Markets & Finance

Omniture's Uphill Battle


When Omniture (OMTR) filed its initial-public offering paperwork Apr. 4, the numbers didn't look great. The outfit, a maker of software that e-commerce companies use to get more consumers to buy things, lost $17.4 million in 2005 on $42.8 million in revenue. Worse, advertising expenses and overhead were growing even faster than revenue, which more than doubled last year, vs. its small base in 2004. Omniture's IPO, set to begin trading June 28, wasn't looking so hot.

A solid first quarter persuaded some investors that Omniture's future may be as bright as underwriter Morgan Stanley thinks. But skeptics later showed their hand. After the close on June 27, the Orem (Utah)-based software-as-a-service vendor priced its IPO at $6.50 a share, well below the expected range of $8 to $9 a share. That market hiccup cost the company more than $90 million in market value, cutting its estimated capitalization to $336 million from about $430 million if it had priced in the higher range, according to IPOHome.com.

CONSUMER INSIGHTS. It's a sign of a tough market in the wake of the botched Vonage (VG) IPO, because Omniture has been making financial progress. Compared to 2005's first quarter, Omniture (OMTR) boosted gross margins by five percentage points this year to 59%. Sales and marketing expenses fell 10 points to 50% of sales. Even though overhead rose again, overall operating expenses fell as a percentage of revenue. Sales rose 102%, to $15.5 million, and net loss rose 26%, to $3.4 million. But the net loss as a percentage of sales shrank from 34% to 21%. So bulls argued the losses represent growing pains on the path to profits.

One optimistic investor is Paul Bard, an analyst at Renaissance Capital, which runs the IPO Plus Aftermarket mutual fund. He says the quarter's successes suggest that Omniture's market could support a relatively large company. Two key areas of expansion stood out. One is that Omniture signed up scads of midsize e-tailers during the quarter. While none are nearly the size of marquee clients eBay (EBAY), Expedia (EXPE), and AOL (TWX), they pay higher prices for Omniture's software-as-a-service offering than do the big guys, who get volume discounts based on heavy usage. Omniture's software helps e-tailers build business by tweaking everything from search-advertising keywords to the design of a checkout feature in response to data about where customers are balking. BusinessWeek.com is also one of the company's customers.

Bard is also encouraged that the quarter showed signs that Omniture can, as promised, expand from its niche in Web site optimization to related areas such as online ad-campaign management. Whether it can has been one of the key questions about Omniture since it filed (see BusinessWeek.com, 4/13/06, "Big Questions For a Hot Deal"). Bard says about 10% of the company's existing customers signed up for a search-ad related software service during the quarter, Bard says. "They will get growth from existing clients," Bard says. "The question is, can they grow in the middle market?"

SLIM PAYOFFS. News like that bolsters Omniture CEO Josh James' argument, made during the company's online roadshow, that there are "five reasons Omniture's IPO will make a great investment." He contends that although Omniture is on a path to put up between $80 million and $100 million in sales this year, it is playing in a "multi-billion dollar market" for e-commerce related software. He also points to the company's 95% annual customer-retention rate and a management team that has mostly been with Omniture since its founding in 1996. He argues the outfit will eventually be seen as a company whose software serves as a "platform" for all e-commerce, instead of being a simple "application" that can manage individual tasks. If that were to happen, it would help expansion into new markets.

However, that still doesn't mean the deal is a slam dunk, even at its lower price. Omniture remains more expensive than its closest rival, Websidestory, which grew 93% during the first quarter, with sales reaching $13.4 million. Unlike Omniture, Websidestory had positive cash flow from operations in both the first quarter and full-year 2005. The punchline: Websidestory's market cap is just $244 million, or 3.5 times 2006 forecasted sales, vs. four times sales for Omniture. Concedes Bard: "The on-demand software guys trade at a ridiculous multiple to earnings."

Also, Omniture's claim to fame is that its software helps clients make more money, but the payoffs they report aren't huge. James cites examples like Macromedia saving $450,000 or Bell Canada reaping $600,000 from a change in its Web site that came from patterns Omniture's software spotted. By contrast, Visicu (EICU) has helped clients achieve millions of dollars worth of savings, paying off significant capital investments in as little as six months. But Visicu is trading below its first-day closing price, though it's still above its IPO price of $16.

APPROACH WITH CAUTION? The other thing to watch is the relative youth of Omniture's management. Most of its top execs are between 32 and 37 years old, and most have worked for Omniture essentially since they were in college, Bard says. He frets that they lack the experience outside of their own company that they will need.

James says twice in his outfit's taped roadshow that Omniture "dominates" the enterprise e-commerce market, but that seems like a stretch considering the small gap between Omniture and Websidestory. Even the stat James cites doesn't back up his boast: He claims 30% of the top 400 e-tailers use Omniture already, which is considerably short of dominance.

The bottom line: Omniture is an interesting deal, with considerable flaws. Its market godfather is probably salesforce.com (CRM), the leading software-as-a-service company since its 2004 IPO. But salesforce has stumbled in recent months after a big post-IPO run. As with salesforce, stiff competition and high valuation make Omniture an outfit to approach with caution.


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