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Technology Stocks : Netscape -- Giant Killer or Flash in the Pan? -- Ignore unavailable to you. Want to Upgrade?

To: EPS who wrote (3432)	6/13/1998 6:43:00 AM
From: EPS	Respond to of 4903

Jun 12, 1998 Netscape (Nasdaq:NSCP - news) Phone: 650-254-1900 Website: netscape.com Price (6/11/98): $25 HOW DID IT FIND TROUBLE? When is a company with a 60% share of the market in a booming industry considered an underdog? When your nearest competitor just happens to be Microsoft (Nasdaq:MSFT - news) -- closing in fast. Netscape owned the Web browser market with its Netscape Navigator long before Microsoft introduced its Internet Explorer in 1995. Just as Windows 95 was rolling out with Microsoft's upstart browser included, Netscape went public. A few months later the shares were trading as high as a split-adjusted $85 a share. That is when Navigator lost its northerly direction. It got lost. For Netscape to shed half its value may have been understandable then. Microsoft was no Spyglass (Nasdaq:SPYG - news) , or any of the other makers of lesser browsers. But over this past year, when attracting eyeballs in large quantities has meant great sums of capital appreciation for just about every Internet-related company, Netscape has not only lagged the market, it has lost half its value yet again. Despite drawing nearly 23 million monthly visitors to its website, the company has been largely overlooked as a potential Internet growth play. It seems strangely similar to the personal computer market, where the two companies that created the market in the first place, IBM (NYSE IBM) and Apple (Nasdaq:AAPL - news) , proved to be poor investments relative to the nimble imitators over the past decade. But is Microsoft nimble? Hardly. However, by taking advantage of its operating system dominance, it has found itself a captive Windows audience and has managed to ink lucrative browser deals with the likes of America Online (NYSE:AOL - news) . While the legality of Windows 98, once again featuring Internet Explorer on its desktop, is in question, the story here is with Netscape -- the once headstrong Wall Street darling, the company whose Chief Technology Officer graced the cover of Time barefoot. Maybe he was readying himself to walk on hot coals -- because it has been one painful trip since then. Error 404, browser popularity not found. BUSINESS DESCRIPTION California-based Netscape's proprietary software, Netscape Navigator, allows users to surf the Net once they have logged on through an Internet service provider. The company is also concentrated in the applications server market and has recently made new deals for ventures ranging from electronic commerce to networking. FINANCIAL FACTS Income Statement* 3-month sales: $127.2 million 3-month income: $0.00 3-month EPS: breakeven Profit Margin: N/A Market Cap: $2450 million (Netscape recently changed its fiscal year for financial reporting purposes. The numbers here are for the 3 months ended Apr. 30, 1998.) Balance Sheet Cash: $96.1 million Current Assets: $372.6 million Current Liabilities: $227.5 million Long-term Debt: $0.2 million Ratios Price-to-earnings: N/A Price-to-sales: 4.8 (Based on annualized quarterly numbers) HOW COULD YOU HAVE SEEN IT COMING? The tumble from a frenzy-smitten $8 billion market cap to a $4 billion company last summer was not a surprise. As the company weathered, not taking advantage of its captive audience by more effectively selling the prime real estate on its popular home page, critics may have given the company an earful. But the potential alone should have kept Netscape in the hunt as investors flocked back to Internet stocks -- certainly not fodder to be cut to the $2 billion company it is today. However, at a time when most investors would overlook a money-losing "e-tail" venture reporting a deficit, when Netscape reported a quarterly loss late last year and announced 400 layoffs, shareholders got jittery. This was a growth segment, right? In today's market it will cost you two Netscapes to buy one Yahoo! (Nasdaq:YHOO - news) or eight Netscapes to equal the market cap of America Online (NYSE:AOL - news) . At its peak, one Netscape could have bought you both bellwethers. The recent demise is unfortunate, naturally, but a good indicator that even in a booming niche, dormant players will often miss the ride on the coattails. As Internet Explorer began to lock up prime partners, from America Online to Disney's Daily Blast, it became apparent that Microsoft was not content to place all its market share eggs in the Windows 95 and Windows 98 baskets. Microsoft's online service, MSN, has floundered despite having a heavy presence on its operating system software. That Microsoft is on the offensive to win the Web browser war should serve as a wake-up call to Netscape -- a call which, given the last few weeks of news, it is apparently heeding. WHERE TO FROM HERE?* The perfect example of how Netscape was not capitalizing on its home page popularity came when the company recently inked a $70 million deal with search engine specialist Excite (Nasdaq:XCIT - news) to sell advertising on a revamped Netcenter page. Netscape receiving the $70 million bounty for a two-year deal may have seemed nice -- until Excite, on its very first day on the job, managed to sell $21 million in advertising. As a portal clone of Yahoo! this may be a case of an innovator imitating an innovator, but Netscape is, for better or worse, now a multi-faceted company. A new Netscape is emerging. The company is now positioned as both a software provider and an Internet '"portal" service. It is shoring up its Web offerings and with My Netscape, Internet drifters will be able to find ABC News headlines, stock quotes, 3M (NYSE:MMM - news) Post-It Software notes, Macromedia (Nasdaq:MACR - news) animation programs and even IDT's (Nasdaq:IDTC - news) Net2Phone (which allows reduced-cost long-distance phone calls by transmitting voice from one's Internet connection) in one place. Netscape has lined up two dozen software partners to allow automatic updates from Netscape's site. Recently Netscape announced a deal with Bay Networks (NYSE:BAY - news) to deliver the first Directory-Enabled Networking (DEN) solution to the market. This cost-effective solution would link the administration of network hardware with enterprise-class directory software services. The company also continues to march ahead in the applications server market, and earlier this year signed a contract to license its electronic commerce software to banking juggernaut Citibank. This is not last year's Netscape, that's for sure. And, while some analysts may feel that the company is spreading itself too thin by specializing in too many areas right now, it got burned before by sleeping at the wheel in one niche. A little diversity and a new strategy might lead Netscape back into that northern course of yesteryear. -Rick Aristotle Munarriz (tmfedible@aol.com)

To: EPS who wrote (3432)	6/13/1998 7:17:00 AM
From: EPS	Read Replies (2) \| Respond to of 4903

Friday June 12, 11:50 pm Eastern Time Gates hits U.S. government's suit against Microsoft LOS ANGELES, June 12 (Reuters) - Microsoft Corp (MSFT - news). Chairman Bill Gates sharply criticized the government's landmark antitrust suit against the software giant in a letter to The Economist magazine. ''America's antitrust laws do not provide any basis fpr government regulators to design software products,'' Gates wrote in a letter to the magazine in response to an article it had published earlier. The letter was posted on the magazine's Web site. State and federal governments sued Redmond, Wash.-based Microsoft last month, arguing that the company had a monopoly in the operating system for personal computers and had used it to compete unfairly. The lawsuit accused Microsoft of using Windows, the crucial operating software on most of the world's personal computers, to seize control of the software market for browsers to access the Internet. Microsoft has denied the charges. Critics have claimed Microsoft uses its dominance in computer operating systems to try to drive other companies, such as Netscape Communications Corp (NSCP - news)., out of business. ''Contrary to the government's central accusation, Microsoft planned the integration of Internet technology into Windows well before Netscape was even formed, and long before it shipped its first browser in October 1994,'' Gates said in the letter. ''The fact that our browser was integrated into Windows 95 from the outset did not in an way prevent consumers from choosing another browser,'' he said. Regulators have sought to force Microsoft to offer its latest operating system, Windows 98, without Microsoft's Internet browser or with Netscape's browser. ''We have invested hundreds of millions of dollars developing and promoting Windows,'' Gates said. ''We should not be forced to link Windows to software made by a competitor, whose quality we could not vouch for.'' He said the company was seeking to defend ''the legal right of every company to decide which features go into its own products.''

To: EPS who wrote (3432)	6/13/1998 7:22:00 AM
From: EPS	Respond to of 4903

Friday June 12, 8:12 pm Eastern Time New book describes early heroes of the Internet By Andrea Orr PALO ALTO, Calif., June 12 (Reuters) - No one can know how the world might be a different place today if a car full of college students cruising around Boston in 1993 had not swerved at the last second to avoid a crash with an oncoming truck. For those who believe in the power of the Internet to change history, the crash would have have had an enormous impact. Riding in the car was Marc Andreessen, who would later found Netscape Communications Corp., and all of his cohorts in a revolutionary project to bring the Internet to the masses. ''They all joked about it later,'' a new book about Netscape recounts. ''... how they had been a split second away from death, which definitely would have changed history.'' Founders of powerful high-tech companies are not always the most humble bunch, and can be prone to overstating their own importance. But ''Speeding the Net'' makes the claim by Andreessen and company seem almost plausible. The book goes back to the World Wide Web's modest beginnings, when it was such a small group of people who were seriously working on a browser, they probably all could have fit into a single car. WORKING FOR FUN AND PIZZA MONEY Long before the high-profile ''browser wars'' with Microsoft Corp., before Netscape made a stunning debut on Wall Street, there was just a group of college students working for kicks and pizza money in a basement lab at the University of Illinois. Sure, some others were working on browsers of their own. But those others were relying on arcane software, and had no notion of anyone other than a PhD student in particle physics ever going online. ''Speeding the Net'' portrays Andreessen and some fellow students as visionaries who turned the Internet into a medium for the average Joe, complete with pictures, graphics and even that little hand-shaped cursor that guided the dimwitted on how to use a mouse. ''When you look at the accelerated pace of how the Internet went from an obscure dusty corner of research to being an accessible new medium, it's wild,'' says Michelle Slatalla, a New York Times columnist who co-authored ''Speeding the Net,'' with her journalist husband, Joshua Quittner. ''Speeding the Net'' elevates to near-idol status the early players in the World Wide Web. It describes Andreessen as a programmer who wrote code ''with the same simple elegance that Hemingway had brought to prose.'' "WIZARDS WORKSHOP" STARTED BROWSER RACE Responding to those who argue the Internet was an idea whose time had come in the mid-1990s, Quittner says, ''I always have a hard time with the 'right place at the right time' argument.'' ''In retrospect, it seems inevitable and obvious, but there were dozens of people at the right place at the right time and it didn't seem obvious to them. Bill Gates is one of the smartest guys on the planet, and he rejected it out of hand.'' While Microsoft still had its sights set on less ambitious technologies, the group from the University of Illinois was charging forward with its Internet project. Andreessen and his team cobbled together an Internet browser that was crude and riddled with bugs but still far more advanced than anything in existence. It was enough to make the group minor celebrities in the high-tech world. They were invited to a ''Wizards Workshop'' in Boston, where they showed off their work, and later, driving back from a record store, had the close brush with the truck. As things turned out, the trip was fateful for another reason. It accelerated interest in the Internet and set off a race to bring a browser to market. Silicon Valley veteran James Clark recruited Andreessen and other students, along with Jim Barksdale -- the charismatic manager who played key roles in the ascent of Federal Express and AT&T Wireless -- to head the company. Their mission: create a commercial browser by the end of 1994. WRITING PROGRAMS THAT ARE "DEEP AND BEAUTIFUL" Some of the stories in ''Speeding the Net'' have already become a part of technology folklare: several programmers at Netscape slept in makeshift beds underneath their desks, and the chubby, pizza-inhaling Andreessen pledged to wear spandex, put on roller blades and eat tofu if the team made its goal. But Quittner and Slatalla also convey a deep respect for the people who write code for a living, and a conviction that the programmers are the true heroes in a story often overshadowed by the names of the large corporations involved. ''I don't think people understand what they do at all,'' says Quittner, who writes the technology column for Time magazine and runs an online news operation for Time. ''I was just in Germany looking at the cathedrals. These people are building cathedrals out of code, with programs that are hundreds and thousands of lines deep, and beautiful.'' With the recent reversal of fortunes at Netscape, Quittner and Slatalla had to adopt a marathon work schedule of their own to cram in all the latest developments in the browser business and still make their publication date. The end of the book covers the assault from the Microsoft browser, the ensuing ''browser wars'' and the controversy that led to state and federal antitrust lawsuits against Microsoft. The story of Netscape goes from one of astounding achievements to one about a scramble to survive. But the authors never lose their own awe for the company. ''I don't think bad decisions were made,'' Slatalla said. ''They were hit broadside by a freight train. The amazing thing is that they walked away from it at all.''

To: EPS who wrote (3432)	6/15/1998 5:02:00 PM
From: Ted Shelton	Read Replies (4) \| Respond to of 4903

Q&D Analysis - by the numbers Not necessarily a good way to base an investment decision, or value a company, but thought this analysis was interesting enough to merit a post to this thread. If you look at RelevantKnowledge (audience measurement company) for May, the public search engines have the following projected total audience figures (I have included AOL and CNET for completeness): (in ,000s) Yahoo/Four11 31,362 AOL.com 22,898 Excite Network 19,407 Netscape 18,890 (drop from 21,000 in April) GeoCities 13,988 Lycos/ Tripod 13,698 Infoseek 13,251 CNet 8,137 No one had as big a drop, by the way, as Netscape. Too early to tell if this is a trend or an outlyer - but in the meantime lets just treat Netscape and and Excite as roughly the same in size. Based on current market caps, there is an imputed value per visitor that the market has attached to each of these companies. Reasonably, as the market leader, there is a broad gap between Yahoo's multiple and Excite's. Excite, Lycos, and Infoseek are in a very narrow band. CNet, Netscape, and AOL all vary from the model, and their businesses vary, so this makes sense. If you were to assign a value to Netscape based just on their audience reach, and use Excite's multiple, they would be valued at the low end (based on May audience) at just $1.468 billion. At the high end (based on April audience) at $1.641 billion. Netscape likes to claim that the percentage of their users that are "business" people is higher than the net average. RelevantKnowldge actually does this analysis (I can't tell you the exact numbers without violating our license agreement)and according to them Netscape does not have substantially more people using there service from "work" than Excite. More but not substantially more. So the interesting question, if you accept that Netscape's "portal" business is worth around $1.5 billion is, what are their server and consulting services businesses worth? Based on the most recent quarter, NSCP saw $77 million in software revenue and another $55.2 million in services. Annualized, that would give them $308 million a year in revenue as a software company and $220 million as a service company. Anyone out there want to guess comparables for these categories of revenue? I'll take a first stab, hoping that someone else will come in and rethink this with more rigor (hey, I did the work on digging up the audience numbers :-) ) Here is an example of a software and services company that is in the Intranet business space -- Arbor (ARSW) with a market cap of $369 M. There total 12 month revenue was about $81 million (though they also had earnings of over 3 million for the most recent quarter). So their price to sales ratio is at about 4.6. Applying this multiple to NSCPs annual revenue (as I had projected above) gives them a valuation of $2.4 billion... without the web part of their business. So together, Intranet software company plus Internet media company would have a valuation of almost $4 billion... Now I admit that there are a lot of holes in this 15 minute analysis. But I think there is a shred of truth here - that based on market comparables, Netscape is undervalued right now. Comments?