Lots of VRSN here:
September 8, 1999 (WSJ)
Heard in Texas:
CustomTracks Has a New Identity,
But Analysts Wonder What Else
----
By Jonathan Weil
At $36.375, shares of CustomTracks are down 60% since their all-time high in
May. But don't bother figuring out the reason for the drop. The real question is:
Why are they worth this much?
For an outfit with a market value of $556 million, the Dallas Internet-security
start-up doesn't have much to show for it. CustomTracks isn't selling any products
yet and hasn't reported any revenue during the past three quarters. The company
is on its third business plan in 18 months. And later this month, CustomTracks will
change its name for the second time since June 1998, this time to ZixIt. But that
hasn't stopped investors from creating a frenzy around the stock, which is up
561% in the past year.
"What we're looking at is a company with no products, just claims of
products," says Greg Jones, an analyst in Jackson Hole, Wyo., for briefing.com, a
Boston-based online securities-research firm. "Why would you give them a
half-billion-dollar market value on just the basis of a promise? They're on their
third business, and I don't see why we should be persuaded they're going to be any
more successful here."
Fans say the main draw is its chairman and chief executive, David Cook, founder
of Blockbuster Entertainment, who they believe can strike it big again. After
taking over the company in March 1998, when its main trade was electronic
security systems, Mr. Cook quickly proceeded to sell off all its businesses, which
had been perennial money losers. By August 1998, the company's focus had
changed to distributing music online. That didn't last long, though, once the
company realized it couldn't sign enough exclusive distribution agreements with
major recording labels.
In February, CustomTracks changed course again -- this time to encryption
technology for secure electronic mail and e-commerce transactions. After some
delays, and more than 20 news releases describing plans for various new
businesses, CustomTracks now says its ZixMail product will be released within a
couple months, while its e-commerce system, ZixCharge, is slated to roll out next
spring.
One thing is clear: If CustomTracks can't sign some major customers soon, its
shares could be in for a dramatic fall. Bears have taken notice, too. About 22% of
freely tradable shares are held by short sellers, who sell borrowed shares in hopes
of replacing them later at lower prices. That's up from under 5% in May.
Analysts' skepticism stems largely from the fact that the Internet-security
industry's leader, VeriSign of Mountain View, Calif., already has signed up
150,000 Web sites as customers -- including all of the 40 most heavily trafficked
e-commerce sites, as well as most of the world's 500 largest companies -- and that
nearly all Web browsers today are compatible with VeriSign's digital certificates.
The digital certificates sold by VeriSign basically ensure that two parties
communicating with each other are who they say they are. For instance, an
Internet user who orders a compact disk from a Web site that uses the encryption
software can be assured that credit-card numbers will get to the right merchant,
and to that merchant only.
But Mr. Cook insists that CustomTracks isn't trying to compete with
VeriSign, and indeed the company is taking a different approach to Internet
security. CustomTracks bills its ZixMail product as the first encryption system
that can be used with any e-mail system or address -- including free services
offered through widely used Web sites like Hotmail and Yahoo!. (Users would be
charged $1 a month to send secure e-mails using ZixMail.)
And on the e-commerce side of the business, the company is developing a virtual
clearinghouse so that no unauthorized party could access Web users' credit
information. With ZixCharge, merchants would be linked to a payment-processing
center run by CustomTracks, which would contain customers' financial data from
credit-card companies and financial institutions.
Customers' transactions would be placed through the ZixCharge center and
would be anonymous -- that is, a merchant wouldn't know who was placing an
order, only that CustomTracks was arranging for the payment. In exchange for
processing the transactions, CustomTracks would receive a percentage of sales
made through ZixCharge, part of which would then go to credit-card companies
or banks as inducements to sign up. The goal is to keep users' information from
being stored on merchants' servers, which themselves may not be secure from
intruders.
According to Mr. Cook, it's ZixCharge that offers the greatest potential, though
he also is counting on ZixMail to be a large revenue generator.
Yet analysts see two big problems with CustomTracks' approach to
e-commerce security. VeriSign's software already has gained widespread
acceptance among merchants. So even if ZixCharge is superior to the current
practice -- where consumers give their credit-card information to merchants
directly over the Web -- they say the company may have a hard time persuading
customers to use the system. "It's going to be very difficult for CustomTracks to
compete," says Daniel Rimer, an Internet-security analyst at Hambrecht & Quist
in San Francisco.
And questions remain over whether consumers are ready to trust sensitive
financial information to yet another intermediary, as CustomTracks is proposing.
"They're saying 'trust me,' and that's dangerous," says John Puricelli, an
e-commerce analyst at A.G. Edwards & Sons in St. Louis who follows VeriSign.
Mr. Puricelli believes financial institutions and customers alike should be wary
about sharing credit and account information with any outside security company.
Mr. Cook dismisses the privacy concerns, explaining that individuals' financial
information already can be accessed by so many companies that consumers won't
be bothered by another one -- if they're even aware of it -- particularly if
ZixCharge is recommended to them by banks or credit-card issuers. He also says
he's tired of the comparisons with VeriSign. Rather than try to sign up
e-commerce merchants one by one, as VeriSign has done, CustomTracks is
pitching its system to credit-card companies and banks first, in hopes that
merchants, and then customers, will follow.
But the company hasn't signed up any financial institutions for ZixCharge yet. Mr.
Cook says CustomTracks has had talks with several companies, including
American Express, Bank of America, Bank One's First USA credit-card unit, and
Citibank. While Mr. Cook is optimistic the company will land contracts in the next
few months, he offers some frank advice to investors. "If we don't get some
financial institutions signed up by the end of the year, sell your stock," says Mr.
Cook. He says he figures if the company can't sign any by January, it would be a
sign that financial institutions don't want the product.
Mr. Cook also says he's perturbed by the stock's recent volatility. While no Wall
Street analyst has initiated coverage on CustomTracks, a little-known securities
analyst in Boca Raton, Fla., did send its shares soaring to $90 in May after issuing
a report that included a 12-month price target of $230. David Weinstein, research
director for Joseph Charles & Associates, distributed the "strong buy"
recommendation over press-release newswires, which spread rapidly through
Internet message boards perused by day traders.
Mr. Weinstein says he came up with his price target after concluding that
CustomTracks might eventually sign up as many e-commerce customers as
VeriSign and therefore should have a similar market value. Mr. Cook was none
too pleased though, either by the price target or the VeriSign comparison. "That
price target was so out in left field," says Mr. Cook, who says he has asked Mr.
Weinstein, to no avail, to stop issuing news releases touting his reports on
CustomTracks. "I like the guy. I just wish he'd stop issuing press releases about
our company," he says.
Mr. Weinstein, who owns CustomTracks stock but declines to say how
much, says he stands by his lofty price target. |
