NetZero Rolls Free-ISP Dice With $100 Million IPO
By Kevin Petrie
Staff Reporter
9/8/99 8:38 PM ET
SAN FRANCISCO -- After winning half a million subscribers in two months,
NetZero is placing a heavy wager on the appetite of Wall Street for its initial
public offering expected this month.
NetZero plans to sell a whopping 10 million shares and raise roughly $100 million
in an IPO underwritten by Goldman Sachs, according to filings with the
Securities and Exchange Commission. Goldman expects to price shares the
evening of Sept. 23 and start trading the next day. Unlike conventional ISPs,
NetZero connects users to the Internet for free and instead counts on advertisers
for revenue.
In July and August, NetZero grew its subscriber base to 1.7 million from 1.2
million, NetZero said in amended SEC filings. That surpasses its rivals
MindSpring (MSPG:Nasdaq) and Earthlink (ELNK:Nasdaq), each of whom
have roughly 1.3 million paying subscribers. This summer NetZero has more than
doubled their recent growth rates. NetZero's suggested market capitalization
would price each user at $612, still less than half the valuation of MindSpring.
While NetZero is often treated as a backup service, its actual visitors did jump to
891,000 in August from 613,000 in July. The sheer number of eyeballs garners
respect even from money managers who are skeptical of free ISPs.
"They're growing pretty quickly, and that is exciting," says Mike Dubrow, analyst
with New-York-based Jacob Asset Management in New York. Dubrow says
serious growth in advertising revenue might lag by a quarter or two, and he seeks
more details about the habits of NetZero's customers.
The company could certainly use the IPO money. It posted a $15.3 million net
loss last year, and expects losses to increase -- not simply continue -- "for the
foreseeable future." NetZero intends to spend the funds on working capital,
capital expenditures and possible acquisitions. Restricted by a "quiet period"
prior to the offering, NetZero officials declined to comment for this story.
To raise the cash, NetZero is offering a float larger than many successful Net
IPOs. Most Internet companies have sold less than 6 million shares in their
IPOs, perhaps to tantalize Wall Street. "What has really kept this market alive
has been the smaller deals which never satisfy the demand," says David
Menlow, editor of IPO Frontline, a newsletter for individual investors.
By betting on a higher demand, NetZero is following the example of the
e-commerce site priceline.com (PCLN:Nasdaq), which sold 10 million shares at
16 in March and watched them quadruple on the first day. Priceline then ran to
160, and has since settled at 63. Less encouraging was the IPO of NYSE
floor-trading "specialist" firm LaBranche & Co. (LAB:NYSE), which issued 10.5
million shares at 14 last month and has since seen them slip underwater.
So NetZero is wagering that investors like eyeballs, but in short order it must turn
the eyeballs into dollar signs. Both its audience and ads are increasing: In
August, 891,000 users accessed NetZero and were delivered 1.2 billion ad
impressions. In June, 613,000 visitors watched 830 million ads.
NetZero can expect more and more advertisers to demand "performance-based"
contracts. Forrester Research predicts that by 2003, half of all online ads will
be priced per click, per lead or per customer.
For example, Fleet Credit Card Services has bought ad impressions from
NetZero and has agreed to pay extra for each customer it wins through NetZero's
advertising window on the PC screen. NetZero has committed to delivering a
minimum number of credit card accounts.
Chris Jenkins, president of the ISP ZipLink in Lowell, Mass., says such "sales
commissions" will become the norm. Free ISPs can thrive, he says, if their users
make just one or two expensive purchases per year.
Goldman is promoting a big deal. NetZero will have 102.9 million outstanding
shares. At the suggested valuation of roughly $1 billion, or 9 to 11 per share, the
WestLake Village, Calif.-based company would be valued at roughly 224 times
its revenue of $4.6 million in the year ended June 30. MindSpring and Earthlink
trade at 8 and 6 times revenue, respectively.
To be sure, two-year-old NetZero, with barely 100 employees on its payroll,
remains an unknown quantity. It is late in its Y2K preparations. The management
team lacks proven entrepreneurs. NetZero CEO Mark Goldston also was CEO of
Einstein/Noah Bagel (ENBX:Nasdaq); he brought it public in 1996 and left in
December 1997 after the stock had fallen 80% from its highs.
However, at least one NetZero manager knows how to gauge investor demand:
CFO Charles Hilliard is a former investment banker with Morgan Stanley Dean
Witter.
Meanwhile, NetZero is spreading fast, and at the suggested offering price its
customers will be valued cheaply. Overall, the company seems to have the
ingredients of an exciting Internet IPO. "For the initial push," says Menlow,
"these stocks are the premier source of adrenaline." |
