Stock of the Day- Flycast: Making Web Ads Click for Direct Marketers
Jul 15, 1999
The web advertising industry is crowded with competition, and this week's merger deal between DoubleClick (Nasdaq:DCLK - news) and NetGravity (Nasdaq:NETG - news) creates a formidable industry leader. But Flycast Communications (Nasdaq:FCST - news) is carving out space in a fast-growing niche on the buy side of ad campaigns, specifically direct response marketing. As with most Internet companies, the trick for investors is to not only understand the story behind the stock, but also find some meaningful metrics to evaluate the company since profits aren't a part of the picture yet.
Let's start with the Flycast story. Direct response marketing refers to when advertisers are seeking leads and customers, as opposed to building a brand image. Credit card companies and online retailers are common examples of direct response marketers -- they want you to click on the ad and take some action -- whereas car companies more typically focus on brand building in their advertising campaigns. Flycast caters to these direct response marketers because it gives them extremely low ad rates to maximize return on investment.
Flycast can offer its advertising clients very low ad rates, $6 CPM (cost per thousand), because it purchases on consignment unsold ad inventory from large sites as well as smaller sites that don't have a sales force. It's estimated that 75%-80% of all ad inventory goes unsold on the web. Rather than just waste those page views, web publishers are willing to sell their unsold inventory to Flycast at fire sale prices. Flycast aggregates the inventory and offers it to its customers. So while it is generic placement for the ad banners across Flycast's network of over a thousand sites, the CPM rate is 40%-90% less than conventional, branded ad buys.
Flycast naturally offers other tools to help clients maximize their return on investment (ROI), including real-time performance monitoring to allow for tweaking of ad strategies, but the core element to ROI for direct marketers is low cost ad inventory.
This is how Flycast differentiates itself from the competition. Other ad networks represent sellers or both parties, and in general seek higher CPM rates (of which they take a percentage) justified by highly targeted marketing plans and brand-building campaigns. But for direct marketers it's all about cost-effective customer acquisition, and Flycast specializes in serving that need. The company lists among its clients AOL (NYSE:AOL - news) , Disney (NYSE:DIS - news) , E*Trade (Nasdaq:EGRP - news) , eBay (Nasdaq:EBAY - news) , Intel (Nasdaq:INTC - news) and Kodak (NYSE:EK - news) .
Many industry watchers believe direct response marketing will be the next big wave for Internet advertising, growing from a current market of less than $1 billion to over $10 billion by 2002. If those experts are even half-way right and Flycast retains its position of distinction in this niche, the company stands to do very, very well.
Flycast is not yet profitable, in fact, analysts expect a net loss of over $2 per share for the next two years. So investors who like the story will need to find other metrics besides earnings to evaluate the progress of this company. Revenues are a good place to start, but the next step is drilling down to some details specific to the business. These might include total ad impressions sold, average CPM, size and per-person productivity of sales force, number of advertisers and revenue per advertiser. Most of these numbers are available in the quarterly reports, and the ones that aren't are readily available from investor relations or can be easily calculated. Second quarter results are expected on August 2.
- James Hale
The Online Investor
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