TO ALL: After further research, I had to make some revisions on my initial summary and raise the earning estimate. It's reasonable to assume that, once I figure out how much revenue will be generated from I/NET's internet consulting business, the estimate will have to be raised again.(Currently, none of those consulting projects, including the $500,000/year revenue for maintaining IBM AS/400 web site, is included in the earning estimate.)
yongzhi
------------ revised summary -------------------------
INNI Summary 6/3/1998
Company name: I/NET Inc.
Address: 643 W. Crosstown Parkway Kalamazoo, Michigan 49008
Contact: I/NET Inc.
Stephen J. Markee, 616/344-3017 ext. 104
smarkee@inetmi.com
or
Seyferth & Associates, Inc.
Jeff Lambert or John Vonder Haar, 800/435-9539
SeyferthPR@aol.com
Web address: inetmi.com
Business: Internet server products for IBM AS/400 systems.
Consulting in developing and maintaining web sites.
Trading symbol INNI (OTC-BB)
Trading range 52wk high .47 low .17
Shares OS/ 30mil/13mil Float
Work force: 20 employees, most engineers (marketing is down by IMS)
SEC filings edgar-online.com
Recent News Release: quote.yahoo.com
Analysis:
The following analysis is based on information found on various web sites and conversation with Stephen J. Markee, President and CEO.
(1) Main Products
I/NET's main products includes MERCHANT/400 (retail price $1500), COMMERCE/400 (retail price $4995), WEBSERVER/400 (retail price $2995) and WEBULATOR/400 (retail price $2995).
Merchant/400 is the two party credit card system for e-business on the AS/400. IBM contracted with I/NET to integrate this product into their Net.Commerce offering to be used as its on line payment option.
I/NET recently introduced a new version of Webulator 2.0. This product sells for $4,995 and provides 5250 emulation with anyone's server (Lotus Domino, Netscape, IBM).
The description of these products can be found at inetmi.com.
Netscape SuiteSpot server products will be ported by I/NET to AS/400 and will be released on the end of July. The first one coming out will be the Enterprise Server.
(2) The Market for I/NET's Main Products
I/NET's main products are specifically for IBM AS/400 users. There are about half million AS/400 users worldwide. The new AS/400E, mainly targeted at network server market, is expected to sell between 25,000 to 50,000 units per year. The ported Netscape products will be for the new RISC based AS/400E with V4R2.
(Note that although ported Netscape server will run only on V4R2 and higher, all the I/NET server products will run on V3R1 and higher. This means I/NET can satisfy the needs of any AS/400 Customer wanting to Internet enable their computer without having to update their operating systems or buy new computers.)
The current worldwide AS/400 market is illustrated below:
US and Canada: 30%
Europe: 45%
Asia: 20% (with 80% of users in Japan)
Other: 5%
I/NET just recently started sales to Asian market.
Competing with I/NET ported Netscape server products in AS/400 market will be Lotus Domino suite, which is more complex and requires large resource to get it up and running. Hence it is mainly for large corporations. Also note that Domino suite will be marketed by Lotus while I/NET's products will be marketed by International Marketing Strategies (IMS, imsworldwide.com ) as well as IBM marketing channels. Another interesting note is that although IBM has its own 5250 Emulation product, it now recommends Webulator/400 to its users.
Since IBM is actively marketing AS/400 as Internet servers and since I/NET will ship
Netscape's popular SuiteSpot Web servers that will run natively on the AS/400, it can be expected that more and more users will accept the idea of using AS/400 as Internet servers. The sales of I/NET's server products should increase after the second quarter.
(3) Other Products and Services
Recently, I/NET lunched Career/Net. It is marketed by a Miami company. Customers signed up include Citibank and pageNet. The software costs $5000 for license fee plus $500 per month for support.
I/NET is also doing consulting business. For example, it designed IBM's AS/400 web site and has just extended its contract with IBM to maintain that site (for 12 months, and $500,000). I/NET's consulting customers also include: The Upjohn Company; International Research & Development Corporation; Kodak ; Electronic Data Systems; The Chicago Tribune; United States Government ; W. K. Kellogg Foundation; Greater Kalamazoo Association of Realtors.
(4) Revenue Estimation
It is hard for me to estimate I/NET's revenue from Career/Net and consulting
business at this time. So I will just try to do a conservative estimation on its Internet server products for the next three years. Before we can do that, we need to take a look at the agreement between I/NET and Netscape and between I/NET and IBM. In order to port Netscape server product to AS/400, I/NET need to pay Netscape $1.25 MM per year for three years, $1MM is for license fee and $0.25MM is for development support. IBM is paying the fee on behalf of I/NET. IBM also paid I/NET $0.6MM in advance for agreeing to take on this project. The $3.75 that IBM paid Netscape on behalf of I/NET and the $0.6 MM paid to I/NET will be reimbursed to IBM out of the future revenue of the ported Netscape products. However, I/NET is under no obligation to pay IBM if no revenue is realized from the Netscape server products.
Since AS/400E sales is expected to be 25,000 to 50,000 units per year. I will take a lower estimation of 20,000 per year. That's 60,000 units in three years. Since this machine is marketed as Internet server products, I will assume half of them is actually used as Internet servers. Among them, assume only half of the users choose I/NET's products over Lotus Domino suites. That's 15,000 new users for I/NET. Among the existing half million AS/400 users, I will only assume 5% of them, that's 25,000 users, buy I/NET server products in the next three years. So they will have 40,000 new server product users over the next three years. (Note that, in reality, even users don't use AS/400 as Internet server may want to buy WEBULATOR/400 for 5250 Emulation.)
Although I/NET products are priced as low as $1,500, most I/NET sales are bundles (two or more products). Webulator needs either Commerce Server/400 or Web Server/400. Merchant/400 needs Commerce Server/400 or Web Server/400. This means that a user buying the $1,500 Web Server/400 will also have to spend $2,995 for Web Server/400 or $4,995 for Commerce Server/400. In order to be conservative, we will just assume each user on average will spend $4,000. That's 40,000x$4,000 = $160,000,000. Deduct the $4.35MM that has to be reimbursed to IBM, we get $155.65MM. Using $40% profit margin (company's current profit margin is 44%), we get $62.26MM profit for three years. That's $20.75MM per year. Divided by the 30MM shares outstanding, we come up with $0.69 per share. That means this will be a $14 stock using a PE ratio of 20.
(5) Risk Analysis
At this point, it is not clear to me whether AS/400 will be successful in competing with well accepted Unix and NT servers in the server market. Therefore the 20,000 units AS/400E per year sales projection might be wrong. Another factor that may affect the outcome is the competition from Lotus Domino suite. However, I feel that IBM has a strong loyal customer base and I believe my estimation is conservative. Even if the sales turn out to be 1/10th of my estimation, the stock will still worth about $1.40. At today's price of $0.3 level, the risk/reward ratio is still heavily in our favor.
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