09:13am EST 29-Mar-99 J.P. Morgan (ARCHIBOLD, R. (1-212) 648-6231) NSOL
NETWORK SOLUTIONS: SEIZING AND EXPANDING ITS INTERNET OPPORTUNITY
March 29, 1999
J.P. MORGAN SECURITIES INC. - EQUITY RESEARCH
RAIMUNDO C. ARCHIBOLD JR, CFA (1-212) 648-6231,
archibold_raimundo@jpmorgan.com
John Reilly Walsh, CFA (1-212) 648-8028, walsh_john@jpmorgan.com
Network Solutions (BUY)
SEIZING AND EXPANDING ITS INTERNET OPPORTUNITY
Earnings Per Share P/E
NSOL 52-Wk ------------------- --------- MkCap
3/26 Rge 12/98 12/99E 12/00E 1Q/99 1Q/98 12/99E 12/00E Yld ($MM)
---- ----- ----- ----- ----- ----- ----- ---- ---- ---- -----
$106.5 $153-11 $0.24A $0.62E $0.87E $0.12E $0.06A 171.7 122.4 0.0% 3,566
Note: NSOL's shares split 2 for 1, effective after market close March 23, 1999.
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Network Solution's CFO and acting COO Bob Korzeniewski presented at J.P.
Morgan's IT Services and Electronic Commerce conference on March 25. The
themes stressed in the presentation are consistent with our investment
thesis on Network Solutions: Network Solutions will be a dominant provider
of domain names subsequent to introduction of competition; and Network
Solution will leverage its distribution channels and established customer
base to offer additional value-added products and services. We
reiterate our Buy rating on Network Solutions with a $150 price target as
we believe the shares offer investors an attractive investment vehicle to
participate in the growth in the Internet via a company with strong
earnings and cash flow.
Points Stressed in Network Solution's Presentation
ú Distribution will be the key to generate registration growth and NSOL
has agreements in place with over 65 domestic and 85 international major
ISP's and web-hosting companies which act as resellers for NSOL.
Additionally, NSOL has agreements in place with an additional 5,000 smaller
partners. Touching the customer at multiple points in their Internet life
cycle will be NSOL's long-term strategy, particularly in the small business
market.
ú Penetration rates remain very low in the domain name registration
market at approximately 5% or 5 million names worldwide (NSOL announce
recently it had registered its 4 millionth name). The opportunity is large
and NSOL's distribution, infrastructure and experience will enable it to
continue to be among the leaders in the market. Moreover, the company's
aggressive marketing campaign is designed to not only build brand equity in
the Network Solutions name, but to also raise the awareness of the value of
a unique Internet identity among individuals, a large untapped market.
ú New product offerings will begin to gain traction in the second
half of 1999. Products introduced in 1998 including dot com e-mail,
registration plus and global registration will continue momentum in 1999.
The company's registration plus offering is its fastest growing channel for
new domain names. The introduction of directory services in the first half
of 1999 will be positioned as the de facto white and yellow page of
Internet businesses.
Update on Governance and Recent Events
ú ICANN has extended the application period for new registrars from
March 29 to April 8. ICANN intends on announcing the five testbed
registrars on April 21. While ICANN has not stated how far this will push
back the launch of the testbed registrars, it now appears unlikely the
launch date will be April 26. A conservative estimate of the start-up time
required for the five testbed participants to have their systems ready to
interface with the shared registry system would suggest the launch date for
the testbed to be sometime in mid-May.
ú A short seller report published last week made a number of inaccurate
assessments with regard to the domain name market and NSOL's place therein.
The company addresses these points in a press release issued on March 25.
The report centered around the registry fee to paid by the registrars for
domain names: The registry fee paid by all registrars to NSOL to register
names in .com, .org and .net we expect will be determined through
negotiations between NSOL and ICANN within the next 30-45 days. NSOL has
proposed this fee at $16 per registration, which is to be on a cost plus
reasonable rate of return basis. We believe the fee will ultimately be in
the $8-10 range.
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