BANCBOSTON ROBERTSON STEPHENS
Keith E. Benjamin, CFA - 415-693-3285
mailto:Keith@rsco.com
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July 16, 1999
The Web Report - Volume 2, Issue #28
This week, the NETDEX index decreased 3.4% from last week to
624.97. For comparison, the NASDAQ ended the week up 2.4%
from last week.
REPORTING SEASON PICKING UP PACE - After fears that Yahoo!'s
reporting might mark the beginning of a sell-off, we are
encouraged by this week's activity, with stocks reacting to
positive surprises in company reports, particularly among
recent deals and other neglected stocks that have been
languishing near their lows. As such, we continue to expect
stocks to move more sideways than down in August. We have
seen a few stocks move up as investors catch up, such as
Student Advantage. There are a few stocks that have not
moved, where we believe reports will provide a positive
catalyst. Among recent IPOs, we believe Value America's
stock is ready to move up with its numbers. Among more
seasoned names, we continue to believe TicketMaster
Online-CitySearch will wake investors up soon.
Next week is a busy week, with Amazon.com reporting and
hosting an analyst day. Other reports include AOL,
Excite@Home, DoubleClick, Xoom.com, Infoseek, Beyond.com,
NetGravity, Onsale, Preview Travel and Network Solutions.
AOL READY TO REACH NEXT LEVEL? - We have been relatively
quiet on AOL, groping for the catalyst to move the company
and the stock to the next level. We believe investors may
have been lulled into inactivity by the success of the AOL
machine, with the laws of large numbers masking the
magnitude of the number of people AOL is now reaching. We
believe AOL is positioned to take a big jump up across
metrics as its service becomes used across multiple
locations and new platforms, allowing a significant increase
in revenues and earnings over the next few years. Over the
next few months, we expect investors to wake up to the power
of AOL's position. As such, we believe now is the time to
grow more aggressive again on accumulating the stock.
This quarter, we expect AOL to add 750,000 U.S. members. In
addition, we expect growth from commerce payments to provide
for positive top- and bottom-line surprises. We believe AOL
will continue to control more shopping than anybody else,
because it has more time to incite impulse buying.
We are stunned by the current numbers associated with AOL's
broader Web-based communications tools. There are more than
40 million registered users of AOL's Buddy Lists and AOL
Instant Messenger (AIM) services, who send over 430 million
messages per day. ICQ's 38 million registered users send an
additional 330 million messages a day. These are more
messages in total than the 500 million letters sent each day
via the U.S. Post Office. What new applications will drive
us to keep on communicating? AOL seems to be a good habit
that's getting better. New interactive devices will enable
new interactive directory services. AOL can provide status
indication and action. Are you there? Are you online or
offline? Are you available?
What is the math of multi-platform subscriptions? Tiers of
membership make sense, packaging each next level for a small
enough cost to encourage upgrading. AOL can use its size to
offer volume discounts to its members on wireless and other
hardware, including PCs. We don't believe even free PCs can
help the lagging brands. Microsoft also announced this week
plans to offer a free computer to customers who commit to
three years of service with MSN. With many family PCs being
purchased as second boxes dedicated to Web use, we believe
AOL will continue to have a natural advantage.
This fall, software client upgrades provide some incremental
improvements. AOL version 5.0 features You've Got Pictures
right under the You've Got Mail button. It also hosts a
calendar. The AOL store has an updated look. AOL 5.0
detects connection speeds and sends a pop-up window for
access to broadband content. We view broadband as an
add-on. Broadband does not solve the challenge of providing
access everywhere. You will still need dial-up access on
the road, for work, or for vacation. We don't see any other
company close to AOL to provide this capability based on
relationship it has with its members, providing their daily
link to the Web and each other.
We believe investors have been missing the math of AOL's
combined reach. We estimate AOL reaches almost 100 million
people through its various services, with AOL and CompuServe
over 20 million, with AIM over 22 million, with ICQ over 38
million, with Netscape over 15 million users, and with the
recently acquired Winamp music client, which has quickly
grown past 12 million downloads. Adjusting for duplication,
the number might still be greater than 80 million unique
users worldwide. We continue to believe AOL holds most of
the cards in any negotiation with the pipe providers given
its huge database of loyal members. As such, we think cable
deals favorable to AOL remain inevitable.
OPEN CABLE ACCESS ISSUE GAINING VISIBILITY- Local rumblings
continue to sneak up on us. Politicians in Broward County,
Florida, decided to let non-cable service providers such as
AOL offer broadband Internet access via the local cable
system. Officials in Portland have already reached the same
conclusion, and the issue has been shelved for a few weeks
in San Francisco and Los Angeles. We continue to believe
open access issues will flounder at the Federal level, with
the FCC trying to avoid Web regulation in general, viewing
it as political suicide. We expect AT&T to appeal, and
continue to believe small victories for each side will
eventually contribute to posturing in negotiations. We
believe once the cable rollout is no longer
supply-constrained, perhaps in early 2000, cable players
will need AOL's member base and multiple service offerings
marketing muscle to continue growing quickly. Excite @Home
reports Q2 results next Tuesday. We believe there is upside
to our modest subscriber growth estimates. The overall
cable adoption rate appears swift, with Road Runner this
week announcing 28% sequential growth to 320,000
subscribers. With Excite @Home expected to have over
600,000 subscribers as of June, we believe we have crossed
the one million cable subscriber milestone. Excite @Home is
hosting an analyst day on July 27, where we expect to hear
more regarding open access appeals. Finally, we believe the
company should continue to make selective acquisitions, like
this week's purchase of iMall.
GEMSTAR'S MICROSOFT DEAL EXPANDS FOOTPRINT - Microsoft will
invest $400 million in Rogers Communications, the largest
cable operator in Canada, and will install Windows CE as the
operating system in at least 1 million Rogers' set-top
boxes. Rogers passes 2.8 million homes in Canada. Of
those, 2.5 million are passed with two-way cable. We
believe Gemstar will collect license fees and a share of
advertising revenue from Electronic Program Guides in these
boxes, demonstrating the ability of licensing deals with
Microsoft, AOL, and others to rapidly grow revenue with
minimum incremental investment by Gemstar. We believe a
deal with AT&T would lift any final shroud of doubt that
Gemstar can continue to benefit from its patented
technology, with very positive implications for the stock.
We believe settlement talks between Gemstar and TV
Guide/TCI/AT&T have continued through this week, which we
view as a positive indicator that we are likely to hear some
resolution in a matter of days or weeks rather than months
or years.
STUDENT ADVANTAGE EMERGING AS THE STUDENT PORTAL - We
initiated coverage of Student Advantage which we believe is
the leading media and membership program for college
students: marketing discounts directly to members and
emerging as leading "student portal." For $20/year,
students can become a member of the Student Advantage
Program, which offers them official discounts at over 50
national branded stores and over 12,000 local businesses. At
the close of the school year just ended, Student Advantage
had over 1.3 million active members. To complement the
student discount, STAD has created the leading online portal
for college students, with over 1M unique visitors and over
20M page views per month. The company is addressing a large
market, with over 15 million full and part-time
undergraduate & graduate college students, on over 3,500
different campuses, spending over $100 billion a year.
Therefore, we believe Student Advantage is building lifetime
brand loyalties with an extremely attractive demographic, to
which it can continue to market, even after college. The
company has exclusive, highly integrated partner
relationships with numerous corporate sponsors including
AT&T, Amtrak, & Greyhound, plus many universities. We
believe there is upside to our model from expanding the
membership base, increasing the revenue generated per member
and possible strategic acquisitions.
eMARKETING CONSOLIDATION CONTINUES WITH DCLK AND NETG -
DoubleClick agreed this week to purchase NetGravity for an
estimated $530 million. We believe that DoubleClick,
following the closing of this deal and its recently
announced merger with Abacus Direct, will be the leader in
the eMarketing sector. DCLK is acquiring NETG's leading ad
serving software product, access to its 360 customers and
stronger international business. As management sees it,
DCLK is now positioned to offer the broadest available suite
of ad management solutions, including a sales network, an
outsourced serving solution (DART), and ad serving software
via NETG's Ad Server product, as well as significant
targeting solutions. We believe this deal could continue to
spur rapid consolidation between the remaining competitors
in the ad management space, with DCLK possibly continuing to
lead the charge using its valuable stock as currency.
DoubleClick also preannounced strong Q2 revenues of $44MM,
which was $8MM ahead of our $36MM estimate. We believe much
of this strength came from DART, which could be poised for
accelerating growth. DCLK will report Q2 earnings on July
19.
NETPERCEPTIONS ACCELERATING - Net Perceptions reported
strong Q2 results yesterday. Revenues of $2.8 million were
well ahead of our $2.0 million estimate. NETP added 26 new
customers during Q2, up from 17 new customers in Q1.
Twenty-five of the new customers signed up for volume-based
contracts which make NETP's model more scalable, providing
the potential for bigger upside surprises. The company also
added Lycos as a customer, which marks the first big
eNetwork to sign up for NETP's products. We view this as a
milestone for the eCommerce product, as it appears to be
proving scalable if Lycos is using it. New product rollouts
are on schedule, with several customer implementations of
the call center product. We have raised our 1999 revenue
estimates from $10.6MM to $11.6MM and our 2000 estimate from
$20.0MM to $22.0MM, and believe there could be additional
upside to these estimates. We continue to believe that Net
Perceptions, given the uniqueness of its products and its
110 customers, remains an attractive partner in the
continuing eMarketing consolidation, although it appears
capable of supplying technology to a wide range of customers
as well. |
