Economic Reset, Not a Recession

Over the past 50 years, the U.S. and the rest of the developing world lived to excess aided by the wide spread availability of credit. The pace accelerated in the past 10 years with looser credit standards on everything from houses, commercial real estate, credit cards, and automobile loans. That excess should never have occurred and will not recur.

Hence, what we are presently going through is what I term an “Economic Reset” and not a recession. The lifestyle and economic prosperity that we all enjoyed over the past half a century peaked with the collapse of Bear Stearns in March 2008. We are currently going through a reset, which history will show, hastened with the Bankruptcy of Lehman Brothers.

When the reset has run its course (Bernanke implied end of 2009 but I think end of 2010), the economic growth trajectory moves to the right but on a much less steeper slope, as illustrated in the graph below:





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Paid Search Ads Now on Google News

Google (GOOG) is now showing paid search ads on Google News' search results pages following the addition of paid search ads on Google Finance a few months ago. I think Google ultimately puts ads on all of their properties, except the home page, as pressure mounts to continue to grow revenues during this "economic reset" (my term for our current economic situation, not recession).


From Google's Blog
"Last November, we announced plans to begin experimenting with ads on a number of Google properties, including news query refinements within Google search. Today, we're continuing a similar experience for users by introducing ads on Google News search-results pages in the US. What this means is that when you enter a query like iPhone or Kindle into the Google News search box, you'll see text ads alongside your News search results--similar to what you see on regular Google searches or Google Book Search.

In recent months we've been experimenting with a variety of different formats, like overlay ads on embedded videos from partners like the AP. We've always said that we'd unveil these changes when we could offer a good experience for our users, publishers and advertisers alike, and we'll continue to look at ways to deliver ads that are relevant for users and good for publishers, too." Read More!

Housing Prices Continue to Fall Providing Little Support for Market a Recovery

The National Association of Realtors reported that sales of existing homes fell 5.3% in January, to an annual rate of 4.49 million units, from a 4.74 million rate in December. It was the weakest showing since July 1997. About 45% of total sales involve distressed property transactions, including foreclosures.

The median sales price tumbled to $170,300 from $199,800 a year earlier and $175,700 in December 2008.

I think house prices are the single most important metric to follow in determining when equity prices are likely to rebound or whether they continue to fall. This is more important than unit sales though both are tightly correlated. The 3% erosion from December is troubling and indicates that more downward pressure on equities is in the cards. Although I am bullish on certain stocks like Oracle, Amazon, Google, and Apple, I am negative on the prospects of the overall market because house prices continue to tumble.

Nouriel Roubini thinks house prices will continue to fall by about 15-20% in 2009.

My belief is that if we stabilize the housing market then capital market stability will follow. Until then I am extremely cautious and fearful as to what lies ahead although I believe one can make money with careful stock selection based on rigorous fundamental research.
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Yahoo Introduces Search Targeting

Yahoo announced several new ad targeting features at the IAB Conference including search targeting, which provides the ability to select advertisements based on what a person has search for. Others include enhanced retargeting, which lets advertisers tune ads according to what users have done on the advertisers' Web sites, and enhanced targeting for search, which lets advertisers adjust ads shown next to search results according to user age and other factors.

Yahoo has also started to test display ads and video next to search results.

This further reinforces my view that Yahoo’s management will not be interested in selling the search business, as they need it fully integrated in their operations in order to create these holistic advertising offerings.

Microsoft should take notice and come back to the table with a full offer.
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Amazon.com Announces Redemption of Remaining 6.875% Convertible Subordinated Notes

Amazon.com, Inc. (AMZN) announced that on March 27, 2009, it will redeem all of the remaining principal amount of its outstanding 6.875% Convertible Subordinated Notes due 2010.

The Notes (valued at $388 million) will be redeemed at a redemption price of 100% of the principal amount at maturity, plus accrued and unpaid interest from February 16, 2009 through March 26, 2009.

After completion of the redemption, Amazon will have no debt on the balance sheet and should end 1Q09 with about $1 billion in cash.

This is a significant positive for the stock and makes the company fit more nicely with my thesis that the best stocks to own are those of companies: 1) which are franchise leaders; 2) with significant cash positions; 3) little to no debt; 3) generates strong free cash flows and is self funding; 4) is taking market share as competitors crumble; and 5) have defensible business models.

Full Disclosure: I am long Amazon

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Closing The 3% to 65% Gap! How Microsoft Can Development a Meaningful Presence in Online Advertising Through Search

Part 1 in a series of discussions on Microsoft’s Internet Business (OSB)

The story as we all know is that Microsoft (MSFT) is a distant third in terms of query market share compared to Google (GOOG) and Yahoo (YHOO) and would like to close the gap and become more relevant in the online search space. More query market share (a.k.a. Volume) ultimately leads to more advertisers, which ultimately leads to more revenues and profits. The key question is whether Microsoft should throw more cash at the business buy hiring talent, buy Yahoo! as a whole, or buy Yahoo’s search business, to accelerate the process of closing the gap with Google.

Here Are The Facts:

• U.S. Search Market Share – 8.5% vs. 64% For GOOG and 21% for YHOO. According to December 2008 comScore data, Microsoft has an 8.5% share of the U.S. search query market compared to Google at 64%, and Yahoo at 21%. That share is down from 11% in January 2007, compared to Google’s which grew from 53% in January 2007. Yahoo’s share was down from 26% one year ago.

• Globally, Microsoft has 3% share of the search market, compared to 66% for Google and 14% for Yahoo. So adding international into the mix, the situation looks worse for MSFT.

• Second In Terms of Unique Users. Surprisingly, Microsoft is second in terms of Unique users globally, with 650 million unique visitors to its sites, compared to Google at 775 million, and Yahoo at 565 million. Thus, MSFT only has 15% less unique visitors than Google, and Microsoft has 15% more unique visitors than Yahoo.

What Microsoft Should Do
Given that online search represents close to half of online advertising revenues and will likely become a larger percentage over the next three years, if MSFT is serious about having a presence in online advertising, it will need to develop a more meaningful presence in the search business. With less than 10% share in the U.S. (3% globally) compared to the market leader Google, which has 64% share (66% globally), Microsoft will have to do something rather drastic to close that gap.

Microsoft has already redeveloped their search and advertising platform, dubbed adCenter, which has and continues to receive good reviews from search engine marketing firms and advertisers for its high ROI. The problem is that Microsoft is not getting the volume penetration that they need to make the business competitive and profitable even though they capture only 15% less unique visitors than Google. Advertisers with fewer resources will often go to Yahoo and Google to post ads and overlook Microsoft even though the returns are higher at Microsoft.

The rather simple solution of getting more users to search on Microsoft is a rather big question of how to achieve this. Clearly, investments and strategies in the past have not allowed MSFT to close the gap with Google. Since MSFT achieves 15% less traffic to its sites than does Google, MSFT should start by converting that traffic to search users. Strategies should be employed to keep the users on the MSFT sites to conduct searches (Yahoo! faces the same problem).

Offers like the cash back program and other couponing and discount strategies should help provide a lift but will not make a dent in closing the “3% to 65% gap.

So that brings us back to MSFT’s only major game changing alternative, and that is to acquire the second player in the space or acquire the second player’s search business (my view remains that MSFT should acquire all of Yahoo). Acquiring Yahoo or Yahoo’s search business would instantly bring MSFT’s share up to 30% in the U.S., about half of Google’s, and close to 20% globally, about a third of Google’s. That would then allow management to focus more on internal strategies (listed below) that can drive incremental share. They can start by trying to convert the existing traffic to both YHOO and MSFT to search users. That would go a long way to closing the gap. That alone would add another 10-15 percentage points to MSFT’s share over time, making them much more relevant in the space.


Organic Strategies to Grow Share
There are a few organic strategies Microsoft could employ that would help it grow share:

1. Change the mindset about search. The focus has been too much on generating revenues when the goal should be on improving the user experience and providing a differentiated product. MSFT’s number one problem is volume. If they improve the user experience then users will come. If users come then advertisers will come. If both users and advertisers come then monetization improves and revenues and profits grow. It is that simple.

Stated differently, to make headway in online advertising, then MSFT will need to significantly penetrate online search. To do so, they will need a steadfast commitment to online search from the CEO on down.

2. More Effective Marketing Strategy Centered on Search. This should be done to convince users that the online search experience and relevance is on par with Google’s. No cute ads like Ask.com which was ineffective and confusing. Just a plain ad that has the aim that search relevancy is on par with Google (provided the claim is true). Several ways to do this: 1) through word of mouth – this can be filtered through the press by attending more search related industry trade functions; 2) through a viral outlet like YouTube; 3) through banner ads on Facebook and other web properties; 4) go straight to MSFT users, which already has the number 2 web property in the world. The aim is to convince users that they do not need to jump off the MSFT pages to Google to conduct searches. In a nutshell, change user behavior through knowledge that their search engine is as relevant to Google and that the user experience is as compelling.

3. Need To Focus On Search Innovation. For the past 4 quarters, Google released 100 search monetization improvements each quarter. Point is they are constantly improving the search product and is letting the world know that or shows it to the world. MSFT should do the same.

4. Change the Brand. “Live” confuses everyone and is difficult to find. Plus the marketing effort behind Live Search was ineffective. Change the Live name to something else. Use either MSN or Microsoft Search as the brand. No need to deviate from the solid brands of those two.

5. Develop More Relationships But Be Careful Not To Overspend. Agreements with Sun, Dell and HP to include the Live Search Toolbar on new PCs, and the much-ballyhooed Live Search Cashback, which gives Web users rebates for purchasing products from participating Microsoft vendor partners through the Live Search site, are good examples. Others like Verizon and Facebook are important in that they create brand recognition. Management should go after MySpace if Google drops it. But management must be careful not to overspend or enter into deals that are uneconomical.

In all, if Microsoft buys Yahoo and in addition follows the recommendations above to grow organically, they will develop meaningful share in online search and as consequence develop a meaningful presence in online advertising.

This is the first in a series of discussions on Microsoft’s Online Services Business (OSB). In subsequent posts, I will discuss strategies for the company in branded advertising/ad agency/ad networks or what they describe as their online advertising platform or the newly created PubCenter, portal and information content products, communications and social networking, and cloud computing efforts.

My reasoning for focusing on Microsoft is because I believe they do have a competitive presence in the Internet space and it needs to be documented, given that it is largely ignored by Wall Street analysts in favor of other parts of the business model.

Full Disclosure: I do not have a position in Microsoft
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eBay Retiring Old Search Engine

eBay announced that it is retiring its old search technology in April 2009 in favor of the new search technology introduced last year. Currently 90% of users are now using the new search engine and the company is aiming for 100% conversion. Jeff King, Senior Director of Finding, states that the new engine is cleaner and faster and will deliver better results. He stated that eBay incorporated user suggestions to make the search engine better – so yes management is apparently listening to users

"In a nutshell, it looks at a multitude of details in listings to deliver more of the results you want," said King. "It makes it easy to browse and narrow your selection, and lets you choose how you want to see the results. With the new auto-complete feature it even 'anticipates' what you're typing in the search box."
eBay also stated that there are several new features in store. “These features include but are not limited to:

• Adding the "Get More results in Other eBay areas" you can see currently at the bottom of the classic search pages as well as the Tools Section

• Upgrading the Category selector on the Advanced search pages to reflect any subcategories you may have used in your browse path

• Including a new customize your preference function so that you have more control over what you see in the left navigation

• Updating the drop downs to change your sort and view to make them easier to use

• Creating a more user-friendly experience when your search returns 0 items.

• Supporting the ability to do a negative search in a lower level category
Last but not least, we wanted to let you know that we will continue our ongoing efforts to incrementally increase the site speed.”

I have long held that search is extremely poor on eBay and the function should be outsourced to either Google or Yahoo, who specializes in search. Even with the new search engine in place, I continue to believe that search needs significant improvement. I am willing to give the new engine the benefit of doubt for about another six months to see if it is a material improvement or is at least comparable to Amazon. Remember that Amazon acquired specialized search knowledge through the development of A9.com, which itself was a failure from a commercial perspective. However, the knowledge learned was invaluable for Amazon and have been leveraged across the Amazon.com sites.

At least eBay’s management is for once admitting that they are listening to users.
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Citigroup Upgrading WebMD To Buy On Defensive '09 Outlook & Valuation

Citigroup analyst Mark Mahaney upgraded the shares of WebMD (WBMD) to Buy from Hold after the company's 4Q08 earnings report. WebMD beat Street estimates and provided 1Q guidance ahead of Consensus. The company's advertising business is surprisingly strong given the challenges at other online advertising companies like Bankrate, Yahoo, and I add CBS owned CNET. The analyst thinks this is due to the fact the WebMD is a must buy for biopharma advertisers who do not have a more effective alternative. The risk-reward scenario is also favorable with 10% downside compared to a potential 25% upside.

This is one of my small/mid-cap Tech favorites but I am not ready to jump in given the 16% jump in the share price after the upgrade. I would wait for a pull back before jumping in at these levels.


From Mark Mahaney
• Solid Beat & Raise Q4 Results - WBMD reported Q4 Revenue of $112MM, ahead of Citi/Street at $106MM, and EBITDA of $34MM, ahead of Citi/Street at $32MM. WBMD also reiterated its '09 guidance and introduced Q1 guidance that was modestly ahead of the Street.

• Modestly Raising '09 EBITDA Estimate - '09 EBITDA estimate raised 3% to $114MM. PT maintained at $25 - 10X '09 EBITDA or 9X '10 EBITDA.

• Why The Upgrade? - 1) $20 or 7X EV/EBITDA appears to be a good support level, implying 10% downside and 25%+ upside; 2) Cash & Investments = 27% of WBMD's mkt cap; 3) Q4 results showed positive momentum - 21% Y/Y Internet Advertising growth, with strong 30% Y/Y Page View growth; 3) WBMD's outlook for 15%-25% '09 Advertising growth stands in sharp contrast to YHOO's and RATE's Display Advertising Decline outlooks; 4) WBMD is a must-online buy for biopharma advertisers, who are concentrating more of their online ad spend with WBMD; & 5) With approx 75% of marketing contracts with WBMD signed on 6-12 month basis, WBMD has unusual visibility.

• Putting WBMD In Context - Consistent with our prior reports, we view WBMD as one of Four Sub-$2B mkt cap Internet core stocks - along with RATE, NFLX & NILE - with currently the best combination of robust long-term growth outlooks, reasonably deep competitive moats, top management teams, and attractive business models. We refer to these as When Stocks - as in When To Buy them. We think the time is now for WBMD, based on valuation and our '09 outlook. Hence the upgrade.
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HPQ and IM Earnings Read Through For Microsoft

Results out of HP (HPQ) and Ingram Micro (IM) yesterday indicate that PC and server demand remains weak, with IBM reporting PC sales declining 19% on a unit volume decline of 4%, and Ingram indicating that they saw weakness across PC and server shipments in January and February with notable weakness among enterprise buyers. This is continued bad news for Microsoft(MSFT) whose business model is facing a bevy of threats from changing consumption patters and a slumping economy. Read More!

Blue Nile Misses Estimates

Blue Nile reported results that missed Street estimates on revenues and profits. Reported sales of $85.8 million and profits of 24 cents a share, compared to Street estimates of $91.5 million and 33 cents per share. Sales were down 23% YoY but excluding the one extra week in the quarter, sales were down 26% YoY. Free cash flow was a negative $4.9 million for the year, however, the company expects to report positive free cash flow in 2009 (the only guidance the company gave for the year). Traffic to the site was down in the single digits YoY according to management, which materially conflicts with the 40% YoY decline reported by comScore. The company did note that 1Q09 demand is down 15% but gross profits have improved. I was glad to see that common sense prevailed here as detailed in my previous write-up, where I recommended shorting the shares. However, the shares are only down 10% in after-hours trading. I am sticking with my $10 price target on the shares so I am not covering my short position at this time. Even at the after-hours price, the shares are still relatively expensive and will be more so when analysts take down numbers for the year. Read More!

Will Blue Nile’s Shares Defy Common Sense?

Consider what may seem like a common sense question. Would you pay 30x ’09 earnings for shares in a company that faces the following headwinds: (1) revenues and profits are expected to decline 5% and 10%, respectively, in 2009; (2) traffic to the company’s website is down 40%+ YoY in the past few months and is unlikely to rebound in the near-term: (3) the model depends on sales of high ASP and discretionary items, both of which are negatively impacted by the worst economic slowdown since the Great Depression (according to our new president); (4) demand for the key product has stalled; (5) management has less flexibility to cut expenses further; (6) key competitors like Tiffany, Zales, and Finlay Enterprises have reported sharp sales declines; (7) comScore reported that online jewelry sales declined 28% YoY during the holidays; (8) credit card application approvals are down significantly due to tighter credit standards and your model depends, in part, on credit card approvals; (9) MasterCard reported that sales of luxury items including jewelry was down 34% YoY during the holidays; (10) in 2008, 1,140 jewelry businesses went out of business, more than half of which were retailers, according to the Jewelry Board of Trade; and (11) competition in your online segment is intensifying.

The answer is not straight forward and depends on whether you believe that the economy gets worse from here or improves. I am in the camp that we are in this downturn for the next two years and the economic situation is likely to get worse, not better, so my answer is obvious.

Since my write up on Blue Nile (NILE) in mid-January (Significant Macro Headwinds Could Drive Blue Nile's Shares Lower), in which I recommended shorting the shares, the stock has appreciated 15%, versus a 2% decline in the S&P 500. [The stock is the only down position in my portfolio.] I suggested that the stock price is properly valued at around $10, given the lack of earnings growth.

The shares at the time were trading at 23x ’09 GAAP EPS and at a PEG of 1.3x, but Street estimates have come down, suggesting that multiples have expanded beyond the 7 points implied by the 30x ’09 multiple, and the PEG of 1.7x that the shares are trading at today.

When NILE reports earnings on Wednesday Feb. 18, I will decide to cover my short because common sense failed or I missed something entirely from left field. Analysts are estimating sales of $91.5 million (down 20% YoY), operating income of $7.97 million (down 21% YoY) for an 8.7% operating margin , GAAP EPS of $0.33 (down 25% YoY) and Adj. EPS of $0.37 (down 23% YoY). My bet is that the company misses those reduced estimates and provides very cautionary comments for the year ahead.

The shares have already corrected 60% from its 52-week high and ~80% from all-time highs set in late 2007. Despite the correction, I am sticking with my $10 price target in my previous write-up, which I based on a 10x multiple to 2010 GAAP earnings of $1.00. But that’s a 12-month out price target. If I applied the 10x multiple to 2009 GAAP earnings of $0.93, I am looking at a share price today of $9.30. The key is in my multiple, which I think is appropriate for a company facing the headwinds I noted in the first paragraph. And this is a 10x multiple for a company whose earnings are not growing in 2009. Even if you are generous and apply a 15x multiple you are staring at a $15 price target, which is 35% below the current share price.

There are some positives to the business such a relatively unlevered balance sheet, the potential to gain market share given the spate of jewelry companies going out of business (similar to Amazon), a low inventory model, and strong supplier relationships.

Thus, I am not stating that the business model is broken or is structurally challenged, like it Internet brethren eBay (EBAY). What I am saying is that the shares are overvalued and should trade at multiples that reflect the company’s realities.

Currently, the top 10 institutional investors own a significant number of the shares, and are likely not selling. Further, over 40% of the shares are sold short and it is difficult to get more shares to short. Thus, there is very little selling pressure on the shares and could explain why it is trading at such a high multiple. On the flip side, the potential for a material short squeeze is real if they post stronger than expected results, which is a possibility given the recently reduced estimates.

Seventeen Sell Side analysts cover the stock, of which 7 have sell ratings, 5 have buy ratings, and the remainder has holds. The median price target is $24. Blue Nile has a share repurchase authorization in place, but like most companies, I doubt they are repurchasing shares - NILE had $27 million on the balance sheet at end 3Q08 or $1.80 per share.

So what am I missing that the market is getting? Not sure, but hopefully I find out on Wednesday evening when the company reports earnings. However, from where I stand, common sense has to apply.
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UBS Lowers Estimates and Price Target on Viacom

The firm believes that worsening advertising trends and operational and cash flow risks are likely to keep a lid on the shares of Viacom.


From Analyst Michael Morris:
Our Neutral rating on Viacom reflects both near-term cyclical and longer-term
structural concerns for the company. In the near term, we believe that weak
consumer spending and credit environments will continue to depress advertising
spending at the cable networks (52% of operating income), and the decision to
reduce the company’s film slate in 2009 will drive higher risk and lower
operating income. Over the longer term, we do not believe the company has a
tenable strategy to fight ratings erosion, which will drive underperformance in
advertising growth relative to peers.

We view it as unlikely that advertising trends will reverse themselves in the
absence of a stronger economy and that Viacom would be one of many
companies whose shares could appreciate significantly in an economic rebound.
At this time we have no indication that an improvement is imminent. In
addition, we view the company as having a relatively weaker balance sheet than
most media peers and an unfavorable ownership structure that features dual
class shares, with the voting class 81% controlled by Sumner Redstone.

Operating Results, Commentary Provided Little Reason for Optimism
In particular, the advertising environment remains weak and is “likely to get worse
before it gets better.” We are now estimating an -8% domestic advertising revenue
decline in 1Q09 versus our prior -5%. For the full year we estimate -9.4%
domestically versus our prior -7.3%. Ratings at MTV and VH1 showed sequential
improvement but remain down year over year.

Attractive P/E Ratio Masks Operational and Cash Flow Risks
We believe that simply using at estimated 2009 P/E overlooks 1) higher relative on
and off balance sheet risk versus competitors and 2) risk of continued weakening in
operating trends. We expect ~$3bn in fixed obligations to come due through 2011,
and see FCF declining to $925mm in 2009 from $1.52bn in 2008. Ratings
weakness, and Film and video game challenges have not been resolved.

Lowering 2009 EPS to $1.85 from $1.99 to Reflect Weaker Ads & Film
We have lowered our worldwide advertising growth estimate for 2009 to -9.2%
from -3.8%, based on current trends and F/X risk. We now expect Media Networks
op inc to fall 12.2% in 2009 and Filmed Entertainment op inc to fall 9.7%. The net
impact these changes is a revised 2009 EPS of $1.85, from $1.99, which reflects
lower op inc and the suspension of share repurchases.

Valuation: Lowering 12-month price target to $17 from $18
Our 12-month PT is based on DCF analysis (10.8% WACC and 2.5% LT growth)
and forward P/E models (9.0x 2009). Read More!

Citigroup Maintains Buy on Priceline Into Earnigs

The shares are up 55% since November while the shares of its main competitor Expedia has languished. I am still calling for a transaction between the two companies this year as the travel environment becomes more challenging.


From Analyst Mark Mahaney:
PCLN Will Report Q4 Results On 2/18 After The Close - We are looking for $1.36B in gross bookings, $383MM in revenue, and $1.03 in proforma EPS vs. the Street at $378MM in revenue and $1.05 in proforma EPS.

Tough Comps, Recession and FX Headwinds... Expect Cautious Q1 Outlook - Against a recessionary backdrop and legitimate concerns about consumer discretionary spending in travel, we anticipate PCLN's outlook for Q1 to be fundamentally cautious. The company has already stated that it will not provide full year guidance (a departure from the past), and negative ADR and FX trends in Europe remain material headwinds. We expect PCLN to report 26% Y/Y int'l bookings growth in Q4 (ex-FX), vs. 45% in Q3, and may actually guide to flat or negative int'l bookings growth in Q1 (mid teens growth ex-FX).

We believe the market will be especially sensitive to PCLN's guidance for European fundamental trends this quarter, given growing signs of cyclical deterioration in Europe (~60% of PCLN bookings).

Reiterate Buy and $83 PT - Based on 1) PCLN's sustainable business model advantages in Europe (large installed base & low-cost agency model); 2) PCLN's defensive hedge in the U.S. market based on trade-down, deep-value Name-Your-Own-Price travel offering; and 3) PCLN's reasonable current valuation (9X '09 EBITDA with a 7% FCF yield), esp given the company's long-term growth outlook. Read More!

Deutsche Bank Maintains Buy on comScore

The high reoccurring revenue base (72%) makes comScore an attractive play but consolidation/dislocation at several customers are likely to be a drag on the stock for sometime. I actually think this is somewhat of a software play and fits into my thesis as software as a safe haven.


From Analyst Jeetil Patel:
Revenue Visibility Still Deserves a Premium - BUY

We maintain our BUY rating on comScore as we believe the company's
subscription-based model offers visibility and defensibility in an
otherwise uncertain economic environment. While 1Q expectations have
been tempered, mostly on EBITDA, we note growth for '09 looks solid
(>15%) and visibility into revs is high. Nonetheless, we view any
share price weakness as a buying opportunity on this growth play on
Internet/advertising. EBITDA margins should also expand still in
2009, helping to drive *20% profit growth in 2009.

Client base still growing in 2009 – Cross-selling of new products
working

With 4Q results largely in line with expectations, net customer adds
of 30 was lower than 40-50 net adds average, after posting net adds
of 32 last quarter. There is some slowing at comScore, as the
company faces economic headwinds and some marketing campaign
freezes. However, total customers now stand at 1,166, with renewal
rates still exceeding 90%. Additionally, its recurring revenue
element (72% of 2009 revenue) offer investors visibility in an
uncertain economic backdrop. In fact, 30% of its subscription
revenues are still under multi-year contract, which offers some
longer term visibility beyond 2009. As for 4Q results, revenues/EPS
of $31.6mn/$0.18 came in slightly below DB at $33mn/$0.17.

Adjusting Estimates

We now expect 1Q09 revenues/EBITDA of $30.6mn/$4.3mn vs. $30.5mn/
$5.6mn previously, implying a 24%Y/Y growth in subscription-
revenues. Our 1Q pro-forma EPS estimate is now at $0.08 vs. $0.15
previously .For 2009, we now expect revenues/EBITDA of $134.8mn/
$28.8mn vs. $141mn/$34.2mn previously. Our FY09 pro-forma EPS is now
$0.70 vs. $0.95 previously.

Reducing Price Target to $15 ($19 previously)

We are lowering our price target to $15 from $19 previously based on
21x our '09 EPS estimate and 13x 2009E EBITDA. Comparable multiples
have contracted in recent months, and our price target for comScore
reflect a premium multiple to its peer group trading at an average
of 17x 2009E earnings and 6x 2009E EBITDA. We believe a higher
multiple is justified, considering that the company exhibits
significant visibility into its cash flows and its diversified base
of over 1,000+ customers across multiple verticals.. Risks include:
VC overhang, competition, panel recruitment/maintenance Read More!

Deutsche Bank Reiterates Buy on GSI Commerce

The valuation looks attractive and I would be buyers of the shares at these levels. See my prior write-up on the company.


From Analyst Herman Leung:
Levers of Business Growth Remain In Tact - BUY

GSI is not sheltered from this macro economic slowdown, but we
believe the early stages of online penetration by these massive
multi-channel retailers, growth in interactive marketing services
and its service-fee model offers an attractive opportunity for
investors. As such, we maintain our BUY rating and $15 price
target. Results from 4Q were solid and guidance was in-line to DB
expectations.

Tough Comp with Hershey's One-Time Benefit Last Year

While 1Q guidance was in-line to expectations, management
directionally guided 2Q EBITDA to decline, but this is because 2Q09
faces a tough comp from the $2mn one-time EBITDA benefit from
Hershey's last year. Excluding this Hershey's deal, we fully expect
EBITDA to grow in 2Q09, especially as the service fee model
transitions (Dick's) and its e-Dialog business remains healthy.
Additionally, GSI is also seeing a healthy pipeline in 2009, with 5
new pieces of business. As for 4Q results revenue/EBITDA came in at
$391mn/$68.7mn better than. DB at $380mn/$68.3mn.

Updating Estimates

Post 4Q results and factoring consideration of management direction
for 2009, we are adjusting our estimates for 2009. As such, for 2009
we are now modeling revenue of $937.5mn (-3%Y/Y) and EBITDA of $90mn
(+9%Y/Y), compared to $988mn/$92mn previously. Our FCF estimate for
2009 is $43mn (+11%Y/Y), on cap ex assumption of $48.5mn. For 1Q09
we are modeling revenue/EBITDA of $188mn/$2.4mn, compared to $380mn/
$68.3mn previously.

$15 Price Target

Our Price target to $15 is based on 10x our 2009 EBITDA estimate of
$90mn. This multiple is at a premium to the e-commerce group trading
at 7x 2009 EBITDA estimates given its diversified client base with
long term contracts. In addition, the 10x 2009 multiple is at a
discount to Amazon's average forward-year EBITDA multiple of 19x and
at a premium to Digital River's average forward year EBITDA of 6x,
given its diversified customer base of 88mn active members, and at a
premium to Digital River, given its 30%+ revenue concentration from
one client. Risks to our investment thesis include loss of key
customers, seasonal business fluctuations. Read More!

Citigroup Reiterating Buy On Google Based on Broad Industry Datapoints

The firm maintains their $450 price target believing that two recent Search conferences reinforces their bullish view on Google.

From Analyst Mark Mahaney:
Two Key Industry Conferences In The Past Week - SMX Search Expo in Santa Clara, CA and Covario Search Conference in San Diego, CA (see 2/8/09 note). Combined, these provide broad reads into Search marketing trends.

SMX Takeaways Consistent With Covario Summit Learnings - 1) '09 Search budgets are broadly - tho not universally - expected to increase over '08 levels; & 2) Q1 Search, however, WILL be weak, with the Retail & Travel segments (not surprisingly) seeing weakness but the Financial segment (surprisingly) seeing stabilization, with select signs of February picking up from weak January.

Findings From Authoritative SEMPO Report Suggest Search Stabilization - Released at the SMX conference, the Search industry survey report concludes that 1) Search marketers are looking for approx 9% spend growth in '09, which is ahead of our GOOG 4% U.S. growth forecast; 2) 2/3rds of Search Marketers could tolerate further price rises, although we view CPC deflation as much more likely near-term; and 3) Search budgets continue to be poached from Magazine, Direct Mail, and Newspaper budgets.

Findings From Advertiser Perceptions Survey Suggest GOOG Display Traction - The survey of over 1,200 online advertisers actually ranked GOOG higher than YHOO in terms of Display Ad Results and Customer Service and close to YHOO on several other Display metrics. YHOO's challenges/distractions over the past several years have created an opportunity for GOOG Display advertising. And there is evidence of some success.

Although Early, We Believe Competitor Checks Suggest Support For Our Q1 Ests - With GOOG, we are assuming 7% Q/Q net revenue decline in Q1 vs. the 7% and 10% declines we see implied in YHOO and IACI's Ask guidance. Given the above datapoints and GOOG's ongoing market share gains, our estimate would appear to safely include a worst case Q1 scenario.

Reiterate Buy As We View Risk-Reward As Very Reasonable - Our $21 in '09 non-GAAP EPS carries assumptions for modest Search growth, the beginnings of material non-Search revenue, and opex efficiencies that recent industry datapoints would appear to support. A close-to-trough 15X multiple would imply approx 10% downside ($315) while the average '07-'09 multiple (25X) would imply approx 40% upside. Read More!

JPMorgan Maintains Hold on ValueClick After Earnings

While the shares are attractive at 4x earnings, the firm remains cautious on the company due to a challenging macro environment for advertising and consumer spending. I actually believe there is upside to the shares from here as advertising spending stabilizes and look for ValueClick to be an acquisition play in 2009.


From Analyst Tonwsend Buckles:
ValueClick reported better-than-expected Q4 results with adj. EBITDA of $38.2m, above our $33.5m estimate and company guidance of $33m-$36m. Operating EPS were $0.16 (ex. goodwill impairment), at the top end of guidance and $0.01 above our estimate. Revenue declines were not as steep as feared, down 14.6% (ex. divestitures), with upside from the comparison shopping, display, and affiliate marketing businesses. The company also maintained solid profitability with operating margin down only 20bps (ex. one-time charge in 4Q07).

Comparison shopping the biggest positive; welcome change from recent trends. The greatest upside came from the Comparison Shopping business - albeit with revenue still down 25% – which had been a big worry after a steep downturn in Q2/Q3. Management noted it made a number of adjustments to how its properties acquire traffic that yielded positive results and should provide more stability/visibility after a very erratic '08.

Q1 guidance in line with expectations, below consensus. Management gave guidance for Q1 – though did not provide a customary full-year outlook – calling for adj. EBITDA of $29m-31m and EPS of $0.11-$0.12 (off revenue decline of 22%-25.5%) vs. our estimates heading into the quarter of $30m and $0.11, and consensus of ~$33m and $0.14, respectively.

"Good" start to the year; tweaking up estimates, though still defensive. We view guidance as somewhat conservative after Q4's performance and management's commentary of a "good" January (particularly in the volatile media and comp shopping businesses); we are bringing up our Q1 adj. EBITDA by $1m to $31m and EPS by a penny to $0.12 at the high end of guidance. For '09, we are raising our adj. EBITDA to $136m from $128m, though remain cautious given VCLK's low visibility and difficult operating environment.

Encouraging quarter; still seeking stability, improved outlook. While Q4 was a good upside surprise after a fairly disappointing year – shares were up ~10% after hours – we remain cautious amidst a very weak advertising and consumer spending backdrop that we expect to remain a challenge to the business and lead to a weak 1H09. At 4x EBITDA, we find valuation attractive; however, we look for stabilization in the business and an improved ad/eCommerce outlook before becoming more positive on the stock. We reiterate our Neutral rating.
Read More!

Deutsche Bank Maintains Hold on The Knot After Earnings

The company believes that while The Knot is well positioned to capitalized on the wedding opportunity, execution challenges will limit upside opportunities.


From Analyst Jeetil Patel:
* Risk/Reward Balanced at Current Levels, Maintain HOLD

We maintain our HOLD rating on The Knot shares, as business
execution still remains tough, especially in the current economic
environment. While the merchandise and print business units
outperformed in 4Q, the advertising and registry units missed the
mark, affected by the recession. We think local online ads are
starting to show promise (+9% in 4Q), yet visibility remains low in
the near-term at TheKnot. We think shares will likely remain range-
bound, yet supported by $4/sh in cash.

* Limited Visibility in 2009, but Focus on Cost Containment

The Knot posted 4Q results below expectations, as
revenues/EBITDA/EPS came in at $24.4mn/$3.7mn/-$0.03 vs. our $25.3mn/
$4.3,m/$0.06 estimate. Excluding a $4mn impairment charge, EPS came
in at +$0.04. The company had its highest net vendors ads in the
local ad business, but weakness in national ads and registry
masked the outperformance. Management plans to test new local ad
pricing models in 1Q, yet the broader theme on the call appeared to
be cost containment in light of the economic uncertainty.

* Modestly lowering estimates

For 1Q09, we now expect revenues/pro-forma EPS of $22.9mn/$0.00 vs.
$23.7mn/$0.03 previously. For 2009, we are now at revenues/EPS of
$104.5mn/$0.19 vs. $106.4/$0.29 previously. EBITDA is expected to be
$16.8mn vs. $20.4mn previously for 2009. Our segment assumptions
include $60.5mn in Advertising (+11%Y/Y), $10.5mn in Registry (+1%
Y/Y), $18.7mn in Merchandise (-10%Y/Y) and $15mn from Publishing (-
19%Y/Y). Overall EBITDA margins will drop from 17% to 16% in 2009 on
1% revenue growth (with declines in 1H and growth in 2H).

* Maintain $6 Price Target

Our $6 price target value shares at 20x our FY09E ex-cash pro-forma
EPS of $0.10, in-line with the Internet media sector (currently
trading at an avg. of 20x FY09E EPS) plus $4 in cash per share.
While we think the company is positioned well to capitalize on the
online wedding opportunity and implementing cost cutting
initiatives, we think execution challenges limit the upside to its
Internet media category multiple at this point. Risks include:
online ad spending slowdown/acceleration, acquisition integration,
increased/decreased competition and customer retention/loss. (See
Page 2 & 3) Read More!

Searching For Equity Value in Value Vision Media

ValueVision Media (VVTV) is the number three player in the domestic television home shopping industry behind QVC (LINTA) and HSN (HSNI), with the ShopNBC channel. The company has a 10% share of the domestic industry and has historically focused on the upscale end of the market with ASPs greater than $200, compared to ASPs for its two competitors in the $40-$60 range. However, the company has been the least profitable of the three in part due to the fact that they pay the same carriage fees over a much smaller revenue base (this also explains why HSN's margins are half that of QVCs).

The shares are trading hands at $0.20 and the company has a market capitalization of roughly $7 million. The shares are down over 95% over the past year and could likely face a NASDAQ delisting notice based on the bid price. The company failed to successfully find a buyer over the past year after soliciting 137 potential buyers and signing confidentiality agreements with 39 of them. With the current economic environment forcing several large retailers to go out of business, one has to wonder whether Value Vision is headed in that direction soon. The shares are indeed pricing in that scenario.

The company has outlined several strategies to grow profitability including: 1) expanding Internet distribution; 2) optimizing the product mix to appeal to a broader set of customers; 3) reducing emphasis on high ticket items; and 4) focusing on repeat usage. In strategy 1, the company faces intense competition for online dollars and would have to increase online marketing spend, which would pressure their profitability goals. In strategy 2, they would be pitting themselves up against QVC and HSN's target segment and gaining share would be difficult. Strategy 3 is prudent given the current economic climate but there are likely to be execution challenges. Both QVC and HSN have had difficulty in the past whenever they have tried a product shift. Point is that this strategy caries significant risks. Lastly, on strategy 4, driving repeat usage would require an immediate investment in retention marketing initiatives, which would pressure near-term margins. The time required to implement these set of strategies is not on the side of management.

In the latest quarter, revenues were estimated down 35% YoY to $142 million, EBITDA was projected at a loss of $15 million compared to EBITDA of $5 million in the prior year, and net loss was projected at $40 million compared to a net loss of $1 million in the prior year. The net loss included a $9 million non-cash charge related to their TV station in Boston and a $6 million impairment charge due to illiquidity of the Auction Rate Securities.

It is difficult to arrive at a value for this company. They do have a business generating significant revenues but profitability on those revenues are uncertain, and given the current economic climate, which our president has dubbed the worse since the Great Depression, it is hard to peg a turnaround in profitability for the company. They have announced headcount reductions and are in the process of negotiating carriage agreements with the cable and satellite companies, which are hopefully favorable. However, both are unlikely to be enough to offset the pressures on profitability.

The company ended 2008 with $75 million in cash, but according to management, $20 million of that figure is Auction Rate Securities, which are not liquid. So lets reduce the company's cash availability to $55 million. That's $1.62 in cash, which is significantly above the current share price. However, the company has $185 million in "contractual" obligations over the next five years relating to their cable and satellite agreements and operating leases, with an average annual cash commitment of $44 per year from 2009 to 2012. In addition, GE has the right to convert its preferred stock in Value Vision on March 9, 2009 at a redemption price of $8.29 per share or redeem the shares for the redemption price (cost at $44 million).

The company is in a difficult position, potentially facing $88 million in cash payments in 2009 when they only have $55 million in the bank and the business is unlikely to generate cash to cover the payments. Management stated that they are in the process of renegotiating with GE to extend the terms of the Series A Convertible Preferred Stock. Assuming that they are successful and that burden is temporarily lifted, the are still on the hook for $44 million, while the business is burning cash. They could presumably go to the markets to raise money but the chances of them being successful is slim, in my view. Anyway you twist this, Value Vision is in a bad position and the market knows this, as reflected by the price of the shares.

So that leaves only the assets to value. I am estimating $4.85 per share in value for Value Vision's assets including cash, working capital, buildings and other property, and licenses. I am also writing down by 50% the value of the Auction Rate Securities to $0.29 per share, for total assets of $4.85 . However, the cash obligations total $6.74 per share, leaving a negative $1.89 per share of value.


Thus, using the liquidation valuation approach, the shares are essentially worth zero, assuming they are on the hook for those obligations. In the event of bankruptcy, it would be up to a judge how these assets are spread across owners (investors) and the parties Value Vision is obligated to make payments to. It's possible that in bankruptcy those obligations are substantially reduced. In that event, investors could walk away with some cash value although I have never seen precedence of this. But this is a risky situation and I prefer to stay on the sidelines.


Read More!

New Yahoo-Microsoft Transaction Proposed by BofA/Merrill Lynch Analysts

In a new twist on the Yahoo-Microsoft saga, analysts at Bank of America / Merrill Lynch are proposing that Microsoft contribute their online services business and cash ($12bn-$21bn) to Yahoo in exchange for a 49% stake in the combined entity, with an option to increase its stake to above 50%. Under that scenario, they value the combined entity at $26bn to $41bn, with Yahoo shareholders receiving an estimated $14.20-$22.50 per share, including an immediate cash dividend of $4.60-$7.60 per share.

The firm’s rationale is that Microsoft’s online business is best left in the hands of a company with a core competence in Internet advertising, allowing Microsoft to focus on its core competence of software.

The immediate value to Yahoo’s shareholders would be a potential 5% to 65% upside to the share price and an immediate cash infusion. In addition, the combined entity would generate revenue synergies and consolidate Internet advertising share to two players, effectively reducing competition in the space.

For Microsoft’s shareholders, the benefit would be removal of an asset that is a drag on operating income and EPS and a higher valuation for the stub business if all goes well. Further, the analysts believe that the combined entity would lower integration and operational risks compared to a full acquisition, leaving room for management to acquire the remaining 51% at a later date when the combined entity reaches critical mass and is squarely profitable.

While this is a noble attempt at presenting an alternative to the MicroHOO drama that has gone on for the past year, I do not believe that it has legs for the sole reason that Microsoft is unlikely to agree to shed its online assets. Microsoft would want to hold onto those assets for competitive purposes with Google, for its cloud computing efforts, and for strategic purposes regarding the desktop. Further, management has indicated their willingness to continue to invest heavily in the online services business, thus following this alternative would be a pointed departure from their strategic plans. Plus, I continue to believe that the best option for Microsoft is a full acquisition of Yahoo. However, the work by these analysts was solid.
Read More!

JPMorgan Maintains Buy on IPG

JPMorgan is sticking with their Buy rating on the shares of Interpublic Group (IPG) ahead of the company’s earnings on February 27th. They are expecting EPS of $0.31, which is two cents ahead of consensus, due to flat organic revenue growth (a positive) and margin improvement. The shares are trading at a surprisingly low 2.7x ’09 EBITDA, which is less than half the trading multiple of its peers.

From Analyst Alexia S. Quadrani:
As Omnicom demonstrated in its better than expected Q4 results, the advertising and marketing services businesses are somewhat protected from the weak ad market due to the very diversified revenues stream (both by service offering and geography) and variable cost structure. Omnicom's CRM (direct marketing) business grew 3% in Q4 and we would expect to see similar positive revenue growth from IPG's marketing services business in Q4.

Internal improvement likely to be a helpful tailwind. We believe IPG has the added benefit of many internal changes made throughout the year, which should provide an additional tailwind and likely continue its trend seen through the first nine months of 2008 of delivering the best organic revenue growth of the group. Specifically, with its agency Lowe now in the black (after losing $70 million in 07) and leading media agency Initiative making a huge turnaround (named by Adweek US media agency of the year with an estimated increase in 2008 revenues of 22%) we believe IPG has a lot of internal firepower to offset this very challenging overall ad marketplace near term.

Liquidity concerns seem unwarranted. With ~$417M of net debt (includes $1.7B of cash at Q3) and near-term limited maturities ($250M in 11/09 and $250M in 11/10) which can be funded from FCF, we see little reason to be concerned about liquidity, particularly as the ELF (which expires this year) is pre-funded and IPG has nothing drawn on its new $335M facility.

Valuation is compelling as IPG is the cheapest stock in our advertising and marketing services group. At 2.7x 09 EBTIDA, we believe IPG shares are significantly undervalued, trading at a trough multiple and well below its peers (6.2x 09 EBTIDA). IPG even trades at a discount to more secularly challenged, slower growth companies with real longer term liquidity concerns, such as NYT and GCI. We look for relatively positive results from other advertising and marketing services companies (Publicis reports later this week) and good results from IPG on the 27th as a catalyst for shares.
Read More!

Deutsche Bank Bullish on Activision Into Earnings

Deutsche Bank maintains their Buy rating on the shares of Activision (ATVI) ahead of earnings today. The company remains bullish on the shares due to Activision’s product line-up, its subscription-based business in WarCraft which provides visibility into revenues, market share gains, and potential margin expansion.

From Analyst Jeetil Patel
In-line 4Q earnings expected, but outlook should be positive - BUY

We maintain our BUY investment rating on shares of Activision-
Blizzard as well as our price target of $13. Activision-Blizzard
(AB) plans to report 4Q earnings on Wednesday (4:30 pm ET, dial-in
719-325-4748; pwd: 9818084), and we would expect the company to post
results in-line with expectations. We estimate 4Q revenues and EPS
of $2.03bn (in-line) and $0.26 (EPS could be modestly ahead of
our estimate on better GM). To no surprise, 4Q was driven by Call of
Duty and World of Warcraft (subs + expansion pack).

* Themes to look for on the conference call

We estimate 62% gross margins and 26.4% operating margins in 4Q,
with upside likely to both from Warcraft GM and opex controls. Note
that Street consensus stands at $0.29 (vs. DB estimate at $0.26) in
EPS for 4Q. The key themes on the call to look out for will be the
2009 lineup, strength/channel inventories/outlook for Guitar Hero,
SKU growth, new IP/titles, update on Warcraft in China & potential
StarCraft 2 launch.

* Expecting '09 growth an in-line with industry growth rates

We estimate 2009 revs/EPS of $4.77bn and $0.65, based on a 7%
decline in core Activision ($3.0bn) and $1.75bn at Blizzard. (Street
consensus at $5.2bn/$0.67). We think the co. guides to '09 software
revs in-line with industry growth (0%-5%), implying $5+ bn in revs,
with upside to EPS offset by lower interest income on cash. We would
expect Activision to guide conservatively in a range of $0.60- $0.65
to start 2009. Upside potential exists from share buybacks,
potential new China deal for Warcraft (could add $0.05 in annualized
EPS), Starcraft launch & SKU growth to propel software growth.

* 12-month price target of $13

Our $13 price target is based on 20x our CY09E EPS of $0.65, vs. the
37x for Electronic Arts and target multiple of 17x CY09E EPS, given
the company's more diversified revenue stream and high-quality
stable of in-house IP, subscription business, market share gains,
higher margins, and potential upside to earnings from leverage
against generally fixed technology costs. Risks: slower demand,lower
software ASPs & slower next gen hardware sales. Read More!

Ticketmaster and Live Nation Agree To Merge

Ticketmaster Entertainment (TKTM) and Live Nation (LYV) announced the signing of a proposed 50/50 all stock merger agreement whereby TKTM shareholders would receive 1.384 shares of LYV for every share of TKTM. Based on exchange ratio and LYV current trading price, this would represent a 10% premium to TKTM’s current price of $6.15. The combined entity is to be named Live Nation Entertainment, and the transaction is expected to close in 2H09 iF the merger receives shareholder and regulatory approval.

The biggest hurdle is regulatory approval for the deal, which is likely to face intense anti-trust scrutiny. In fact, several senators have already voiced concerns about the deal. I cannot handicap this one with conviction the way I did with the Yahoo-Google search deal, but I am sure this one will keep several merger arbitragers up at night. But true to form I will venture a guess: I bet this one passes regulatory muster but there are likely to be concessions or restrictions. My rationale will be detailed in another post.

From Citigroup Internet Analyst Mark Mahaney:

Strategic Rationale Focused On Improving Industry Fundamentals— On a
management conference call, the companies cited the following key
opportunities that the combination could enable: 1) increasing transparency by
aligning promotions, ticketing and artist objectives; 2) More efficient and
“creative” pricing options including all-in-pricing, and 3) encourage industry
adoption of ticketing technology innovations such as paperless ticketing to
improve overall fan experience.

Targeting $40MM In Synergies — The companies estimate that there is roughly
$40MM in potential cost saving synergies primarily from ticketing, marketing,
back office and data center functions. On the call, Live Nation CEO, Michael
Rapino, noted that this estimate did not include any potential benefit from
revenue synergies, which he expected could be material. Cost synergies are
targeted to be achieved by the anniversary of the transaction close.

Potential Client Defection And Regulatory Approval Are Risks — While the
potential benefits to LYV and TKTM seem relatively clear, key ticketing clients
such as AEG may view the combination as inherently conflicted, and TKTM
runs the increasing risk of client defections when contracts come up for
renewal. And finally, the biggest hurdle, in our view, is likely to be regulatory.
Consistent with the acquisition of Paciolan in 2008 (now Ticketmaster Irvine),
investors should expect regulators to scrutinize this transaction just as (if not
more) closely.


Read More!

Final Option for Bankrate: Find A Buyer

Bankrate (RATE) reported revenues and profits that missed street estimates and management declined to provide guidance for 2009. The lack of guidance was owing to low visibility, although management is expecting both revenue and EBITDA growth for the year. Revenues of $40.2 million and Adjusted EPS of $0.33, missed Street estimates of $42 million and $0.34, respectively. The shares fell 13% in after-hours trading.

Although I’ve recommended staying on the sidelines on the shares until more attractive entry points surfaced, I anticipated that RATE would have at least met estimates and provided guidance for the 2009. Thus, the results were indeed surprising. The miss was attributed to both weak display advertising and credit card revenues. The latter was due to loss of organic traffic for two thirds of the quarter due to lower positions on natural search results ($1mn impact), and credit card companies pulling back on offers and approving fewer people for cards (RATE gets paid on approved applications).

Management was surprisingly upbeat on the conference call, believing that they can increase EBITDA margins in 2009 and deliver EBITDA growth in the double digits as they: 1) increase margins for the credit card and insurance businesses; 2) lap expenses for the new website and China launch; and, 3) as they pull back on SEM expenditures. They cited current positive trends such as strong January traffic due to the current refi-boom and strong demand for the deposit channels. Clearly management has levers at its disposal to achieve its goals of margin expansion but macro trends are likely to trump management's ability to exercise those levers effectively.

So what now for the stock? Assuming that EBITDA and EPS Street estimates remains unchanged, we are looking at a stock trading at 7x '09 EBITDA and 14x '09 Adj. EPS. However, management's lack of definitive guidance calls into question the current growth rates of EBITDA and EPS and makes arriving at a true value determination difficult. In instances like this, I would defer to my DCF calculation, which shows the shares reaching a 12-month value in the range of $28-$33. However, I continue to remain on the sidelines and would prefer to buy the shares at a valuation closer to 5-6x '09 EBITDA and 10-11x '09 EPS, which would translate into a price of $20-$22.

Ultimately though, I think Tom Evans should actively shop Bankrate to other Internet companies like Yahoo! or IAC or a traditional media outfit like Newscorp. Unlike its Internet brethren eBay, Bankrate's business is not broken or structurally challenged. It, is however, highly levered to a financial environment that is unlikely to improve this year or next and the shares are likely to remain extremely volatile. For this reason, the best course of action is to be removed from full public disclosure so management can more effectively manage the business without the full pressure of meeting Wall Street estimates. That, in my view, is the best way to reward shareholders.
Read More!

Tempered Enthusiasm For Bankrate; EBITDA Guidance Will Be Key

Sentiment has turned negative for Bankrate as a downgrade from Needham & Co. and cautious comments from JMP Securities, RBC Capital, and others have weighed in on the shares. Analysts were more positive on the shares just one month ago with most increasing their price targets on the stock. However, I've been sounding the cautious bell on this stock for several months on a few write-ups: Bankrate Shares Come Under Pressure; Bankrate Now Showing Google Ads To Prop Up Revenues; Great Refi Traffic But Where Are The Advertisers; Bankrate Has Run Out of Options To Support Its Stock.

I believe that Bankrate is a great trading stock and not one to hold for the long-term given the immense volatility in the shares - a takeout is one reason to hold. I was however hoping the shares would drop to the low-to-mid $20s prior to earnings so I could pick up a few shares, because I do like the company and believe in the management team. It's just that the macro environment for Bankrate is challenging and the shares haven't fully reflected those challenges, in my view.

The company reports earnings Thurs, February 5th, and the Street is expecting revenues of $42 million, EBITDA of $14.9 million (35.5% margin), and EPS of $0.34, all are reasonable numbers to beat. However, what will be key is the guidance for 2009 on revenues and EBITDA, but mostly for EBITDA. Consensus is at $190 million in revenues and $70 million in EBITDA in 2009. If management provides a number above $75 million for EBITDA in 2009, I think we may see a slight bump in the shares. Anything above $80 million and we will see a rally on short covering.

How the stock trades will come down to the EBITDA guidance provided by management so I am guessing Tom and crew have spent considerable amount of time on that one number or a range. Impacting that number is pressure on the display business due to continued weakening macro trends and essentially weak visibility, headwinds in the credit cards business, and whether the refi-boom continues. The deposit business is the one piece of the business that is operating without negative pressures.

On an EBITDA basis, the shares are trading at 8x '09 EBITDA, with EBITDA growing 20% in 2009 and at a 14% CAGR from '09-.'12, per my estimates. So the shares are inexpensive at these levels. On an adjusted PE basis, the shares are trading at a PE of 16x '09 but at a PEG of 1.2x based on a 13% EPS CAGR from '09-'12. So on a PE basis, the shares are reasonably priced. Whether to follow the EBITDA analysis or the PE analysis is up to the analyst or PM investing in the shares. But in my book (which is forthcoming), earnings is the chief driver of equity prices and I defer to the PE analysis to arrive at a valuation determination. Thus, based on a PE analysis, I believe that the shares are reasonably priced and I am awaiting a pullback in the low $20s before I buy the shares. Lets see what happens with the earnings report and conference call. Read More!

Competing Forecasts on Kindle Sales

Amazon is expected to release version 2 of the highly popular Kindle book reader product on February 9, 2008, and several analysts are estimating past sales and forecasting future sales of the product, which differ widely.

Merrill Lynch/BofA analyst Justin Post has used long-term unearned revenue numbers and sequential changes in unearned amortization from Amazon’s financials to estimate 2008 kindle unit sales of 374K and 3Q unit sales of 142K. He also estimates Kindle revenues (both hardware and media) of $48 million in 2008 and is forecasting sales of $207 million in 2009, or 1% of 2009 revenues, and $422 million in 2010. As a side, he is estimating 500K Prime additions in 4Q.

Citigroup analyst Mark Mahaney estimates unit sales of 500K Kindles in 2008 but thinks that it is not unreasonable to assume unit sales of up to 750K. He is basing his estimates on revelations in Sprint's filings. He is estimating Kindle related revenues of $153 million in 2008, $429 million in 2009, and $1.2 billion in 2010, off the strength of 500K, 1 million, and 3.5 million unit sales for those years, respectively. His forecasts is based on comparisons to iPod adoption rates and Kindle pricing.

The Citi analyst was the first to cause a stir with Kindle estimates last year, which were then somewhat disapproved by Amazon as too aggressive. Here are his thoughts on what to expect at the Feb. 9 conference.

"What To Expect On February 9th...
Amazon will be hosting a news conference next Monday, February 9th, at the
Morgan Library & Museum in NYC. CEO Jeff Bezos will host the event.
Expectations are running high that Bezos and company will debut the Kindle
2.0. We believe these are reasonable expectations.
Blogs and newspapers have carried reports and prototype pictures of the
Kindle 2.0 for several months now. What seems consistent is that the new
device will be longer and thinner than Kindle 1.0, with a more user-friendly
keypad and device side-buttons that are less prone to accidental
hits/accidental page turns. We don’t expect the device to have touch-screen
capability, nor do we expect the device to have a color screen. We also expect
the device to incorporate faster page-turning functionality.

Among other key issues, we will be looking to see whether the price point is
lowered from the existing $359 level and whether Amazon will be able to
announce any new wireless carriers for the device, particularly in international
markets. On price, Amazon already lowered the price of the Kindle from the
initial $400 level to $359, and we would expect continued pricing cuts going
forward. We wouldn’t be surprised to see the new Kindle come out closer to
$300. And as for international wireless carriers, we are actually surprised that
Amazon hasn’t been able to line these up already. But we wouldn’t be
surprised to see them introduced along with the 2.0 version." Read More!

OpenTable Braves The IPO Market

Online reservations company OpenTable, headed by Jeff Jordan, the former head of eBay’s North American business and former head of PayPal, filed an S1 to go public and raise $40 million dollars. The company is not under the gun to raise capital like Friendfinder Netwtorks (see write-up here) and I did not find anything in the prospectus indicating why they are braving this challenging market, where they are likely to receive a low valuation for the business.

The company is solidly EBITDA positive with EBITDA margins of 15.8% in the first 9 months of 2008, up 340bps from 12.4% in 2007. Revenues grew 41% and EBITDA grew 80% YoY in the 9 months of 2008, but most of the EBITDA growth and margin increase was due to a pullback in G&A spend, which declined to 20% of revenues in 2008 from 26% of revenues in 2007. [All calculations are adjusted for stock based compensation.] If G&A spend was held constant as a percent of revenues, EBITDA would have only grown 10% YoY. Technology spend increased 70% YoY in the 9 months, due to increased technology headcount to “address website and ERB enhancements, internationalization of our solutions and website, and system control enhancements.”

Surprisingly the model is extremely capex intensive with capex as a percent of sales at 13% in both 2007 and 2008.

The model is holding up well in the recession as subscription revenue per restaurant per month increased to $2253.6 in 2008 from $247.72 in 2007, and revenue per seated diner per month remained flat at $0.08.

Some other facts:
• 292 employees
• 95% of revenues from the U.S.
• Currently in London, Canada, Tokyo, Mexico, France, Germany, and Spain
• $23 million in cash and zero debt
• 9709 installed restaurants (8788 in U.S., 921 int’l)
• Seat 2.8 million customers per month

“We generate substantially all of our revenues from our restaurant customers; we do not charge any fees to diners. Our revenues include installation fees for our ERB (including training), monthly subscription fees and a fee for each restaurant guest seated through online reservations. Installation fees are recognized on a straight-line basis over an estimated customer life of approximately seven years. Subscription revenues are recognized on a straight-line basis during the contractual period over which the service is delivered to our restaurant customers. Revenues from online reservations are recognized on a transaction basis as the diners are seated by the restaurant. Revenues are shown net of redeemable Dining Points issued to diners as described below in "Dining Rewards Loyalty Program."”

“We provide a points-based loyalty program, OpenTable Dining Rewards, to registered diners who book and honor reservations through the OpenTable website. OpenTable Dining Rewards involves the issuance of "Dining Points," which can be accumulated and redeemed for "Dining Cheques." The standard award is 100 points per reservation, but diners can earn 1,000 points for reservations during featured times under the OpenTable Dining Rewards program. When a diner accumulates a minimum of 2,000 points, he or she may redeem them for a $20 Dining Cheque. Every 100 Dining Points is equal to one dollar. Diners may present Dining Cheques at any OpenTable restaurant and their bill is reduced by the cheque amount. The restaurant then deposits the Dining Cheque to its bank.”

“Moreover, the majority of our restaurant customers are located in major metropolitan areas like New York City and the San Francisco Bay Area, and to the extent any one of these geographic areas experiences any of the above described conditions to a greater extent than other geographic areas, the material adverse effect on our financial condition and operating results could be exacerbated. We believe that the total number of reservations, including reservations by phone, seated by our restaurant customers has decreased approximately 10% to 15% for the fourth quarter of 2008 from the same period in 2007.”
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