Bernie: In response to your request for comments on your post, I would suggest that part of NETP's problem is the lack of transparency about its business strategy. Although there are ambiguous clues in some of the filed documents, there is no clear, compelling presentation. I was struck by the non-answers NETP gave in the CC when analysts strayed into this area.
Here is a potential scenario.
The original strategy was to define and dominate the personalisation niche. Domination would come through the lead in technology that seven years work at the University and all the patents applied for had given them. This would be consolidated by progressive sophistication in applications as the number and variety of customers grew.
Central to this goal was to become an arms-dealer type of company. It would sell to anyone and everyone. It would leverage its own sales force by selling through partners and by its own and third-party ASPs. It would become ubiquitous - a neutral but necessary component in all internet or other electronic transactions by whatever medium. This strategy brought with it a kind of academic or virtuous culture. NETP would be research driven and agnostic, prospering by maintaining objectivity and serving the whole market.
I suspect that integral to this strategy was that it start first in CRM and eCRM because that is where a ready market could be found, that is where the early cash flow would arise. But in that field it would be facing companies offering to sell a complete platform or set of solutions including personalisation. To win their custom and co-operation it was important not to be seen competing with them head-on. In other words, NETP would not be offering its own platform or a complete set of solutions. It would remain the modest handmaid of the sector allowing the platform companies to take the credit for introducing NETP technology as part of their own complete set of solutions.
Although apparently modest, this strategy, if it succeeded, could bring strong consistent growth to NETP over many years, and the share price ought to follow, irrespective of any bubble in internet valuations. NETP would be a ten-bagger (1,000 gainer) in 2-3 years. (In fact it was a 4 bagger - 400% - for part of its first year measured from its IPO price).
But the NETP strategists underestimated the short-term effects of the stock market. The market always likes vertical integration in a compny. The concept of a platform or complete set of solutions appeals because to the unsophisticated it appears to offer much higher average selling prices, customer dependence (loyalty), the strength that comes from a diverse product line as well as the ability to leverage the products of other companies, like NETP, by being a re-seller for them.
The platform companies in CRM presented themselves as the engine of internet e-commerce at a time when the market was warm to that idea. They were rewarded with hyper-valuations. As their share price ran ahead of NETP's they were able to convert their shares to currency to buy up other companies. Their stock market success also contributed to commercial success as it strengthend their brand image.
Theoretically, their success ought to have been to NETP's advantage, because they were promoting the concept of e-commerce and CRM and they were, theoretically NETP partners - selling NETP products. But they were also committed to vertical integration. It was in their interest to try to replace NETP, if they could, with their own personalisation product. Some of them tried to develop their own, some bought products by buying other companies and some simply failed to promote any product leaving it to their customers to decide their personalisaiton needs and their brand preference. Very few of the 33 partners sell NETP, the bulk being done by three partnes and the lion's share by one - Vignette. In this scenario, NETP needed to promote the need for personalisation, and then to establish its own brand image and make itself first choice - the best of breed.
NETP has executed well on promoting personalisation as a concept, but much of its work has benefitted other companies as much as it has benefitted itself. Arguably, given enough time, this effort will benefit NETP more.
But NETP underestimated the threat that the stock market poses. NETP is a sitting duck to be bought out by companies who have done better in the market. NETP's intellecutal lead and its dominance of its niche makes it all the more attractive, as done its cash hoard and the imminence of profitability - possibly 1Q 2001. A company buying NETP with shares could claim to have bought the best-of-breed, increased its own cash position and increased its own earnings, as of 1Q 2001. No doubt such a company could make NETP profitable instantly by sellng NETP products to its installed customer base. They could co-opt the NETP strategy and use NETP products as a hook to sell their other products. Such a takeover might cause some relativeley minor problems where an acquiring company could not work with some of NETP's partners or customers. But the major hurdle would be NETP's intellecutal property. NETP is nothing if not a pool of talent consisting of design engineers and consultants. The main leaders do not need a job or ready cash. What might motivate them is the prospect of huge increases in their wealth and the ability to continue their dominance in the field of personalisation. If they all, as a group, resisted a takeover, they might deter an acquirer. But they could not prevent a takeover. A majority of NETP shares are available to any buyer.
Faced with these events - NETP appears to have started to adjust its strategy. It appears to be realising that it must increases its share value both as a defence against a takeover and also as a means of growing faster by becoming an acquirer, itself. Growth will help its long-term strategy to achieve dominance by expandng the scope and depth of its applicaitons. But to grow its share value it has to start dancing to the market's tune. And the market likes vertical integration, complete solutions, broader niches and so on.
So we see NETP beginning to hint, suggest, infer that its growing number of products in personalisation might amount to a complete platform a complete set of solutions. It does not come right and say so - no announcement that NETP offers a competitive product to the other platform companies, and not even much PR about the growing number of its products. The cognescenti who follow the company closely might know about it, but the market, as a whole remains ignorant and uncaring. NETP merely mumbles, half apologetically that it might be in a position to satisfy all the needs of mutlichannel retailers. It appears to be caught between the strength and the weakness of its orignal strategy. It is a plausible strategy, given time, but the market will not allow time. It is dog eat dog.
In my view, NETP has to quit being humble. It has to boldy state its strategy and ambitions and stress that it is a niche company only in so far as it specialises in personalisation. But personalisation has huge applications over a very broad spectrum of markets and involves a large number of separate products. It has to give some idea of the size of the market and the prospects for growth. It should state, that as a by-product of its strength in personalisaiton, it is able to offer a complete platform or set of solutions in CRM - relying on its own products, mixed with best-of-breed products from its partners. In other words, NETP should turn a potential takeover strategy on its head. Instead of becoming a hook product for an acquiring company, it should use their products as a hook for its own.
My bottom line guess is that NETP will be bought out for $50 anytime and within nine months. However, if it improves its stock market valuations, it will deter a takeover for longer, and thereby give itself a better chance to grow through acquisition.
If a takeover does not happen first, I think improved PR, and especially new coverage by up to the 7 analysts they are talking to - especially if one or two were to be from major houses - could bring the stock to the $28-$34 range even without a major bubble. I think that it could retest its high of $66 by the end of January if it continues to execute effective PR in the sense in which I use the word.
Oddly enough, I believe that NETP's fundamental arms-dealer strategy will be understood by some of the large brokerage houses and some of their clientele will feel more comfortable with this than with any dash for growth approach. But one has to ask why no major house does cover NETP - apart from the underwriters. It may simply be because NETP's market cap has not qualified it - but that begs the question. EPNY had the same market cap and about the same revenues and growth as EPNY when they started out, but EPNY attracted large house coverage, its share price grew quickly, it was able to make acquisitions and now has higher revenues and higher growth than NETP.
Lots of "ifs". I think NETP has some deep-rooted problems of defining iself and then of adjusting its strategy. Its culture does not seem attuned to effective PR. That could be put right if there is a will to do it. The company is re-organising its management and appears to be trying to be aggressive on PR to the investment commuity. My sense is that nobody in NETP has appeared who is convincing on PR. They seem to treat is as an unfortunate accessory. However, perhaps the new COO will take the bull by the horns - it is now his responsibility, too. |
