NSOL NEWS JUST OUT:
PRUDENTIAL SECURITIES INC. ISSUES RESEARCH NOTES
ON NETWORK SOLU
Business Wire
April 7, 1999, 9:01 a.m. PT
tions
Business Editors
--(BUSINESS WIRE)--April 7, 1999--
WHAT: Paul Merenbloom, Senior Technology Analyst at Prudential
Securities Incorporated, is releasing his research notes on
Network Solutions.
WHEN: April 7, 1999
PLEASE SEE EXCERPT OF RESEARCH NOTES ATTACHED
NSOL--FORGET THE SHORTS & CHECK THE FACTS-ICANN NEEDS NSOL'S
BLESSING TO PROCEED & TECHNOLOGY DELAYS LIE AHEAD FOR POTENTIAL
COMPETITORS; STRONG BUY
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R E S E A R C H N O T E S April 7, 1999
Subject: Network Solutions (NSOL-- 115)-OTC
COMPUT OPINION
COM EPS =======
Current: Strong Buy
Prior:
Risk: High
Analysts: Paul L. Merenbloom
Aydin O. Tuncer
12-Month Target Price: $188
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Ind. Div.:-- Yield:-- Shares: 34.2 mil. 52-Wk.Range: 1533/4- 101/2
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EPS FY Year P/E 1Q 2Q 3Q 4Q
Actual 12/98 $ 0.38 NM $ 0.13 $ 0.13 $ 0.18 $ 0.22
Current 12/99 $ 0.62E 185X $ 0.11E $ 0.13E $ 0.17E $ 0.21E
Current 12/00 $ 1.24E 92.8X
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Key Points:
-- While short sellers are pressuring the stock price; ICANN and the
Department of Commerce may not be as far along as the Street
thinks;
-- We believe potential registrar's system integration to the shared
registry system (SRS)(used by registrars to create and modify
records) will take 120 days or longer to deploy.
-- NSOL's agreement with the Department of Commerce (Amendment 11)
stipulates that both ICANN (as NewCo) and each of the registrars
must have separate agreements with NSOL prior to the initiation
of competitive access to the NSOL controlled registry. No such
agreements currently exist.
-- ICANN, to our best knowledge, has not yet been 'recognized' by
NSOL as the official NewCo, and hence, no negotiations between
NewCo and NSOL, as specified in the NSI/US Government agreement
have begun. These events (recognition of NewCo and the creation
of an agreement between NSOL and NewCo) are prerequisites for
competitive access.
-- We believe NSOL shares have been unfairly are being 'pushed
around' by the press who have not taken the time to understand
the contractual and technical issues at hand and by short sellers
working the momentum angle.
-- We believe that NSOL's position and defensibility remain strong.
We believe that domain name registrations will increase,
substantially, over currently published estimates reflecting
strength in the Internet itself. Accordingly, we are raising our
price target (split adjusted) from $125 to $188 comprised of $164
in NPV from a discounted cash flow analysis and $24 per share on
other (bounty) revenue value.
-- We believe NSOL shares should be a core holding for Internet
portfolios and, with a $3.4 billion market cap and 34.3 million
shares, NSOL shares are very liquid.
Summary. Shares of Network Solutions (NSOL) have been 'in play'
by short sellers and arbitrageurs as a trading vehicle given the great
complexity and lack of clarity surrounding the issue of competitive
access to the .COM registry database. We believe that the polarized
views surrounding the subject of competition and the associated
process, in conjunction with various biases that exist on the matter,
have led to manipulation by both the press corps and investment
community resulting in dramatic volatility in NSOL shares.
It is our belief, and strong point-of-view, that the process of
deregulation, and enablement of competitive access will continue to
drag out. The complexity of the process of creating a 'level' playing
field, creating international consensus for 'deregulation' and
administration; and the sheer wealth potential effectively awarded to
registrars will foster an environment of controversy, competition and
confusion for the coming 12-18 months.
Moreover, we note that there are any number of technical issues
and limitations that must be addressed and resolved in order for
multiple, independent organizations to establish unbiased, equal
access to a central registry system. We believe that the mid-April
target date for competitive access is neither (a) attainable; (b)
technically feasible; nor (c) reasonably achieved given the other
legal and structural issues facing the process. Accordingly, we
believe NSOL will enjoy an effective extension of their monopoly well
into 3Q 1999 and possibly into the first part of 2000.
The Shared Registration System (SRS) Is Up And Running-Now
ICANN's Job Is To Select The Initial Group Of Registrars. Noting that
the technical integration of the five initial (additional) registrars
must follow their selection, we note that in our experience, the
integration of disparate systems, to operate in concert, using various
sets of systems, and administrators is a challenge under even the best
circumstances. NSOL's creation of a centralized set of specifications
and interoperability requirements will, we believe, serve to reduce
the potential points of confusion, thereby speeding the reality of
online multi-vendor registration.
This said, we believe that the integration process, viewed
exclusively from a technical point of view, could require well in
excess of the ninety-days some observers and analysts have suggested
could be a viable working time frame. Specifically, we note that the
process to create the various 'feeder systems' that represent the
distributed front end are heavily laden with user interface issues,
Java(TM) and HTML programming, and security issues. While we have not
yet seen the final technical specifications, one element we believe to
be included is the incorporation of 'digital certificates' that are
used to uniquely identify and track each transaction and the
respective parties to the transactions.
Investment Thesis. Network Solutions (NSOL) enjoys an effective
monopoly in the creation, maintenance and stewardship of the central
database that contains the names and corresponding numerical addresses
for the Internet. NSOL enjoys interminable annuity revenues from
'licensing' the 'slots' in which unique names are made available in
the .COM, .NET and .ORG databases (registries). The company enjoys the
'keystone' role in the Internet. Without their database, the Internet
and incumbent/affiliated commerce would cease to function as it does
today. While competitive access to this database is an endorsed event,
and will, we expect promote additional domestic and international
near-term the process of deregulation and the introduction of
competition has furthered confusion in political, business and Wall
Street contexts. We do not expect the confusion to abate any time
soon. While there will be claims of threats to the NSOL franchise, the
US Courts have affirmed NSOL's rights and position.
We expect the company will enjoy significant time advantages in
developing their brand, franchise, market, products and relationships
with distributors and end-users alike. Accordingly, we expect NSOL
will embody a full E-Commerce company, similar in certain regards to
America Online (AOL, $168, rated Strong Buy) enjoying the annuity
revenues of domain name registrations (which are growing by 75% per
year), consulting revenues, 'layered' revenues associated with
advertising and E-Commerce enablement roles, and high-margin revenue
shares affiliated with the company's position to broker business
between vendors and buyers (corporate and individual).
Accordingly, we rate shares of NSOL a 'Strong Buy' and are
raising our near-term price objective to $188. Further, we fully
expect that this figure will increase in forward quarters and years.
Prudential Securities Incorporated makes a primary
over-the-counter market shares of Network Solutions.
Prudential Securities Incorporated (or one of its affiliates) or
their officers, directors, analysts, or employees may have positions
in securities or commodities referred to herein, and may, as principal
or agent, buy and sell such securities or commodities. |
