On the Record with Timothy Choate

The fallout in online advertising has left FreeShop.com and others dazed and confused. Can this e-marketer somehow buck the trend?

Veteran e-marketer and FreeShop.com CEO and founder Timothy Choate sure thinks so. But then again, he’s also the captain of this leaking ship. It’s his job to stand at the helm and sound optimistic even as dire hurricane winds approach.

In fairness to FreeShop.com, though, there are a few reasons to be optimistic about the company’s long term plans and decimated stock price. To start off, at a current price range of $3 a share the company is trading for close to as much cash as it has on hand.

In addition, FreeShop continues to maintain that it will hit break even by the second half of next year. Throw into the mix that the company enjoys gross margins of over 90%, and it’s clear that from an operating model perspective, this company will be successful.

But here’s the bad news. The company warned last week that it would miss analysts’ third quarter revenue estimates. In fact, FreeShop will likely report sequentially smaller sales for the quarter. Clearly, for at least the time being, FreeShop has been sucked into the pull back in ad spending affecting the entire e-marketing sector.

We recently sat down with FreeShop.com CEO Tim Choate to help us better understand the company’s long term positioning and strategy for surviving the current online ad storm.

ISR: Let’s start off by talking about the FreeShop.com business model. How does it work?

Choate: FreeShop is the leading online direct marketing network. Our central concept is about connecting consumers and marketers through a forum where the consumer can drive the process and pick and choose the offers that they want. So FreeShop.com has about 1,500 different offers from about 600 different clients. We offer everything from product samples to information to trials to e-mail newsletters and catalogs. Anything a marketer might offer to a consumer as a way to get them to know a product or service better.

ISR: So how’s the model work then?

Choate: The way the business model works is that at our core the business is about lead generation. About half of our revenue comes from that. Basically, every time a consumer picks or chooses an offer, we take that information and we pass it on to the marketer for fulfillment. That marketer pays us anywhere from $.50 cents to a hundred dollars per lead for that access to customers.

ISR: So in the simplest sense, you are an online customer acquisition engine?

Choate: We are the largest customer acquisition engine on the Internet. Yes.

ISR: What differentiates your service from other e-marketing players out there like Coolsavings.com

Choate: Well, FreeShop has a pretty unique model in that we aggregate offers in a site and we allow consumers to come in and pick and choose what they actually want. So it’s a completely consumer-driven approach. It’s unlike how Coolsavings has coupon offers, and we have coupon offers as well, but we are also much broader than that. We have about 1,500 offers at a time whereas Coolsavings might have 100 or 150. Theirs is more savings or coupon oriented and ours are much broader than that. We have free offers, samples, newsletters and catalogs. So I think that they have a good approach, but it’s kind of just a segment of what we’re doing in terms of the general Coolsavings premise.

ISR: A quick glance across the e-marketing landscape today shows that the valuations of publicly traded firms like FreeShop, Coolsavings, MyPoints and Netcentives have been crushed. What gives?

Choate: I think that there is essentially just a large amount of confusion in the marketplace. There’s a lot of behind the scenes dynamics that people don’t generally understand in terms of how stocks move. We’ve continued to have very strong ins

titutional holding, but where the marketplace is right now, it’s very hard for new institutions to get involved. They’re all kind of holding and waiting. So really mass consumer stock buyers drive a lot of the pricing dynamics today. Among that group there is a lot of fear and confusion based on all the market changes that have occurred.

ISR: Yes, fear and confusion have definitely reared their ugly heads.

Choate: The whole group of e-tailers sells pretty dramatically out of grace. With that, a lot of people said that anything consumer-oriented must be low margin and must be a business that has high risk. The level of sophistication in terms of people’s “read” has not led them to realize that many of the e-marketing plays – and FreeShop in particular- just have a phenomenal business model.

ISR: Yes, your current market cap is almost equal to the cash that you have on hand.

Choate: So if someone really looks under the covers, they’d see that we have a huge amount of cash, we have 91% percent margins – so it’s a phenomenal business model. It’s a network model so that as it scales, we will be incredibly profitable. But I think what people have done in a simplistic view is to mash everything consumer together and assume that they’re all e-tailers with low margins. I think that when the markets clear out a bit, and especially when businesses like ours start to turn profitable, people will realize that the business has an amazing business model.

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