Wednesday

Overture struggling to maintain their numbers. Ad market softening?

In another sign of slowing display ad market, Tiernan Ray writes about Overtures struggle to grow it’s display ad revenue numbers.

“sources” are telling him online advertising is slowing, mostly outside of paid search ads, in areas such as display ads, and online publishers are making less money off each ad. Omniture’s software, which customers use through a Web browser, does things like tell a publisher or advertiser how much time Web surfers spend with ads. Lowy thinks that business is potentially vulnerable. “Despite the great fundamental promise of the space,” he says of Omniture’s market, “and OMTR’s track record and long-term outlook in particular, we do not subscribe to prevailing views that the company is immune to e-commerce and ad budget slowdowns amid a weak economy and the potential inroads by the major search companies, which offer their analytics tools – albeit less feature rich than OMTR’s – for free.” Lowy notes Omniture is trading at almost 5 times sales, 47 times projected earnings per share for this year, and has a P/E-to-growth ratio of 1.3 times, which he thinks leaves “little margin for error.” His 12-month fair-value price is $24.

Surprise is not so much the overall weakening in marketing budget but the enterprise market type dynamics affecting Overture book keeping. Revenue realization is tied to customer going live on Overture platform,

Susquehanna’s Wolk has a different beef. She worries that profit growth may be tempered by investments in R&D, product development, and acquisitions as the company tries to support its torrid rate of growth. Sales rose 82% in 2007, and Wolk projects revenue to be up 115% this year. To keep away from Google (GOOG), which competes with free offerings that overlap with Omniture’s product, the company has to broaden its revenue sources to include professional services and additional software offerings. The investment required to broaden out in that way could “cap” operating profit margin expansion from about 13% of sales this year to a company goal of 20% in coming years, writes Wolk. Specifically, it takes Omniture 90 days to set up a new account on its Web server, but has to invest to build capacity to host those new accounts, leading to a 1 quarter lag before the account is cash-flow positive. “Thus, rapid growth in new customers requires a substantial amount of upfront cash investment.” Wolk thinks the stock is worth between $22 and $25 based on a multiple of projected 2009 Ebitda of between 11 and 18 times.

Margins are under microscope and monetization officers will be well advised to sharpen their spreadsheet.