iVillage Inc.: New Price Optimization Technology Should Drive eCPMs Higher

William S. Morrison | JMP Securities

September 27, 2005

Investment Highlights:

New price optimization partner should lead to significant uplift in effective CPMs during the fourth quarter and beyond; reiterate Market Outperform rating on iVillage.
We recently learned that iVillage has inked a deal with Rapt Technologies, a leading online media price optimization vendor, to help it improve the pricing of its branded CPM based inventory. Our research suggests that iVIllage could see a 5-10% increase in the company's branded/display advertising revenue. We are raising our revenue estimates by 5% for the fourth quarter of 2005 as well as the full year 2006 to reflect the pricing uplift we expect as a result of this deal. We are increasing our EBITDA estimates by more than 8% to reflect the high incremental margins that typically accompany price increases in online media. Lastly, we are raising our target price from $7 to $8 and reiterating our Market Outperform rating on iVillage's stock.

Rapt has proven success with larger online media companies such as Yahoo! and MSN.
Rapt is a relatively unknown private company based in San Francisco that has been quietly working with some of the Internet giants, including Yahoo! and MSN, over the past few years to improve the pricing on their CPM based ad inventory. The company is now bringing its solutions to mid-market online media companies with significant branded ad inventory. We believe iVillage is the first company outside the major portals to sign a deal with Rapt. Our research suggests that the deal could drive a 5% to 10% uplift in iVillage’s effective CPMs beginning in the fourth quarter and moving into next year. As Rapt continues to refine its price optimization technology, there should be room for further price improvements beyond the next several quarters.

We are raising our estimates to reflect the higher revenue and earnings as a result of this deal.
Because the deal was just recently signed and we do not believe there will be an impact from the deal in the current quarter, we are leaving our 3Q05 estimates unchanged. In the fourth quarter, we believe iVillage should begin to see the benefit from Rapt’s software and are raising our revenue estimate by $0.9 million to reflect the change. We are also raising our fourth quarter EPS estimate by $0.01 from $0.11 to $0.12. After these changes, our new estimates put us at the high end of both management’s guidance and Street consensus. For next year, we are raising our revenue estimate from $108 million to $112 million and our EPS estimate from $0.22 to $0.26. Ournew 2006 EBITDA estimate is $28.1 million, up from $25.9 million previously. Our estimate changes assume that Rapt helps to drive a 5% uplift in iVillage’s CPM based online ad inventory (not total revenue) and that the company can generate a 66% incremental margin on that additional revenue.

Disclosure: In accordance with U.S. Securities laws please note:
1. Rapt and JMP securities are not affiliated;
2. The report has been re-published with explicit consent from JMP Securities;
3. The information posted here is for informational purposes only and is not an attempt to solicit orders. 

 Click here to download a copy of the full report. [ pdf /100k ]