956- 9:UQAM-BAN(60@ION KUdtgf@UN @ltrHtN@
BancBoston
Robertson Stephens
October 6, 1998
CMG INFORMATION SERVICES
Initiating Coverage ofthis Internet Incubator with an LTA Rating.
Keith E. Benj@ CFA (415) 693-3285 kelth-behiamin@.com
BANCEOSTON ROB SON sTr;ptfE BANCBOSTON ROBERTSON STEPHENS
CMG Information Setvlc*o CMC4 $49 Y4 ioletee
Industry: Wefntt
CHANGE IN.. YESINO WAS 13 Keith E. @tkin 416 603 3285
-Roung: Now LTA Mchdefom"m 415 893 3514
... EPS FISSO: Actual $0.76 FYJULY Fl$$aA-EILUE F200OF
... EPS F199SE: Now ($1.72) EPS:10 50-131 (30 63) ($0.3T)
--. F2000E, New fsl."@ 20 (SO@29) (30.45) ($0.41)
52 Week Range: Sol.75-13.53 30 1 0. ($0.37) ($0.44)
24.7 40 $I")@
FO Shares Outstanding (MM): .2T@ ($0.36) ($0.48)
Mari(et Cap: $1.226.8 Year $0.76 ($1.72) ($1,70)
Avg Daily Volume (OOD): 007 PIE MM NM NM
7/98 Bk VaILWSh: , $4.76 CY (SO,26) ($1,52) $ (1.99)
7196 Tot DebIfTot Cap; 12% CY PIE Net NM
199SE ROAE: NM Revt($M): F1927A _ FIOOBE Fioggt
PricelSook Value: 10.4x IQ $25.11 $35.01 $68.0
Nat Cas@h: si.061 20 $17.6 $42.0 $76.0
oi4i@IW: 0% 30 $20.4 $52.0 $84.0
13-Yr SiK Omwtti RI: NM 40 $28.1 $60.0 $92.0
Year $91.6 $169.0 $320.0
Ukt CantRoy 13,4x 6.Sx S.gx
Key Points.
CMGI is a portfolio of more Um 20 Internet investments focused on four themes: direct marketing via dw InMme@ Web communities, @comm@ and IntcMCC Outsourcing.
We value the company on an "Asset Value," or Sum-of-the parts basis. WC estimate the asset Value is roughly S46 per sham although we see the potential for upside dependent largely on a favorable IPO market.
· Mawement is well informed through various powers and invrs4ncnts, in our view. We view this as important in the search for valuable investments in an increasingly competitive vcnturt capital environment.
· Man3gemenx's investment track record has been strort& with more than half of the company's investments achieving greater than lOx ratunu and only one losing money.
· We believe there may be five IPO candidates in the portfolio for the first half of L999, which could increase our asset value estimate.
Several operational catalysts at portfolio companies could increase our asset valuation and target price. Although a strong IPO environment is important for the stock. by selling two companies to
Amazon.com and one to Holly"od Ent@itunmt, management has demonstrated flexibility in pursuing aimmative liquidation strategist
Based primarily on weal [PO conditions, we art initiating coverage with a LAg-Tcrm Attractive rating.
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BACKGROUND
CMGI is an incubator for Internet investments. The company has a portfolio of mom than 20 investments, both wholly-owned subsidiaries and venture investments made through its venture capital arm, @Ventures. Nearly all of the companies in the portfolio arc positioned to benefit from CMG's four investment themes: direct marketing via the Internet, Web conununities, Internet outsourcing, and
@mmerce.
Theme 1: Direct marketing via the Internet - extending traditional marketing and advertising models to take advantage of the one-to-one capabilities of the Web. @ goal is to present consumers with products and services they desire individually in such a way that a purchase or other next step is readily at hand.
Theme 2: Web communities - involves layering interaction-oriented enhancements atop basic Web sites to keep users coming back. The first layer is readily familiar to most - email. On top of email, a connnunity could add message boards, chat rooms, and finally a chance for members to create their own Web sites.
Theme 3: Internet outsourcing -we believe many companies will outsource funcfions such as Web site hosting, Internet access, and product fulfillment. These services will be valuable both to young Internet companies and more mature businesses seeking to extend a marketing presence onto the Web.
Theme 4-. E-commerce - this includes both entailing companies and others that will seek to facilitate transactions on the Web.
Structure
The basic idea behind CMGI's stock is that, much like a closcd-end mutual fund, its price should reflect the aggregate value of each of the underlying investments. As the portfolio companies grow, so should the asset value and the stock price. While fundamental developments at the companies are important, the most direct effect on CMGI's stock will be from the IPO environment, in our view. Large post-IPO price increases in the stock of Lycos and GeoCities and subsequent appreciation in CMGI are examples of how a strong new issue market can be positive for the stockt Conversely, the decline in CMGI over the past two months, in one of the weakest IPO markets in recent history, highlights the downside risk.
Subsidiaries
CMG has six wholly-owned subsidiaries focused an the Internet. Each was started by CMG
management to address a specific need in the market place. We believe at least four of @ subsidiaries - Engage, NaviSite, NaviNet (recently split off from NaviSite), and Planet Direct, all have prospects of becoming sumg fiwwhises in their respective areas.
There am also two subsidiaries that are focused on CMG's direct marketing origins: CMG Direct and
SalesLink. The latter is much bigger and by our estimate comprises approximately 20% of the total value of the company.
Twenty percent of the equity in each subsidiary is set aside for issuance to the subsidiary's management
team in the event of an IPO or sale. Therefore, in d@ving our asset value, we dilute our estimate of the value of each company by 20%.
BancBoston Robwwn Stepheos
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Venture J'nvesimetgts
The company's @Vcn@ arm has minority investments in more flm 15 Internet companies, including GeoCities (which by our estimate represents about 15% of CMGI's value), Lycos (6%), several private companies. These invesmmts are w=tured with a carry on profits reserved for the fimds' profit partners. @Vent=s has raised and fully invested two funds to date, @Venwms I and 11, and @VenWms HI is almost ready to close. I and 11 were SI OO million funds with a 22.5% carry for I and a 20% carry for II. CMGI supplied most of the capital for each of these. @Ventures M should be approximately $200 million, with CMGI putting up approximately 2DO/o and the rest coming from outside investors, who nearly always provide some strategic value.
We believe ft practice of selecting strategic investors both for the funds and as co-investors outside the funds highlights an important aspect of the CMG mq. We believe that the company's network of investments, subsidiaries, and partners is a reliable toot for gamering timely information on Web developments. We believe entrepreneurs recognize this and therefore may seek CMG @Ventures out as a backer, sometimes at below-market valuations. Further, we believe that being in the center of this information mix allows CMG management to make sound and timely investment decisions.
PARETO SPEAKS: MOST OF THE VALUE COMES FROM A FEW lr4VESTMENTS
We have included 16 of the more than 20 CMG companies in our asset valuation, which is detailed near the end of this report. Eight of the companies contribute more than $2 each to the valuation, and together these eight comprise approximately 85% of the total value. They include three public companies - Lycos, GeoCities, and Hollywood EnterWnmen@ and five private ones - Engage, NaviSite, NaviNct, Planet Direct, and SalesLink. Below is a short discussion of each, Nvith the dollar amount of the contribution to our S60 target price shown in parentheses.
Note-. The company does not disclose operating results of its subsidiaries or venture investments. Therefore, while our valuations of public companies are based on market prices, the rest are only educated guesses.
Lycos (LCOS $31-15/16) (CMG owns 7% through @Ventures) (worth S8.50
0 "'e @e) Based in Mariborougk MA, Lycos is one of the leading scarch/directory =onp@e Web, as
measured by @ic. It falls under the major CMG investment theme of Web conununifies. Ile company has been expanding its reach through cobmnded sites with other Internet service companies. The compariy's services are free and include the Lycos Catalog, a comprehensive index of Web sites, the Oz Directory, a general-interest browser and Point Reviews, a source of editorial reviews and ratings of popular Web sites and activities. Lycos generates most of its revenues by selling advertising space on its services and by licensing its products and technology.
Lycos has been mahng a conceded effort to reach more people through direct marketing, joint ventures, licensing and acquisitions. We suspect a key element may be greater personalization features offered through the network. The futest growing sites on the Web have been build-your-own-homepage communities, like recently acquired Tripod and Angelfire. These appear to kttract visitors and keep thmn on site longer, generating more rec@g page views. This community element was one of the key's to AOL's success, in our view. As such, we believe Lycos has put together the right package to build its brand, although the rewards for being number one in this space are huge, and Yahoo! seems to be at least maintaining its lead on LCOS and XCIT. We recently upgraded Lycos to Buy fromlongTerm Attractive. Potential catalysts for the stock include increased page view market share as the brand gets stronger and the potential for partnership with a major traditional media company.
BancBoston Robertson Steph@ 2
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GeoCities (GCTY $18-1/4)(CMG owns 3 10/0 through (Zvcnmms) (6;50)
GeoCities, based in Sant& Clara, California, is also one of CMG's Web community investments. 'fhe company is building a brand and con=unity by leveraging low-cost member-generated content, it is one of the five biggest sites on the Web in terms of traffic, and we have been impressed with the company's ability to grow page views and registered users. The network of sites currently touts 20 million pages of personalized, member-generatl-d content, 2.5 million members or 'homesteaders', 15.5 tWIlion unique visitors, and more than 30 million average daily page views.
In our view, the biggest challenge facing GeoCifies is monetizing the impressive @c. Clearly, the company has struck a viable formula for building community and growing frequency of use on its network. We wonder how successful the company will be in selling the inventory, however. It remains to be seen how eager advertisers will be to pay for a spot on '@'s Spice Girls Page", for instance.
GeoCities recently went public with a flourish, although the stock has settled in since then. Over the Short term, we would expect the stock to trade in line with the Internet group.
Hollywood Entertainmtnt (HLYW $II) (CMG corporation owns 5% from sale of Ree ".30) Hollywood, based in Wilsonville, Oregon, is the second largest video rental ch4in in the'josm) 'Me
company is growing rapidly, with more than 1,000 land-based stores in the U.V. and opening approximately I store per business day. It is also investing aggressively in a Web movie store, which we believe has a chance to become a significant player in that area. Even in the face of a future involving video-on-deinand, we foresee years of cash flow growth through market share pins. One of the reasons we believe Hollywood will be able to compete on the Web with Amazon and others is that it does have a network of land-based stores with which to cross-promote the Web site.
CMG became the owner of 5% of HLYW stock when it sold its stake in Reel.com, a Web-based movie store, to Hollywood in mid- 1 998. Coincident with the sale of Reel.com for HLYW stock, CMG and other Reel.com investors including Paul Allen purchased additional HLWY stock.
KLYW stock has been relatively flat in recent months as investors contemplate the future of the video rental and sale business. It is important to note that selling videos now accounts for about half of this segment, where rentals used to dominate. We believe that the combination of Hollywood and Reel.com has good prospects for success as people collect more movies. Yirst, the Hollywood base business throws off cash to fuel the online business. Also, the Internet distribution channel provides an effective outlet through which to sell slightly used movies that stores ovcr-otdered wh'en they were new releases, thus solving one of the major problems for businesses like Blockbuster and Hollywood. We believe there is upside potential to RLYW stock if consumers start buying the used movies online.
Engage (wholly-owned CMG subsidiary) ($4.90)
Engage, based in Andover, MA, is a promising company, in our opinion, focused on the future of direct marketing via the Internet, another of the key CMG themes.
T'he market for companies involved with data collection, reconunendation software and ad serving is evolving rapidly. However, we believe Engage's ability to capture anonymous user pkofiles across many sites, and then to allow customers to serve targeted ads toftrst iime visitors based on those profiles, is a valuable service that will find a profitable place on this evolving competitive landscape.
Engage currently boasts more than 30 million profiles in its database, implying that fin Engage customer (Web site) has greater @ a 50% probability o@owing something about a visitor before the first page is downloaded. Through its recent acquisition of the Accipiter AdManager product line
BancBoston Robertson StepheT 3
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