vtro is a short

8/8/2019 VTRO is a short

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Vertro,Inc.(NASDAQ:VT

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DL | davianletter.com

Thursday,December2,

Vertro, Inc. (NASDAQ: VTRO)Disclaimer and Independence: Asofthepublicaondateofthisreport,TheDavian

Leer,LLChasNOposionorinterestinthiscompany.

Thisreportdoesnotpurporttobeacompletestatementofallmaterialfactsrelatedto

anycompany,industry,orsecuritymenoned.Theinformaonprovided,whilenot

guaranteedastoaccuracyorcompleteness,hasbeenobtainedfromsourcesbelievedto

bereliable.Theopinionsexpressedreflectourjudgmentatthismeandaresubjectto

changewithoutnoceandmayormaynotbeupdated.Pastperformanceshouldnotbe

takenasanindicaonorguaranteeoffutureperformance,andnorepresentaonor

warranty,expressorimplied,ismaderegardingfutureperformance.Thisnoceshallnot

constuteanoffertosellorthesolicitaonofanoffertobuy,norshalltherebeanysale

ofthesesecuriesinanystateinwhichsaidoffer,solicitaon,orsalewouldbeunlawful

priortoregistraonorqualificaonunderthesecurieslawsofanysuchstate.This

researchreportwasoriginallypreparedanddistributedtoclientsofTheDavianLeer,

LLC.

Our Recommendation: Sell/Sell Short

Stock Price Target:


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Thursday,December2,

High Concentration of Revenue: No new contract

Google,whoisalsoacompetorofVertro,accountsfor88%ofthecompanysconsolidatedrevenuesandthatcontract

issettoexpireinDecember31,2010.In2008,VertroannouncedthecontractwithGoogleinearlyNovemberfor2-

years.

OnNovember10,2008,MIVA,Inc.(MIVA)andGoogle,Inc.enteredintoanAmendedandRestatedGoogleServices

Agreement(theGoogleAgreement),effecFveJanuary1,2009,whichamendsandrestatesMIVAscurrentGoogle

ServicesAgreementwhichwassettoexpireonDecember31,2008.UndertheAmendedandRestatedGoogle

Agreement,MIVA,anditssubsidiaries,haveagreedtouFlizeGooglesWebSearch,onanexclusivebasis,andAdSense

Services,onanon-exclusivebasis,forapprovedwebsitesandapplicaFons.ApprovedwebsitesandapplicaFonsinclude

websitesandapplicaFonsfromMIVAssubsidiaryMIVADirect,Inc.thathaveimplementedGoogleWebSearchand

AdSenseServicesunderthecurrentGoogleServicesAgreement.PursuanttothetermsoftheAmendedandRestated

GoogleAgreement,MIVAanditssubsidiarieswillgeneraterevenueswhenconsumersclickthroughlisFngstoGoogle

adverFserswebsites.TheAgreementhasatermoftwoyearsandcontainscustomaryterminaFonprovisions.1

Itisofgreatconcernthattherehasbeennowordontherenewalofthecontractsince88%ofthecompanysrevenues

areedtothatrelaonship.

NASDAQ Compliance Issues

ThecompanyhasflirtedwithNASDAQcompliancerequirementsbefore.Bothinthebidpricebeingabove$1,whichis

easilyremediedthroughreversestocksplits,buttheequityrequirementof$2.5MMisgoingtobeaconnuedchallenge

Thecompanyrecentlytookmeasurestobringtheirshareholderequitybackabovethe$2.5MMmarktoregainNASDAQ

compliance.Anydropinrevenuesorlargeexpensescouldcauseahittoretainedearnings,causingthecompanyto

becomedelistedfromtheNASDAQ.

Revenue Per User is Dropping

Asyoucanseefromthetablebelow,thecompanyismakinglessmoneyperuserofthetoolbar!Theeasyfruithasbeen

pickedanditisgengincreasinglydifficultforthiscompanytomakemoney.Vertroalreadyspendsthevastmajorityof

theircapitalacquiringusersandtheyareinvesngshareholderscapitalinanincreasinglylessprofitablebusiness.

1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10

Revenues $6.20 $6.00 $7.40 $8 $8.10 $8.5 $9.8

#oftoolbarusers 4.4 4.7 5.3 4.7 6.1 7 9

RevsperUser $1.41 $1.28 $1.4 $1.7 $1.33 $1.21 $1.09

1Miva,Inc.,November10,2008Form8-K(filedNovember11,2008).


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Thursday,December2,

Appeal to court case could have a material adverse impact on our results

In2005,fiveputaFve securiFes fraudclass acFonlawsuitswere filedagainstusandcertainofourformerofficers and

directorsintheUnitedStatesDistrictCourtfortheMiddleDistrictoflorida,whichweresubsequentlyconsolidated.The

consolidatedcomplaintallegedthatweandtheindividualdefendants violatedSecFon10(b)of the SecuriFesExchange

Actof1934(the"Act") andthatthe individualdefendantsalsoviolatedSecFon20(a) of the Actas"controlpersons" of

the Company.PlainFffssoughtunspecifieddamagesandotherreliefallegingthat,duringtheputaFveclassperiod,we

madecertainmisleadingstatementsandomiedmaterialinformaFon.

The Court granted Defendants moFon for summary judgment on November 16, 2009, and the court entered fina

judgmentinfavorofallDefendantsonDecember7,2009.ThePlainFffshavefiledanappealofthesummaryjudgmen

ruling.OralargumentoftheappealisscheduledforNovember17,2010.

Regardless of the outcome,this li3ga3oncould haveamaterialadverse impact onour resultsbecauseof defense

costs,includingcostsrelatedtoourindemnifica3onobliga3ons,diversionofmanagement'sa:en3onandresources

andotherfactors.2

Ifthe outcome of this case hasa materialimpact on thecompanys earnings,thiscould causethe company todrop

belowtheNASDAQcompliancelevelof$2.5MMintotalshareholderequity.

Vertro is a 1 trick pony

WithVertroonlyhavingoneproduct,alot.com,theenvironmenttheyareinputsthecompanyinafragileposionwhere

thecompeoncansha[erthemwithease.TheAlottoolbarhassomeseriouscompeonfromthewebsite

Conduit.com.Conduitallowsuserstodesigntheirownpersonalorpublictoolbar,createapplicaonsoruseappsmadebyothersforthattoolbar,andthensharethattoolbarwiththeusercommunity.Whatthisdoesisputmillionsofusersin

compeonwithalot.com.ItmightevenbepossibletocreateareplicaoftheAlottoolbarwithConduit.Theunlimited

amountofcompeonthatcanbecreatedfromConduitputsVertroinaposionwheretherewillbenolong-term

growthasthemarketwillalreadybesaturatedwithself-madetoolbarsandapplicaons.

Conduit.comcanclaimTechcrunch,MLB,WarnerBros,andotherbignamehighprofileclients.Traconatconduit.comis

veryrealandtheyconnuetogrowatahealthyclip.Thechartbelowisfromcompete.comandshowshowmuchlarger

conduit.comhasgrownthanalot.com.Conduit.comisprivatelyheldandhasonlyraise9.8MM,whileVTROhastapped

thepublicmarkets.Vertro,evenwiththeabilitytoraisemuchmorecapital,hascompetedverypoorlywithConduit.As

customeracquisioncostsandcompeoninthespaceconnuestoincrease,Vertroisinapoorcompeveposion.

InthecaseofatakeoverweseethevaluaonandexecuonofConduitoverVertro.NotonlyhasConduitraised

substanallylesscapitalthanVertro,theyhavebeencapitalefficient.Thisnotonlyspeaksvolumesaboutoperaons,bu

management.ItisouropinionthatmanagementatConduitruinsaghtershipandsimplyexecutesbe[er.

2 Vertro, Inc., September 30th, 2010. Form 10-Q (filed November 4, 2010)
http://alot.com/http://alot.com/http://alot.com/http://alot.com/http://conduit.com/http://conduit.com/http://alot.com/http://alot.com/


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Thursday,December2,

Call to investor relations

OurteamhasplacedseveralcallstotheinvestorrelaonsdepartmentatVertro.Thefirsta[emptat9ameasternon

December1,2010,resultedinthephonejustringingandringing.Ourseconda[emptprovedtobemorefruiul,yet

disturbing.Wedialedinandwentthroughthecompanysautomatedsystem,whichdidnotanswerwhenwecalledthe

firstme.Ourassociatehit0fortheinvestorrelaonsdepartmentanditroutedourcalltoafriendlyandcheerfullady

Weexplainedthatweweredoingduediligenceonthecompanyandwehadseveralquesonsregardingthefinancial

statements.Shesaidthatthecontrollercouldanswerourquesonsandroutedourcalltoalady,thecontroller.We

againsaidthatwearedoingindependentduediligenceonthecompanyandwehaveseveralquesonsaboutthe

company.

Ourteamconnuedtoexplainourconcernswiththecompanysaccountsreceivable(AR).Weexplainedthatsince

revenuesfromGooglemakeup85%ofARandnearly90%ofconsolidatedrevenues,wewonderedwhenthecompany

wouldannounceifthecontractwithGooglehasbeenrenewed.ThecompanyannouncedtheoriginalGooglecontractin

earlyNovemberof2008forallof2009and2010.ItisnowDecemberandthereisnowordofthecontract.Ifthe

companycannotrenewthiscontractorreceivesunfavorableterms,thatwillaffectnearly90%ofthecompanysrevenue!

Aerthecontrollerlistenedtoourconcerns,sheeitherhunguponusorweweredisconnected.Wequicklycalled

backandtalkedtothesamehappyandcheerfulsecretaryandexplainedtoherwewerejustonthephonewiththe

controllerandthephonewasdisconnected.Theladyturnednotsohappyandmadeusidenfywhowewereand


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Thursday,December2,

whatweredoing.WeexplainedwewerefromTheDavianLe[erandweareperformingduediligenceforindependent

equityresearch.Shesaidthatthecontrollerwasinmeengsallmorningandnotsurewhowetalkedto.Weconnuedto

tellherthatshewastheindividualwhoconnectedustothecontroller.Sherepeatedthatthecontrollerwasin

meengsandwewouldhavetocallbackaer1pmEST.

Wecalledbackaertheinstructedmeonlyforthemtoaskustoleaveamessageandsomeonewouldcontactusback.Ourteamhasalsosentanemailtotheinvestorrelaonsdivisionaskingforsomeonetocontactus.Alex,theVPof

markengandcommunicaons,hasemailedusandourteamhassetupaphoneconferencefor3pmESTon12.02.10.

WefinallytalkedwithAlex,theVPofmarkengandcommunicaon.Notesfromthecall:

FeelsconfidentaboutthecontractnegoaonsongoingwithGoogle.Ifsomethinggoeswrong,usingYahoo

wouldbeplanB,althoughrevenueconcentraonWILLsllbeonongoingissuenoma[erwhatoutcome.

TheyremakinganefforttodifferenatetheirrevenuestreamfromGooglemakingdealswithEbay.Wentfrom

2-3%ofrevenuecomingfromsourcesotherthanGoogleayearagoto12-13%inthe3rdquarter.

Theyareawareofconduitsstronggrowthandsurprisedweknewofthem.Considereddoingsomethingsimilar

but,Googlewouldntapprove(theyconductbusinesstopleaseGoogleinouropinion).Gaveanexampleabout

howunscrupulouspublisherscouldbeaproblemwithallowinguserstopublishtheirowntoolbarsandwould

requirewatchdogs.ToallowthiswithunderanagreementwithGoogle,eachtoolbarwouldhavetoget

approval.GoogledidnotresignwithConduitbecauseofthisaccordingtoVertroandConduitmovedtoBing,

whohasbeenknowntogivemoreaggressiverevenuesplitstostealcustomersawayfromGoogle.

Theydonotcurrentlyloanagainstaccountsreceivable,butdohaveanuntappedcreditlineof$5MM

VertroistakingstepstorelylessonGoogleforrevenue,butissllmakingGooglethekeypartoftheirbusinessmodel.

ThisleadsustobelievetheywilldowhatisnecessarytogettheircontractrenewedwithGoogle.WiththeGoogledeal

notallowingthemtopublishcustomizedtoolbars,theyhavelostanypotenalincompengwithConduitinthatmarketspace.Thismarketspaceisimportantbecauseasmoreusers,includingbusinesses,publishtheirowncustomized

toolbarsfromConduit,itincreasestheirrevenueandcompeveadvantageoveralot.com.

IfVertroweretoallowuserstopublishtheirowntoolbars,theywouldbeonanequalplayinglevelwithConduitand

usercreatedtoolbarswouldnolongerbeathreat.TheycouldfocusoncompengwithConduit,insteadofworrying

aboutbeingbe[erthanthemillionsofpublishersoutthere.Rememberthateachnewuserthatpublishesatoolbar

fromConduitbecomesanewcompetorforVertro.BecauseVertrocaterstoGoogle,theyarehurngtheirlong-term

growthpotenal.Itsonlyama[erofmebeforetheyaregobbledupbythecompeonfromthemillionsofpublishers

outthere.

Conclusion

earesuggesngthatclientssellorsellshortVRTOstockforseveralreasons.Useracquisionscostsare

increasing,whichmakeseachincrementaluserlessandlessprofitable.Anupsidecatalystishardtoidenfyas

themarketisalreadypricinginarenewaloftheGooglecontract.Ifunfavorabletermsarereachedinthe

Googlecontractornotermsarereachedatall,thestockcouldstandtofall50-60%.
http://alot.com/http://alot.com/http://alot.com/http://alot.com/


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Thursday,December2,

Mounngcompeon,beerexecuonandmanagementmakeConduit.comabestofbreed.hileweare

uncertainofhowmuchcompeoncouldflowintothespace,operatorslikeconduit.comwillconnuetotake

thevastmajorityofthemarketshare.ealsoremainhighlyskepcalofthebusinessmodelasawhole.These

typesofbusinessesarenotonlycapvetocompanieswhofilltheiradinventory/revenuechannels,butthey

arecapvetothecompanieswhodevelopandmarkettheactualinternetbrowsers.

Disclaimer and Independence: Asofthepublicaondateofthisreport,TheDavianLeer,LLChasNOposionorinterestinthis

company.

Thisreportdoesnotpurporttobeacompletestatementofallmaterialfactsrelatedtoanycompany,industry,orsecurity

menoned.Theinformaonprovided,whilenotguaranteedastoaccuracyorcompleteness,hasbeenobtainedfromsources

believedtobereliable.Theopinionsexpressedreflectourjudgmentatthismeandaresubjecttochangewithoutnoceandmay

ormaynotbeupdated.Pastperformanceshouldnotbetakenasanindicaonorguaranteeoffutureperformance,andno

representaonorwarranty,expressorimplied,ismaderegardingfutureperformance.Thisnoceshallnotconstuteanoffertosell

orthesolicitaonofanoffertobuy,norshalltherebeanysaleofthesesecuriesinanystateinwhichsaidoffer,solicitaon,orsale

wouldbeunlawfulpriortoregistraonorqualificaonunderthesecurieslawsofanysuchstate.Thisresearchreportwasoriginally

preparedanddistributedtoclientsofTheDavianLeer,LLC.

vtro is a short

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