Tuesday, June 09, 2009

Omniture (NASDAQ:OMTR): Upgraded to Overweight at Morgan Stanley

Morgan Stanley is out with a major call on Omniture (NASDAQ:OMTR) upgrading their rating to Overweight from Equal Weight and initiating a price tgt of $18.

Current valuations underestimate the core cash flow growth potential: The dominant vendor enabling better returns on a customer’s online marketing spend, OMTR is well-positioned to be one of the strongest growers in the group. Conversations with customers indicate a pent up demand for new spending with OMTR, which should drive upside to consensus looking for just 2% billings growth in CY09, the firm estimates +6%. Expectations have come down materially over the past 10 months, and may now actually overestimate the impact of free offerings. More aggressive expense management — compounding the impact of stronger billings — drives 25%+ cash flow growth in Morgan Stanley model. Yet at 12.5x, OMTR trades at a 20%+ discount to the software group avg. of 15.8x on a CY10 EV/FCF basis. At their $18 price target OMTR would trade inline with the group on an EV/Sales basis at 2.7x.

Web 2.0 driving increasing spend with OMTR: Feedback from 25+ customers indicate $-weighted growth expectations for CY09 of +11% YoY. Near-term budgets remain tight, but customers plan to add products as budgets open up — avg. products per customer is expected to expand by 25% over the next year. At the same time, the ability to track social media sites like Twitter and Facebook, video embedded within sites, and activities on mobile sites should all increase overall transaction growth for OMTR.

The upcoming June quarter will likely show a continued difficult environment for new customer additions and attrition, however this is already in firm's estimates which look for net new customer adds to be down 61% YoY in CY09. But after a poor first quarter performance, management is taking more aggressive steps to control expenses, which should drive better EBITDA and EPS in the quarter. Stronger expense management along with a re-acceleration in billings growth in the back half of CY09 drives 25%+ cash flow growth in firm's model.

Notablecalls: This call will likely generate significant buying interest in the shares. OMTR has been a laggard but Morgan Stanley is now calling for a re-acceleration in fundamentals.

I suspect we will see OMTR trading above $13.00 level today (and possibly touching $13.50 if the market plays ball)

PS: I'm tempted to call this one Actionable.

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