capt_nemo

Stocklemon Updates Housevalues.com (NASDAQ: SOLD)

Who naught suspects is easily deceived." Petrarca Petrarch

Lack of transparency is extremely frustrating when attempting to analyze the sustainability of a business model like that of Housevalues.com (NASDAQ:SOLD). SOLD’s management has consistently withheld the numbers which would support a transparent answer to this critical question. This forces both analysts and Stocklemon to use “voodoo math” to try to determine if Housevalues has actually attracted a customer base.

Stocklemon believes that transparency is a major problem facing Housevalues. They are not being forthright with either: the initial lead, the customer for the lead, or the investment community.


Anecdotal Evidence

The preponderance of agents we’ve spoken to freely express their dislike of Housevalues and its aggressive sales tactics. (Just ask any real estate agent you know.)

Complaints on internet sites reflect a litany of disgust and resentment over manipulative sales tactics, bogus leads, onerous cancellation fees, and ruined credit.

Just read the latest threads on Ripoffreport.com and Real Estate Agent Networking Sites.

http://www.ripoffreport.com/reports/ripoff146227.htm

http://www.realtychat.com/forum/sear...match_dates=30....

The sales tactics of Housevalues have angered agents so much that on December 13, we saw the launch of the website

http://www.housevalueslawsuit.com/

*Let is be known that neither Stocklemon or anyone affiliated with Stocklemon had anything to do with the above site and has no knowledge of who actually registered and is operating the above site. We learned about the website by checking the recent complaints against Housevalues on realtychat.com. Furthermore, Stocklemon has never published or solicited the publication of any postings on any consumer action site against Housevalues or any other company.



Analytical Evidence

The analytical approach is rendered difficult, because the company has notably never released the numbers on:

1. The distribution of “core customers” by length of subscription

2. The distribution of cancelled customers by length of retention

3. The actual amount of revenue received from cancellation fees

4. The number of customers who are released from their contracts without cancellation fees.

Instead of using the CSFB investor conference on December 1st to bring transparency to this critical issue, SOLD’s CFO muddied the water further by abusing one of those infamous “hypothetical statistics”. Stocklemon is aware of SOLD’s version of math that a 6.5% churn rate, applied to a static number over a 12 month timespan, yields a retention rate of 45% -- drop that right in the “interesting but meaningless” bin.

But then by sleight of hand, CFO Zdanowski states it as an actual number – stepping well over the line into what Stocklemon considers as “intentionally misleading”. There is absolutely nothing in SOLD’s entire reporting history that EVER supports a retention rate even remotely approaching 45%.

Here’s what we do know and find quite disturbing.

The total number of new customers added during the last 4 quarters exceeds or equals the entire core customer base. (This eye-popping comparison has in fact been true for all 7 historical quarters the comparison can be computed.)


The number of churned off customers, calculated using the company’s method equals or exceeds the number of customers added 4 quarters prior – for every period over the last 2 years. This supports the conclusion that there is a huge drop-off when the 12-month cancellation fee period expires.

The Thom Weisel analyst admits that SOLD’s method for calculating its churn rate understates the churn. By the Weisel analyst’s method, the churn rate is nearly 7% per month. As Weasel’s last research states


”The company’s calculation may understate churn because it uses the average count for the quarter as its base. It may be more appropriate to use the beginning subscriber count as the base because few of the lost subscribers in a given quarter are likely to have been from among those added in the quarter. If we recalculate churn on that basis, the monthly rate for 3Q05 would be 40bp higher.”

The CFO says you can’t multiply the monthly churn rate by 12 to get an annual rate. The Thomas Weisel analyst agrees with us that you certainly can:

“Monthly churn ranges from 6-7% (70-80% annualized)”.

In order to clear the confusion Stocklemon offers the attached model on Housevalues.com. The attached spreadsheet tracks all SOLD’s key core customer subscription and marketing expense statistics since the company began publishing them.

http://sl.stocklemon.com/ProdImages/SOLD_table.html

It is clear SOLD is adding new customers at an escalating rate. But is this due to building a subscriber base, or hidden by escalating marketing expenses?

Two important data points stand out:

1) Customers lost to churn , compared to new customers.


Row 9 calculates the number of customers churned off each qtr.

Row 11 is an average churn loss for the prior 4 quarters.

Row 15 shows new customers during each quarter.

Row 11 shows the average new customers for 4 quarters, one year prior.

Clearly, from comparing rows 11 and 12, for the last 9 months the company is churning off customers at the rate they were adding them one year prior. This is consistent with the expiration of the cancellation fee period which new customers are contractually obligated to pay if they terminate their service.)

2) Marketing expenses are increasing in absolute and proportional terms – a trend that suggests no efficiency of scale. SOLD has been spending in excess of 50% of gross revenues on marketing expense as its new customer counts grow. But, of more concern, (see Row 24) the average cost per new customer has been rising for the last 4 quarters, indicating that escalating spending on its telesales marketing crew, rather than its retention rate, is responsible for the growth in gross revenues and customer counts.

Both these numbers are consistent with Stocklemon’s conclusion, that SOLD’s business model is not sustainable as the residential real estate bubble loses momentum.

Same Business, presented honestly

Just to show that Stocklemon is not totally Bah Humbug, we will show a real estate lead site that creates no ill-will through deception of its customers. Just look at the business model of Reply.com’s www.realtynow.com and www.agentconnect.com

websites.

In sharp contrast to Housevalues, the above sites demonstrate 3 business practices that in the opinion of Stocklemon make their business more reputable and sustainable than Housevalues.

1. They pre-screen leads before they sell them to agents to make sure they are real people.

2. They do not make agents sign long term contracts.

3. They inform the buyer right up front in bold letters that they are connecting them to a real estate agent, and not leading them to the false belief that they are providing an online property valuation report.

Of course much like every lead generation company Reply.com will have their share of customer complaints, but not locking agents into a 12 month contract and telling the consumer up front that they are being referred to a real estate agent is a good start.

For this, we commend the way Reply.com does business.

Conclusion

Stocklemon continues to believe that the business model of Housevalues.com is truly unsustainable. Through the lack of transparency, SOLD is creating ill will within its customer base, lead system, and now the investment community. Rapid growth in new RE agents during the real estate boom fueled some sales, but those days are gone. And word has gotten around among Real Estate agents, which will require increasing marketing costs per customer to overcome.

Cautious Investing To All.




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