iVillage Inc.: iVillage Reports Strong Fourth Quarter; Raising to Strong Buy and $11 Target

William S. Morrison | JMP Securities

February 14, 2006

Investment Highlights:

iVillage reports solid fourth quarter 2005 financial results highlighted by stronger than expected revenue growth; raising rating from Market Outperform to Strong Buy. Revenues for the fourth quarter were $30.1 million, ahead of our Street high $28.5 million forecast and representing 33% year-to-year growth. EBITDA (excluding a $0.5 million legal charge during the quarter) was $11.6 million, in line with our $11.5 million estimate but slightly lower than we would have anticipated given the revenue upside in the quarter. We are making a number of changes to our model (detailed in the attached note) including lowering our 2006 and 2007 EBITDA estimates by $2 million to reflect slightly higher cash operating costs and to bring our model more in line with the Street and management guidance. With that said, the company's business model and our investment thesis are intact, and we have a higher level of conviction in the company's ability to meet our new model. We expect another year of significant pricing leverage with the implementation of Rapt Technology's price optimization software and continued strong demand for online media inventory from traditional brand advertisers. We are taking this opportunity to move our valuation over to 2007 forecasts, using slightly lower multiples than we have in the past, and raising our target from $9 to $11. Our new target was derived using a 16.5x multiple against 2007E EBITDA and 38.5x 2007E FCF/share. With 45-50% upside from current trading ranges to our new target, we are also raising our rating on IVIL from Market Outperform to Strong Buy.

There should be lots of pricing leverage in 2006.
As we have written about frequently over the past several months, we believe that there is significant pricing leverage at iVillage due in part to the strength of its brand, the large delta that still exists between its eCPMs and its offline competitors in television and print media, and more recently the relationship it has developed with Rapt Inc, one of the Internet's leading online revenue and profit optimization companies. According to our estimated, iVillage grew its effective CPMs by 75% in 2005, and our current model contemplates a 19% increase in 2006, which could prove to be conservative if Rapt is successful in achieving pricing uplift at iVillage as it has at Yahoo! and MSN. We believe that Rapt's technology helped to drive 5-10% revenue uplift at those companies during the first year following the implementation of its software. We are currently forecasting 5% uplift from Rapt in our model, which again could prove to be conservative. In the meantime, iVillage continues to execute on its business plan of driving organic users and usage higher and improving its inventory management to drive higher effective CPMs (excluding the Rapt effect) across its online network of properties. Management indicated that it expect to grow users and page views in the double digits during 2006. We are forecasting 12% growth in users for 2006 and a 15% increase in page views. If the January comScore numbers were any indication (iVillage page views grew at twice the rate of users from December to January), our estimates could prove to be too conservative.