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LoopNet (NASDAQ:LOOP), reported 3.4 million basic members and a conversion rate of basic members to premium members of 2.2% in Q1, according to their 10-Q filed on 5/8/09. So what do these metrics mean? Are these reliable metrics?

No. I believe many investors don't understand this. In fact, Credit Suisse initiated coverage on LoopNet on 12/18/08 stating: "The commercial real estate market has a total population of 20-24 million participants, with about 5 million annual participants actively buying, selling, or leasing commercial real estate, by our estimates. LOOP has over 3 million basic members... or Roughly 60% of the Active CRE Annual Participants." No, no, no.

On February 10, 2009 it was disclosed in court that more than 2.1 million of LOOP's 3.3 million basic members never logged on to LoopNet's web site over a one-year period ending in mid-January 2009. (64% were not active in the last year.) And, only 206,544 or approximately 6% of its claimed 3.3 million of registered users had logged on to LoopNet's website over a 30-day period from mid-December 2008 to mid-January 2009. Golly, the roughly 1 million dollars in legal fees that LoopNet spends per quarter -- or 5.8% of revenues in Q1 -- couldn't keep this a secret. It's out now.

What about the company's conversion rate metric. Is it a useful metric!?

LOOP explained in their Q1 2009 10-Q: "Historically, our average monthly rate of conversion of basic members to premium members has been approximately five percent, and our average monthly cancellation rate for premium members has ranged between three and five percent. We believe that a decline in the first quarter of 2009 in our average monthly conversion rate to approximately 2.2% is attributable to an increasing proportion of principals (i.e. investors and tenants) in our membership base, who convert to premium membership at a lower rate than the professional agents and brokers in the market, the impact of a slowdown in commercial real estate transaction activity, and an approximately 12% increase in the average monthly subscription prices which we charge our premium members." (Well, at least they finally admit that raising the price of premium membership was a factor in declining premium membership.)

What LoopNet also doesn't explain is that they tally dead people in their basic member count, which inherently affects the conversion rate. (Yep, LoopNet sees dead people!) A basic member according to LoopNet is anyone in the 10+ year history of LoopNet who registered as a basic member on the site. Ever! Well, I doubt basic members who have since passed away are going to become paying premium members any time soon. (Unless, perhaps, like Mike the headless chicken, somehow the member just keeps going and going and going...

LoopNet's basic member count and conversion rate are flawed. These metrics have more holes in them than the company's ticker: LOOP.
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