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Summary

  • XO Group delivered an earnings beat and a revenue beat in Q2.
  • I’m still bullish on shares and think the 20% gain since my March article is the start of a bigger move higher.
  • The new CEO and CFO are delivering the results I anticipated in my prior article.

XO Group (NYSE:XOXO) posted EPS in Q2 of $0.12, which beat expectations by two cents. Revenues grew 3.6% y/y to $38.33 million and beat estimates by $130k. XO Group also beat earnings and revenue estimates in Q1, so I like what I'm seeing. XO Group also boosted its cash balance by $3.9 million at the end of Q1 to $79.4 million. The chief marketing officer of TripAdvisor (NASDAQ:TRIP) joined the company's board in Q2 and I think that's a positive sign.

As I discussed in my prior article, XO Group is investing for the future. The key for the company is turning its site The Knot into a digital marketplace. The second part is transitioning to mobile and engaging with its customers on smartphones and tablets. But this transition is costing money and is why the company earned $0.12 per share in Q2 versus $0.16 last year. Overall, XO Group will spend $15 million this year fine-tuning its business model.

For me as a shareholder, this makes a lot of sense. If you look at its margins, XO Group achieved an 83.3% gross margin last year. The company's long-term goal after its transition is to deliver double-digit revenue growth, gross margins of 83% to 85%, and EBITDA margins of 15% to 20%. The company expects its initiatives to start paying off in the second half of this year. On the earnings call, CEO Mike Steib said:

"Over the past 5 years, our company has had a 5% compound annual revenue growth rate. We believe the investments we are making will accelerate that rate of growth. During the second half of 2015, you should start to see the initial benefits of these investments. And when we look at our longer-term horizon, we believe we can deliver solid double-digit growth."

I am still bullish on XO Group and see it as an undervalued play with a lot of potential. It's also underfollowed with only one analyst on the Q2 earnings call.

Source: Update: XO Group Earnings