J.P. Morgan (ARCHIBOLD, R.) NSOL - NETWORK SOLUTIONS: EARNINGS PREVIEW; EXPECT ANOTHER STRONG QUARTER
April 20, 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)
EARNINGS PREVIEW; EXPECT ANOTHER STRONG QUARTER AND CONTINUED
OPPORTUNITIES
Earnings Per Share P/E
NSOL 52-Wk ------------------------ --------- MkCap
4/19 Rge 12/98 12/99E 12/00E 1Q/99 1Q/98 12/99E 12/00E Yld ($MM)
---- ----- ----- ----- ----- ----- ----- ---- ---- ---- -----
$70.50 $153-11 $0.34A $0.62E $0.88E $0.12E $0.06A 113.7 80.1 0.0% 2,453
Note: NSOL's shares split 2 for 1, effective after market close March 23,
1999.
Our reports and models are now available on the JPMS morganWISE
website. Please contact your JPMS salesperson for more information.
Network Solutions is expected to report its first quarter financial results
on April 22nd before the market open and hold a conference call at 11am EDT
that morning. Our revenue estimate for the quarter is $35.2 million, a 113%
increase versus the same quarter a year ago and 12.5% above last quarter.
Our $0.12 EPS estimate is in-line with consensus and is double the $0.06
reported in the same quarter a year ago. The March 15th announcement NSOL
has registered its four millionth domain name gave us a good preview of a
strong revenue quarter with registrations likely to exceed our expectation
of 620,000 for the quarter. Our investment thesis remains: Network
Solutions will maintain its dominant position in the domain name
registration market for the foreseeable future, investors should look past
the governance cloud to see the value in NSOL's business model and the
opportunities ahead for this Internet savvy enterprise. We reiterate our
Buy rating and $150 price target on NSOL as we believe the shares offer
investors a unique vehicle to participate in the growth of the Internet.
On April 21st at 10 am EDT, ICANN is expected to announce the
five testbed registrars. We believe the five testbed registrars will be
comprised of both international and domestic entities and be either
independent registrars or Internet Service Providers (ISPs). ICANN has also
indicated it would post a list on the Internet of all applicants upon
announcement of the testbed. We believe ISPs will have encounter channel
conflicts offering domain name registration outside its customer base and
independent providers' breakeven is probably around 500,000 names. We
believe ICANN could indicate these registrars will be included in the next
phase of implementation which is currently scheduled for June 25th. Upon
announcement of the chosen testbed registrars, each must work with NSOL to
integrate its systems to communicate with the SRS established by NSOL. We
believe NSOL will meet the specified April 26th date to have the SRS
available but would not expect integration with the testbed registrars for
thirty days or more from the April 21st selection date. We believe
investors should be aware of the potential for political posturing during
this phase of competition introduction as to any possible delay in getting
the testbeds running. Logic would indicate the registry fee NSOL would
receive from the new registrars would be announced prior to the testbeds
being announced, we believe if the registry fee is not announced prior to
April 21st, it will be announced shortly thereafter. We believe NSOL will
be able to maintain its current growth trajectory by leveraging its
formidable distribution channel encompassing over 5,000 partners and new
entrants will serve to extend the market.
Negotiations with the Department of Commerce on Registry Fee: Network
Solutions and the Department of Commerce (DOC) continue to negotiate the
fee NSOL will receive from new registrars in its capacity to act as the
sole registry for .com, .org and .net. in an agreement that currently
extends to September 30, 2000. Network Solutions has initially proposed a
$16 fee, we believe it is reasonable the registry fee will ultimately be
between $8-10 per name per year but a fee under would not be alarming as it
would indicate to us the projected growth in registrations was higher than
originally projected. Remember, NSOL will operate the registry on a cost
plus reasonable return basis and cost to build and operate the shared
registry needs to be spread over an estimated revenue (i.e. number of
registrations). It is important to realize NSOL must build a commercially
viable shared registry system (SRS) with full redundancy, security,
authentication procedures, offsite backup etc. as well as ongoing
supporting operating costs. Importantly, the NSOL's registry business
allows them to participate in the growth of the Internet by sharing a piece
of every domain name issued in .com, .org and .net.
Directory Services - We believe NSOL's upcoming directory services
offering will be positioned as the de facto yellow page on the Internet.
The directory services offering has the potential to leverage NSOL's
existing customer base by selling them additional services. Moreover, it
could be NSOL's first advertising based revenue opportunity. Yesterday's
announcement to partner with InfoUSA.com who has information on both online
and physical world merchants was an indication of the potential of the
breadth and depth of information which can be provided. Other partners
announced yesterday to build the directory services offering include:
Looksmart, VeriSign, GTE (GTE/$66/Buy) and Vicinity.
CEO Search - The company has indicated the search for a new CEO is
going well and are pleased with the candidate finalists. We expect the new
CEO to be announced within the next 30 days and an update from the company
on the progress made to date on the call.
BANCBOSTON ROBERTSON STEPHENSKeith E. Benjamin, CFA
April 16, 1999
The Web Report -- Volume 2, Issue #15
INTERNET STOCKS TAKE A BREAK -- The Internet stocks finally took a break,although it was small compared with the last two months of almost uninterruptedascent. This week, the NETDEX index closed down 5% from last week at 1046.95.This was up approximately 551% over the same period last year. For comparison,the NASDAQ ended the week down 2% from last week, but still up 38% from thesame date last year.
A GAME OF CHICKEN: We were encouraged to see the first break from frenzy thisweek. While we suspect many were looking for a post-reporting season lull, thestocks kept going up. It has been particularly disconcerting to see companiesin narrow and competitively challenged markets show stock spikes to valuations
difficult to quickly grow into. The challenge for the lesser-company stockshas been figuring out when to sell, because the valuation ranges started highand went to galactic levels. This week, many investors blinked. We would notencourage waiting any longer. We expect further divergence between the winners
and laggards, with the few standouts declining a bit before recovering to new highs and most stocks falling and not getting back up. We expect reportingseason to remind investors how difficult it is to compete on the Web, with few
companies having big, scalable brands.We only want to own the big franchises showing fundamentally sound business
models with marketing more a function of word-of-mouth than aggressivespending. These names at the top of our list still include AOL, Amazon, Lycosand TicketMaster CitySearch, Network Solutions, and CNET. We expect each toreport strong quarters to help investors appreciate how quickly each company
can grow into its valuation.IPO SPREAD NARROWING -- We believe we are beginning to see a slightly morerational IPO process in terms of the entourage of Internet companies being
introduced to the market each week. Comparing Q4 Internet-related deals to Q1,we found it interesting to note that the average first day jump from the IPOoffer price to the first trade, declined from approximately 225% in theDecember quarter, to approximately 156% in Q1. We expect this spread to
continue narrowing as more supply hits the market and as stocks stop going upafter the first day of trading. For reference, the average percentage changefrom the closing price on the first day to the price two weeks later was up31.4% in Q4 and up only 14.3% in Q2. We believe investors will learn to avoid
this frenzied trading as quickly as the first few deals start going down afterthe first trading day. We have already seen a few examples.
NETWORK SOLUTIONS -- We believe NSOL is continuing to widen its marketing lead,despite mis-perceptions of competitive challenges. Network Solutions signed 18U.S. companies to its Premier Domain Registration Service Program in Q1:99,bringing the total to 174 ISPs and Web hosting and design firms worldwide. We like the stock's current risk/reward profile and would begin to build positionsnow, prior to resolution of the issues surrounding who the next registrars willbe. We expect the company to report a very strong March quarter report on April 22.
|
