Friday, January 27, 2006

TheStreet.com: No BOOYAHH!

In June 2005, after slumping to a 52-week low of $2.59, TheStreet.com (TSCM-$7.88), a pure-play Internet provider of a suite of subscription services for use by professionals and self-directed investors, has seen its stock jump 204 percent. In January 2005, the Company announced that New York investment bank Allen & Co. was hired to assist corporate in considering possible "strategic alternatives" for enhancing stockholder value--and as buyers of the stock have speculated, perhaps a possible sale of the Company. To date, however, save for the shuttering of The Street.com's money-losing subsidiary, Independent Research Group LLC., which operated as a securities research and brokerage unit, the smart-ones at Allen & Co. have come up empty in the idea gallery. Then again, just by mentioning corporate talks with Allen & Co., TheStreet.com put itself in play. Anyone seen a "For Sale--by Owner" sign on the front lawn?

Shareholders rode out a dismal summer and autumn. In November 2005, the 10Q filing revealed that subscription revenue decreased by approximately 2% to approximately $16.6 million, as compared to approximately $16.8 million for the nine-month period ended September 30, 2004. Corporate said that this disappointing performance metric was attributable to decreases in subscription revenue for several products, including TheStreet View, Street Insight, RealMoney.com, TheStreet.com Value Investor, and The Telecom Connection--which management blamed on "negative market sentiment." Subscription revenue, not online advertising revenue, dominates this business, and contributes roughly seventy cents to every dollar in sales.

However, looking at the glass as being half-full, management did stress that a more relevant indicator of future growth expectations was the fact that subscription revenue did increase slightly during the third quarter of 2005, compared to the prior quarter. Interestingly, this high-priced management team [more on that later] said that this increase was caused by several factors. First, strong deferred revenue in the previous quarter (a function of subscriptions that have been sold but not yet recognized as revenue) led to subscription revenue growth as this revenue was recognized. Second, the Company experienced "strong growth in both page views and unique visitors" during the quarter due to its success in (i) signing and implementing agreements with large, high-traffic portal companies to direct users to its web sites, (ii) promoting its brands, products and services through contributor James Cramer’s television television and radio programs, and (iii) introducing new content on its free, flagship web site (theStreet.com) to expand its appeal to a broader audience.

  • Red Flag #1. The base of paying subscribers increased by only 7,600 from the third quarter of 2004. Under GAAP accounting, revenue is recognized when it is earned. Sales at TheStreet.com are derived from annual, semi-annual, quarterly and monthly subscriptions. And this subscription revenue is recognized ratably over the subscription periods. The Street.com has collected more than $9.4 million, which is sitting on its balance sheet as a current liability called, deferred revenue. The 10Q Detective is clearly stating up front that we are not accusing corporate of any malfeasance. Theoretically--just for our readers' own edification--it would be easy for a 'less-than-honest' management team to 'massage' top-line growth. In an otherwise flat quarter, someone could pre-maturely move forward subscription activity dates; ergo, the liability moves to the cash-earned line-item on the income statement. [ed. note. If this concept still confuses any of our readers, please drop us an e-mail.]

    Red Flag #2. Good news for the bulls, for in a Form 8-K filed on August 5, 2005, it was dutifully noted that TheStreet.com and its co-founder, director and columnist, James J. Cramer, entered into a new employment agreement. Pursuant to the Employment Agreement, Mr. Cramer will author articles for the Company’s publications, provide on-air radio hosting services for the Company’s radio programming, and provide reasonable promotional and other services, subject to his personal and professional availability, through December 31, 2007. Nonetheless, the 10Q Detective is still left scratching this one unrelenting itch: A significant portion of the Company's subscription revenue is generated by the marketing power of "Mad Money" James J. Cramer. And let's be honest, Cramer aside, the Company's past brand development efforts to attract new subscribers is spotty--at best. And what inquisitive third-party would be willing to pay a premium for this content provider with a subscriber/advertising business business platform that has an accumulated deficit of approximately $155.3 million?
  • Red Flag #3. The Company's operating segments face competition for customers, advertisers, employees and contributors from financial news and information sources, and from many other types of companies. Truism--so to be succint--chief competitors include: (i) online services or web sites focused on business, finance, or investing such as The Wall Street Journal Online (www.wsj.com), Forbes.com, SmartMoney.com, CBS.MarketWatch.com (recently purchased by Dow Jones & Company) and The Motley Fool; (ii) traditional media focused on finance and investing, including print and radio, such as The Wall Street Journal; (iii) investment newsletter publishers such as Phillips Publishing, KCI Communications and Agora Publishing; (iv) information and analysis providers such as Standard & Poors, Moody's, and Morningstar; and (v) Blogs--that's correct, B-L-O-G-S.

Rhetoric aside, if you bought TheStreet.com last summer at $4.00 per share, you are sitting on an unrealized gain of approximately 97 percent--buy, sell, or hold? Thank the financial news media for your healthy gains. In December, 2005, The New York Post speculated that TheStreet.com was in play as a Target of Takeover.

Mad Money Man Cramer is fond of saying: "you can be a bull, a bear, but a pig gets eaten in all markets!" That said, there is some merit to an acquisition bid for TheStreet.com. Traditional media has been doing some shopping--and buying of online content providers with similar subscription/advertising business models:

  1. 1. Rupert Murdoch's News Corporation spent $580 million in cash to buy Intermix Media, Inc. The deal successfully closed on September 30, 2005. Intermix is best known for its MySpace.com site, which is an active online community that integrates social networking applications with proprietary online content to motivate its users to spend more time on its Network and to invite their friends to join them, too. When last checked, the Intermix Network (which also owned some thirty other websites) had grown to over 30 million unique visitors per month.
  2. 2. In January 2005, Dow Jones closed on its $519 million deal to purchase MarketWatch, Inc. (MKTW), a well-known provider of business news, financial information and analytical tools. According to ComScore Media Metrix, during the last months of its independent life, MarketWatch averaged around 5 million unique visitors each month and 230 million pageviews. On a valuation basis, Dow Jones paid 30 times estimated cash flows. Looking at a popular Internet performance metric--with 6.8 million unique visitors per month [NOW]--Dow Jones paid approximately $76 per pair of eyeballs acquired!
  3. 3. Feb. 17, 2005--The New York Times Company announced that it had reached an agreement to acquire About, Inc., a leading online consumer information provider, from PRIMEDIA Inc. in an all-cash transaction valued at approximately $410 million. About, Inc., through its Web site About.com, provides "practical solutions for everyday problems." Ranking among the most frequently visited sites, About.com reaches an audience of 22 million unique visitors each month. In this case, The Times purchased About.com on the cheap, for only $18.60 per pair of eyes! Or, in the traditional analysis, the purchase price reflected a multiple of over 10 times About's 2004 revenues

Compelling these transactions were similar strategic benefits, as noted by the acquiring firms in press releases: (i) Adding a fast-growing, highly profitable Web site to complement the acquiring company's existing portfolio of digital properties; (ii) Extending reach and scale by combining the traffic of the network of Web sites. This best positions the companies to further capitalize on double-digit growth in online advertising; (iii) The acquisitions should add complementary proprietary content, expanding the scope of proprietary offerings; and (iv) The mergers should provide significant opportunity for cost savings through operational cost synergies, including elimination of royalty fees and other overhead costs. Ergo, The transactions will be accretive to forward earnings.

Will TheStreet.com sell? Looking at the aforementioned comparables--what is the share-net value?

TheStreet.com is not a fast growing, profitable website. The Company did report a 26 percent increase in ad revenue in the third quarter, as sales picked up to $2,117,805, from $1,676,007 in the second quarter of 2005. However, this marked only the first sequential increase since 1999! Advertising revenues contribute just $0.26 per dollar in net sales. A salient factor that contributed to this growth in advertising sales was a strong demand for online advertising--which led to increased spending by the Company's advertisers. A large proportion of the Company’s top advertisers are concentrated in financial services, particularly in the online brokerage business. . For the three months ended September 30, 2005, one advertiser accounted for approximately 12% of total advertising revenue. The 10Q Detective suspects this client is Fidelity [given the size of its banner advertisements].

  • TheStreet.com did return to profitability in the 3Q:05. The Company's reported that net income from continuing operations for the three-month period ended September 30, 2005, was approximately $1.4 million, or share-net of $0.05, on 26.2 million diluted shares outstanding. However, the Company used cash in operating activities of $1.64 million for the nine-months ended September 30, 2005, primarily the result of the Company’s net loss of $1.5 million combined with a decrease in accrued expenses (primarily the result of payments related to incentive compensation), and in increase in accounts receivables.
  • Dow Jones & Co. and New York Times Co. bought Internet companies to gain a bigger piece of the fast-growing market for online advertising. Given that TheStreet.com does not have a strong cost-per-click advertising business, in our opinion, investors should not get too excited about the prospects of TheStreet.com as a takeout target.
  • TheStreet.com sells online subscription services for newsletters with names like Action Alerts PLUS, TheStreet.com Stocks Under $10, Street Insight, TheStreet.com Value Investor, TheStreet View, and RealMoney.com. In our opinion, The Street.com probably is not attractive to many media companies, too, because it's too much of a niche business.

Net sales' estimates for the current year ending December 31, 2006, are approximately $32.6 million. Sustainable operating profits are uncertain, in our opinion, given runaway expenses. SHAME! SHAME! In 2005, general and administrative expenses, consisting of compensation for general management, finance and administrative personnel, ate up $0.23 cents of every dollar in net sales.

A review of senior management highlights another case of substance--oh, we mean, salary abuses:

  • (i) On December 27, 2005, TheStreet.com, Inc. and Thomas J. Clarke, Jr. entered into a new Employment Agreement, effective as of January 1, 2006, upon expiration of his prior employment agreement with the Company. Pursuant to the Agreement, Mr. Clarke will continue to serve as the Chairman of the Board and Chief Executive Officer of the Company through December 31, 2007.

    In consideration for his service, Mr. Clarke, the CEO, is entitled to an annual base salary of $410,000 and is eligible to receive annual cash bonus compensation, with a target of such bonus being 75% of such salary. Mr. Clarke also will receive an annual grant of long-term equity incentive compensation. Each grant will have a value on the grant date of $300,000 and will vest ratably over the first three anniversaries of the effective date of the grant.
  • (ii) Annual salaries and cash bonuses for other insiders: James Lonergan, President and COO, Lisa Mogensen, CFO, and Jordon Goldstein, General Counsel, total $516,000, $448,000, and $380,000, respectively excluding equity options].
  • (iii) And let us not forget the one who drives top-line growth at the Company--James Cramer. From a recent 8K filing: "Mr. Cramer’s salary will be $500,000 per annum for the remainder of 2005, $750,000 for fiscal 2006 and $1,000,000 for fiscal 2007. In addition, he will continue to be paid the radio talent fee (currently $363,000 per annum) paid to the Company by Buckley Broadcasting Corp.-WOR under the Company’s radio agreement. Mr. Cramer is also eligible to receive stock option awards and annual bonuses under the Company’s annual incentive plan....

Just for these five insiders--excluding stock options--General & Administrative expenses totaled $2.8 million, or 8.5% of expected 2006 net sales! And these numbers do not include other G&A expenditures, including finance and administrative personnel, occupancy costs, professional fees, equipment rental and other office expenses.

This math activity eruditely casts a shadow on any belief that buying TheStreet.com would be accretive to a possible buyer's bottom-line.

TheStreet.com has a market capitalization of approximately $200 million and sells for a forward 12-month Price of 29.2 times earnings. Trailing twelve-month operating margins were (2.30%) and ROE was 1.50 percent. Trailing twelve-month EBITDA was (82.62K).

Online performance metrics do not favor the Company--We estimate online subscribers and monthly unique visitors to be approximately 83,000, and 3.1 million, respectively.

Murdoch spent $19.33 for each Intermix Media monthly visitor; Dow Jones paid $103.80 for each set of eyes and on a valuation basis, 30 times estimated cash flow; By comparison, The New York Times, bought About.com on the cheap, paying only $18.60 per set of eyes and a multiple of ten times sales.

At a share price of $8.00 per share and a market cap of $200 million, TheStreet.com would cost a potential acquirer $64.52 per eyeballs or a multiple of 5.5 times sales.

If Allen & Co. could find an Old World [European?] Media company willing to ante up a premium to buy itself an existing web-franchise, TheStreet.com might command $350 million [excluding debt], or $13.35 per share. Comparables: $112.9 million per set of eyes or a multiple of 9.7 times 12-month forward revenues.

Given that TheStreet.com lacks product diversity, has a business model unlikely to sustain profitability, a management team more interested in making portfolio manager salaries, and no original ideas [save for Mad Money Man himself--who ought to be peaking soon from 'overexposed' media time & unreliable"money-making" ideas] to combat the new competitor called BLOG, it is doubtful that this stock will "stay-in-play."

As there are no visible catalysts to move the share price higher, lock in profits and sell. Don't Back up the truck. And no "BOO-YAHHHH" for TheStreet.com.

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NO DooDahs said...

Excellent post. I had thought about including that company on a list of possible shorts in 2006, but declined to include similarly overvalued stocks with higher market caps. If I had read the fine print as well as you did, I probably would have included it. As always, excellent work!

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