• Consumer spending: If consumer spending slows more rapidly than we are currently expecting, the company may have difficulty meeting our revenue estimates, and, as such, there could be
Trang 1(b) even the public companies were still in their early-growth (and, for some, rapid growth) stage during the last economic downturn
As such, given our projection for eBay of a ~54% F’09 - F’14 EBIT CAGR, and our view of the beginning of a possible economic turnaround in 2H’09, we believe the stock can achieve a 54x EV/EBIT multiple to our F’09 EBIT estimate (reflecting better forward visibility than the current valuation of 22x our F’09 estimate) and thus arrive at our December 2009 price target of $12
The parameters of our EV/EBIT multiple analysis are in the table below:
Table 170: Key Valuation Assumptions
5 yr forward EBIT CAGR 54%
Implied Enterprise Value $201
2009 Price Target $12
Source: Company reports and J.P Morgan estimates
Our EV/EBIT valuation is based on the following projections for revenue and operating income growth
Table 171: Growth Profile
$ in millions
2009E 2010E 2011E 2012E 2013E 2014E
Less: Operating Expenses 220.6 256.2 295.9 335.4 373.6 408.3
As % of total revenues 98.3% 96.3% 95.5% 94.6% 93.7% 92.7%
Operating Income (Loss) 3.7 9.8 13.9 19.1 25.1 32.1
Source: J.P Morgan estimates
Valuation and Rating Analysis
Shutterfly trades at a discount to its peers On an EV/EBITDA basis, SFLY trades at 2.6x our F’09 EBITDA estimate of $49.3M vs its peer group at 6.5x Given SFLY’s strong growth prospects, we believe there is opportunity for multiple expansion and thus rate the stock Overweight
Risks to Our Rating
We believe there are three primary risks to our Overweight rating on Shutterfly:
• Seasonality: Currently, Shutterfly’s business is very seasonal, with
approximately 50% of revenues earned in the fourth quarter If the company were unable to deliver customer orders during the holiday season, there would be downside risk to our rating
• Product pricing: Pricing on 4X6 prints has come down over the last few
years, causing the company to look for growth in other product segments
Trang 2Should other product segments experience similar pricing pressure, our Overweight rating could be at risk
• Consumer spending: If consumer spending slows more rapidly than we are
currently expecting, the company may have difficulty meeting our revenue estimates, and, as such, there could be downside risk to the stock
Table 172: SFLY Annual Income Statement
$ in millions, except per share
Product Revenue (80%) 149.4 166.8 179.5 212.8
Shipping Revenue (20%) 37.3 41.7 44.9 53.2
Pro forma Gross Profit 102.8 111.0 122.8 147.8
Technology and Development 28.6 38.4 40.8 48.9
General and Administrative 29.6 32.0 34.1 36.5
PF Income from Operations 15.5 9.1 16.7 23.7
Tax benefit (provision) (6.3) (0.5) (2.9) (5.4)
Cumulative effect of change in acct principle - - - -
Shares outstanding - basic 24.3 25.1 25.4 26.6
Shares outstanding - diluted 26.9 27.2 28.8 26.1
Source: Company reports and J.P Morgan estimates
Trang 3Table 173: SFLY Quarterly Income Statement
$ in millions, except per share data
Q1-07 Q2-07 Q3-07 Q4-07 Q1-08 Q2-08 Q3-08 Q4-08E Q1-09E Q2-09E Q3-09E Q4-09E
Trang 4Table 173: SFLY Quarterly Income Statement (cont.)
Q1-07 Q2-07 Q3-07 Q4-07 Q1-08 Q2-08 Q3-08 Q4-08E Q1-09E Q2-09E Q3-09E Q4-09E
Orders 1,288,471 1,461,804 1,660,840 2,650,489 1,617,127 1,561,877 1,656,050 2,647,839 1,620,361 1,594,676 1,738,853 2,833,187
Expenses as % of Revenue
Y/Y Change
Sequential Change
Source: Company reports and J.P Morgan estimates
Trang 5Table 174: SFLY Annual Balance Sheet
$ in millions
2007A 2008E 2009E 2010E ASSETS
Cash and cash equivalents 122.6 76.3 94.5 116.2
-
-
-
-
-
Additional paid in capital 190.8 199.2 212.0 225.6
- - - -
Source: Company reports and J.P Morgan estimates
Trang 6Table 175: SFLY Annual Cash Flow Statement
$ in millions
OPERATING ACTIVITIES:
Depreciation and amortization 17.4 24.1 32.6 38.3
Amortization of intangible assets 0.4 1.9 2.0 2.0
Amortization of stock-based compensation, net of cancellation 4.0 8.7 11.0 11.9
Change in carrying value of preferred stock warrant liability - -
Gain/loss on disposal of fixed assets 0.3 0.3 - -
Charitable contribution expense for shares issued to charitable foundation
Prepaid expenses & other current assets (1.8) (3.6) - -
-
-
Purchase of property & equipment (35.0) (27.0) (40.0) (47.0)
Acquisition of business, net of cash (2.9) (10.1) - -
Purchase of short term investment (3.0) 3.0 - -
Purchase of long term investment - (52.3) - -
Proceeds from sale of property and equipment 0.0 0.0 - -
- - - -
Principal payments of capital lease obligation (2.8) (0.4) (0.2) (0.2)
Proceeds from loan from a related party - - - -
Principal payment of note payable obligation - - - -
Proceeds from issuance of redeemable conv pref stock, net of issuance cost
Proceeds from issuance of common stock - 1.1 - -
Proceeds from exercise of unvested options - - - -
- Net change in cash and cash equivalents 3.5 (46.3) 18.2 21.7
Cash and cash equivalents at beginning of period 119.1 122.6 76.3 94.5
Source: Company reports and J.P Morgan estimates
Trang 7ValueClick, Neutral, ($6.56) Like the rest of ad-based media and eCommerce, we believe ValueClick has another challenging year ahead with ad budgets and consumer spending likely to be under heavy pressure We expect further steep revenue declines across the company in
2009, particularly in the more volatile, lower-visibility ad network (media) and comparison shopping businesses We maintain our Neutral rating with our view of attractive long-term valuation tempered by near-term macro/industry uncertainty and likelihood of continued deterioration of fundamental performance
• Display advertising under pressure; spending cuts + growing inventory = further price deflation Display advertising has come grinding to a halt
industry-wide CPM-based display, in particular, has suffered as marketers fall back to more accountable, ROI-based channels such as search, or simply stick with ‘tried and true’ traditional media Compounding pullbacks is a growing glut
of inventory that is driving down pricing We expect ValueClick’s display ad revenues to decline 17% in 4Q08 and 10% in 09
• Can comparison shopping stabilize? Since acquiring MeziMedia in 07,
performance has been on a rollercoaster ride, initially growing triple digits organically before plunging into negative growth in 2H08 from weak eCommerce trends and traffic monetization struggles Performance in the comparison shopping business is probably the biggest question mark for earnings in 2009 –
we expect a tough year with revenue down more than 25%
• 2009 drivers In our view, the following factors will drive shares in 2009: (1) the
consumer – sentiment and spending should be a major influence on advertiser budgets and eCommerce; (2) margin preservation – management remains confident it can minimize margin compression with two-thirds of costs variable and fixed-cost cuts planned; (3) hitting guidance – after a number of earnings misses and negative guidance revisions over the last two years, we believe several quarters of hitting expectations would instill greater investor confidence
• Maintaining 4Q’08 estimates We expect a difficult Q4 given very weak ad and
consumer spending trends With little visibility into the media and comparison
shopping businesses in particular, we see downside risk to guidance We are looking for results at the bottom range of guidance, or EPS of $0.15 and adj
EBITDA (ex stock comp) of $33.5m off a revenue decline of 25%
Our current and recently introduced 2010 estimates are in the table below:
Table 176: ValueClick Financial Snapshot
$ in millions, except per share data
J.P Morgan
Revenue 138.1 630.8 524.7 544.2 -2.3% -16.8% 3.7%
Adj EBITDA 33.5 161.4 128.1 135.4 -3.5% -20.6% 5.7% EPS 0.15 0.54 0.51 0.59 -22.4% -5.8% 14.8%
Consensus
Revenue 142.7 635.3 559.5 586.0 -1.6% -11.9% 4.7%
Adj EBITDA 34.0 162.0 138.5 142.2 -3.2% -14.5% 2.7%
Source: J.P Morgan estimates, Company data, and Bloomberg
U.S Advertising & Marketing
Services
Townsend Buckles AC
(1-212) 622-0461
townsend.buckles@jpmorgan.com
J.P Morgan Services Inc
Trang 8Our Estimates and Outlook for 2009
We recently tweaked down our 2009 estimates as online advertising and eCommerce spending look to further weaken We project a continuation of Q4 trends into 1H09 and expect easing declines in the back half of the year against easier comps Our 09 EPS estimate is $0.51 and adj EBITDA of $128 million
Look for double-digit revenue declines; focus on margin preservation We
expect management will continue its focus on mitigating margin compression through cost cuts, and possibly at the expense of booking low-margin revenues from lower pricing or boosting third-party publisher payouts We expect revenues to decline 17%, including the effect of two small divestitures at ~2%
Media: Display weakness, further lead gen declines expected We project
segment revenue to decline 14% (-11% organically, ex divestiture impact), with display down 10% and another 12% of declines in lead gen As mentioned above, CPM-based display (1/3 of ad network revenues) has suffered more substantial weakness in online ad spending, which we expect to continue throughout the year The remainder of the business, under performance-based pricing such as CPC and CPL (cost-per-click and cost-per-lead), has remained in greater demand, however fewer consumer clicks/actions still mean less revenue
Our agency contacts also indicate Internet spending could be a victim of its own convenience (short lead times), where larger advertisers stuck in longer-term media commitments (e.g., TV sports sponsorships) may have to turn to their Internet budgets for cuts
We see possibility for a changing competitive landscape over the next year, both on the consolidation side and for the smaller players that might have to find a strategic buyer or shut down with VC support drying up We do believe ValueClick’s strong, established position in the ad network space should help the business weather a difficult revenue environment and possibly even pick up market share from recent entrants; however, with Google making a concerted effort in display and Yahoo and AOL possibly headed for ownership changes, we believe the bigger portals pose an
increasing threat to this low barrier, low switching cost business
Comparison Shopping: Cyclical and structural issues set up challenged outlook
eCommerce has undergone a substantial slowdown with little reason for near-term optimism as weak consumer spending will not likely be helped by rising
unemployment and continued home value declines ValueClick is also facing demands for higher quality traffic amidst the industry slump from its biggest customers, the search engines Consequently, the company has struggled to acquire and monetize traffic, a problem we expect to continue for the foreseeable future We see this as ValueClick’s worst performing business in 2009, with revenue down 26%, and remain cautious of the outlook in such a competitive space
Affiliate Marketing: Resilient business model, though heavy retail exposure
We continue to see affiliate marketing as ValueClick’s most defensive and resilient business to competitive and macro pressures We expect the business model of an essentially pre-determined ROI to advertisers may come in greater demand as accountability and driving sales become paramount However, with 70% of revenues
2009 Revenue Forecasts
09/08 %chg
Comparison Shopping -26%
Affiliate Marketing -8%
Technology1 -26%
Total Revenues -17%
Note: 1 Includes impact of Oct 08 divestitures
Source: JPM estimates
Ad network shakeout?
Trang 9commission-based revenues We expect to see revenue declines in 2009, offset somewhat by new clients and expanded programs
Technology: Volume-based business likely to decline with display advertising
We expect display ad spending cuts to translate into ad serving declines We believe market share gains stemming from the fallout of the industry’s two biggest ad servers being acquired by portals (DoubleClick/Google, Atlas/MSFT) helped revenue growth over the last two years; however, we expect those benefits to have largely cycled through Also dampening reported top-line growth in 2009 is the sale of ValueClick’s AdVault business, which we estimate to take off around $7-7.5 million
in revenue
Our Estimates and Outlook for 2010
We recently introduced 2010 estimates assuming an improved macro outlook and return to growth, albeit tepid, in online advertising and eCommerce Our preliminary estimates are for EPS of $0.59 and adj EBITDA of $135 million off 3.7% revenue growth Given the highly uncertain macro environment and low visibility into online advertising, we expect these estimates will likely undergo significant revisions as
2009 progresses
Mezi earnout payment? A silver lining to an expected tough 2009 could be that
ValueClick would not have to make its final acquisition earnout payment to MeziMedia in 1Q10, which could be up to $80 million, representing a substantial portion of expected FCF The earnout is based on Mezi’s annual performance, and while a 1Q09 payment of ~$64 million on Mezi’s 08 results has already been met despite the recent weak performance, the company has indicated that if the business remains particularly weak in 2009, some or all of the $80 million may not be achieved, saving a good portion of cash
Valuation and Rating Analysis
At 3.9x our 2009 adj EBITDA estimate, we see valuation as attractive given our favorable long-term view for online advertising growth once the economy improves However, we believe the macro environment – with little visibility – continues to pose a risk to earnings into 2009 and potentially beyond We reiterate our Neutral rating with a year-end 2009 price target of $9, representing moderate multiple expansion to 5x our 2010 adj EBITDA estimate due to an improved, more stable macro and company outlook that we expect to see across many of its peers We further expect that in the current highly volatile equity markets, VCLK shares will fluctuate broadly near to mid-term
Risks to Our Rating
Potential risks to the downside include:
• Prolonged and/or deepening slowdown in online ad spending or eCommerce
• Intensified competition from the larger online ad properties, pressuring growth
and profitability
Potential risks to the upside include:
• Company takeout or other strategic maneuver
Trang 10Table 177: VCLK Annual Income Statement
$ in millions
Revenue
Comparison Shopping & Search 112.7 169.3 124.7 127.8
General and administrative 75.3 78.4 65.2 66.9
Total operating expenses 302.0 290.9 241.6 249.3
Amortization of intangible assets 25.9 29.4 26.4 26.5
Interest income and other, net 12.1 4.6 2.5 4.5
Provision for income taxes 51.6 45.7 33.3 36.9
Shares outstanding, diluted 100.5 93.2 88.0 84.9
Non-recurring (costs) benefits, net of tax (2.9) (11.2) - -
Notes:
2008 Non-recurring cost represents 1) $33.8 million non-cash portion of employee stock option buyout; 2) $9.1 million tax benefit
2007 Non-recurring cost represents FTC settlement over promotional lead generation marketing practices
Source: Company reports and J.P Morgan estimates