"Pointcast IPO is a cautionary tale"
sjmercury.com
DAVID W. Dorman's eye-popping pay package makes for good
reading, but it's no reason not to invest in the initial public offering
of Pointcast Inc., the Internet start-up headed by the well
regarded executive.
But there are plenty of other reasons to shun Pointcast, and
they're all on display in the fine print of the company's IPO filing
last week with the Securities and Exchange Commission.
Pointcast has a 100 percent churn rate, meaning it's lost about as
many users as it's added since the beginning of last year. Revenue
growth is inconsistent and is expected to be flat for two quarters
-- not good signs for a would-be public company. And it's in the
middle of a costly and critical technological upgrade that promises
to make or break the company.
Sound like shocking stuff? It is, but it isn't unusual. A ''risk
document'' like Pointcast's registration statement typically contains
loads of boilerplate about reasons the company might not
succeed. Much of it is uninteresting noise intended to preclude
trouble with the SEC. But the IPO filing is littered with other
nuggets that spell out real worries every investor should know
about before plunking down money.
In Pointcast's case, the company will try to sell up to 4.3 million
shares of stock for about $11 a share. The price of an IPO often
varies from the time a company first files to when it sells the
shares to institutional investors. At $11, Pointcast's investment
bankers -- Lehman Brothers Inc., BT Alex. Brown and
BancAmerica Robertson Stephens -- value the company at about
$235 million, a far cry from the $400 million to $450 million
News Corp. (NYSE, NWS) reportedly offered to pay for
Pointcast early last year.
The company, founded in 1992, was a pioneer of ''push,'' the
now passe buzzword that describes the process of delivering
focused information directly to users' computers via the Internet.
It's also a word that doesn't appear once in Pointcast's IPO
document, although that's still the focus of its product.
Instead, Web sites that accumulate loads of information to attract
eyeballs (such sites are now called portals) are all the rage, so
Pointcast has narrowed its strategy to focus on more likely users,
namely business customers, rather than a mass audience.
''Push has been pushed out by portals,'' alliterates investor David
Simons, who follows the Internet for Digital Video Investments in
New York.
Pointcast has signed up an impressive client list, including
Hewlett-Packard Co. (NYSE, HWP), National
Semiconductor Corp. (NYSE, NSM) and the Federal Aviation
Administration. It's also attracted a number of corporate
investors, including Knight Ridder (NYSE, KRI), publisher of
the Mercury News and an early investor in Netscape
Communications Corp. (Nasdaq, NSCP).
But the company's got a problem keeping users. Despite adding
between 850,000 and 1 million viewers per quarter since the
beginning of 1997, the total audience has remained constant at
about 1.2 million. Most users who bolted did so within three
months, and they have left because of poor performance and
reliability. What's more, some companies have banned Pointcast
because it clogs up their systems. In conversations, Pointcast
downplays this problem, but it details it in black and white for the
SEC.
Here's a gem, obviously written by a lawyer, that sums up the
churn-rate problem: ''The failure by the company to reduce
attrition levels and increase its installed viewer base would have a
material adverse effect on the company's ability to increase
advertising revenues, which would have a material adverse effect
on the company's business, financial condition and results of
operations.''
In other words, Pointcast has been doing a good job of selling
more advertising and marketing its network, but it has serious
technical problems. It says it's fixing those glitches with new
software launches this month and later in the year. But is this
critical juncture really the best time to be selling stock?
Regarding those advertising revenues, they now account for 96
percent of the total, but they aren't consistent. Revenue in the first
quarter was $5.1 million, about $2 million below the previous
quarter. Pointcast blames seasonality in advertising, but as a
comparison, Yahoo Inc.'s (Nasdaq, YHOO) first-quarter
revenue of $30.2 million was about 20 percent over the
December quarter and more than triple the year-earlier period.
Oh, there is one more smallish threat to Pointcast's existence:
Microsoft Corp. (Nasdaq, MSFT). Microsoft currently includes
Pointcast's network on its Active Desktop product, but that deal
expires in September and Pointcast says it doesn't get much
business from Microsoft. It warns that the ''announcement or
introduction by Microsoft of a directly competitive product could
have an immediate, material adverse affect on the company's
business, financial condition and operating results.''
Ouch.
None of this means Pointcast will flop. In this market especially,
anything can happen. Remember this column's disparagement of
the mid-February follow-on offering by search-engine also-ran
Infoseek Corp. (Nasdaq, SEEK) at about $13? The stock
closed Friday at $30, down from a high of $45.
It does mean, however, that Internet investors should break their
bad habit of not reading IPO prospectuses. But then again, who
can blame them? Too scary. |
