Viggle’s Incentivized Ad Viewing Is A Weak Business Model

12/04/2014 at 6:39 PM

 

  • Viggle’s (VGGL) business, incentivized ad viewing, is bottom of the barrel ad view quality.
  • VGGL spends more money to get users than it gets paid by advertising companies.
  • VGGL spends close to $2M per month on advertising and marketing. At this rate, they’ll need to raise more money in 1H15.
  • VGGL makes almost 100% of its revenues on mobile phones from its mobile phone app, and the app has a low download ranking.
  • The CEO has never bought common stock of VGGL, but is buying highly dilutive preferreds and debt. He is, however, buying common stock of his other company, SFX Entertainment (SFXE).
  • VGGL common stock will eventually reach zero.
  • The lower the trading volume, the lower the stock price goes.

Viggle’s (VGGL) business model of ads incented with ulterior motives makes it a sham. If somebody is only clicking on something to get “points” they very likely don’t care about the message and the impression of the ad is very low. The value of ad impression is very important, as internet ad companies are finding out. Look at what happened to the stock of Blinkx (BLNX.L). Blinkx had placed low quality ads on the internet, and eventually ad companies caught on. Harvard professor Ben Edelman wrote a scathing report on Blinkx earlier this year before it collapsed.

There is no hope for VGGL. It costs the company much more money to get users and keep them interested than the revenue it receives from ad companies. VGGL common stock will eventually be worth zero, as the CEO will take over the company with his loans and preferred stock.

Yet the company is highly promotional to investors and presents at many investor conferences so they can fund the business by dumping shares on the open market.

The CEO’s Predatory Lending

VGGL’s founder and CEO, Robert Sillerman, bought a shell (Gateway Industries) in 2011, and invested in that shell which became Function X and then Viggle. He has been pouring money into this business for awhile. He doesn’t want to let a bad idea die.

On 10/31/14, Sillerman’s company, Sillerman Investment Company III (SIC III) invested $30M of predatory lending to VGGL. With the company’s advertising and marketing spend of almost $2M per month, those funds will run out by 1H15 of next year. Much of that $30M will be used to pay off debt and short term liabilities. The PR for this lending doesn’t show the predatory terms of the deal. That is shown in the SEC filing.

Some shareholders might think Sillerman is helping them, but he’s not. If he were buying common stock on the open market, then that would buoy the stock price and help shareholders. But buying preferred stock and bonds won’t help shareholders, it only digs them a deeper hole to come out of.

In fact, the stock trended down after news of this dilutive offering on October 29th, as shown in the stock price chart below:

 

The stock rebounded over 100% after quarterly results were announced but the quarter actually wasn’t very good. The stock then cooled off a bit, but then shot back up again on announcement of another small, token financing deal with SIC III on November 28th.

What’s also interesting about the above stock price chart, is the volume bars on the bottom. Whenever there is heavy volume, the stock goes up. When volume is low, the stock goes down. There was hardly any volume prior to November 12th, and nobody cared about the stock. Now everyone cares about it. Once volume dries up again, the stock will predictably immediately fall back down to sub $3 within the next week or two, and then sub $2 in a couple months.

Viggle’s Mobile App Is Hardly Used

VGGL makes close to 100% of its revenues through mobile advertising. Its mobile app is hardly used however as shown by app analytics service App Annie. If an app is ranked below 250, it’s non-existent. As shown below, the Viggle app is ranked well below 250.

 

CEO’s Related Party Dealing

As explained in this article, the CEO, Robert Sillerman, owns a big chunk of VGGL but bought his shares for less than 10 cents apiece. The reason why he’s keeping the company afloat right now with debt funding, is partially because he is funneling some of the revenues to his other company, SFX Entertainment (SFXE). What’s interesting, is Sillerman has been buying shares on the open market of SFXE, but he has never bought shares of VGGL on the open market.

From the latest 10-Q:

“Our licensing agreement with SFX Entertainment, Inc. may adversely affect our ability to generate revenues in the future.

 

On March 10, 2014, we entered into a software license and services agreement with SFX, a company affiliated with Mr. Sillerman, pursuant to which we licensed our audio recognition software and related loyalty program to SFX. SFX may use the software for its own internal business purposes and may sublicense the software to its affiliates or to its co-promoters. The agreement provides that during the term of the agreement we may not license the software to any third party that directly competes with SFX in the promotion of dance music. Therefore, the agreement will prevent us from entering into, and generating licensing revenues from, any third parties that compete with SFX in the promotion of dance music. The agreement also provides that SFX will receive 50% of our net revenues from the license of the software to any third party. Accordingly, any future revenues that we receive from licensing the technology to third parties will be reduced.”

 

A Lousy Q3 2014

Last quarter’s reported results were lauded by the market as the stock rose over 100%. It was reported in news streams as:

“Viggle reports Q1 revenue $6.48M, one estimate $5.31M
Total reach was 26.2 million and active reach was 10.3 million in September 2014. The Viggle platform’s net registered users surpassed 7 million during the quarter, which was an increase of 112 percent and 32 percent from the same quarter of the prior year and prior quarter, respectively.”

 

But that increase in users and revenues came at a big price. For quarter ending 9/30/14, losses reached a yearly high of $17.6M, or about $1M more than the previous quarter. In quarter ending 6/30/14, revenues increased $2M quarter over quarter, but losses increased by $2.7M. The more revenues VGGL makes, the more money the company loses.

VGGL is now getting less revenues per user. Even though net users increased 112% year over year, revenues for the quarter only increased 49%.

The following are VGGL’s latest quarterly income statements taken off Yahoo finance:

Conclusion

With the need to consistently “buy” its revenues, VGGL is a business that doesn’t work. It’s apparent that the company’s CEO also feels this way, because he isn’t buying common equity in the open market, yet he’s buying stock on the open market with his other company, SFXE. This predatory lending he is doing doesn’t help shareholders, it just digs a deeper hole for them. Right now, with the hype in the markets, the stock hasn’t been punished for his predatory lending. But sooner rather than later, when volume dies down, the share price will feel its toll. Expect to see much insider selling later this month and next month by VGGL employees and major shareholders. We expect there has been a lot of insider selling during this recent trend of high volume the past couple weeks.