There are plenty of reasons to warm up to LoopNet (Nasdaq: LOOP) these days, especially after watching its stock endure an 8% haircut on Friday on the heels of apparently reasonable quarterly results.
Revenue grew by 20% to $22.4 million, an oasis in the crumbling commercial real estate desert. Earnings did dip to $0.13 a share after posting a profit of $0.14 a share a year earlier, but Wall Street was actually braced for a larger decline on the bottom line. The more encouraging metric is a 15% boost in EBITDA, adjusted for stock-based compensation and litigation costs related to its legal battle against property researcher CoStar Group (Nasdaq: CSGP).
Deal seekers also continue to flock to LoopNet's commercial real estate website. The company now has more than 3.1 million registered members on its site, a 29% improvement over last year's tally. The site's premium members are also paying 22% more for enhanced access and listing features on the site.
Where's Waldo?
I'm leaving out one damaging statistic, but let's see if you can figure it out. Put on your sleuthing cap and walk through those numbers again. Does anything seem out of line?
You may have caught on to the falling margins, with earnings growth -- even on an adjusted EBITDA basis -- lagging the top line. That may be true, but it's also expected in these chilly economic times. Let's look elsewhere.
If the membership rolls are growing, and paying subscribers are willing to pay more, why did revenue only grow by 20%? Bingo! Just 83,808 of LoopNet's members are premium subscribers, a 7% decline year over year.
Let's ask the boss about that...
I actually raised my concerns to CEO Robert Boyle on this potential pothole two months ago.
"You increased your subscription rates last year, and I have seen online companies like The Knot (Nasdaq: KNOT) and eBay (Nasdaq: EBAY) raise their fees under deteriorating marketing conditions last year, only to be ultimately burned," I asked. "What is LoopNet doing to avoid falling into that trap?"
Boyle explained that the price hikes only applied to agents marketing properties, not the premium members paying for enhanced access to the listings.
"Our model historically was a monthly flat fee," Boyle told me. "If you had one listing, you were paying us a certain fee. If you had 100 listings, you were paying us the same fee. We did that for a reason, as we were building momentum in the business initially, but what we introduced at the end of last year was a gradual tiering, where the $89 monthly subscription to the marketing listings right now is for up to four active listings. As you go to five or more listings, the fee scales up in a fairly linear manner."
Boyle also felt that LoopNet would hold up well, giving agents more bang for their marketing buck.
"We feel very comfortable with that in a couple of ways," he said. "No. 1, the agents are used to thinking in terms of a marketing budget on a per-listing basis. That is how they operate in the offline world. No. 2, the cost to market those properties on LoopNet as compared to the other marketing channels they have available to them is still very, very low and No. 3, the cost to market those properties [is attractive]. Let's say you have four active listings. You are paying roughly $22 a month as an effective rate, and the cost of that as compared to the value of the leads we deliver to completing a transaction and earning a multi-thousand dollar commission is pretty trivial in our minds."
Turning lemonade into lemons
Clearly profitable and still flush with IPO cash, LoopNet has made the most of its sparkling, debt-free balance sheet. It has acquired smaller online companies that open new doors for the company. It's also aggressively repurchased its own stock, devouring nearly 14% of its shares outstanding since February.
Naturally, its initial buys came at much higher price points than the stock's current price. That's a drawback to repurchases; when a company overpays for its own stock, it's not a prudent buy. It is, unfortunately, an open admission to the market that the company can't pick its own bottom (or else it would have waited).
For example, discount broker TD AMERITRADE (Nasdaq: AMTD) announced last month that it has spent $400 million to buy back 23 million shares this year. The broker has paid an average of $17.27 for its repurchases, well above the stock's price as of this morning.
This doesn't mean that LoopNet shouldn't earmark more of its own $69.4 million in cash and short-term investments for further buybacks. However, it'd get more bang for those bucks by finding other desperate companies available at fire-sale prices.
The best such deals may be on the residential side, where companies like Realtor.com parent Move (Nasdaq: MOVE) and Web-savvy agency ZipRealty (Nasdaq: ZIPR) are trading for pocket change. Nonetheless, LoopNet needs to stay focused on its commercial real estate stronghold. Once it settles its legal differences with CoStar, that would be the better tactical purchase.
Then again, if the commercial real estate market is heading into a deeper funk, the last thing LoopNet needs is to be an unfashionably early buyer, again.
Prices will get cheaper. For now, LoopNet, hold onto that cash.
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