GOLDMAN SACHS RESEARCH REPORT - VERY BULLISH:
Goldman, Sachs & Co. Investment Research
DoubleClick, Inc.
* * Initiating Coverage on Leading Internet Ad Tech Company, MO. * *
Michael Parekh - NY Equity Research
===================== NOTE 9:02 AM March 18, 1998
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Stk Latest 52 Week Mkt Cap YTD Pr
Cur
Rtg Close Range (mm $) Change
Yield
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DoubleClick, Inc. MO 35.00 36-26 555.2 %
0.0%
* We are initiating coverage of DoubleClick (DCLK), with a market
outperformer rating. We view DoubleClick as the market leader in the
essential, fast-growing segment of Internet Advertising technology
services. The company is investing for multiple growth opportunities
worldwide off its core technology expertise, and has an opportunity
to
grow its revenues and margins, with profitability expected in 2000.
Since the IPO, the company has added to its senior management ranks,
and
continues to execute on rapidly growing its three core businesses.
* The company is a pioneer in the Internet advertising market providing
both leading edge technology and media expertise. According to
Forrester Research estimates, the Internet advertising market is
expected to grow from $1 billion in 1998 to over $8 billion in 2002.
The company uniquely offers a comprehensive suite of solutions to
direct
marketers, advertisers and Web publishers. DCLK's three distinct
solutions are designed to meet the various needs of Web publishers,
Advertisers and Marketers - Network, DART Service, and Direct. Over
the
past eight quarters, DCLK has achieved a $44 million revenue run
rate.
* The company has achieved market leading critical mass in web
publishers
(65+ sites), advertisers (1000+), end-users (over 20 million per
month),
and ads served (over a billion a month). These metrics put
DoubleClick
in the leagues of leading Traffic Aggregators like Yahoo! (YHOO),
AOL.com (AOL), and Excite (XCIT). We view the DoubleClick business
model as a compelling variation on the leading 'branded portal'
business
model that we have favored for over three years.
* The shares currently trade at a price to revenue multiple of 11.6 and
6.8 times our 1998 and 1999 estimates, at the mid to lower end of the
Internet industry range for a market segment leader. Internet
advertising driven companies trade at 6 to 35 times their 1998 sales
and
4 to 20 times 1999 sales. As the company is investing for multiple
growth opportunities worldwide off its core technology expertise we
expect the company to maintain if not widen its competitive advantage
vs. competitors from multiple quarters. We rate the shares market
outperformers and view the company as a core holding in our Cyber
Commerce investment theme for long-term growth investors.
Industry Overview: The Internet and the Web have enjoyed unprecedented
growth since 1994. The interactive capability of the Web has led to the
introduction of an exploding variety of content, commerce, and
aggregation
sites. According to International Data Corporation, Internet annual
user
growth is expected to surpass 35% both domestically and internationally,
with 72 million and 129 million users respectively in the year 2000.
As a medium for advertisers the Internet represents a number of
significant
advantages over traditional media which make it highly attractive for
advertisers. The demographics of Internet users represent a highly
attractive target audience for advertisers. In many cases the
transaction
can be tied closely with the advertising or direct marketing pitch and
be
consummated directly on-line; this is an advantage over traditional
broadcast media.
We believe there is tremendous long-term potential for traditional
advertisers to increase their levels of Internet ad spending relative to
their total advertising budgets. Compared to an estimated $175 billion
that was spent on traditional media advertising in 1997 and $153 billion
on
direct marketing, only $551 million (International Data Corporation) was
spent on the Internet.
Increasingly many Web publishers are challenged by: 1) Their lack of
sales distribution, large enough traffic, and experience in selling
internet advertising to large corporations and their ad agencies; 2)
The
lack of sophisticated and scaleable targeting technology and related
expertise to maximize effectiveness of content and advertising; and 3)
Inability to develop a large database of user information and response
patterns across a large user base that allows for accurate ad targeting
and
premium advertising rates. On the other side, many advertisers are
increasingly faced with hundreds of web site opportunities across dozens
of
categories, without an efficient way of reaching them in terms of
aggregation and micro-targeting.
Company Overview: DoubleClick is the leading company providing
solutions
for Web publishers and advertisers. The company is a pioneer in the
Internet advertising market providing both leading edge technology and
media placement expertise. The company provides three main
products/services which combined together makes it a unique
'one-stop-shop'
for Internet Advertising technology and services. For the advertiser,
DoubleClick offers access and precise targeting across an unparalleled
breadth of top branded high-traffic web sites, through the DoubleClick
Network. For content companies fielding web sites themselves,
DoubleClick
provides a complete solution of advertising options including a place on
the DoubleClick Network, a software licensing option through its Dynamic
Advertising Reporting and Targeting (DART) technology and a targeted
advertising approach through the company's Direct program.
DoubleClick's technology solutions provide Web publishers essential
delivery and inventory management capabilities combined with targeting,
tracking, and reporting functionality. The software, running on Windows
NT
machines, is very scaleable and currently serves over 1,000 ads per
second.
DoubleClick has built three primary products and services around this
technology with an opportunity to integrate additional features and
services over time.
Full Outsourcing - The DoubleClick Network offers Web publishers the
opportunity to fully outsource their advertising sales and operations.
To
date DoubleClick manages relationships with over 65 Web sites organized
across half a dozen specialized areas like News, Entertainment amongst
others. These sites taken together represented approximately 30 million
page views a day and 20 million unique visitors in the month of December
1997 (excluding AltaVista, a major customer). DoubleClick focuses on
selling the available inventory of ad pages to advertisers in targeted
demographic packages, as the traffic to its affiliates grows
organically.
DoubleClick is growing a large direct and tele-sales based salesforce in
seven U.S. and eight overseas offices, focused on selling ads on its
affiliate Web sites. The company keeps 30% to 50% of the ad revenues
generated through this service with the overall duration and breadth of
the
contract increasing over time. This product represents the mainstay of
DoubleClick's current revenue base, with growing contribution by the
other
two services described below.
>From the marketer/advertiser perspective DoubleClick's Network provides
a
single 'buy' across leading branded content sites on the Web.
DoubleClick
has served over 1,000 advertisers including AT&T, Microsoft, Disney, and
Hallmark, and all of the top 10 advertisers on the Web today.
Technology Outsourcing Only - The DART Service provides Web publishers
with
an existing salesforce, the opportunity to take advantage of
DoubleClick's
leading technology which offers them essential delivery and inventory
management capabilities combined with targeting, tracking, and reporting
functionality. The service is not a significant contributor to the top-
line today but is expected to grow and provide higher gross margin
(70+%)
business in the coming years as the salesforce for the software service
is
expanded from five today. The service has already attracted several key
Web publishers including NBC, The Wall Street Journal Interactive
Edition,
RealNetworks, The Sporting News, and Reader's Digest. The standard
pricing
model is based on CPMs (Cost per Thousand) with a sliding scale and a
small
start up fee.
Direct Marketing - DoubleClick Direct allows Web publishers to make use
of
their unused ad space inventory by offering it on a cost-per-action
basis
to direct marketers. The service, launched in December 1997 leverages
DoubleClick's strong relationships with its advertising partners and the
unique capabilities available only on the Web. The overall model in
this
business segment is still evolving as there are various actions (product
sale, lead generation, clickthrough, download, etc.) that determine the
pricing ranging from $0.50 to $50 per action. The Direct service can
potentially serve to extend the reach to new Internet advertisers by
providing cost-per-action payment allowing economic and measurable
returns,
while allowing DoubleClick a way to participate in the commerce
potential
of the Internet. We expect to see growing revenue contributions in 1999
and beyond as the business model matures and the salesforce expands.
According to Forrester Research estimates Direct Marketing on the
Internet
is expected to grow from $550 million in 1998 to $4.9 billion in 2002.
Having achieved leadership in each of these three segments, the company
has
undertaken an aggressive strategy to expand its operations
internationally.
The expansion will serve to expand both network affiliate sites as well
as
advertisers on the network. By establishing an international presence
DoubleClick has created additional sales opportunities in both the U.S.
and
internationally. The creation of non-domestic networks will allow
DoubleClick the ability to target advertisements for both domestic and
foreign advertisers on a national, international, and global basis.
Partnerships and Alliances: DoubleClick's 'Network' offers a wide range
of
high-traffic Web site buys to advertisers and direct marketers. Some of
these top branded sites on the Web include AltaVista, Dilbert,
Macromedia,
Billboard Online, and U.S. News Online.
AltaVista (www.altavista.digital.com) is a leading Internet search
engine
that has a broad technology and revenue sharing partnership with Yahoo!,
providing search engine capabilities to the premier Web portal. Most
recently, AltaVista averaged over 30 million page views a day during the
month of December. As a part of its network, DoubleClick has an
exclusive
relationship to manage all the advertising technology and services on
AltaVista's multiple international sites.
While DoubleClick boasts a star cast of Web Publisher relationships, we
expect the company's success of its long-term strategy to be driven by
providing a comprehensive set of solutions to an expanding set of
customers, enabling ever-increasing micro-targeting to advertisers and
marketers. As Internet advertising grows 65+% from $1 billion in 1998
to
over $8 billion in 2002, the 3-pronged service offering by DoubleClick,
along with new product and service offerings should allow the company to
grow at 50% plus rates over the next few years.
Overall, while the market remains fragmented, with many participants in
the
various segments, we view the market as being large enough at this early
stage for DoubleClick and a range of competitors. In addition,
DoubleClick
possesses an additional asset in its growing database of users and
traffic
patterns. This database provides a repository of information that
assists
in planning targeted Internet advertising campaigns for specific
products.
In particular, this offers DoubleClick opportunities in the local
advertising market, where advertisers today spend billions through
traditional media vehicles. As DoubleClick improves its targeting
capabilities over the coming years, the value of providing access to
this
database from either the Network, DART or Direct business, while
maintaining individual user privacy, is likely to help maintain its
meaningful lead over its competitors.
Recent Highlights: The company recently raised $63 million by issuing 4
million primary shares (including Green shoe) in its Initial Public
Offering (IPO). The cash position will help the company build its
International operations while continuing to invest aggressively
domestically.
In the last few months, DoubleClick has brought on several senior level
managers, including Ms. Wenda Millard, EVP of Marketing and Sales, a
senior
executive with extensive media experience. The company recently
announced
the addition of Jonathan Shapiro from McKinsey, Robert Linsky from
American
Express, and five new salespeople in the Silicon Valley area. Mr.
Shapiro
will join as Vice President (VP) of Business Development where he will
leverage his past experiences at United Media's Internet business. Mr.
Linsky joins as VP of Operations, leveraging his background managing
Internet Business Development at American Express. The recent additions
add to the strong management team of Kevin O'Connor (CEO & Chairman of
Board) and Kevin Ryan (COO and President). We expect the company to
appoint a CFO in the coming weeks, a role currently filled by Mr. Ryan.
Valuation: The shares currently trade at a price to revenue multiple of
11.6 and 6.8 our 1998 and 1999 estimates, at the mid to lower end of the
Internet industry range for a market segment leader. Internet
advertising
driven companies trade at 6 to 35 times their 1998 sales and 4 to 20
times
1999 sales. We view our revenue estimates as being achievable, with
opportunities for upside on strong execution, and view the shares as
attractive relative to long-term growth prospects. We view DoubleClick
as
the market leader in an important segment of Internet technology
services
with an opportunity to rapidly grow its revenues, with a positive margin
shift. The company is investing for multiple growth opportunities
worldwide off its core technology expertise. We expect the company to
maintain if not widen its competitive advantage vs. competitors from
multiple quarters. We rate the shares market outperformers and view the
company as a core holding in our Cyber Commerce investment theme for
long-
term growth investors. |
