Visual Sciences: What's in a name?
What’s in a name? For web analytics company Visual Sciences Inc., it seems to count for a lot.
For the last year, the company known as WebSideStory, trading under the symbol WSSI, has been bouncing between $11 and $14 a share. In recent months, it’s been largely at the low side of the bounce, in part because earnings have been depressed by the cost of assimilating Visual Sciences LLC., a competitor it acquired in February 2006.
Then on May 10, WebSideStory disappeared. Along with its first-quarter earnings report, the company announced that the acquirer was taking on the name of the acquired. Now called Visual Sciences Inc. and trading under the symbol VSCN, it slightly beat analyst forecasts and announced upgrades of its two main products.
Investors embraced the changes—including the shift its new name implies—by bidding the stock back from $11 to just over $14 per share on unusually high volume in one day. Its market cap is about $290 million.
The name change makes it clear that the company is placing its emphasis on the Visual Sciences technology platform, which it acquired in the acquisition. The shift, however, has been visible for many months. Last October, former Visual Sciences CEO Jim MacIntyre became president, CEO and a director of the merged company. Former WebSideStory CEO Jeff Lunsford left to take over another company. MacIntyre started shaking up management two months later.
The Visual Sciences product does just what its name implies. It was developed with the help of computer game programmers to create a visual view, through charts and maps, of the data it collects. It boasts fast, real-time results that can integrate large amounts of data about the effectiveness of different campaigns to attract and keep customers. It tracks all marketing and site visitor activity, including the loyalty of customers, where in the purchase process customers defect, and to what sites those defectors go instead.
Another plus: The company announced on April 5 that it is now offering the Visual Sciences Platform as an on-demand service for a monthly fee. Previously it had only licensed the product to customers, requiring an up-front fee of $20,000. The new service puts it within reach of a larger market of smaller customers.
The new emphasis looks good to Bradley Mook, an analyst at Boenning & Scattergood. He doesn’t officially follow the company, but follows the market analytics business and has been keeping an eye on WebSideStory for several years. By placing its emphasis on its unique visual platform, Visual Sciences is betting on “a great product,” says Mook. “It’s a game changer for the company.”
But there may be less to this story than meets the eye. Mook and others warn that, while the product is good, it could end up as merely a feature in products offered by other Web advertising and marketing companies. That includes giants such as International Business Machines Corp. (NYSE: IBM) and BroadVision Inc. (OTC: BVSN), as well as the most visible company in the business, Google Inc. (Nasdaq: GOOG), which announced a major upgrade to Google Analytics last week.
These companies could end up making a bid for VSCN to get its visual presentation platform. But Google, for one, is no slacker when it comes to incorporating graphics into its products. It already offers graphics and a visual map in Google Analytics that shows where customers are located.
Visual Sciences’ first-quarter results also deserve closer scrutiny. Non-GAAP revenue was up 42.9% to $20.7 million, edging out Wall Street’s consensus of $19.8 million. EBITDA earnings, at $0.16 a share, beat consensus estimates by $0.02. Visual Sciences raised its outlook for the remainder of the year, but only to what the consensus already expected, at $90.2 million to $92.2 million revenues and $0.69 to $0.74 per share earnings for all of 2007. The estimate includes increased investing to market the new company.
A report by Bradley Whitt at RBC Capital Markets raises several warning signs. The company “signed the lowest number of new customers in the past ten quarters, deferred revenue declined Q/Q for the first time based on our records, and the company generated only a penny in free cash - also the lowest on record,” he writes. Visual Sciences also has patent litigation with NetRatings Inc. (Nasdaq: NTRT) hanging over its head.
Whitt believes many investors value the industry on free cash flow, which he estimates at $0.65 per share for Visual Sciences in fiscal 2008. He values the company at 20x FCF, slightly lower than the industry average, resulting in a target price of just $13. Since the earnings announcement, VSCN has gained about $0.22, to $14.53.
With all the changes afoot and an emphasis on its most differentiated product, Visual Sciences is certainly an interesting company to watch. But its several weaknesses signal that investors should be advised to simply watch out.
