Tuesday, July 25, 2006

Color on quarter: NTRI, RNOW

- Citigroup is defending NutriSystem (NASDAQ:NTRI) after the co announced its Q2 results last night. Stock traded down 13.5% in after market.

Firm notes stellar 2Q06 results indicate NTRI is in the early stages of its growth cycle. NTRI reported 2Q EPS of 53c and beat First Call consensus by 7c. NTRI had 168k new direct custs vs. guidance of over 155k custs. Importantly, the 2Q conf call revealed NTRI's Men's program could provide a very significant new market opportunity for NTRI (perhaps as big as women's).

The company announced the President/COO George Jankovic would be resigning due to family health issues after nearly 4 years with the company. Thomas Connerty, who has been with the company since November 2004 will serve as Chief Marketing Officer and EVP of Product Development effective July 25, 2006 (CEO Michael Hagan will assume the title of President). Firm notes CEO Michael Hagan will maintain his active role (as he has in the past) in marketing and operations. Overall, they do not view the changes as negative, given Mr. Connerty's background in the diet industry (previously served as Vice President of Direct Marketing at Nautilus) and role in creating and implementing a direct marketing program, which has contributed to NutriSystem's rapid growth over the past two years. Believes Mr. Connerty would make a solid CMO.

Firm is raising their EPS estimates by 27c each in '06-'08, respectively, to reflect the updated guidance and strong trends. Also raising long-term (2006-2010) EPS growth rate to 30% from 29% previously given new EPS estimates.

Tgt goes to $95 from $90. Reiterates Buy.

- While several firms are out cautious on Rightnow Tech (NASDAQ:RNOW) I chose to highlight the ones out in defense. Why? Because historically RNOW has been a bouncing stock.

*Deutsche Bank notes that with shares trading down in the after-market (likely due to excessive investor attention to near-term revenue and EPS guidance), they recommend investors look to RNOW's strong bookings (up 30% in 2Q and 49% YTD) and cash flow (up 168% in 2Q and 123% YTD) to asses business health. And while they acknowledge that an extended average contract length (now 30 vs. 24 months) inflates total bookings, the shift away from perpetual deals (15% of bookings YTD vs. 29% in 1H05) artificially lowers bookings results. Moreover, current bookings growth of 35% YTD illustrates the health in bookings despite a shift toward perpetual deals.

The company confirmed that it continues to hire aggressively with over 20% annual organic growth in quota carrying reps (QCR) at 124 reps and over 100% growth in open employment QCR positions currently. Management reiterated its bookings and cash flow guidance and stated that the pipeline is the best it's ever been.

FCF estimates for 2006 and 2007 are unchanged and they reiterate Buy rating and $22 PT. Using an after-market price of $12.50, shares are trading at 14x '07 FCF estimates (inline with the group). Firm believes these levels are compelling given RNOW's high-growth profile (40-50% bookings growth vs. the group grows in the low-teens).

* JMP Securities notes the bookings miss and lower guidance caused the stock to trade down 22% in the after-market. While the quarter was disappointing, they are not unduly concerned about RightNow's fundamentals. Although the business is lumpy, the firm believes RightNow has an industry leading on demand customer service product, little direct competition and strong free cash flow generation. Free cash flow was $0.13 per share versus estimate of $0.11 and $0.04 per share in the year ago quarter. Maintain their 2006 free cash flow estimate of $0.65 and ups 2007 free cash flow estimate from $0.70 to $0.75, primarily due to a lower assumed cash tax rate. As the on demand comps have fallen significantly, the firm reduces their price target from $23 to $18, representing a 2007 price to free cash flow multiple of 20x, in line with the peer group median.

Maintains Mkt Outperform rating.

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