Omniture: A Radar Screen For E-biz
It was a few minutes before 4 p.m. in New York City, and Joshua G. James was ready for his close-up. The chief executive of Omniture Inc. (OMTR ) stood onstage at the NASDAQ broadcast studio, smack in the middle of Times Square, ready to play the starring role in a hoary Wall Street ritual: ringing the closing bell.
James had been invited to close the NASDAQ on this bone-chilling day in mid-February because he is the leader of the fastest-growing publicly traded software company and because Omniture has pulled off one of the most successful tech stock offerings in recent memory. After going public last June at 6.50, Omniture shares recently passed 18, giving the company a market capitalization of close to $1 billion and making James worth, at least on paper, about $100 million.
It's a classic Silicon Valley tale: Young entrepreneur cashes in via public offering. Except that the 33-year-old James and his startup sprang out of nowhere--or Orem, Utah, to be exact. "If Josh had been in Silicon Valley, he would have already been a rock star," says Mark P. Gorenberg, a partner at venture capital firm Hummer Winblad Venture Partners in San Francisco, whose 15% stake in the company has produced the best return in the firm's history. "Being out here, he was an undiscovered gem."
Against all odds, tiny Omniture--with 2006 sales of just $80 million--has installed its software onto the computers of more than 2,000 of the world's major corporations, the likes of Microsoft (MSFT ), Wal-Mart (WMT ), Hyatt, Toyota (TM ), and The McGraw-Hill Companies, owner of BusinessWeek. Its desktop readouts are like the instrument panel on a jet plane. But instead of tracking air speed they monitor the velocity of Web marketing tools such as e-mails, search engine keywords, and display advertising. With huge chunks of advertising shifting to the Web from traditional media, Omniture has emerged as a key player in the digital economy. "This is vital to us," says Johanna Steen, MSNBC.com's manager of marketing research and a user of the software. "It's the difference between taking a road trip following your instincts and taking a road trip with a map."
Now that they've established the value of so-called Web optimization programs, though, this tech entrepreneur and his company will have to withstand an onslaught of competition, ranging from more than a dozen startups to that Internet gorilla, Google Inc. (GOOG ), which offers a simpler analytics program that has the advantage of being free.
James and his co-founder, John Pestana, followed a roundabout path to their breakthrough. Both dropped out of Brigham Young University in 1996 to launch a company, but they experimented with several business models before hitting upon the current incarnation. First they developed Web sites for companies, then they started an advertiser-supported analytics program. Finally in 2002 they created Omniture to focus on leasing their technology to large customers.
For publishers, optimization means increasing the amount of traffic on their Web sites. Take Andrew Wilson, the general manager of new media for the Meredith Corp. (MDP ), a big magazine publisher with titles such as Better Homes and Gardens and Ladies' Home Journal. Last year, Wilson used Omniture's programs to test out an important new product, Meredith's first paid online service, Decorating Inspiration. Through the Better Homes and Gardens Web site, Decorating Inspiration lets homeowners view more than 15,000 photos that show them ideas for sprucing up kitchens and bathrooms, and other home renovation projects.
Wilson needed to determine how best to sell the service, though. So he created one Web site with an animated tour of the service, and another site that gave consumers a free preview. With the Omniture tools, Wilson could quickly determine that the two sites generated very different results. Visitors who came from search engines such as Google or Yahoo! (YHOO ) preferred the free preview. Even better, the software revealed that the preview page produced three times as much revenue from users who signed up for the service. Wilson shut down the animated site and redirected consumers to the more productive one. "We were able to make our search advertisements really profitable," says Wilson.
But Omniture's innovation doesn't stop with its tools. It manages all the data and software on its 8,000 computer servers, a model that boosts revenues. Typically, customers subscribe to the service for a few years with minimum usage levels based on monthly page views or transactions. If they exceed the minimum usage, they pay more. When a user clicks on a link or buys something online, the data flow to one of Omniture's servers, where they get processed and served up in digestible form on a browser.
That way, a mountain of data is converted into useful nuggets. A year ago, Hyatt Hotels & Resorts was using an online ad agency to manage the 70,000 keywords that the chain bids on each day from Web search engines, and it had to use several programs to analyze the results. Omniture gives Hyatt one place where it can internally manage all of its keyword campaigns. Hyatt previously could only see the rate at which customers clicked on a search advertisement; now Omniture shows the conversion rate, or number of consumers who actually make a purchase based on a search ad. "It has dramatically changed the funding for each of the keywords and categories we buy," says Hyatt's director of e-commerce, Greg Johnston. "We are saving hundreds of thousands of dollars."
SPEND, SPEND, SPEND
That's fueling Google-like growth, albeit from a far smaller base. In 2006, Omniture sales shot up 86%, compared with 73% for Google; this year, analysts expect Omniture to grow 66%, to $132 million. It's still losing money--analysts expect a net loss of $13 million this year. A big reason for that is high sales and marketing costs, which came to 43% of sales in 2006. That's O.K. for now, figures Credit Suisse Group (CS ) analyst Jason Maynard, since Omniture should snap up as much of the market as it can. He has an "outperform" rating on the stock.
But the clock is ticking. "If they don't make progress toward their profit targets in the second half of the year, it could be cause for concern," says Renaissance Capital analyst Phil Stiller. And there's always the chance that Google will get more aggressive about Web optimization. "If we're not scared of them, something would be wrong with us," says James.
Still, he feels up to the challenge. His mother, Kandi, who was in the crowd at the NASDAQ ceremony, notes that since he was young, James has always been a self-starter. "Most mothers have to push their kids" to become Eagle Scouts. "I didn't care. He got his Eagles by himself." A short while later, Omniture had its 15 minutes of fame, as James closed the market and an image of his team flashed on a screen in Times Square. James was jazzed, but quickly noted the work ahead: His goal, he said, is to "create a billion-dollar software company."
By Spencer E. Ante