Description
Switchboard is one of the leading providers in the internet yellow pages sector. And it is trading for less than the cash on their books.
Market Cap: $44 million with $52 in net cash on the balance sheet -- cash value is approximately $2.75 per share
Switchboard has basically reached break-even and they will continue to trend in this area for the next couple quarters. This company will start to produce cash flow as the industry matures and advertisers shift more of their money to Internet yellow pages or they bring a few new partners into their network.
Switchboard business model: Switchboard has two components to their business model. First, Switchboard licenses their technology to their partners. Switchboard has the most advanced platforms for running on online yellow pages. They have spent approximately $100 million developing this platform and it will be very hard for others to duplicate it. Licensing partners include: AOL, The Berry Company, Transwestern Publishing, and newspaper groups including Advance Communications, Knight Ridder and New York Times.
Second, they own Switchboard.com which has five million unique visitors every month looking up yellow page listings. They generate revenue from these users by selling advertising and listings on their site. In addition, they signed a deal with BellSouth in December 2002 to feature BellSouth’s advertisers on the Switchboard.com site. This deal is expected to generate about ½ a million dollars in 2003 and more than a million in 2004.
Trend to Internet: Currently 10%-15% of yellow page look-ups are done online. This number is expected to grow to 50% over the next five years according to the Kelsey Group. The print yellow page advertising business is a $14.3 billion market in the U.S. Assuming the advertising dollars will follow the consumer’s use of the Internet yellow pages, this will be a multi-billion market in the next few years.
AOL relationship: Switchboard originally signed a deal with AOL in the Internet heyday where they paid AOL millions of dollars a year for access to AOL. This deal has been restructured as a revenue sharing deal. In the new deal, AOL pays switchboard a percentage of the revenue generated from selling online yellow pages. This percentage goes down as certain cumulative revenue targets are met. AOL is expected to hit a new milestone next quarter which will trigger a lower revenue share, which is leading to a small decline in the projection for Q12003 over Q42002. AOL represents 53% of revenue in Q42002. The current deal expires at the end of 2004 and it would be big loss to switchboard if AOL went to another party. I have talked with several people at the company and they don’t see any issues with renewing this deal, but turnover at AOL is high and things may change. This is the largest downside risk for switchboard.
I haven’t made specific financial projections, because it is so dependent on the future deals that are signed. The company projects revenue of $3.0-$3.4M in the first quarter with a net loss of $100-$500K. This compares to revenue of $3.4M with a loss of $180K in Q4.
Catalyst
Negative enterprise value. The company trades for less than the cash on their balance sheet. As the company reaches sustained positive cash flow, I believe the market will give them credit for their cash and the potential for their business as well.
Large growing market. The internet is taking a larger share of the yellow pages lookups and advertisers will have to follow the customers to the internet to maintain their positions. With the market growing rapidly, I expect that they will be able to grow revenue without signing new contracts.
New deals. Switchboard is talking to everybody in the industry to sign new partnership deals. Deals come slowly, but switchboard keeps signing them. If Switchboard can sign a major deal with a RBOC or large yellow page provider that can immediately bring the company to sustained profitability.