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DL | davianletter.

Thursday,  December  2,  2010

Vertro, Inc. (NASDAQ: VTRO)
Small/Micro  Cap  Research  Team Disclaimer and Independence: As  of  the  publicaIon  date  of  this  report,  The  Davian   LeLer,  LLC  has  NO  posiIon  or  interest  in  this  company.   This  report  does  not  purport  to  be  a  complete  statement  of  all  material  facts  related  to   any  company,  industry,  or  security  menIoned.  The  informaIon  provided,  while  not   guaranteed  as  to  accuracy  or  completeness,  has  been  obtained  from  sources  believed  to   be  reliable.  The  opinions  expressed  reflect  our  judgment  at  this  Ime  and  are  subject  to   change  without  noIce  and  may  or  may  not  be  updated.  Past  performance  should  not  be   taken  as  an  indicaIon  or  guarantee  of  future  performance,  and  no  representaIon  or   warranty,  express  or  implied,  is  made  regarding  future  performance.  This  noIce  shall  not   consItute  an  offer  to  sell  or  the  solicitaIon  of  an  offer  to  buy,  nor  shall  there  be  any  sale   of  these  securiIes  in  any  state  in  which  said  offer,  solicitaIon,  or  sale  would  be  unlawful   prior  to  registraIon  or  qualificaIon  under  the  securiIes  laws  of  any  such  state.  This   research  report  was  originally  prepared  and  distributed  to  clients  of  The  Davian  LeLer,   LLC.

In Focus:
About  the  company. High  degree  of  revenue   concentraIon NASDAQ  compliance  issues Revenue  per  user  is  dropping Court  case  appeal Contract  with  Google  expires  this   month.  We  see  no  improvement. A  “1-­‐trick”  pony Call  to  investor  relaIons

Our Recommendation: Sell/Sell Short Stock Price Target: <$3.00 About the Company:
Vertro,  Inc.  is  a  soVware  and  technology  company  that  owns  and  operates  the  ALOT   product  porWolio. ALOT's  products  are  designed  to  'Make  the  Internet  Easy'  by  enhancing  the  way   consumers  engage  with  content  online.  Through  ALOT,  Internet  users  can  discover  best-­‐ of-­‐the-­‐web  third  party  content  and  display  that  content  through  customizable  toolbar,   homepage  and  desktop  products. ALOT  has  millions  of  live  users  across  its  product  porWolio.  Together  these  users  conduct   high-­‐volumes  of  type-­‐in  search  queries,  which  ALOT  moneIzes  through  third-­‐party   search  and  content  agreements. Offices: Vertro,  Inc. 143  Varick  Street New  York,  NY  10013 Vertro,  Inc. 5220  Summerlin  Commons  Blvd. Suite  500 Fort  Myers,  FL  33907 Vertro,  Inc.  (NASDAQ:  VTRO) P a g e  |  1

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High Concentration of Revenue: No new contract
Google,  who  is  also  a  compe2tor  of  Vertro,  accounts  for  88%  of  the  company’s  consolidated  revenues  and  that  contract   is  set  to  expire  in  December  31,  2010.  In  2008,  Vertro  announced  the  contract  with  Google  in  early  November  for  2-­‐ years.   “On  November  10,  2008,  MIVA,  Inc.  (“MIVA”)  and  Google,  Inc.  entered  into  an  Amended  and  Restated  Google  Services   Agreement  (the  “Google  Agreement”),  effecFve  January  1,  2009,  which  amends  and  restates  MIVA’s  current  Google   Services  Agreement  which  was  set  to  expire  on  December  31,  2008.    Under  the  Amended  and  Restated  Google   Agreement,  MIVA,  and  its  subsidiaries,  have  agreed  to  uFlize  Google’s  WebSearch,  on  an  exclusive  basis,  and  AdSense   Services,  on  a  non-­‐exclusive  basis,  for  approved  websites  and  applicaFons.    Approved  websites  and  applicaFons  include   websites  and  applicaFons  from  MIVA’s  subsidiary  MIVA  Direct,  Inc.  that  have  implemented  Google  WebSearch  and   AdSense  Services  under  the  current  Google  Services  Agreement.  Pursuant  to  the  terms  of  the  Amended  and  Restated   Google  Agreement,  MIVA  and  its  subsidiaries  will  generate  revenues  when  consumers  click  through  lisFngs  to  Google   adverFsers’  websites.  The  Agreement  has  a  term  of  two  years  and  contains  customary  terminaFon  provisions.” 1 It  is  of  great  concern  that  there  has  been  no  word  on  the  renewal  of  the  contract  since  88%  of  the  company’s  revenues   are  2ed  to  that  rela2onship.

NASDAQ Compliance Issues
The  company  has  flirted  with  NASDAQ  compliance  requirements  before.  Both  in  the  bid  price  being  above  $1,  which  is   easily  remedied  through  reverse  stock  splits,  but  the  equity  requirement  of  $2.5MM  is  going  to  be  a  con2nued  challenge.   The  company  recently  took  measures  to  bring  their  share  holder  equity  back  above  the  $2.5MM  mark  to  regain  NASDAQ   compliance.  Any  drop  in  revenues  or  large  expenses  could  cause  a  hit  to  retained  earnings,  causing  the  company  to   become  delisted  from  the  NASDAQ.

Revenue Per User is Dropping
As  you  can  see  from  the  table  below,  the  company  is  making  less  money  per  user  of  the  toolbar!  The  “easy  fruit  has  been   picked”  and  it  is  geVng  increasingly  difficult  for  this  company  to  make  money.  Vertro  already  spends  the  vast  majority  of   their  capital  acquiring  users  and  they  are  “inves2ng”  share  holders  capital  in  an  increasingly  less  profitable  business.  
1Q’09 Revenues #  of  toolbar   users Revs  per  User $6.20 4.4 $1.41 2Q’09 $6.00 4.7 $1.28 3Q’09 $7.40 5.3 $1.4 $8 4.7 $1.7 4Q’09 1Q’10 $8.10 6.1 $1.33 2Q’10 $8.5 7 $1.21 3Q’10 $9.8 9 $1.09

1  Miva,  Inc.,  November  10,  2008  Form  8-­‐K  (filed  November  11,  2008).

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Appeal to court case “could have a material adverse impact on our results”
“In  2005,  five   putaFve   securiFes   fraud  class   acFon  lawsuits  were   filed  against  us   and  certain  of  our  former  officers   and   directors  in  the  United  States  District  Court  for  the  Middle   District  of  Florida,  which  were  subsequently  consolidated.    The   consolidated   complaint  alleged  that  we   and  the  individual   defendants   violated  SecFon  10(b)   of   the   SecuriFes   Exchange   Act   of  1934  (the   "Act")   and  that   the   individual  defendants  also  violated  SecFon  20(a)   of   the   Act  as   "control  persons"   of   the   Company.  PlainFffs   sought  unspecified  damages  and   other  relief  alleging  that,  during  the  putaFve  class  period,   we   made  certain  misleading  statements  and  omibed  material  informaFon. The   Court   granted   Defendants’   moFon   for   summary   judgment   on   November   16,   2009,   and   the   court   entered   final   judgment  in  favor  of   all  Defendants  on  December  7,   2009.  The  PlainFffs  have  filed  an   appeal  of   the  summary  judgment   ruling.  Oral  argument  of  the  appeal  is  scheduled  for  November  17,  2010.   Regardless   of   the   outcome,  this   li3ga3on  could   have   a   material   adverse   impact   on  our   results   because   of   defense   costs,  including  costs  related  to  our  indemnifica3on  obliga3ons,   diversion  of   management's   a:en3on  and   resources,   and  other  factors.”2 If   the   outcome   of   this   case  has  a   material  impact   on   the  company’s  earnings,  this  could   cause  the  company   to   drop   below  the  NASDAQ  compliance  level  of  $2.5MM  in  total  shareholder  equity.

Vertro is a “1 trick pony”
With  Vertro  only  having  one  product,,  the  environment  they  are  in  puts  the  company  in  a  fragile  posi2on  where   the  compe22on  can  sha[er  them  with  ease.  The  Alot  toolbar  has  some  serious  compe22on  from  the  website  Conduit  allows  users  to  design  their  own  personal  or  public  toolbar,  create  applica2ons  or  use  apps  made   by  others  for  that  toolbar,  and  then  share  that  toolbar  with  the  user  community.  What  this  does  is  put  millions  of  users  in   compe22on  with  It  might  even  be  possible  to  create  a  replica  of  the  Alot  toolbar  with  Conduit.  The  unlimited   amount  of  compe22on  that  can  be  created  from  Conduit  puts  Vertro  in  a  posi2on  where  there  will  be  no  long-­‐term   growth  as  the  market  will  already  be  saturated  with  self-­‐made  toolbars  and  applica2ons.  can  claim  Techcrunch,  MLB,  Warner  Bros,  and  other  big  name  high  profile  clients.  Trac2on  at  is   very  real  and  they  con2nue  to  grow  at  a  healthy  clip.  The  chart  below  is  from  and  shows  how  much  larger  has  grown  than  is  privately  held  and  has  only  raise  9.8MM,  while  VTRO  has  tapped   the  public  markets.  Vertro,  even  with  the  ability  to  raise  much  more  capital,  has  competed  very  poorly  with  Conduit.  As   customer  acquisi2on  costs  and  compe22on  in  the  space  con2nues  to  increase,  Vertro  is  in  a  poor  compe22ve  posi2on.   In  the  case  of  a  takeover  we  see  the  valua2on  and  execu2on  of  Conduit  over  Vertro.  Not  only  has  Conduit  raised   substan2ally  less  capital  than  Vertro,  they  have  been  capital  efficient.  This  not  only  speaks  volumes  about  opera2ons,  but   management.  It  is  our  opinion  that  management  at  Conduit  ruins  a  “2ghter  ship”  and  simply  executes  be[er.


Vertro, Inc., September 30th, 2010. Form 10-Q (filed November 4, 2010)

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Call to investor relations
Our  team  has  placed  several  calls  to  the  investor  rela2ons  department  at  Vertro.  The  first  a[empt  at  9am  eastern  on   December  1,  2010,  resulted  in  the  phone  just  ringing  and  ringing.  Our  second  a[empt  proved  to  be  more  fruibul,  yet   disturbing.  We  dialed  in  and  went  through  the  company’s  automated  system,  which  did  not  answer  when  we  called  the   first  2me.  Our  associate  hit  “0”  for  the  investor  rela2ons  department  and  it  routed  our  call  to  a  friendly  and  cheerful  lady.   We  explained  that  we  were  doing  due  diligence  on  the  company  and  we  had  several  ques2ons  regarding  the  financial   statements.  She  said  that  the  “controller”  could  answer  our  ques2ons  and  routed  our  call  to  a  lady,  the  “controller.”  We   again  said  that  we  are  doing  independent  due  diligence  on  the  company  and  we  have  several  ques2ons  about  the   company. Our  team  con2nued  to  explain  our  concerns  with  the  company’s  accounts  receivable  (AR).  We  explained  that  since   revenues  from  Google  make  up  85%  of  AR  and  nearly  90%  of  consolidated  revenues,  we  wondered  when  the  company   would  announce  if  the  contract  with  Google  has  been  renewed.  The  company  announced  the  original  Google  contract  in   early  November  of  2008  for  all  of  2009  and  2010.  It  is  now  December  and  there  is  no  word  of  the  contract.  If  the   company  cannot  renew  this  contract  or  receives  unfavorable  terms,  that  will  affect  nearly  90%  of  the  company’s   revenue!   Afer  the  “controller”  listened  to  our  concerns,  she  either  hung  up  on  us  or  we  were  disconnected.  We  quickly  called   back  and  talked  to  the  same  happy  and  cheerful  secretary  and  explained  to  her  we  were  just  on  the  phone  with  the   “controller”  and  the  phone  was  disconnected.  The  lady  turned  not  so  happy  and  made  us  iden2fy  who  we  were  and  

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what  were  doing.  We  explained  we  were  from  The  Davian  Le[er  and  we  are  performing  due  diligence  for  independent   equity  research.  She  said  that  the  controller  was  in  mee2ngs  all  morning  and  not  sure  who  we  talked  to.  We  con2nued  to   tell  her  that  she  was  the  individual  who  connected  us  to  the  “controller.”  She  repeated  that  the  controller  was  in   mee2ngs  and  we  would  have  to  call  back  afer  1pm  EST.   We  called  back  afer  the  instructed  2me  only  for  them  to  ask  us  to  leave  a  message  and  someone  would  contact  us  back.   Our  team  has  also  sent  an  email  to  the  investor  rela2ons  division  asking  for  someone  to  contact  us.  Alex,  the  VP  of   marke2ng  and  communica2ons,  has  emailed  us  and  our  team  has  set  up  a  phone  conference  for  3pm  EST  on  12.02.10.  We  finally  talked  with  Alex,  the  VP  of  marke2ng  and  communica2on.  Notes  from  the  call: • • • Feels  confident  about  the  contract  nego2a2ons  ongoing  with  Google.  If  something  goes  wrong,  using  Yahoo   would  be  plan  B,  although  revenue  concentra2on  WILL  s2ll  be  on  ongoing  issue  no  ma[er  what  outcome. They’re  making  an  effort  to  differen2ate  their  revenue  stream  from  Google  making  deals  with  Ebay.  Went  from   2-­‐3%  of  revenue  coming  from  sources  other  than  Google  a  year  ago  to  12-­‐13%  in  the  3rd  quarter. They  are  aware  of  conduit’s  strong  growth  and  surprised  we  knew  of  them.  Considered  doing  something  similar   but,  Google  wouldn’t  approve  (they  conduct  business  to  please  Google  in  our  opinion).  Gave  an  example  about   how  unscrupulous  publishers  could  be  a  problem  with  allowing  users  to  publish  their  own  toolbars  and  would   require  watchdogs.  To  allow  this  with  under  an  agreement  with  Google,  each  toolbar  would  have  to  get   approval.  Google  did  not  resign  with  Conduit  because  of  this  according  to  Vertro  and  Conduit  moved  to  Bing,   who  has  been  known  to  give  more  aggressive  revenue  splits  to  steal  customers  away  from  Google. They  do  not  currently  loan  against  accounts  receivable,  but  do  have  an  untapped  credit  line  of  $5MM  

  Vertro  is  taking  steps  to  rely  less  on  Google  for  revenue,  but  is  s2ll  making  Google  the  key  part  of  their  business  model.   This  leads  us  to  believe  they  will  do  what  is  necessary  to  get  their  contract  renewed  with  Google.  With  the  Google  deal   not  allowing  them  to  publish  customized  toolbars,  they  have  lost  any  poten2al  in  compe2ng  with  Conduit  in  that  market   space.  This  market  space  is  important  because  as  more  users,  including  businesses,  publish  their  own  customized   toolbars  from  Conduit,  it  increases  their  revenue  and  compe22ve  advantage  over   If  Vertro  were  to  allow  users  to  publish  their  own  toolbars,  they  would  be  on  an  equal  playing  level  with  Conduit  and   user  created  toolbars  would  no  longer  be  a  threat.  They  could  focus  on  compe2ng  with  Conduit,  instead  of  worrying   about  being  be[er  than  the  millions  of  publishers  out  there.  Remember  that  each  new  user  that  publishes  a  toolbar   from  Conduit  becomes  a  new  compe2tor  for  Vertro.  Because  Vertro  caters  to  Google,  they  are  hur2ng  their  long-­‐term   growth  poten2al.  It’s  only  a  ma[er  of  2me  before  they  are  gobbled  up  by  the  compe22on  from  the  millions  of  publishers   out  there.

We  are  suggesIng  that  clients  sell  or  sell  short  VRTO  stock  for  several  reasons.  User  acquisiIons  costs  are   increasing,  which  makes  each  incremental  user  less  and  less  profitable.  An  upside  catalyst  is  hard  to  idenIfy  as   the  market  is  already  pricing  in  a  renewal  of  the  Google  contract.  If  unfavorable  terms  are  reached  in  the   Google  contract  or  no  terms  are  reached  at  all,  the  stock  could  stand  to  fall  50-­‐60%.

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Thursday,  December  2,  2010

MounIng  compeIIon,  beLer  execuIon  and  management  make  a  “best  of  breed.”  While  we  are   uncertain  of  how  much  compeIIon  could  flow  into  the  space,  operators  like  will  conInue  to  take   the  vast  majority  of  the  market  share.  We  also  remain  highly  skepIcal  of  the  business  model  as  a  whole.  These   types  of  businesses  are  not  only  capIve  to  companies  who  fill  their  ad  inventory/revenue  channels,  but  they   are  capIve  to  the  companies  who  develop  and  market  the  actual  internet  browsers.    
Disclaimer and Independence: As  of  the  publicaIon  date  of  this  report,  The  Davian  LeLer,  LLC  has  NO  posiIon  or  interest  in  this   company.   This  report  does  not  purport  to  be  a  complete  statement  of  all  material  facts  related  to  any  company,  industry,  or  security   menIoned.  The  informaIon  provided,  while  not  guaranteed  as  to  accuracy  or  completeness,  has  been  obtained  from  sources   believed  to  be  reliable.  The  opinions  expressed  reflect  our  judgment  at  this  Ime  and  are  subject  to  change  without  noIce  and  may   or  may  not  be  updated.  Past  performance  should  not  be  taken  as  an  indicaIon  or  guarantee  of  future  performance,  and  no   representaIon  or  warranty,  express  or  implied,  is  made  regarding  future  performance.  This  noIce  shall  not  consItute  an  offer  to  sell   or  the  solicitaIon  of  an  offer  to  buy,  nor  shall  there  be  any  sale  of  these  securiIes  in  any  state  in  which  said  offer,  solicitaIon,  or  sale   would  be  unlawful  prior  to  registraIon  or  qualificaIon  under  the  securiIes  laws  of  any  such  state.  This  research  report  was  originally   prepared  and  distributed  to  clients  of  The  Davian  LeLer,  LLC.

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