Exactly On Target

AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Sometimes you just serendipitously stumble across a company that makes you wonder,”Where have you been all my investing life? “ A company you don’t feel you need to make sneering, snarky comments about, one that makes writing about it that much harder. You want to be firm but fair and not act like a teenager around their first crush. Exact Target (NYSE: ET) is such a company.

Exact Target, about to celebrate its 12th anniversary, is not yet a teenager but seems to be a precocious but assured global interactive marketing provider. They’re in the SaaS (Software as a Service) business enabling businesses and organizations to improve and/or introduce them to building a social and internet presence in marketing and communications.

Just on Nov. 19 the company was named again (the sixth time) to the Deloitte Technology Fast 500TM list of fastest growing tech companies for its 332% growth in revenues over the last five years with 47 consecutive quarters of revenue growth. It’s still fairly small with a $1.36 billion market cap.

Over the past six months of reading the texts of  other companies' conference calls, there’s a single theme that seems to be predominant: companies telling investors and analysts they intend to beef up their Twitter, Facebook, mobile, and email campaigns. Okay, maybe in some cases it‘s like one of those empty New Year resolutions to floss more and keep up with the oil changes, but I honestly think most companies are quite serious.

Future So Bright They Gotta Wear Shades?

The addressable market for this company is virtually unlimited. While there is competition it is much smaller like Constant Contact (NASDAQ: CTCT) which is aimed more at small businesses. Exact Target competes with Responsys (NASDAQ: MKTG) which is also smaller than Exact Target. On the earnings call an analyst asked about the disappointment from Responsys on their Nov. 5 call and CEO Scott Dorsey explained how differentiated the two are with Responsys targeting more enterprise and mid-level business and that Exact Target customers can open an account just for one aspect, ex. just email or opt in to all their benefits.

Exact Target often partners up with salesforce.com (NYSE: CRM) to streamline their service and allows customers to start small with just e-mail optimization or buy the whole shebang of Facebook, twitter, mobile, and other social media platform campaigns.

Recent big client wins included Cabela's, Keurig, BBC Worldwide, Getty Images, GoDaddy, and Informa, a Swiss publishing titan. Current clients include Estee Lauder, Expedia, Universal Music Group, Adobe, P.F Chang’s, Papa John's, Sears Canada, and Microsoft who appreciate the company’s Relationship Managers (translate account concierges) and the Interactive Marketing Hub which integrates social, mobile, email and website messages from one console. According to IBM's holiday shopping report more consumers used multichannel platforms, especially mobile on smartphones this year. Despite a drop in Facebook and twitter referrals this holiday season, Exact Target is in the sweet mobile spot, so no worries.

The Downside

While the company currently has a negative EPS of -$0.36 that is mainly due to this year’s expansion, adding branches in Paris and Sweden. Apparently, the French want to be tres social. The company is already in Brazil, the U.K., Australia, and Germany. Also, the company recently acquired two businesses, Pardot (b2b marketing automation) and iGoDigital (web personalization) which won't be included in operating results until the Q4 earnings release in February 2013. On the Q3 conference call on Nov. 8 CFO Steve Collins raised the revenue outlook to $287 million from a previously guided $277 million and an EPS loss of $0.22 for the full 2012 fiscal year, again mainly due to the acquisitions and branch expansions. Another expense this year has been accelerated hiring to cope with new services like push notifications and more sales and marketing to bring in new clients.

Note the company has a 6.70% short interest and has only a 30.70% institutional hold. The return on equity is -8.48%.

An Awesome Opportunity

Collins opened his remarks with the good news that the subscription revenue renewal rate was over 100% and that the gross margin rose by 2%, and in the quarter overall revenue growth was up 35%. CEO Scott Dorsey was particularly upbeat about the synergies with iGoDigital and Pardot, "International Data Corporation, or IDC, predicts the marketing automation market will grow to $4.8 billion in 2015. Forrester Research estimates that together lead origination and lead nurturing account for 21% of the overall B-to-B marketing technology budget, the largest component of marketing spend. This incremental market potential represents an awesome opportunity for ExactTarget, and one that we believe will accelerate as marketers are able to unlock the value of B-to-B and B-to-C marketing automation, all from one integrated platform." (source Seeking Alpha transcript).

On Nov. 29 they present at the J.P. Morgan SMid Cap Conference and if you have interest in this company due diligence should include listening to the webcast for more color on Exact Target. At RBC Capital’s Software & Services Investor Day in mid-November Exact Target came away as one of their top ideas and was reiterated at an Outperform with a $22-24 price target. That implies at least 10-20% upside. The mean analyst target is $33.00..even better.

This is a somewhat speculative growth pick but it is a leader in their specialty with big clients. They are spending more on capital expenditures this year but they are also expanding into huge markets overseas. Their area of expertise is expected to grow by leaps and bounds if other companies' promises to their shareholders are any indication. At this stage in their growth they are just turning into a gawky teenager but one that has a very bright future ahead. If you feel Facebook is too volatile and salesforce.com has just run too much Exact Target is a good way to play social media and e-commerce in a burgeoning sector.


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