NetGravity interview by Darren Chervitz, CBS MarketWatch...
Company
NetGravity
Who We Talked To
John Danner, CEO
IPO Date
June 12
Offering Price
$9
Stock High
32 1/2
Stock Low
9 1/4
Last Update: 02:17 PM July 13, 1998
Profile: San Mateo, Calif..-based NetGravity (NETG) sells Internet
advertising management and targeting software.
Notable: The company sold 3.0 million shares at $9 each in the IPO,
within original expectations listed in the company's preliminary registration
statement. BancAmerica Robertson Stephens was the lead underwriter.
On Monday, NetGravity announced Internet auctioneer OnSale (ONSL)
would be using its product.
* * *
This is somewhat odd, but in the Internet world, the growth that
you experienced in the first quarter -- 43 percent year-over-year --
doesn't seem that impressive. What was the problem?
Danner: I think if you look a little bit under the covers at the way
NetGravity operates, where our growth really kicks in is as customers get
up and running, they buy additional servers from us.
And if you
look year-to-year '97 to Q1 '98, there were a tremendous amount of
customers added, but a lot of those were still basically in deployment
throughout the year. so we hadn't gotten to the point where we were
adding a lot of server licenses. That's really what our growth depends on
-- the growth of traffic of those sites and adding servers as they need to
target additional ads.
So, I think that 43 percent wasn't all that we would have hoped for, but
it's probably not too far out of line with the average growth that we were
seeing in our customer base. So this year, if you look at the analysts'
expectations, I think they're looking at 50 percent or so growth -- that's
pretty much 50-percent license and 50-percent services growth -- and
I'm pretty comfortable with that. That's about right.
I think we could probably be more aggressive than that, but that's kind of
mirroring the market in terms of growth rate.
For this quarter, you're seeing that kind of growth going on as
well?
Danner: I can't really comment on this quarter, but overall, I think the
customer base is growing properly. We do have strong customer
satisfaction right now. I feel pretty good about the way that the customers
have responded to our 3.0 product.
Obviously, winning new customers and gaining market share is
key to this game. There are a lot of competitors out there. Pricing must be
aggressive. I know that you guys reduced the price of your upgrade
product last year.
Danner: It's somewhat aggressive. The strategy is to make sure that we
continue to grow the market share with the big players. So when you're
talking about the top 100 content sites, the top two or three hundred
commerce sites, we're going to go try to get the business.
What we found though, in general, people aren't as price-sensitive in our
markets as in a lot of markets because the way we're selling the product is
based on the ability to target more effectively, etc. and grow their revenue.
So when we talk about payback period for the product, even at full price,
for the initial license, it's generally in the three to four-week time frame,
and that really keeps you away from the cutthroat pricing.
You've seen people like Engage Technologies, Accipter (CMGI),
basically drop their prices to nothing, and generally the customers don't
respond well to that in our market, because it means, how are you going
to fund your future R&D? It doesn't seem like a good strategy. So far, the
pricing pressure has been strong but not ridiculous.
Much of the growth that did happen in the first quarter came
from, like you said, consulting services to existing clients. That was not
good for margins which fell in half to 41 percent ... What can we expect
from margins and how much of an emphasis are you placing on the
consulting business?
Danner: The target model is 65 percent license, 35-percent consulting.
You see that we did a little bit more consulting in the first quarter --
around 60/40 -- because we were still in the period where we had added
a bunch of large customers and were trying to get them up and running.
So the consulting for us -- I wouldn't call it a loss leader, but it's certainly
probably a 30 percent margin business target, compared to our software
business, which is basically 100 percent gross margin. So, we want to
keep the mix at about 65-35, and I think that over the next couple
quarters, you'll see it stabilize at that point.
Now, in terms of overall gross margin for the company, when we get to
that point, you've got 65 percent that goes directly to gross margin, and
then as I said about 30 percent of the consulting goes there, so you should
see our gross margins stabilize in the area of 73-75 percent.
So it was significantly lower than you wanted in the first quarter?
Danner: Yeah, absolutely. We're still in building mode on the consulting
side.
The most obvious comparable to you guys is DoubleClick
(DCLK). They've pursued a fairly different strategy from the get-go, an
outsourcing strategy, and (DoubleClick CEO Kevin O'Connor) thinks
that all indications point to more outsourcing in the future as Internet
companies growing quickly don't have the time or desire to focus on their
own advertising management. Where do you see things going and what
kind of response have you gotten from your new outsourcing product
(AdCenter)?
Danner: I would say in general, there's not a very strong precedent for
outsourcing of the revenue-generating or mission-critical piece of
someone's business. If you look at an EDS (EDS) or someone like that,
there not as often outsourcing the sales automation piece or that side as
they are the back-office or HR financials.
So there's not really a precedent for somebody taking a core business
application and moving it outside. We do think in this world that there will
be a division between things that people consider critical to have tight
ownership over and things they don't.
We definitely see with our AdCenter product, there's probably a year
from now, a very good mix of software on site that gives the customer the
confidence that they've got the business-critical data, about the financials
and the reporting information, and they're able to outsource things like the
ad serving and the targeting. That's quite possible as a model. We haven't
seen a lot of the large sites move to that yet. We're certainly open to that if
it happens.
I would agree with you that DoubleClick has really pursued an
outsourcing-only strategy. and that that's really why if you look at the
breakdown of the large sites, NetGravity has a better share. I'm not going
to say that that has to be true for all time, but it's certainly true that the
large sites generally like to own that mission-critical information.
Is your outsourcing product competitive with DoubleClick?
Danner: We sure think it is. We have had very good success with it to
date, in really what's been a completely bring-up mode for us. As it starts
to mature, and we have some nice customer announcements coming in the
future, I think it will be fairly competitive. There's really no rocket science
in creating a service bureau, it's all the underlying technology that's hard to
do.
From your comments, do you think the DoubleClick Network,
where Web sites basically give DoubleClick ad revenue, is sustainable?
Danner: As I look at the market place, I think there's a definite place
for a network, for an aggregator like DoubleClick. Clearly, we believe in
that. We sell a product to networks; I think we've deployed about 30
other networks worldwide that are competitive to DoubleClick.
In the U.S., DoubleClick has done it with some of the lower-volume sites.
Internationally, we've done it in a lot of countries where the traffic just isn't
that high, so you've got an aggregator taking a bunch of sites and selling
them. So I think that's a good business.
The real question long-term will be, where do the margins end up going?
Is that a 30 percent margin business, a 50 percent, or a 10 percent margin
business. I don't even know enough about that business to really
comment, but it seems to me it ends up being an ad sales function, and
sites are just going to have to decide how much is it worth to have
somebody sell my advertising versus what I could pay to do it in-house.
I know Netscape mentioned your international business when
they signed you up as one of your strengths. What can we expect
overseas as far as NetGravity's business goes?
Danner: That's an interesting question because we are adding a lot of
sites overseas. We're kind of in the same mode that we were in the U.S
about a year ago where there are tremendous number of sites, telecom
companies, that are getting on the Internet and know that advertising is
part of their business. So we are selling a significant amount of software
over there.
I think if you look at Q1, it was 30 percent or so of our revenue. The real
key is traffic growth. So if you look throughout '98 and probably '99, I
would expect that the U.S. will continue to be a stronger piece of our
revenue. But long-term, probably two years out, my guess is that the
aggregate traffic in Europe and in Asia will start to mirror North America,
and we should end up somewhere close to a 50-50 split.
What about new products?
Danner: The one that we've discussed a bit is that we really believe that
there is a strong need within our customer base to do better and better
targeting and that that's not just a software solution.
To do better targeting, you need to move up the food chain and you need
better data to do better targeting. One of the things you'll see out of
NetGravity in the next year are more and more products or services
focused on providing better data to our users, so for example, a
geographic or demographic data service would be something you could
look for ...
It's an important business for us, because that's a transaction-based
business. Right now, we sell servers, and as their traffic grows they add
severs, but being able charge per drink on data access is probably a good
business model for us as well ...
Let's talk about the stock market and Internet stocks. A month
ago, investors thought you were worth 9 or 10 ... now you're at 24.
What's changed in a month to make that possible?
Danner: Obviously, NetGravity just benefits from the enthusiasm
toward the Internet sector in general. My interpretation of that enthusiasm
is that there have been a number of good results over the last couple of
quarters.
I think we've reached a level of critical mass in on-line users, and for the
advertising business in particular, that's extremely important because it
means that we're all seeing a much larger number of major brand
advertisers looking at the Internet seriously and spending some dollars,
and I think that will allow us to grow the overall Internet advertising
industry quickly. I think that underlying driver is one of the things that's
affecting Yahoo!, DoubleClick ourselves.
As far as our particular stock, why we've gone from 10 to 24 to this to
that, I really have no idea. My philosophy is that we're going to keep
building good products and making our customers happy, and the
market's going to do whatever it's going to do in the short-term. In the
long-term, we think we're building value, the stock will go up.
Are there enough customers out there for you? It seems like all
of the major sites are already using an advertising solution, from you or
DoubleClick, or one of your other competitors.
Danner: If you look at kind of Internet advertising, it should mirror the
global advertising business, where you've got 300 or 400 media
companies of any size, and then 3,000 or 4,000 advertisers. We're not
really worried about running out of total customers in the advertising
industry.
Our guess is that there are probably 3,500-4,000 large customers. So by
the time you get done with that, and adding to that traffic growth, that's
plenty of potential business.
That's why I don't worry too much about DoubleClick's model versus
ours. I think both companies are going to make a lot of money because
there's just a tremendous amount of companies that haven't done anything
yet (on the Internet) and need to get into the game because their
competitors are in the game.
Darren Chervitz is an online reporter and editor for CBS
MarketWatch. |
