QUEPASA CORPORATION (QPSA) Recent Stock Volatility… “Much Ado About Nothing”
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Social Networking - Internet Company Update February 14, 2011 BUY QUEPASA CORPORATION (QPSA) Recent Stock Volatility… “Much Ado About Nothing”. 4Q10 Results and Subsequent Events Show Investment Thesis On Track. Reiterate Buy Rating and Price Target of $16.00. COMPANY & MARKET DATA 2/14/2011 Investment Rating BUY Highlights Prior Rating Price Target (12-month)$ 16.00 Stock Volatility… “Much Ado About Nothing” – Last week’s Prior Target trading in QPSA was the manifestation of our previously stated Liquidity Risk. QPSA opened the week of February 7-11, 2011 at th TRADING DATA QPSA $13.60 per share, traded as high at $14.25 on the 8 , collapsed to a th Price $ 11.10 low of $9.82 (> 30% decline) on the 10 , before moderating and 52 - Week High$ 15.45 closing the week at $11.10. It is our opinion that this volatility was due 52 - Week Low$ 2.90 more to “How” the Company communicated with the Street, not Mkt. Capitalization ($mm)$ 169.69 “What” was communicated. As such, we believe the volatility was Primary Shares Outstanding (mm) 15.3 “Much Ado About Nothing.” Fully Diluted Shares Outstanding (mm) 25.3 4Q10 and FY10 Results. 4Q10 revenues came in at $1.85 million, $150 thousand less than our $2.00 million expectation. EPS came in Avg. Daily Trading Vol. (000) 286.9 at a loss of 13¢ versus our estimate of a loss of 9¢. At this stage of the Company’s growth, we don’t believe either of these misses is material BALANCE SHEET (in millions) 12/31/2010 to the ongoing story. Cash and Cash Equivalents$ 13.55 Accounts Receivable$ 1.36 EBITDA Positive for the year. DSM and Web Development contracts Debt - Notes Payable$ 6.27 (the majority of which were with affiliated Directors) of $7.3 million were signed during 2010, of which $5.7 million were recognized. This REVENUE AND EARNINGS ESTIMATES led to EBITDA coming in positive for the year. Combined with their 2009 2010 2011E 2012E December offering to put QPSA in a much better cash position Revenues ($mm) $ 0.54 $ 6.05 $ 15.03 $ 35.59 ($13.55 million) than they were at the beginning of 2010. 1Q EPS$ (0.20) $ (0.21) $ (0.13) Most Importantly, Events Occurring Subsequent to Year End Show 2Q EPS$ (0.20) $ (0.15) $ (0.11) That Our Investment Thesis For the Company is On Track. 3Q EPS$ (0.23) $ (0.03) $ (0.06) Record Membership Growth. At Year-End 2010, QPSA had 27.2 4Q EPS $ (0.20) $ (0.13) $ (0.01) million members, in-line with our estimate. However, January 2011 EPS - Basic$ (0.84) $ (0.51) $ (0.31) $ 0.22 saw a record 2.32 million newly registered members added, of which EPS - Fully Diluted$ (0.84) $ (0.34) $ (0.19) $ 0.13 26% were from Brazil and 14% from Mexico. Consensus EPS na na na na TechFront Acquisition. In our opinion, this was the most important announcement the Company has made. On February 1, 2011, QPSA announced the acquisition of XtFt Games, the owner of TechFront Desenvolvimento de Software, a Brazilian social game developer. Not all Wine and Roses this Valentine’s Day. While membership growth continues to be impressive, in our opinion, we continue to be concerned about the stickiness of users, their page usage, and monetization. Maintaining Rating and Price Target. Nothing that was reported in the past week changes our long-term Investment Thesis. In fact, we believe the TechFront acquisition could prove to be key to the Company achieving “stickiness” and monetization. We continue to rate the shares of QPSA a Buy, and maintain a Price Target of $16. We recommend investors accumulate on any price weakness. Source: bigcharts.com E. Brian Harvey 305-572-4110 [email protected] Disclosures and Analyst Certifications can be found in Appendix A. NEW YORK, NY MELVILLE, NY PRINCETON, NJ MIAMI, FL BOCA RATON, FL 4400 Biscayne Boulevard, 12th Floor Miami, FL 33137 Telephone: 305-572-4100 800-LAD-THAL Member: NYSE, NYSE Amex, FINRA, all other principal exchanges and SIPC E. Brian Harvey 305-572-4110 Quepasa Corporation (QPSA) 4Q10 and FY10 Results Reported 4Q10 revenues came in at $1.85 million, $150 thousand less than our $2.00 million expectation. EPS came in at a loss of 13¢ versus our estimate of a loss of 9¢. Actual Estimate Difference 4Q10 Revenues (mm) $1.85 $2.00 ($0.15) FY10 Revenues (mm) $6.05 $6.20 ($0.15) 4Q10 EPS ($0.13) ($0.09) ($0.04) FY10 Cash Flow $26,207 n/a n/a While the revenue growth Quepasa showed year-over-year is impressive, we note that according to the Company, 95% of the revenues for the year came from two companies of which a director of Quepasa is an officer or director. With recently announced DSM reselling arrangements with Sony Pictures Television Ad Sales (SNE, $34.90, Not Rated) and Grupo Expansion (a division of Time), we expect non-affiliated revenues to improve in 2011. Current DSM backlog totals $1.6 million, which management expects to recognize in 2011. Cash Improves at Year End The previously discussed positive cash flow combined with an equity offering ($12.6 million) completed in December led to a cash balance of $13.55 million at year end 2010, versus $1.03 million at year end 2009. Important to validate the DSM Platform. We have heard some concern about affiliated revenues from some investors, but in our opinion, these affiliated revenues have been critical to help generate data about the ability of the DSM Platform to reach the appropriate advertising targets. Our conversations with management about this lead us to believe that the validation of the platform has been very important as Quepasa has now gathered data and expectations that it is bringing to third- party advertisers. According to management, several of the campaigns have achieved 3- 4x their anticipated engagements, as is shows in the example below. DSM Engagements Exceeding Expectations Subsequent to year-end, Quepasa announced that one of its DSM campaigns, “Ley de Fomento al Primer Empleo” (“Law of the First Employment”), which was run for 30 days, generated more than 8 million total views, votes and shares across a targeted base of 30 million internet users in Mexico. Management noted that 3-months after the start of the campaign, the Law was passed by the Mexican Senate, and they believe the campaign generated over 180,000 votes in support of the law and reached users in over 2,300 cities and municipalities across Mexico. Additional Revenue Opportunities. Management notes that aside from the expansion of DSM revenues with other non- affiliated sources, they expect to seek additional revenue sources from marketing, political, and environmental campaigns. But it is our belief that to generate meaningful revenues, Quepasa will have to have success in turning its membership in to gamers. Ladenburg Thalmann & Co. Inc. PAGE - 2 - E. Brian Harvey 305-572-4110 Quepasa Corporation (QPSA) Events Subsequent to Year End Record Membership Announced In January, Quepasa added 2.32 million additional members, bringing the total user base to 29.5 million, in-line with our expectations. Page views which were 184 million in December 2010 rose to 214 million in January. While we view the page view growth trend as encouraging, we believe the company will need to increase both the number of monthly Unique visits and visitors, along with page views in order to capture more monetization opportunities. It is our opinion that better “gaming” offerings will lead to this “stickiness”. Exhibit 1: Quepasa Membership Chart Membership Cumulative Unique Growth (mm) Members (mm) Visits (mm) January 2010 1.4 9.0 February 2010 1.5 10.5 March 2010 1.5 12.0 April 2010 1.3 13.3 May 2010 1.1 14.4 9.6 June 2010 1.2 15.5 10.8 July 2010 1.4 16.9 12.4 August 2010 1.8 18.7 14.4 September 2010 2.0 20.7 16.0 October 2010 2.1 22.8 16.3 November 2010 2.3 25.1 17.4 December 2010 2.2 27.2 16.4 January 2011 2.3 29.5 17.6 Source: Company Reports, Ladenburg Thalmann & Co. Inc. Estimates. TechFront Acquisition In February Quepasa announced what we believe to be the most important piece of news the Company has made in years, the acquisition of XtFt Games, the owner of substantially all the assets of TechFront Desenvolvimento de Software, a social game development studio based in Brazil. TechFront was founded in 2006 as a developer of multi-platform console, Web, and mobile games. In 2010 TechFront began developing games for Orkut in partnership with US-based eGames. The acquisition brings Quepasa a team of 41 full- time game developers focusing on culturally relevant social gaming. We see the importance of this acquisition in many different areas. By promoting culturally relevant games, we believe the stickiness of users will increase. We believe this will allow for better economics to Quepasa, as we had previously expected gaming revenue to average a 40/60 revenue split. With the game creation capacity in-house, we believe the economic proposition will improve over the longer-term. Leverage. As both a publisher and a platform, we believe games created by TechFront for Quepasa will also be ported to other platforms, thereby creating additional revenue streams for the games. We see the cost of $4 million to be reasonable ($3.7 million in shares of Quepasa, $300 thousand cash), and the “earn out” provisions to be particularly encouraging.