Google Wins, Cryo-Cell Shareholders Lose

Cryo-Cell (CCEL.ob) reported earnings today. If you read our last post, you probably were not surprised by the climb in revenue, increase in the company's cash position to over $9.3 million (up from $8.6 million in the 4th quarter), and yet the disappointing operating loss at the company (i.e. expenses, including interest expenses, are rising much faster than revenue).

Despite the semi-decent report as it pertains to cash flow and revenue growth, we are slowly dumping our position in Cryo-Cell (CCEL.ob), in what has become a major loser for our portfolio (down 30%). It's difficult to actually sell a position in this stock, given the ridiculous lack of liquidity in bulletin board stocks (Note to Self: Don't buy stocks on the bulletin board), but we'll be looking to scale back more on any bounce.

So what finally convinced us to start dumping here? Just check out these quotes from the CEO:

"During this period the Company strengthened its balance sheet and now has over $9 million in cash and no debt. We believe Cryo-Cell is in the best financial condition in the Company's history. This is an ideal time for us to utilize our balance sheet to launch new services, grow our market share and drive unit growth. While the initiative may potentially impact earnings in the short-term, we expect that it will accelerate both our top and bottom line growth in the long-term."

"The Cryo-Cell Board of Directors believes that the competitive landscape is fast-emerging as heightened standards for healthcare practitioners underscore the public's expectation for objective, vendor-agnostic professional guidance, and as consumers increasingly utilize the Internet to obtain information and purchase cord blood preservation services." Ms. Walton continued, "By virtue of its targeted scalability and real-time adaptability, the Internet channel is keenly optimized and well-suited to reach our addressable market of highly educated families who demonstrate a strong preference for making independent, knowledge-based buying decisions. We believe that results in the coming periods will favorably reflect our commitment to achieve new levels of unit growth while contributing to our goal of delivering substantial and sustainable, long-term shareholder value."

So what can be wrong with an increased investment in marketing, you ask? Well, it's one thing if your marketing plan is ahead of the curve, but it's another if you are late to the game. Essentially, Cryo-Cell is just waking up to the Google AdWords advertising channel, just in time for the ludicrous pricing of keywords. So in our estimation, Cryo-Cell is about to spend shareholder's money on a marketing channel (i.e. Google AdWords) that is currently overpriced and way too competitive.  As shareholders we would rather see the company generate more cash, and forego expansion until either online advertising rates improve and/or a more unique marketing plan (and there are many) can be implemented. At the same time, we think that a revision to the company's Revenue Sharing Agreements are far more important to the long-term health of the company than an increased marketing effort via bidding on keywords in Google. It's mind boggling to us how a company can claim to be committed to delivering substantial and sustainable, long-term shareholder value, if they will not even address agreements which are obviously harmful to long-term cash-flow and shareholder value.

The bottom-line, is that this expenditure on the latest overpriced marketing fad (i.e. Google), is just more evidence of a mismanaged company. We think the stock will be dead money for a long time and we would sell into any bounce. ViaCell (VIAC) is probably a better long-term bet, if youw would like exposure to the cord blood industry. However, ViaCell (VIAC) too has its host of problems. We're stepping back from this sector for now and will revisit it once we find a management team that is interested in long-term shareholder value.

Comments

[One Guy]

Good points. I think you've got a solid concern with their revenue sharing, but I'm not as worried about their online ad spending plans. This is where the customers who are in prime buying mode are doing their research, so I follow the logic and I think this is a reasonable way to push growth and maintain market share. I'm holding for now, but I certainly take your position under advisement.

[BH]

I agree with your assessment of this company's outlook, but I think your emphasis on paid search being overpriced and faddish is a bit overstated. Remember, the paid search business is all about the words you are actually bidding on - some are 'hot' markets where the bids have exceeded a rational ROI, but others are not. I don't know where the cryogenics words are on this spectrum, but it could well be that paid search will turn out to be a profitable marketing channel.

[SCA]

I sold part of my position in CCEL. I still like the industry, and I still like the company's recurring revenue model. Revenue sharing "interest" model is concerning - at a low rate and capped - not so much as this is the nature of sales incentives... but at 25%... not so good.
I dont know enough about the "paid search industry" but I would guess that it is not as big of a factor as giving away 25% of revenue in "interest"...