William - what do you think of NetZero. Let's see:
>$15 million in losses
>Totally reliant on web advertising for revenue
>Expects mounting losses for the foreseeable future
>Plans to raise $100 million via IPO - Offering 10 million shares at $9 to $11 a share.
>100 employees - CEO from Einstein/Noah Bagel, CFO from Morgan Stanley Dean Witter
>Oh yes - 1.7 million subscribers - all of whom pay $0.
Is it a buy? -Eric
thestreet.com
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NetZero Rolls Free-ISP Dice With $100 Million IPO
By Kevin Petrie
Staff Reporter
9/8/99 8:38 PM ET
SAN FRANCISCO -- After winning half a million subscribers in two months, NetZero is placing a heavy wager on the appetite of Wall Street for its initial public offering expected this month.
NetZero plans to sell a whopping 10 million shares and raise roughly $100 million in an IPO underwritten by Goldman Sachs, according to filings with the Securities and Exchange Commission. Goldman expects to price shares the evening of Sept. 23 and start trading the next day. Unlike conventional ISPs, NetZero connects users to the Internet for free and instead counts on advertisers for revenue.
In July and August, NetZero grew its subscriber base to 1.7 million from 1.2 million, NetZero said in amended SEC filings. That surpasses its rivals MindSpring (MSPG:Nasdaq) and Earthlink (ELNK:Nasdaq), each of whom have roughly 1.3 million paying subscribers. This summer NetZero has more than doubled their recent growth rates. NetZero's suggested market capitalization would price each user at $612, still less than half the valuation of MindSpring.
While NetZero is often treated as a backup service, its actual visitors did jump to 891,000 in August from 613,000 in July. The sheer number of eyeballs garners respect even from money managers who are skeptical of free ISPs.
"They're growing pretty quickly, and that is exciting," says Mike Dubrow, analyst with New-York-based Jacob Asset Management in New York. Dubrow says serious growth in advertising revenue might lag by a quarter or two, and he seeks more details about the habits of NetZero's customers.
The company could certainly use the IPO money. It posted a $15.3 million net loss last year, and expects losses to increase -- not simply continue -- "for the foreseeable future." NetZero intends to spend the funds on working capital, capital expenditures and possible acquisitions. Restricted by a "quiet period" prior to the offering, NetZero officials declined to comment for this story.
To raise the cash, NetZero is offering a float larger than many successful Net IPOs. Most Internet companies have sold less than 6 million shares in their IPOs, perhaps to tantalize Wall Street. "What has really kept this market alive has been the smaller deals which never satisfy the demand," says David Menlow, editor of IPO Frontline, a newsletter for individual investors.
By betting on a higher demand, NetZero is following the example of the e-commerce site priceline.com (PCLN:Nasdaq), which sold 10 million shares at 16 in March and watched them quadruple on the first day. Priceline then ran to 160, and has since settled at 63. Less encouraging was the IPO of NYSE floor-trading "specialist" firm LaBranche & Co. (LAB:NYSE), which issued 10.5 million shares at 14 last month and has since seen them slip underwater.
So NetZero is wagering that investors like eyeballs, but in short order it must turn the eyeballs into dollar signs. Both its audience and ads are increasing: In August, 891,000 users accessed NetZero and were delivered 1.2 billion ad impressions. In June, 613,000 visitors watched 830 million ads.
NetZero can expect more and more advertisers to demand "performance-based" contracts. Forrester Research predicts that by 2003, half of all online ads will be priced per click, per lead or per customer.
For example, Fleet Credit Card Services has bought ad impressions from NetZero and has agreed to pay extra for each customer it wins through NetZero's advertising window on the PC screen. NetZero has committed to delivering a minimum number of credit card accounts.
Chris Jenkins, president of the ISP ZipLink in Lowell, Mass., says such "sales commissions" will become the norm. Free ISPs can thrive, he says, if their users make just one or two expensive purchases per year.
Goldman is promoting a big deal. NetZero will have 102.9 million outstanding shares. At the suggested valuation of roughly $1 billion, or 9 to 11 per share, the WestLake Village, Calif.-based company would be valued at roughly 224 times its revenue of $4.6 million in the year ended June 30. MindSpring and Earthlink trade at 8 and 6 times revenue, respectively.
To be sure, two-year-old NetZero, with barely 100 employees on its payroll, remains an unknown quantity. It is late in its Y2K preparations. The management team lacks proven entrepreneurs. NetZero CEO Mark Goldston also was CEO of Einstein/Noah Bagel (ENBX:Nasdaq); he brought it public in 1996 and left in December 1997 after the stock had fallen 80% from its highs.
However, at least one NetZero manager knows how to gauge investor demand: CFO Charles Hilliard is a former investment banker with Morgan Stanley Dean Witter.
Meanwhile, NetZero is spreading fast, and at the suggested offering price its customers will be valued cheaply. Overall, the company seems to have the ingredients of an exciting Internet IPO. "For the initial push," says Menlow, "these stocks are the premier source of adrenaline."
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