last year there were some around Christmastime that you tend to -- well, why don't you just go into what you're planning on doing in this quarter.

Yes, so we had warned last year Christmastime -- and I think you're referring to the buy-side dynamics and our ability to continue direct marketing --

Yes.

-- throughout the quarter. So, first, let me tell you what our plan is and then tell you what our warning is.

So as Jim said, our plan as of now, buying has been going very well for us with everything we've talked about in our prepared remarks.

Our plan as of our forecast meeting today at three o'clock is to continue to spend equally, which is an increased spend in Q4 over Q3 right through Christmas and into New Year's Eve.

Now, having said that, that was our intention sort of last year, and beginning around the 15th of December, and this isn't a specific day of the month, meaning Monday through Sunday, but around the calendar date of the 15th, Internet usage in general around the world because of the upcoming Christian holidays tends to fall off, which is typically -- it's okay for e-commerce, people still buying onsite, but kids are out of school, people are starting to take vacations from work and not be in front of their machine, people are holidaying around the world in general and pay attention to things other than their computers.

So often, even though our intention is to want to be able to spend perhaps 70 or $80,000 a day or maybe even a little bit more at that time, we're actually not able to because there's simply not enough usage on the Internet because of all the things I said.

So our only caveat -- so what we're trying to signal to our investor community, we want to continue our advertising spend lockstep right up until December 31. We probably will have difficulty doing that, and there will be some days -- I'd mentioned a few -- Thanksgiving Day, we likely can't get the usage on the Internet and drive the downloads that we would like to. Christmas Eve, Christmas Day, New Year's Eve and some other days, we usually struggle being able to spend as much as we'd like to on those days.

So we want to signal to our investor community that we're bullish about our ability to buy and buy profitably, but that will only be offset by whatever happens to us on a day-on-day basis as we get later into the quarter.

Hey, Ryan, it's Alex here. The only thing I would add to that is that it's worth bearing in mind that this year as compared to last year we have pretty significantly changed the international mix of our user base, and we've also introduced a number of new distribution channels.

I think on our last call or possibly in the call before, we talked about a number of bundled partnerships we have. That's where our software is downloaded, our toolbars are downloaded as part of another piece of software.

So because we've kind of changed the international mix by user base and because we've changed our distribution mix, I think we all, as a company, feel more comforted in our ability to spend through Q4 as opposed to last year. But as Peter says, we have to wait and see because every year is different and we have to wait and see what happens when it happens.

You talked about being able to have modest sequential growth in the fourth quarter. Looking out to 2011, I know you're not giving guidance, but do you think that you can grow -- is there a scenario where you can see growing sequentially each quarter in 2011? Is that too much of a reach?

That is not a reach. We would -- again, we're not forecasting into 2011, but we would all anticipate that we would be still talking sequential quarter-on-quarter growth through every quarter of 2011.

And further, I'm not trying to minimize the fact that we believe we will grow in [2004 over 2003] (sic). We only wanted to temper that growth to the extent that we just talked about our buying ability. I don't think we expect another 15% quarter, and part of the reason for that is we don't think we'll be able to spend all that we want to throughout the quarter for the reasons we just discussed but certainly are anticipating growth in Q4 over Q3 and certainly would still anticipate quarter-on-quarter sequential growth throughout 2011.

And then, last, I don't know if you mentioned this in your prepared remarks, but what was cash from operations and CapEx for the quarter?

Yes, we'll let Jim answer that.

CapEx really was probably in the area of about 250, 300,000. The cash from operations, it ran about just from the true direct operations was about 1.5 million.

Great. Thank you.

Okay.

Thank you. Our next question is from John Gilliam with Point Clear Strategic. Your question, please?

Congratulations. Great quarter.

Thanks, John.

The non-advertising operating expenses this quarter came in pretty low. You guys did a great job of managing that. That line, I believe, around 750,000 a month ballpark, do you feel that you would be able to maintain that in Q4 and going forward?

Yes, John, let me let Jim give you a detailed answer, but I'm actually glad you asked this question. We had a rent adjustment that Jim will talk about of $200,000 in the quarter that actually makes our total expense for the quarter look like less than it actually is.

Right.

And what we've always talked about is we thought we could keep operating expenses for the quarter below $3 million, which we believe we can.

Right.

We still believe that, but I want to be careful that we don't get into Q4 and have you believe that operating expenses beyond ad expense have increased because the real difference is going to be this $200,000. So let me let Jim tell you about that and give you the details.

Yes, John, the key thing that's there is the $200,000 adjustment relating to our deferred rent was something that's a non-recurring-type thing.

So if you look at what -- our traditional OpEx, excluding our customer acquisition cost, was about 2.7 for the quarter. Obviously, that's below our 3 million threshold that we've been working on. Obviously, we've been doing certain things from a cost-containment standpoint.

So looking at that, that's effectively within the range that we've been talking about. It's normally averaged about a million per month, and again, the 3 million per quarter, and we feel that we've done a good job in terms of maintaining or controlling our expenses as it is in the quarter.

I would say great. Our models were expecting around the 900 range, so that's fantastic, and keep up the good work with that.

You guys are making the contribution from the non-search category, particularly the -- I believe it was the display ad segment with some new formats and some new CPA agreements. Could you give us a little more color on that?

Yes, let me give you some color on that, John. So we talked about the quarter having a 15% sequential quarter-on-quarter growth, and then we talk about, generally speaking, our non-search revenue being in the 15% range of our total revenue, right? And you've known that for a while.

What I'd say is inside of that 15% growth, we've exaggerated growth in non-search revenue, and we actually grew the non-search revenue portion on its own 35% during that period.

Now, non-search revenue for us is display advertising and CPA deals, and I think you've seen some of that. And part of it is simply that we have increased volumetrics, more toolbars and Home page users, so more views to be seen. But another part of it is we simply have more deals with more consumers -- I'm sorry, more advertisers out there finding our products rich avenues to get to our consumers. We put those deals up, and you can see that that was a pretty dramatic difference on that increased revenue.

Now, it kind of should be expected except it's hidden in only 15% of our base because we've been talking now for I would say the last two quarters maybe, Alex, maybe two or three quarters about a focus there and that we thought our ability would be just that, that we'd be able to grow non-search revenue. And I think as we move more and more from our traditional toolbar into the app marketplace, you'll even find our non-search revenue in coming quarters and years being a bigger percentage of our total revenue in general.

Okay. And you said around 35% growth. That was quarter-over-quarter non-search revenue?

That's right. I think, John, about 15% of our total revenue.

Okay. And could you break that out between a display product and the CPA (inaudible) type arrangement?

We don't but -- 50/50 would be a good thing to think of, but we don't break it out, John, and remember, three or four quarters ago, we only had several customers in that base. Now I've got so many I don't have the number off the top of my head, right? But 50/50 wouldn't be far off, and by next quarter, if you think to ask it again, we'll see if we can provide a number at that point.

Okay, very good. Thank you. Would it be fair to say that the display component of that, the most significant growth came from the Home page product?

Well, the Home page product, if you've been looking at it, we've been featured a new display partner there, and of course, that's incremental revenue, and it's a piece of the 35% growth. But I wouldn't say it's the predominant piece of the growth at all, just part and parcel to the increase of 35%.

Interesting. Okay. Okay, very good. Great quarter, guys. Thank you very much.

Thank you, John.

Thank you. Our next question is from [Jahan Ishwar], a private investor. Your question, please?

Thanks. Good quarter. However, it seems like every time the revenue goes up, it takes all of the money and spend it on customer acquisitions. That's a good thing in that you are looking for the future; however, my suggestion would be to take a part of it and drop it down to the bottom line so that we can see that you're actually not only growing the business but providing greater profitability back to the shareholders.

Well, [Jason](sic), thanks for your comments. We'll keep that in mind, and frankly, that's one of those issues that we struggle with every quarter, so going back to the divestiture of (inaudible) and really focusing on our ALOT product portfolio beginning March of last year, first, we had sort of this survival mentality. You may recall back then our first operating quarter we did $6 million in revenue -- only four quarters ago, we did $6 million in revenue and then a $3.5 million plus or minus EBITDA loss.

So we ran for the goal line to get ourselves to profitability, to make sure that we had a strong balance sheet, to make sure that we could secure some dry powder from financing should we need it, and now we're trying to really ride that fine line that you point out between just how much growth do we want to try to drive the company through versus how much do we deliver back in terms of EBITDA and then consequently cash.

Clearly, and it should be known to our investors, we're trying to go down the path of continue this accelerated growth, and we're doing that simply because we can. We find a very rich user audience, audience really accepting of our product, and while we can get them and while we can get them to good ongoing margins, we feel compelled to continue to chase them. At the same time, we're trying to deliver more cash through EBITDA, and so we're trying to do both.

So on that front, I would say count on us continuing to try to drive growth, but further count on us, like we signaled for Q4, to continue to try to deliver EBITDA and consequently cash profitability quarter on quarter.

I'd hope so because my point is that you spend more of the increase in the customer acquisition cost from Q2 higher than the increase in the revenue from Q2.

I understand the whole thing about the future, but the (inaudible) thing is it's always -- it kind of shows good financial sense and also says that you can actually get customers and make money (inaudible). See, I don't mind you increasing the customer acquisition cost, but keep it below the increase in revenue.

Let me address that just for a second. The situation is that, yes, we did tell everybody on our last call that what we're going to do is we're going to grow our top-line revenue. Part of that is effectively driving our customer acquisition cost.

The dollar that we spend today, which under Generally Accepted Accounting Principles has to be accounted for in this period, actually will bring back revenues over a four-and-a-half to five-month period. So the dollar that I'm investing today is intentionally coming back to me to a breakeven point within four-and-a-half months and then has a much longer -- what we refer to as a long tail, which can go on for much longer than a year, 18 months.

Situation is if you look at some of our legacy products, such as Starware, as Peter mentioned in the presentation, that's a product that's been out there. We have no ad spending inset, and that's generating some significant revenues.

So the investment that we've made today, yesterday, and going back before is effectively creating the revenue stream that's going to carry us forward.

As Peter said, and what I had mentioned in my remarks, was that we're looking to grow top-line revenue in the third quarter, which we're able to do. We drove that primarily by our customer acquisition costs, and we're looking for the additional revenues and profitability to come in in not only the fourth quarter but into the 2011 timeframe, as well.

No, I fully understand. I fully agree with what you're doing. There's a point here what the other person said about a minute ago which is how much do you spend this quarter versus the increase in revenue.

Obviously, what you've done is you've kind of kept the net profits kind of equal into last quarter and spent everything else, which obviously is going to pay off in the future.

However, from an investor standpoint and from a stockholder standpoint, always helps if you marginally increase the profit you drop to the bottom line. So essentially quarter after quarter after quarter if you increase it from $0.5 million to 0.6 to 0.7 to 0.8 to $0.9 million profit [instead of] keeping it flat at 0.5, that gives us more confidence the stock price will go up.

Now, the fact that you captured the 0.5 level or whatever the level it was this quarter does [see] that you are happy with keeping it there. I mean you could've done that (inaudible) spent even more and dropped your profitability with all the same kinds of reasons.

All I'm saying is you could also go the other way a little bit. All we're talking, it's marginally improved, okay? It's $100,000, $200,000 per quarter, and that gives us a lot of confidence.

Okay.

Well, we appreciate your insights, and obviously, we'll take that into consideration in addition to the model and the overall strategy that we're working on. We appreciate it. Thank you.

Thank you. Our next question is from [Terry Nill], stockholder. Your question, please.

A couple quick [follows]. One, is it that the current stock -- common stock flow is 3 million?

I don't know that exact number for you, Terry, but I think it's more like 2.9 million.

Right, I think it's 2.9 million --

Okay, three, give or take.

In the next 12 months, do you all have anything that maybe some of us have missed where you have a plan that that float would increase in the next 12 months?

We have no plan at all in place to do anything in terms of incremental shares for the company at this point. In fact, I talked in past quarters specifically about not doing anything, so the last time we did anything with shares is we did our equity financing arrangement in Q2 with Red Oak, and there is nothing else in place for future shares.

So that's all been satisfied and gone away, so to speak?

Satisfied, shares delivered, and I think at that time -- again, I'm going back two quarters -- I think the dilution for shareholders was something like 1.3%.

Right.

The total deal was $250,000, and all it was a topper for us to secure ourselves at that point greater than $2.5 million in shareholder equity to satisfy NASDAQ.

That particular quarter -- again, I'm going back to Q2 -- we closed at 2.8 million -- 2.85 million in shareholder equity, and as Jim said, we've increased that ever since then and continue to -- continue to increase it as we have income from operations.

So, again, quickly, not trying to be repetitive, but in the next 12 months, you don't see that you have any need for that anymore?

We do not see that, no.

Okay. All right. Number two, do you -- and I heard your comments. I came late. Do you feel that we are to assume as stockholders that the Google contract will continue?

What we've said -- and I'd ask you to go back and look specifically at my prepared remarks. I could read them again.

No, that's fine.

But we do think that we have a good relationship with Google. Our contract with Google is due January 1 of next year, and when we have something to report on it, we would report against that.

I could also tell you if we had something to report negatively, we would report that, and I want to be clear, we have not done that.

Okay, thanks. And along that guideline, not trying to trap you in any way, is there any other source like a Yahoo or whatever relationship that you all are working on?

Well, we already have a -- I want to be clear that you're talking, Terry, about our sell-side arrangements, not who we buy from, so I just want to make sure the rest of the (inaudible) is clear.

Yes, our current method of monetization, and we anticipate this will be the same method into 2011 and beyond, is we gain search revenues from two partners, and you mentioned who they were, Google and Yahoo.

Right.

And we anticipate that 2011 beyond would be the same way. The reason there's been no discussion or even questions, Terry, about the Yahoo contract is our Yahoo contract isn't due in January. I think it's not due for, what, 8, 16 -- six months after that, so it's due June or July of 2011, and it just isn't time to discuss it yet.

Okay, good.

We would anticipate that life would continue the same with both after that period.

Okay. All right. Appreciate your work. (Inaudible - multiple speakers).

Sure. Thank you.

Thank you. (Operator instructions)

Our next question is from John Gilliam with Point Clear Strategic. Your question, please?

Had a couple more questions, guys. Sorry, I forgot them on the original call there.

The quarter four to date, can you give us a little bit of insight into how we're doing so far? And I know obviously we've only gotten the most insignificant part of the quarter under our belt and that the pre-holiday period is all important.

But just wanted to get an idea how we were doing so far and just the -- as far as -- I know you don't typically give guidance, but in the past, we've done something like -- for instance, the past quarter, you had suggested that we would achieve double-digit sequential growth, and prior quarters, you had said you had mid-single to low double-digit growth. And I was just wondering if you felt that we would be able to get into that mid-single-digit range sequentially?

Yes, what we said for -- I don't know if you mentioned it early on, John, but --

(Inaudible - multiple speakers)

-- in my prepared remarks, what we said for Q4 with what we know now, and of course, we're a little bit into Q4, is that we thought we would have sequential growth in Q4 and we thought we'd be profitable.

We tried to steer away from this 15% again in Q4. We do not believe we'll do that, but we do think we'll get single-digit growth in Q4. We'll have to see how it goes.

In terms of how the quarter is going so far, all I'll tell you that not even on a financial front or anything else, the quarter to date looks pretty much like the end of Q3. And in saying that, we continue sort of along the same growth patterns that we've been. The difference is we have not yet seen any evidence of the holiday season seasonality kicking in.

So doesn't mean it won't. It likely will, but so far, what we've seen in November looks a lot like what we saw at the end of October and months before that. Clearly, the holiday shopping season has not kicked in.

Okay, now you're talking about the positive seasonality, the way that it really kicks in because you also have mentioned previously on the call towards the end of the quarter, there's kind of a negative aspect of it, at least on the buy side.

Yes, let me give you both pieces. On the revenue side, typically kind of a little before Thanksgiving to about mid-December, revenue for us on a seasonality basis, that's as good as it gets.

Right.

On the buy side of our business for the entire quarter, what we've said -- you may have missed these in the remarks -- we're going to try to continue with an increased advertising spend for the entire quarter over Q3.

We warned, however -- and we had a pretty long conversation about this -- what we warned was, look, we don't know if we'll be able to do what we want to do on Christmas Day. In fact, we doubt that that will happen. And consequently, we wouldn't spend as much Christmas Day, Christmas Eve, New Year's Eve, Thanksgiving Day and the like as we would.

Now, the caveat to that, which Alex rightfully jumped in to tell our investors, was we are way more international and way more international than a lot of non-Christian countries now where the Thanksgiving to New Year's holiday doesn't mean such a big deal, and since we don't have that experience yet, we don't know what to forecast, right?

So that's why we sort of tailored down the holiday spending period in growth for us because we're in markets that they don't have holiday spending, and it's why we've said maybe we can continue advertising spending throughout the quarter, the reason being there, as we stated, we're about half in non-English-speaking countries, and some of those countries are non-Christian countries where perhaps we could run our advertising spending right through.

Okay, great. Last question, with regards to the new Appbar product, wanted to get an idea if -- and I know it's brand new and you may not have even had an opportunity yet to run the -- to offer the Appbar through the campaigns that you run. But if you have, I wanted to get an idea -- and, again, I know that a big part of the value is to come when we offer the Appbar in that we expect that the value added property (inaudible) will make consumers keep it longer and use it longer and build the revenue longer.

That's right.

I'm just wondering if you have run any yet, are you seeing any increase in the amount they're searching? Because I think -- I guess that's the other side of it, that it's just a -- it's more prominent, it's more aesthetically pleasing, and it's -- to look at the new one versus the old one, I noticed the search feature more. And I was wondering if you were seeing more searches conducted in the first 30 days versus the legacy ALOT Toolbar?

John, I'm going to have Rob answer that for you, and before he does, I want to caveat whatever he'll say, okay? That's that our -- as you know, we spent a tremendous amount of intellectual capital internally on our buy-side and sell-side modeling, right?

Right.

And we're proud of the fact that if we start buying in a new market today, within three days, we have a good sense that we can make a go of it. Within seven, we're pretty close. And by 21, we're certain. And potentially spend a couple of hundred dollars to make that determination, and we can go like the wind, right?

And I do want Rob to give you some information on what we know, but I'll caveat that, that because we've not lived a life ever, a lifetime value ever on the buy side or the sell side, we really don't know, but I'm happy to have Rob tell you what we've learned in our testing so far. So, Rob?

Sure. Hey, John.

Rob.

So what I can tell you is we have done some testing. This Appbar's been a long time in development. We've actually had prototypes out there that we've done some testing on to try to get some idea of this, and there have been some positive indications.

But as Peter said, to really -- the real test for us in terms of testing in the marketing channel is to have a full 12 months of ROI so that we can really have some confidence in how that's going to perform.

That said, the indications were good, but again, this is a limited test in a certain market segment, and it's not necessarily applicable to all.

What I can tell you, though, is that in terms of -- and this speaks to, I think, some of the points you're making about the attractiveness of the product and how visible it is -- we definitely have noticed -- it was in our test -- that users tend to interact more with the Toolbar, and whether that's the search piece --

The Appbar, you mean.

I'm sorry, the Appbar, yes. Whether that's the search part, but also significantly the apps themselves, and so we think that the presentation really lends itself towards drawing the user's attention. It's more attractive for the user to interact with it. As you noticed, there's multiple pages of apps in the Appbar, and it's not like the apps on the first page get all the attention. Users - many users click into the multiple pages and use apps that are buried deeper within the interface. So for us, that also spells good news not only for the potential to get search revenue, which is obviously important to us, but in terms of the success of the app paradigm. We're also very much interested in users interacting with apps, and we believe that it's likely to happen.

Again, this is based on data on a limited test, and we won't really know until we roll it out more fully.

And what we're doing today, John, since we've rolled out the Appbar, we are going to start doing limited testing within our direct marketing channels, and we will -- as performance proves itself, we will scale up that distribution over time. But we're going to let the performance drive our decision. We're not going to try to force it, and we're not going to take a large bet on this. We're definitely going to be doing it carefully and productively.

Great. Thank you, Rob.

Sure.

Thank you, gentlemen.

Thanks.

Thank you. (Operator instructions)

I'm showing no further questions in queue at this time. I would now like to turn the conference back over to Alex Vlasto for any further remarks.

Thank you. This conference call contains certain forward-looking statements that are in the meaning of Section 27A of the Securities Acts of 1933 and Section 21A 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 agreement with Google, which accounts for a significant portion of our revenue, has a two-year term that expires on December 31, 2010. If unable to renew our agreement (inaudible) renew our agreement on less favorable terms, would likely experience a decline in revenue and our business operations may be significantly harmed.

Two, our ability to successfully execute from our corporate strategies.

Three, our ability to distribute and monetize our international products at rates sufficient to meet our expectations.

Four, our ability to develop and successfully market new products and services.

And, five, 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 and Form 10-Qs for Q1, Q2, and Q3 2010.

In addition, past performance cannot be relied upon as a guide to future performance.

That concludes our call today. Thank you for listening.