Omniture Inc. (OMTR) dominates the fast growing business
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B2B Advertising Software is a hot area for venture capital investing, currently ranked as our second most popular VCA theme. 14 private companies have attracted $301 million in total venture capital funding over the last 3 months.
These private companies help both web publishers and web advertisers. They help web publishers monetize their Internet traffic through better site analytics, and they help advertisers better manage their advertising and brand promotion campaigns through new lead generation capabilities and cross-platform advertising sales.
The dominant public company in this sector is Omniture Inc. (OMTR). Through a series of acquisitions culminating in the purchase of Visual Sciences in January, Omniture has consolidated the largest of the “online business optimization” software providers.
This Visual Sciences acquisition is a big one, bringing $70 million in run-rate revenues to Omniture’s top line. These acquired revenues, along with a projected 50% organic growth rate, have led Omniture’s management to guide 2008 revenues to over $300 million, up from $145 million in 2007. The acquisition also increased Omniture’s headcount from 713 at yearend 2007 to over 1,000 currently.
Omniture successfully completed two previous domestic acquisitions of analytics customer bases (Overture’s Keylime Software, DoubleClick’s Site Advance) and one international acquisition (Instadia). Not surprisingly, they claim to have the internal teams and know-how in place to successfully integrate Visual Sciences.
For more detail on Omniture’s integration strategy and an overview of their products and client base, read through the powerpoint from their recent analyst meeting.
Very High Current and Expected Growth Rates
The company is growing quickly now, as this quote from Josh James, founder and CEO, in their most recent quarterly earnings call reflects:
- “Let me describe what we believe is a multibillion dollar opportunity ahead of us. 2007 represents the sixth consecutive year in which Omniture revenues have grown in excess of 79%; an amazing thing when you consider that we are now fighting the law of large numbers. While it’s true that some of this revenue growth came as a result of acquisitions, when you look at our most recent quarter our organic growth rates for Q4 on a year-over-year basis was still an outstanding 76%, demonstrating that our core business remains very healthy. Our next goal is to reach $1 billion in revenue and when you do the simple math based on reasonable growth and retention rates it’s easy to understand our excitement and the achievability of this goal.”
Personally, I like it when a founder is also the CEO. I think it reflects strength in the underlying business. There are so many pressures on a founder to step aside for “professional management” that only a situation where “it ain’t broke, so don’t fix it” will allow the founder to stay in place.
In addition, Mr. James makes a point of detailing the strong management team Omniture has put in place, people with background from companies such as Siebel, Oracle, BEA Systems and Ariba. Neil Weston, Omniture’s SVP and GM of EMEA (Europe, Middle East and Africa) for the last two years, is a good example of the depth of talent Omniture has been able to attract. Mr. Weston was SVP and President of EMEA at Siebel for seven years and MD of Australasia for Oracle for seven years. He’s clearly done a good job — aided by the Instadia acquisition, Omniture’s international revenues have grown faster than their domestic revenues. 26% of revenues came from outside the United States in 2007, up from 11% in 2005.
Valuation
View the spreadsheet used for this valuation analysis.
The most useful valuation methodology, in my experience, starts with developing a long term, 5 year target value for a company. I work through a five year income statement to arrive at a five year estimate for earnings and sales. Then, I place a reasonable valuation on those long term earnings and sales estimates to arrive at a target value. I then discount that long term value back and figure out how much I would pay for the Company now.
You can click the spreadsheet link above to see the detail, but basically I have developed a December, 2012 target price for Omniture of $59 per share. Discounting that $59 back to today at a 15% annualized rate of return gives me a current fair value for Omniture of $30. Omniture is a Buy up to $30 per share. The stock is trading at $24 right now.
I’ve made several assumptions in developing this terminal value of $59.
- I am accepting the strong growth projections from the company and consensus analysts over the next two years, including a 37% expected revenue growth rate in 2009 over 2008.
- I have extended that strong growth out beyond 2009 in my spreadsheet. I am looking for 35% growth in 2010, 2011 and 2012. The activity among venture capitalists that I track on VCA Stocks gives me confidence in the longer term growth prospects for B2B Sofware for Websites. Omniture dominates this category.
- I have modeled continued net margin expansion over the next five years. Consensus estimates have the net margin expanding to 11.0% this year, in 2008, from 8.1% in 2007. I have those margins continuing to expand to 16.3% in 2012.
- Omniture’s share count has been rising rapidly, but I have modeled a slowdown in dilution. Given the 15% in outstanding employee owned options, I have a modeled a little over 3% in dilution during each of the next five years.
- I placed a 5 multiple on 2012 estimated sales and a 30 multiple on 2012 estimated earnings.
I feel that these growth assumptions are aggressive, even though they have been developed using consensus estimates and management guidance. Accordingly, I have discounted the $59 value back at a high 15% internal rate of return to arrive at my current fair value of $30. I have included a table in the spreadsheet above that allows the reader to look up their own current fair value given a series of annualized internal rates of return.
Competition and Other Operational Risks
Reading between the lines, Omniture’s management seems to feel that that they have no meaningful competition. They have purchased their three biggest domestic competitors. Further, their product now includes substantial barriers to entry and switching costs. Omniture holds client data on their own servers to facilitate the analytic process. This makes switching to an alternative difficult for an enterprise-class company.
Omniture notes that both Google and Microsoft have free web analytic products, but they seem genuinely puzzled that anyone could think these free alternatives were legitimate choices for a large Internet company.
Capital Structure
Omniture has been aggressive in building their business with stock, both in acquiring rivals and in attracting top management talent. I hope that the Visual Sciences acquisition marks the beginning of the end of this dilution process. The company is cash flow positive, and they have acquired their biggest competitors. Omniture’s employee stock options are about 15% of the share base. That is a reasonable percentage for a young, fast growth company, but it should generate 3% dilution per year over the next 5 years.
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