Intermix On the Radar

Kevin Kelleher

Second chances are rare for dot-com also-rans, but the rebound in Intermix (MIX) could give tech investors something to talk about.

Intermix used to be eUniverse, a company that found its Nasdaq listing through a reverse merger with a nearly defunct motorcycle retailer, dabbled in an eclectic mix of Web sites, restated its finances and was banished to the pink sheets. But now, thanks to a new management that saw potential in an emerging technology called social networking, Intermix has found a home on the American Stock Exchange, where its stock has been rallying.

The stock has risen from $2.25 in October 2003, shortly after the venture firm Vantage Point took Intermix under its wing, to a high of $7.13 earlier this month. Funds that have been invested in Intermix for years -- even through the dark times, when the stock was trading for less than the value of its assets -- believe the stock has room to go higher.

"It's still very early for this company," says Michael Balkin, who co-manages the (WBSNX)William Blair Small-Cap Growth fund. "They've had a lot of challenges and now they have a lot of opportunities. I think there will be a period of being discovered by Wall Street, where it will get on a lot more radar screens."

Rules of Attraction

Right now, you'd need a pretty sensitive radar to find Intermix. Its tiny market cap of $210 million and its sleepy daily average turnover of 208,000 shares have shut out investments from most institutional investors.

Balkin and others believe that will change, in part, because of Richard Rosenblatt, a 35-year-old Internet veteran whose tousled hair and chipper persona make him look like he stepped out of a Dawson's Creek spinoff. Rosenblatt founded two companies, iMall and GreatDomains, selling them to Excite@Home for $565 million and VeriSign for $100 million, respectively. Rosenblatt set up a venture firm, Prime Ventures, and briefly signed on as CEO of drkoop.com, after the medical content site had reached critical condition.

In the Mix The Intermix rebound

As the tech bubble burst, Rosenblatt was unable to turn drkoop's content into a viable business. "You learn a lot more from a failure like drkoop than from a success," says Rosenblatt. "I learned you have to look at the business carefully and only try to do a few things. Drkoop was trying to do way too many things."

eUniverse presented Rosenblatt problems that drkoop.com, for all its baggage, didn't face. Under Rosenblatt's predecessor, founder Brad Greenspan, the company had more than its share of controversy, notably a May 2003 restatement of $39 million in revenue over three quarters. Nasdaq delisted the stock in September 2003 and Greenspan and the CFO left the following month.

Since Rosenblatt took over in February 2004, the company has found an experienced CFO, changed its name, sold off unprofitable businesses and won respected advertisers like Procter & Gamble , Nike and HSBC . He couldn't persuade Nasdaq to relist the stock, so the company listed it on Amex in November.

Just as important, investors say, is that he's turned around the company's finances. Last Monday, Intermix posted a net income of $38,000 in the quarter ended Dec. 31, reversing a loss of $2.1 million in the year-ago quarter as revenue jumped 44% to $20 million. While the marketing arm saw revenue rise a respectable 32%, the real potential lies in the entertainment sites, which posted revenue growth of 68% to $7.9 million.

Secret Sparkle

At Intermix, Rosenblatt reorganized the company into two businesses: The first is a network of sites grouped around MySpace.com, a community of 16- to 24-year-olds drawn by a shared interest in independent music, and a gaming community called Grab.com. The second is a subsidiary that markets products ranging from beauty creams to pet care on the Internet based on marketing data collected from its millions of members.

"eUniverse was a lot of varied concepts set up to make money from traffic on the Internet," says John Lewis of Gardner Lewis Asset Management, a firm that has held an investment in the company since 1999 and gone through what Lewis calls "extraordinarily hard times" to hold the stock. "The new management has done a good job of integrating those concepts into a coherent, self-sustaining whole."

The secret sauce in the company's sites is social networking, a technology that has the potential to change ad spending on the Internet. Anyone who's signed up for Friendster knows social networking. It's based on the six-degrees-of-separation concept that we're all more connected to each other than we think through our friends' friends. Friendster had mixed results applying the technology to online dating, but MySpace hit the jackpot using it on an Internet portal.

MySpace's success came quickly and almost by accident. In 2003, small independent rock bands began setting up pages for fans. MySpace helped them out by letting them stream or download their songs, post tour schedules, set up blogs and communicate directly with fans. More than 100,000 bands now use MySpace, and millions of fans have signed up as well. Unique users surged to 5.8 million in December from 214,000 a year ago. The site is ranked the 14th most visited by Hitwise, which tracks the traffic of 25 million Internet users -- putting MySpace ahead of Amazon.com (AMZN).

MySpace wasted no time in mining the site for ad dollars, which make up 90% of its revenue. It integrated the brand of a P&G deodorant, Secret Sparkle, throughout a page set up for teen singer Hilary Duff. It worked with Fox to set up a site for its hit show, The OC. And it prereleased streaming samples of REM's most recent album, Around the Sun.

Rosenblatt won't break out revenue for MySpace.com, but ThinkEquity analyst John Tinker, the sole analyst covering the stock (his firm has no underwriting relationship with Intermix), estimates it at $9 million for the fiscal year ending in March. Intermix turned MySpace into an independent unit in December, when Redpoint Ventures bought a $4 million stake in Intermix and announced that Geoff Yang, a VC behind AskJeeves and TiVo , would join MySpace's board. Rosenblatt says Intermix plans to split MySpace off through an IPO within 12 months.

Four-Point Swing

Intermix also applied social networking to Grab.com, allowing gamers to invite in friends -- or friends of friends -- to play, to create tournaments and to chat with each other while playing. Before, gamers usually played games alone on the site. Since the change, visitors spend an average of 69 minutes on the site, three times longer than when they were playing games by themselves. Launched in October, Grab.com's traffic had already risen to 1.1 million unique visitors in December.

"Our users are creating content that we are advertising against," says Rosenblatt. "You know, at one point people nearly wrote us off for dead. To go from that to a fast-growing company is pretty exciting."

Intermix still faces a lot of vulnerabilities: The technology behind social networking is very easy to replicate, although what sets MySpace apart right now is that it has managed to turn the technology into a growing revenue stream. Even riskier is the notoriously fickle online audience that has for now flocked to MySpace and Grab.

But if the company proves to be more than a flash in the pan, it may be that Nasdaq will regret passing up relisting Intermix. Or perhaps it will be snapped up: Companies like InterActiveCorp (IACI) have shown an interest in buying social-networking startups.

"I think the most obvious buyers are large media companies," says Lewis, who stresses that he's trusting the management to decide whether or when to sell. "The media giants need a way to play in this business. Can you imagine buying a profitable company at this valuation that's drawing eyeballs and that you can put your content in to add to the value of?"

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