Competitors & Challenges
Competitors
Answers.com's closest competitor is Ask Jeeves.Com. Ask Jeeves is currently the leader in this enhanced search arena.
'Ask Jeeves' (www. ask.com) is a search engine that responds to questions phrased in natural English instead of the keywords or the precise Boolean expressions that other search engines require. Some reviewers have stated that their results were sometimes skewed by fees paid by companies for prominent placement in results and the site fumbled basic questions that were quickly answered on other sites. Ask Jeeves has stated that approximately 65% of its revenue comes from the consumer side of its business, and the remaining 35% comes from the corporate side. The company's goal is to even that ratio to half and half.
When Ask Jeeves went public on July 1, their shares almost quintupled in value on the first day. Their IPO was close to $100 million.
As Ask Jeeves's primary corporate market is the high end Fortune 1000 companies, and Answers.com will not be targeting this niche, NSI does not consider Ask Jeeves (ASKJ) to be a significant competitor. ASKJ has been rumoured to charge some of their business customers as much as $500k as an initial fee to get them started. Answers.com will be targeting the Middle Market businesses, and charging an initial fee of $15 - $20k.
As Ask Jeeves does not have the same ability to scale their technology that NSI has, then NSI believes that given their infrastructure, Ask Jeeves would find themselves at a disadvantage should they try to move into the Middle Market. According to TheStreet.com, Ask Jeeves initially had approximately 100 full time (specialized) researchers, who represent a significant overhead expense to the company. If they employ the same model as they expand their business, their operating expenses will grow substantially.
"Ironically, one of Ask Jeeves' supposed competitive advantages, its staff of 100 human editors, may be an Achilles' heel. 'They need to demonstrate that their editorial model doesn't become a bottleneck,' - competing services may offer quicker, more automated solutions." - Ante, Spencer E., Ask Jeeves: What's the Big Deal?, TheStreet.com, July 6, 1999.
NSI expects that its technology and community model will provide Answers.com with a huge cost and efficiency advantage over Ask Jeeves.
Another new firm could take some of the consumer market away from Ask Jeeves and Answers.com. This company is Real Names.com. It provides the ability to search the Internet by using Keywords. This site enables a person to enter Internet Keywords directly in the browser command line in Microsoft Internet Explorer 5 or in other search engines such as AltaVista, GO Network, and MSN. The company just received $75 million in venture financing. Once again, rather than being perceived as competition, this site will be another tool that NSI's distributed task force will be able to utilize for work they do for their corporate clients.
One of NSI's focus areas is the huge Customer Relationship Management area (CRM). They are targeting both N. America and Europe. A leader in this field - Remedy Corp. has recently announced that they are expanding into Europe as well. Remedy offers companies a 'Turn Key' product suite. NSI has licensed Orbital's CRM products and as such they could be seen as competing for the same market.
However, it is important to emphasize that the demand in the European and N. American market is enormous, and this demand far outstrips the ability of any one company to meet it all. In their European launch press release, Remedy stated . . . "Analysts see Europe as a broad, eager market . . . Analysts see the most immediate growth for call centers".
As mentioned earlier, Answers.com has stated that a primary focus area for them will be the call center market.
As their growth plans are aggressive, it is also important to note that they will require financial support to achieve their goals. Since they released their "Road Map" document in the early fall, the company has not announced any major financing arrangements or significant revenue contracts which will fund their ambitions.
A potential threat to NSI's business model comes from the Open Directory Project. AOL is considering using an Open Directory model, whereby they would search Web sites to create a local restaurant guide. This option, and the growth of a natural language query database will no doubt compete with Ask Jeeves and companies like Answers.com. This move to natural language queries could potentially mean trouble for the business model that pays editorial staff to create content and sell the results to other firms. It is important to recognize that although this free service will no doubt take some of the general inquiry business away from the 'pay for service firms' The AOL model is free and it has a large volunteer editorial staff.
That said, it is also safe to assume that businesses will most likely be very reluctant to entrust their core 'customer service', or business intelligence needs to a group of volunteers. Quality control, and consistency, and reliability are variables that will not be easy to maintain through a free service.
It is also important to mention that NSI's distributed taskforce will be able to use this open directory service to assist them in their initial data / information gathering endeavours.
Challenges
Don Sandford, NSI's President has stated that their greatest challenge is to educate the market on the possibilities of Version 2.0 and the compelling business models.
As they grow their businesses, they will have to be careful to ensure that they have the management depth and infrastructure in place to handle that rapid growth. Their plans are aggressive, and achievable. However, to pull them off without a stumble will take some strong leadership and guidance.
At the present time, few Canadian investment firms understand the company's objective and their plan going forward. During an earlier investors' tour, NSI executives stated that they felt that they were being valued based upon their 1998 revenues. They believed that Canadian analysts were not placing a proper value on the company as they were using traditional bricks and mortar valuation models on an Internet company with emerging technology. On the other hand, they stated that the investment firms in the United States immediately understood their business model, and are very excited about what Net Shepherd had plans to do. NSI is currently planning an investment tour within both Canada and the US. The reception, and subsequent support they receive on this tour will play a part in determining how rapidly they can proceed with their plans.
In order to start to generate significant revenue contracts, NSI must wait for key customers to move beyond the pilot stage and sign significant project / service-related contracts.
With respect to their plans for moving to NASDAQ by either merging or acquiring another firm, NSI has stated that they are more interested in seeking the right type of merger. With an understanding that only 1 out of every 10 mergers work out, they are being extremely cautious and selective in their choices. They also feel that the acquired company or partner has to have a compatible culture to theirs. There still exists a risk that any merger or acquisition they undertake may not be successful.
Management's Stake in this Company
Shares :
- 32,354,686 issued and outstanding shares
- 2402,000 options
- 290,000 warrants
- Trading: 18.7 million
- 7.3 million shares are in Escrow (includes those for Answers.com). Many of these will be held in escrow until Net Shepherd's Cash flow reaches $0.20 per share.
The total number of employee options that are currently in their plan represent 10% of the issued and outstanding shares.
When interviewed in the spring, Rick Charron (NSI's CFO) stated that their core management team have all elected to take a comparatively lower salary for an increased stake in the company (by way of share options).
Other than their own private purchases, here are the holdings of the following individuals as of March 31/99:
Chairman of the Board - Owen Pinnell 1,009,533 shares (note: the most recent filings shows his holdings at 857,333 shares)
Director - James H. Coleman 684,967 shares
Director - JD (Jan-Dirk) van de Geer (Not Available - New Director)
Director - Jake (Jacob) T. Halldorson 1,009,200
Secretary - Richard P. Borden
President and Chief Executive Officer/Director - Don Sandford 200,000 shares plus 500,000 options
Executive VP and Chief Operating Officer/Director - Phil Dublais 571,450 shares plus 300,000 options
Founder & Vice President Technology - Ron Warris 1,773,624 shares
CFO - Ric Charron 150,000 options (note: Mr. Charron stated that when hired, he elected to take an even greater cut in salary for a larger equity stake in the company)
All other Senior Managers (8 in total) - 100,000 options each
The fact that the management team of Net Shepherd has elected to take lesser salaries in exchange for an increased stake in the company demonstrates that they all have a strong vested interest in seeing the shares rise higher in value.
Financials
NSI's Stated Revenue Targets
1999: $10 million (through increased revenue and acquisitions)
2000: $20 million (through payoff from Vanenburg group pilot projects turning into contracts and increased business-related projects, etc.)
Revenues will double each year from then on. Goal is $100 million in 3 - 5 years (from the NSI document - Understanding Our Business).
Special Note: NSI has no debt. They have also stated that they are comfortable that they have sufficient cash available to fund their operations into the foreseeable future.
Q1 results
Revenues for the first quarter ended March 31, were $1,429,422, a 300% increase compared to revenue of $494,991 for the same quarter last year. For the three months ended March 31, 1999 the Company reported a loss of $135,650 compared with a loss of $232,098 for the three-month period ended March 31, 1998.
As a result of getting out of the system integration area, they were not actively pursuing small projects; instead, they were focusing their staff on building the infrastructure for their future growth. As a result, direct revenue had been impacted - short term. As they moved to their new business focus, they expected their last Quarter revenues to be strong as they expected to be receiving income from their Virtual Communities.
Combined Q1 and Q2 results
Revenue for the first half of 1999 was $2.3 million, up from $1.5 million during the same period in 1998. This represented a revenue increase of 53% over first half of 1998.
While their revenue increased, it would have been even higher had they completed commissioning their Internet Community Management System.
Their investment in technology and new business and the delay to some revenue generation during the commissioning of their Internet Community Management System has both increased their costs and also restricted their income. The loss for the quarter of $997,000, up from $129,000 in the same period of last year, was expected. They have now created a platform and business models that are just now generating annuity-based revenue growth. Answers.com and their new Business Intelligence company, have the potential for revenues well in excess of Net Shepherd's previously announced figures.
Net Shepherd closed its private placement financing of Special Warrants on June 16/99. They completed this financing of $1,015,000 on June 9, 1999. The financing was closed at a price of $3.50 for each Special Warrant and $4.50 for each Share Purchase Warrant. The holder of the Special Warrant is entitled to purchase shares within 12 months of closing. The size of the offering had an estimated maximum value of $5,000,000. However, the financing was closed at after the company raised just over $1 million. The management felt that they were being pressured to reduce the price of the offering, so they decided to close it rather than dilute the value of the company.
They have stated that further financing for technology enhancement will come from other sources. For example, the purchase and their plans for commercialization of Answers.com, (announced on May 20, 1999) has presented them with potential opportunities for financing in the United States and Europe.
In order for the special warrants to be converted, NSI would have to show a positive cash flow of .20½ per share or over $8 share price for 20 sessions in a row within 12 months (Aug. 2000).
Note: The company's 3rd Quarter results will be released during the last week of November, 1999. These results will illustrate their current cash position. It is important to note that these results are not expected to be stellar. This is due to the fact that during the quarter, the company was still engaged in their restructuring efforts. As the restructuring is now complete, and they are ready to put their system into production, significantly enhanced revenues are expected in the 4th and subsequent quarters.
Full details of their financial results, can be found on the Net Shepherd website at
netshepherd.com
Share Value Projections
"Canadians have been blinded by some dazzling returns in the U.S. and have overlooked what's been going on under their two feet." "Canadian stocks are generally, sector by sector by sector, among the cheapest in the world" - THE WALL STREET JOURNAL Message 11629700
NSI only needs a small fraction of several billion dollar potential market to be a roaring success. NSI has already proven that they can do searches 10 times faster, 10 times cheaper, with a higher accuracy than traditional searches can. As mentioned earlier, the company is not aware of any other firm that is doing what they are doing. This provides them with a tremendous "first to market" advantage. Message 11901077
At this present time the only perceived competition Answers.com has for their intended market is AskJeeves.com. However, as stated earlier, due to the differences in target markets, NSI does not see Ask Jeeves as taking market share from Answers.com.
When Answer.Com is brought to an IPO it can be safe to say that some of the idealab! companies will be supporting it along with some of NSI's other Blue Chip line of partners. Given this support, and a number of other significant customers supporting it as well, then this company will stand a very good chance of being a great IPO success in its own right. AskJeeves.com has recently come out with an IPO that soared over 400% on their first day of trading on NASDAQ.
NSI also plans to bring their Business Intelligence company to NASDAQ IPO as well. The potential threat of competition that NSI would face in the Business Intelligence market has been greatly minimized as the leader in this field - Dun & Bradstreet is already a customer of NSI's.
So how much will the shares of Net Shepherd appreciate in value?
To determine a forward looking target price for the shares of Net Shepherd, a few calculations have been presented. These are projections which can be said to represent both very conservative and a more traditional valuation scenarios. If the most conservative scenario holds true, and the company achieves its stated objectives, then it is very easy to see how this company's shares could be trading at or above $14 dollars (CDN) by next year. Should the more traditional valuation hold true then the shares could be valued at $28.50. It is important to stress that there also exists a good chance that NSI will see valuations considerably higher than the ones outlined in this document.
When using the most conservative estimate 3 times book value, this provides an investor with an approximate increase of 350% over NSI's current share price.
The two variables which play the biggest role in these estimates include the amount of money that the Answers.com and Business Intelligence companies will raise in their IPO's, and the appropriate Price to Book ratio to use when valuing an Internet company. (Book Value = total assets less total liabilities) The two Price to Book valuation numbers used are - most conservative value @ 3, and a more traditional value at 6.
Note: Some Internet based companies have enjoyed price to book multiples considerably higher than the ones used in these models (P/B of 3 & 6). Ask Jeeves has a Price to Book ratio of 170 for example. The more conservative valuations numbers have been used to ensure that if there are any errors in the valuation model, then any errors will serve to understate, rather than overstate, this company's potential.
Assumptions
- The expenses incurred to build the two new businesses would be relatively low in that each would have a relatively low cost base. This is because they will be licensing NSI's technology rather than having to develop it themselves. These lower set up costs would largely be offset by revenue earned from revenue generating contracts.
- NSI will achieve the $20 million (CDN) revenue targets they have set for their core business
- « of NSI's revenue ($10 million of the $20 million revenue target) will go directly to their bottom line in the year 2000
- Answers.com and the Business Intelligence company will be taken to an IPO on NASDAQ in 2000
- There will be an average of 12 million shares issued for each of the new companies
- NSI will retain a 60% ownership position in both companies ( + 7 million shares each x 2 companies = 14 million shares in total)
- The initial price of the IPO shares will be set at an issue price of just over $8 a share.
- At an ~$8 price, then Answers.com and Business Intelligence companies will each bring a valuation of $100 million (US). The combined total is $200 million (US).
- NSI's 60% ownership position in both companies ( + 7 million shares each x 2 companies) represents an ownership position of 14 million shares in total between the two companies
- In order to complete necessary acquisitions, etc., over the course of the coming 8 -18 months, NSI would expand their parent company's total outstanding share count to 40 million shares.
Note: The following calculations do not include any cash received by the company for the private placement of any of the 40% of available shares prior to the IPO. The conversion of US to CDN dollars was calculated at 1.5 times for ease of calculations.
- This ~$8 initial IPO price does not account for any price appreciation that may occur beyond the IPO issue price. As a point of interest, Ask Jeeves share price when it came to IPO was just $22 1/8. It currently is trading at $157 US per share.
Scenario #1
- $100 million (US) realization from the Answers.com IPO plus $100 million (US) realization from the Business Intelligence IPO
- Combined valuation of both companies = $200 million
- NSI's retained 60% ownership of both companies = $120 million (US)
- $120 million (US) @ ~$1.5 conversion factor = $180 million (CDN))
- NSI (parent company) will earn $10 million based on yr. 2000 revenue
- $180 million + $10 million = $190 million (CDN)
- $190 million divided by the estimated 40 million NSI outstanding shares = a book value of $4.75 per NSI share
- 3 times the book value of $4.75 share = a share price of $14.25 (CDN)
- 6 times the book value $4.75 = $28.50 share (CDN)
These calculations have been re-worked using the following changes to the model.
Scenario #2
If the Answers.com and Business Intelligence IPOs only provide NSI with one half of the $180 million (CDN) referred to above, then this would provide NSI with a combined Answers.com and Business Intelligence ownership value of $90 million (CDN).
- $90 million (US) realization from the two IPOs
- NSI's retained 60% ownership of Answers.com and Business Intelligence = $60 million (US)
- Using a CDN to US dollar conversion factor of 1.5 times $60 million = $90 million CDN
- add $ 10 million NSI's cash reserves based on yr. 2000 revenue = $100 million (CDN)
- $100 million divided by the estimated 40 million NSI outstanding shares = a book value of $2.50 per NSI share
- 3 times the book value of $2.50 share = a share price of $7.50 (CDN)
- 6 times price to book value works out to = $28.5 (CDN) a share
Comments
It can be stated that, Price to book value is just a snapshot of the value of a company during a short window (such as immediately following a spun off IPO listing). To determine a company's forward looking value of their stock price, an investor should base their projections on their costs as compared to their current earnings, and their potential for earnings in the future. Others prefer to value Internet businesses primarily on their price to sales ratio. As the infrastructure for both NSI and Answers.com becomes more established, and their customer base grows in the coming months, we will be in a better position to project revenues in the period after the IPO. Answers.com will be supported by NSI's proven technology and community research tools. As their competitors do not now have the speed, low cost, and technological edge that the NSI group of companies has, it is reasonable to expect that they are well positioned to be able to conduct faster, more effective researches for their clients than their existing competition.
It has to be assumed that companies who have a proven technological, speed, and cost advantage, will continue to be well received when they offer their IPO (s) to the investment public next year.
As a follow up to their Answers.com and Business Intelligence IPOs, NSI's has stated its intention to start a third private Market Research company. Given their business model of of taking these private companies to IPO it is reasonable to believe that NSI could see an additional 30% or more contribution to their significantly increased book value when this company is taken public.
Summary
If the above calculations withstand scrutiny and do indeed come true, then it will not take long before the investment community begins to understand this company's potential. As a result, we can fully expect to see a dramatic, and potentially exponential, increase in NSI's share value over the next few months.
What this illustrates, is that for an obscenely low price of ~$3 to $4 CDN , investors have the opportunity to realize the benefits of holding a stake in three (or more) well positioned, well managed, well connected, and exciting companies for the deep discounted price of one.
Timeline
From their perspective, their community management tools are "bare bones" right now. They want to ensure that the "bells and whistles" are in place so they can offer their researchers a more robust experience.
Now that ICMS 2.0 is commercially available, NSI is starting development work on Version 3.0. They feel that this will have much wider commercial applications than 2.0 and will enable them to provide a richer experience for their on-line community members. Version 3.0 will also use highly sophisticated machine tools such as neural networks to enable them to offer faster, more sophisticated and lower cost services to their customers. This will be available during the second half of 2000.
In the meantime, Version 2.0 is now commercially available in some very large markets. For example, Forrester, the US Internet analysts, estimate that the business intelligence market alone will be worth $11 billion within five years. Their attendance at Baan World helped them showcase their Version 2.0 in those markets.
NASDAQ Listing
They have stated that they will continue to make strategic investments in their technology platform and they plan to continue to aggressively pursue the best route to NASDAQ, either on their own or in a relationship with another company.
In early November, Peter Hunt, NSI's VP of Corporate Affairs has been quoted recently as saying . . .
"They are engaged in negotiations related to a possible merger / acquisition with a goal of NASDAQ in mind. This situation has made it necessary for the management team to remain in Calgary at their Head Office, rather than on the road. They are hoping to have some substantial news by the end of the month. They have therefore delayed the tour until the end of the month, though they cannot be certain that they will have firm news by then."
Recognition
"I think perhaps they (Net Shepherd) are on the verge of a whole new trend in the human resources field, a whole new way for companies to define workers and get them very quickly . . . a company that comes along and says: 'We can serve your needs immediately' - that's very attractive for organizations to whom time is everything.
Canadian Internet guru Rick Broadhead
"Net Shepherd's?software is phenomenal. What Net Shepherd has done is figured out how to control people over the Net with very high quality, and very good efficiency."
Gene Patterson, Chief Technology Strategist, Dun & Bradstreet
"What we have is an application, a system, which in my opinion has huge economic potential. It is exciting leading edge stuff."
Tony McLellan, Chief Executive Officer of ClickChoice.com
Net Shepherd has been named as a company to "hit the home run"
Garry Foster, National Director of High Technology at Deloitte & Touche.
More comments . . . netshepherd.com
- Founder Ron Warris delivered a key address at the October 1997 Washington DC Internet Summit
- In 1998 Net Shepherd was inducted into the Smithsonian Institute' Permanent Research Collection for its highly innovative and pioneering technology
- President Don Sandford addresses Ottawa-held OECD Conference in Oct 1998 and Paris-held in April 1998
- Warris received the outstanding Canadian technical excellence award from Canadian Computer Wholesaler in July 1998
- Net Shepherd, Inc. became part of the Smithsonian Institution's Permanent Research Collection on Information Technology Innovation at the National Museum of American History in April 1998
More Awards . . . netshepherd.com
Final Thoughts
I recently attended a presentation by Ian Ainsworth, Fund Manager for Altamira's E Business fund. This fund is one of the most successful Internet, e-Business, and Technology focused funds in N. America. During his presentation, Mr. Ainsworth put up a slide which outlined Altamira's selection criteria for stocks that they include in their fund. What struck me was the similarity of what they look for in companies, and what I know to be true about Net Shepherd.
Altamira's selection criteria . . .
Qualified management who are motivated to see the business succeed
A low cost business model
Multiple Revenue Streams
Strong Partnerships
They have an early mover advantage
They have strong Financial Resources
and They are leveraged to the Internet.
Of these several criteria, Net Shepherd may only be shy in just one area. Aside from having no debt, they are still in the process of proving their new system to potential clients. Once this occurs, then I am confident that they will be able to bring in a strong revenue flow that will strengthen this company even more than it is now.
Once again, to quote Don Sandford, Net Shepherd's President . . . NSI's greatest challenge is to educate the market on the possibilities of Version 2.0 and the compelling business models.
The conclusion that I have come to is that Net Shepherd is a company which is extremely focused, superbly positioned, and which has the connections to take them much higher. It is my hope that with this document, I have helped to communicate their story, and therefore helped other investors better understand the company and the tremendous opportunities it presents.
Thank you for reading this.
Crazy Canuk |
