Am a new kid here thanks to the recent Free SI thing. A few are playing COVD and DSLN here on the HOME thread and this article discussing DSL service providers COVD DSLN NPNT RTHM is worth a read.
figanin
All four with ugly charts right now:
finance.yahoo.com
biz.yahoo.com
Tuesday August 1, 11:08 am Eastern Time
worldlyinvestor.com Sector of the Day
DSL.net Runs into Trouble
By Mitch Ratcliffe, Columnist
Freefalling on analyst downgrades and wider losses, DSL.net is getting bruised playing with the big boys.
Ouch! It's what all the kids say when the little kid sails off the swings and lands in a heap on the ground. For youthful digital subscriber line (DSL) companies, last week's disappointing second-quarter report from DSL.net Inc. (Nasdaq:DSLN - news) was a painful thing to watch.
DSL.net, a provider of DSL services to small- and medium-size business in smaller cities, reported an apparently impressive 252% quarter-over-quarter revenue growth on a widening loss that increased to $23 million from $15.9 million in the same period. Three firms -- Deutsche Banc Alex. Brown, Frost Securities and Stephens Inc. -- promptly downgraded DSL.net and it sank like a rock during the Monday trading session. It lost 18.5%, closing at 4 15/16.
Despite the downgrades, the average 12-month price target for two of the analysts that ventured to speculate is 14. This is ridiculous, unless you believe that the tooth fairy is going to be depositing substantial sums under DSL.net's pillow.
Frost Securities, which overestimated DSL.net's revenue this past quarter by 39%, did not provide a price target and lowered its rating to a ``hold.''
Cap Doesn't Fit
DSL is a growth game, but the sheer number of subscribers already signed up with the leaders in the market puts DSL.net's growth into stark perspective: DSL.net has 6,100 lines in service at an average price of $255 per line each month. Covad (Nasdaq:COVD - news), the market leader with 138,000 lines in service, generated $131.5 million in revenue -- $317 per line each month.
Covad's market cap, $2.46 billion, dwarfs DSL.net's $322.1 million, because in the network business, leadership earns a substantially higher value than that of any follower. Northpoint Communications (Nasdaq:NPNT - news), the number-two DSL provider, had 41,300 subscribers as of May 15 (it announces its latest results on Aug. 8) and a market cap of $1.55 billion.
More importantly, scaling growth and network capacity are critical to the success of an ISP. Subscribers drive revenue, and if you cannot grow subscribers, the company will not be able to expand to reach more potential customers.
Effective Medium?
Before a DSL ISP can turn on service to a community, it must first install systems in the local telephone company's central office, essentially piggybacking on the existing copper lines to add their high-speed service.
Now, let's look at the fundamental difference between DSL.net and the top two DSL ISPs. DSL.net focuses on a subset of the telephone customers in any market it serves, instead of trying to sell through to everyone within reach of the local central office. Focusing on small- and medium-sized business in medium-to-small cities is an inefficient approach to this market.
Yes, they tend to spend more than home subscribers, but when it comes to DSL service, the early adopters in the home are willing to pay a pretty penny for fast Internet connectivity.
Covad and Northpoint serve business customers through their own sales forces and address the consumer market through reseller relationships with local ISPs that want to provide faster service. This lets them maximize the return on their investment in any local central office.
Small, but Inefficient
A major reason for the revenue shortfall at DSL.net was the long delay between orders and installation of service. This underscores the inefficiency of its business model. Reaching and serving small business in second- and third-tier cities is expensive work. The company must maintain more engineers on staff or contract to serve customers than a DSL provider that has addresses both the consumer and business markets in larger cities.
Consider that DSL.net's 12-month trailing revenue per employee for the quarter that ended March 31 was $24,914 while Covad saw its per-employee revenue approach $450,000. In other words, Covad employees are 18 times more productive.
With network providers you can pretty much draw a line under the third or fourth player in the space and count the rest as cannon fodder. In the case of DSL, Covad and Northpoint are the only billion-dollar competitors, with Rhythms NetConnections (Nasdaq:RTHM - news) bringing up the rear with a $942 million market capitalization. Then there is a sharp break, and none of the rest of the pack eclipses $500 million.
Positioning for a Sale
DSL.net can only expect to be acquired. With a book value of $228.8 million and so few subscribers, the company may bring -- if it sells at current lows -- somewhere in the $10 per-share range, or a total of about $650 million.
However, it has plenty of cash to operate for the next year and will likely do so to increase subscriber numbers and, by extension, valuation. In that case, and with an uptick in DSL valuations, DSL.net could very well sell in the 20s. In the meantime, the value of the leaders, which are selling for only 2.5 to 3.5 times DSL.net shares, will likely see values soar under those circumstances.
Overall, there's not enough evidence that DSL.net is growing its business effectively. Compared with the market leaders, it will underperform over the next year.
Ratcliffe is vice president and editor-in-chief of the ON24 Network, on24.com a personalized financial broadcast network for individual investors. He is also longtime executive and investor in the technology industry. Ratcliffe's insights and analysis of the high-tech industry will appear twice each week. |
