Vertro (VTRO: Nasdaq)  is a fast-growing, under-the-radar, microcap Internet company in the early stages of its transformation from a company with two divisions (one of which was a big money-loser) to a fast-growing company with one focused line of business that derives most of its revenue from online advertising.

 

Vertro was formerly known as MIVA, Inc.  MIVA, Inc. had two divisions, MIVA Direct and MIVA Media.  MIVA announced on March 12, 2009 that it sold MIVA Media to Adknowledge, Inc. for $11.6 million.  MIVA Media is an auction based pay-per-click advertising network that connects buyers and sellers online by displaying advertisements in response to consumer search or browsing activity on select Internet Properties.   An 8-K/A filed on March 19, 2009 showed the business line disposed of had $89 million of revenue and an operating loss of $9.2 million in calendar 2007.  In the first nine months of 2008, MIVA Media had revenues of $55 million and an operating loss of $4.9 million.  The operating loss figures cited are before items such as impairment losses and restructuring charges.

 

The strategy to exit the third-party MIVA Media ad network and focus on the high-margin consumer-oriented MIVA Direct business had been in the cards for awhile.  The company MIVA Inc. changed its name to Vertro, Inc. on June 9, 2009 and rebranded its continuing MIVA Direct Business to ALOT.  The ALOT division comprises the Company's toolbar, homepage, and desktop products as well as the Company's portfolio of consumer destination sites.   Vertro has 42 full-time employees. 

The ALOT Toolbar is a toolbar that can be permanently displayed in either an Internet Explorer or Firefox web browser.  The ALOT Home page is a home page that users can customize to suit their interests, and the ALOT Desktop is a software application that enables users to display online content directly on their computer desktop.   Each of these products is used to display ALOT "buttons."  The buttons provide access to online content.  There are more than 1,000 buttons available for users, which can be used to do things like check the weather, see news headlines, find recipes, see celebrity gossip, or listen to online radio stations.  Users can add or delete buttons from their ALOT products whenever they wish, and the buttons are free to use.

 

All ALOT products include a search box along with the buttons.  When users conduct a search through the ALOT search box (http://search.alot.com), they get both normal search results along with sponsored listings.  These are provided by third parties with whom VTRO has contractual relationships.  Google is by far the biggest of these (Google accounts for 87% of revenue).  If the user clicks on a sponsored listing, VTRO earns a portion of the total click through revenue.  This is where the majority of the Company's revenue is derived.  VTRO also earns revenue from publishing partners and advertisers when users click on buttons taking them to third-party content. 

 

On December 2, Vertro and Google amended their services agreement (which was due to expire December 31, 2010) with a renewal term of Jan. 1, 2011 to Dec. 31, 2012, though either party has an option to discontinue after Dec. 31, 2011 with 60 day notice prior to Dec. 31, 2011.  Vertro first entered into a services agreement with Google in December 2006, and it has been periodically extended near the expiration date.

 

Since MIVA Media wasn't accounted for as a discontinued operation before its sale, clean operating data for the company as it stands today is only available starting in Q109.  There is information on current Vertro's predecessor entity, MIVA Direct, in earlier filings, but I focus on the company in its current iteration since I believe this best reflects what investors are betting on and what management is singularly focused on.

 

As can be seen in the data table below, revenue has been growing strongly since MIVA Media was sold.  Revenue of $6.2mm in Q109 has grown to $9.8mm in Q310, a 56.5% increase in six quarters.  In the last three quarters, where clean YoY data is available, YoY revenue growth has ranged from 30% to 41%.   EBITDA, which was negative $2.5mm in Q109, has steadily improved nearly every quarter, turning positive in Q4 09 and reaching $.379mm in Q310.  For the LTM Q309, Revenue reached $34.3mm and EBITDA was $.81mm.  The growth of these metrics is shown by annualizing Q309 data: revenue of $39mm and EBITDA of over $1.5mm.  Note that I do not add back stock based-compensation to derive EBITDA as many companies do when reporting their own EBITDA.

 

As the company has stated in the past, revenue growth is dependent on the company's increasing advertising spending.  When MIVA Direct was part of MIVA Inc, advertising spending in the MIVA Direct division fluctuated as the company focused on cash conservation as it moved closer to finalizing the MIVA Media business.  As a result, MIVA Direct sales declined in 2008.  Now that Vertro is a standalone company, it has been increasing advertising spending, from $4.4mm in Q109 to a planned $9.2mm in Q409.  The impact of this increased ad spending can be seen on the top line as well as on the EBITDA line.  VERTO operates with an astounding 95% gross margin.  As revenues continue to grow, I expect the operating leverage to be reflected in a rapidly growing EBITDA.

 

As of September 30, 2010, the Company had cash of $7.1mm, net working capital of $3.8mm, and had generated $1.5mm of cash from operations for the nine months to date.  The company anticipates it will be able to meet liquidity needs from cash on hand and from operations. 

 

The data table below also shows trading multiples.  Since VTRO is growing so rapidly, I thought it would make sense to show the latest quarter annualized next to most recent LTM data to highlight how quickly historic multiples are dropping as the company continues its growth trajectory.

On an LTM basis, VTRO trades at .89x revenues and 37.7x EBITDA.  On a run-rate basis (Q309 annualized), VTRO trades at .78x revenues and 20.1x EBITDA.  This highlights how quickly the multiples drop as revenues and margins grow.  The run-rate 20x EBITDA multiple is obviously high, but not very considering top line growth and how early the company is in its life-cycle.  This is highlighted by the meager 3.9% EBITDA margin (most recent qtr) reflected in the 20x multiple.

 

Looking at other publicly traded online advertising focused companies such as IACI, YHOO, GOOG, ANSW and MCHX, we see them all trading between 1.0x and 5.6x revenues.  Excluding GOOG, the range is 1.0x to 3.25x with an average of 2.56x, and none of these has close to VTRO's top line growth (off an admittedly small base).  YHOO has declining YoY revenue and it still trades at 12.7x EBITDA.  This doesn't make VTRO's 20x run-rate EBITDA seem so high. Another microcap Internet company, Autobytel.com. trades at a similar .82x revenues, but has no top line growth (flatline) and operates at a significant EBITDA loss.

 

These examples highlight how VTRO is relatively inexpensive for such a high growth, focused, cash generating company.  I believe as VTRO continues to focus on growing users through advertising spending and enhancements to the ALOT products, revenue will continue to grow and the company's high gross margins and operating leverage will results in rapidly expanding EBITDA and net income.  ALOT of growth, at a very reasonable price!

 

VERTRO, INC
Year over Year Revenue Growth																	30.0%				41.0%				32.1%
Quarter-by-Quarter Data	Q/E				Q/E				Q/E				FYE				Q/E				Q/E				Q/E
($millions)	31Mar09		%		30Jun09		%		30Sep09		%		31Dec09		%		31Mar10		%		30Jun10		%		30Sep10		%
Revenues	6.234		100.0		6.002		100.0		7.389		#		8.008		100.0		8.104		100.0		8.461		100.0		9.759		100.0
Cost of Goods & Svcs	0.456		7.3		0.445		7.4		0.479		#		0.387		4.8		0.506		6.2		0.363		4.3		0.505		5.2
Gross Profit	5.778		92.7		5.557		92.6		6.910		#		7.621		95.2		7.598		93.8		8.098		95.7		9.254		94.8
Product Development	0.698		11.2		0.673		11.2		0.702		#		0.525		6.6		0.549		6.8		0.535		6.3		0.405		4.2
SG&A	7.830		125.6		8.336		138.9		7.945		#		7.007		87.5		6.884		84.9		7.410		87.6		8.487		87.0
Operating Income	-2.750		-44.1		-3.452		-57.5		-1.737		#		0.089		1.1		0.165		2.0		0.153		1.8		0.362		3.7
Interest Expense	0.082		1.3				0.0				#		-0.082		-1.0				0.0				0.0				0.0
Other Expense (Inc.)			0.0		0.389		6.5		0.091		1.2		-0.304		-3.8		-0.355		-4.4		-0.060		-0.7		-0.019		-0.2
Pretax Income	-2.832		-45.4		-3.841		-64.0		-1.828		#		0.475		5.9		0.520		6.4		0.213		2.5		0.381		3.9
Income Tax	0.014		0.2		0.014		0.2		0.000		#		-0.028		-0.3		0.025		0.3		0.017		0.2		0.013		0.1
Net Income	-2.846		-45.7		-3.855		-64.2		-1.828		#		0.503		6.3		0.495		6.1		0.196		2.3		0.368		3.8
Depreciation & Amort.	0.270		4.3		0.064		1.1		0.139		1.9		0.001		0.0		0.009		0.1		0.014		0.2		0.017		0.2
EBITDA	-2.480		-39.8		-3.388		-56.4		-1.598		#		0.090		1.1		0.174		2.1		0.167		2.0		0.379		3.9
Capital Expenditures	0.133		2.1		0.179		3.0		-0.001		#		0.023		0.3		0.029		0.4		0.045		0.5		0.278		2.8
Free Cash Flow	-2.613		-41.9		-3.567		-59.4		-1.597		#		0.067		0.8		0.145		1.8		0.122		1.4		0.101		1.0
LTM Data													FYE				LTM				LTM				LTM				Q3 30Sep10
($millions)													31Dec09		%		31Mar10		%		30Jun10		%		30Sep10		%		Annualized
Revenues													27.633		100.0		29.503		100.0		31.962		100.0		34.332		100.0		39.036		100.0
Cost of Goods & Svcs													1.767		6.4		1.817		6.2		1.735		5.4		1.761		5.1		2.020		5.2
Gross Profit													25.866		93.6		27.686		93.8		30.227		94.6		32.571		94.9		37.016		94.8
Product Development													2.598		9.4		2.449		8.3		2.311		7.2		2.014		5.9		1.620		4.2
SG&A													31.118		112.6		30.172		102.3		29.246		91.5		29.788		86.8		33.948		87.0
Operating Income													-7.850		-28.4		-4.935		-16.7		-1.330		-4.2		0.769		2.2		1.448		3.7
Interest Expense													0.000		0.0		-0.082		-0.3		-0.082		-0.3		-0.082		-0.2		0.000		0.0
Other Expense (Inc.)													0.176		0.6		-0.179		-0.6		-0.628		-2.0		-0.738		-2.1		-0.076		-0.2
Pretax Income													-8.026		-29.0		-4.674		-15.8		-0.620		-1.9		1.589		4.6		1.524		3.9
Income Tax													0.000		0.0		0.011		0.0		0.014		0.0		0.027		0.1		0.052		0.1
Net Income													-8.026		-29.0		-4.685		-15.9		-0.634		-2.0		1.562		4.5		1.472		3.8
Depreciation & Amort.													0.474		1.7		0.213		0.7		0.163		0.5		0.041		0.1		0.068		0.2
EBITDA													-7.376		-26.7		-4.722		-16.0		-1.167		-3.7		0.810		2.4		1.516		3.9
Capital Expenditures													0.334		1.2		0.230		0.8		0.096		0.3		0.375		1.1		1.112		2.8
Free Cash Flow													-7.710		-27.9		-4.952		-16.8		-1.263		-4.0		0.435		1.3		0.404		1.0
Shares O/S																									7.03				7.03
Share Price																									5.35				5.35
Equity Market Cap (EMC)																									37.606				37.606
Net Debt (Cash)																									-7.108				-7.108
Enterprise Value ("EV")																									30.498				30.498
EV/Revenues																									.89				.78
EV/EBITDA																									37.7				20.1
EV/EBIT																									39.7				21.1
EMC/Net Income																									24.1				25.5