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Minyan Mailbag: Up, Up and Away For Omniture?

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Credit contraction bleeds into technology.

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Professor Katz,

When you have a second, take a look at Omniture (OMTR). I have a position that I started at $17. The stock got as high as $39 but has retreated with the market. Seems to me to be in a leader in a good space but I'm curious what the you think..

Thanks

Minyan Dale


MD,

First an overview of the space Omniture is in. It basically optimizes a company's online presence to achieve maximum exposure to web real estate with the highest probability of yielding a transaction. All the bells and whistles the company offers are centered on creating efficient online marketing campaigns. Clearly this is a high growth space.

There are some verticals, insurance companies for example, where an estimated 70% of new business comes from the web. This is important for two reasons. First, when it comes to budget cuts in marketing, we're seeing more evidence that budgets for traditional media get cut first.

Second, given that web based marketing is largely driven by the analysis of meta data created by how individuals use the web, it's getting easier to quantify how much bang for your buck you're getting. In other words, questions are finally being answered like, how much are you paying per click? Where are the potential customers coming from? What is your conversion ratio?

The question regarding holding or bailing is always one of time horizon and pain tolerance. I can tell you that in my travels, I'm consistently finding the credit contraction is bleeding into enterprise scale as well as small and medium sized businesses. Customers are losing access to credit revolvers, which is making short term management of cash flow more difficult. Many deals are getting deferred - not canceled but deferred.

I believe we're in for a very rough pre-announcement season and when companies start reporting for the quarter, it's hard to imagine guidance will be anything but conservative. What I'm trying to do is paint a picture as to how substantially a company is going to have to perform this quarter and how solid the guidance will have to be for it to mean something.

OMTR has a great business, but the stock is not cheap trading at 30x the expected 2008 Enterprise Value / EBITDA (Earnings Before Interest Taxes Depreciation and Amortization).

It's also notable that several analysts have upgraded the stock as of late - Baird, Amtech and Cantor just since March 14. To me, that means there are renewed expectations in the stock despite a difficult environment. That's not to say investing in your web presence isn't a must have - these days, it's a utility bill.

But when the tape gets bad -- and in my very humble opinion it will, because the credit contraction is far from over -- suddenly everything trading with premium valuations becomes subject. I also think when the market does recover, OMTR can be the kind of company that leads us out of the cellar.

I do agree that the contribution from the Visual Sciences acquisition is probably conservative, but the expectations around integrating the company are aggressive and so that can be a two edged sword.

If you have been as handsomely rewarded -- as my firm has -- for selling hope and buying despair as Toddo likes to say, I would encourage you to look to buy the stock lower. I have traded the stock well in the past but don't have a position in the name right now.

Hope this helps.

Ada
No positions in stocks mentioned.
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