Updated 03-Feb-99
NationsBanc Montgomery Securities Technology Conference
The NationsBanc Montgomery Securities Technology Conference is being held this week in San
Francisco. Two hundred nine of the country's leading technology companies are making
presentations to buy side analysts at the Ritz-Carlton Hotel through Thursday. Briefing.com is
attending the presentations. Here are notes from some of Tuesday's presentations. Comments in the
bulleted lists are paraphrased from the presentations. Briefing.com comments on the presentations
are presented after the bulleted lists.
Company Presentation Notes: EBAY, VeriSign, Intel, Intuit, ONSALE
EBay (EBAY)
EBay's presentation was given by Meg Whitman, CEO of EBay. The presentation was packed,
however, EBay has few institutional investors. Clearly attracted by the business model of EBay,
institutional investors are attracted to the company. However, at current valuations, few are buying,
but all are watching it.
EBay now has 2.2 million registered users
13.6 million items were listed in Q4, a 47% growth from Q3
Gross merchandise sold in Q4 was $306 million
EBay is the #2 on the internet in "usage minutes" behind Yahoo and 5 times the usage of
Amazon.com. Usage minutes is the total amount of time users spend viewing the site
New competitors are coming: Sotheby's, Millionaire.com, 2themart.com
EBay's goal is to improve the user experience, attract new customers
Will do this through new content programs, gift highlights, better search features, chat
rooms, EBay online newsletter: Goal is to build a sense of community
Will build better purchase experience: Verify Ebay users, using Equifax credit bureau
(details on how this works not given); provide insurance on transaction completion via
Lloyds of London; provide escrow services; now have stronger shill and deadbeat bidder
policy; have 24 people patrolling site continually looking for sale of illegal items
Expansion: International first place to expand: EBay UK just launched
Business Model:
Sellers pay $0.25 to $2.00 to list an item
Sellers can buy additional features, BOLD for $2.00, Prominent display for 14.95, Home
page rotation feature for $99.95.
Commission Fees:
Sales up to $25: 5%
Sales $25 to $1000: 2.5%
Sales $1000 and up: 1.25%
No upper limit on commission fees
Advertising revenue contributes less than 1% of revenue
Great advantage of wide customer base: No concentration of accounts
Strong advantages of this business model: Completely leveraged, no COGS, no inventory, no
product fulfillment costs or logistics. Strongest ecommerce model on the net
P&L Highlights:
Revenue
Current Percentages
Goal Percentages
Cost of Goods Sold (Product Support)
14%
15%
Sales & Marketing
42%
30-35
R&D
10%
9
General & Administrative
21%
12
Operating Income
13%
Non-cash Charges (primarily Stock Options)
12%
Operating Income, exclusive of NC charges
25%
30%
$72 million cash, no capitalized software
Briefing.com summary: EBay is probably the best business model on the Internet. In fact, it is a
license to print money, with unpaid customers as the operators. Revenue increases come through
the effort of others, with no incremental cost toEBay. This does not mean, however, that
Briefing.com recommends purchase of the stock. That's a completely separate issue.
Most entertaining part of the presentation: EBay showed a complete fluff video composed of media
clips and web site snapshots. Even had a clip of President Clinton saying, after being introduced by
Meg Whitman at some unidentified event, "I've been thinking what I could do after all this. I think
I could be a successful trader on EBay."
Verisign (VRSN)
Emphasized they are in the trust business, not the certificate business
Have three lines of certificate business: Server Certificates, Enterprise, Service Provider
Certificates: Now have 100,000 Web Sites using Verisign certificates; Top 25 ECommerce
sites all use Verisign; Cost is $300 per year/per server, subscription based model
Showed slide of certificate backbone overlaid on IP backbone: Want to be seen as integral
technology piece of the internet
Enterprise business: Issue certificates to client side in network transaction. To access a
corporate network, you need the Verisign certificate on your PC or laptop. Goal is to sell
these client side components to a company, to be issued to every employee in a company,
prevents hackers, tracks employees. Also can be used to allow supply chain vendors to access
your system
Cost is from $5,000 to $500,000 per year, subscription model, paid on per-user basis. Goal
is Fortune 10,000 companies (that's what he said, not Fortune 1000).
Service Provide Business: Sell certificates in wholesale style to service providers who are
attempting to build communities. Service Provider, such as data center, provides secure
environment for connected systems, such as corporate networks. Verisign does revenue
sharing on certificates as they are sold. (This is essentially a distribution channel for the
Enterprise business model of certificates) Initial costs are $250,000 to $1 million up front.
Data Centers: have relationships with 8 affiliates, building data centers. Immediate focus for
the future is developing the data center business.
Briefing.com commentary: The attempt to broaden the product line from server certificates to
enterprise and service provider business lines is clearly needed to provide a higher growth curve
for Verisign. The original business model of a per-server license simply doesn't provide a sharp
enough revenue growth for the long term.
Intel (INTC)
Presentation was given by Gordon Casey, CFO, instead of the scheduled Andrew Grove, due to Mr.
Grove's sickness. SRO as institutional investors hold a large portion of Intel's stock.
1998 Revenue growth of 5% lower than recent years,
EPS decline to $3.45 in 98 from $3.87, but Q4 earnings of $1.19 were an all time record.
Q1 98 was a sharp decline from Q4 97, but Q2, Q3, Q4 were steady upward
Business growth resumed in Q3, Q4
Segmentation strategy implemented: Pentium XEON for the hi end market, Celeron brand
for the lo-end
P6 architecture completed
Converted to 0.25 micron process, helps cost reduction
EPS growth attributed largely to cost reduction in manufacturing
Still the largest semiconductor manufacturer, by large margin. Intel Revenues at 22.7
Billion, next largest is NEC at 8.27 billion. NEC's revenue decline in 98 was (19.1)%. All
major chip manufacturers showed sharp decline in revenue, due to collapse of DRAM prices
Expectations for the future:
Lower sequential revenues in Q1, due to seasonality, not secular weakness
Gross margin will decline to 57% in 99, from 58.3%
Aggressive push at the low end is reason for Gross Margin decline
Expenses should be 2-4% lower, Q4 expenses were 1.6 billion
Capital Spending $3.0 billion, lower than in past, because building less office buildings,
purchase of Digital plants closed in 98, accounting for some of capital spending in the past.
Strategy for 99 is to have a 0.25 product for each market segment, vary clock speed, bus
speed, packaging, and scalability. Segments are server/workstation, performance desktop,
notebook, value PCs.
Goal for the future: Expand across segments, rollout Pentium III, develop 0.18 micron
process
Original Pentium line will end at 0.25
Pentium III announced 2/17, PCs with Pentium III ship end of Feb.
Briefing.com commentary: Overall, a solid presentation, with lots of financials for analysts. The
overall message is: expect a lower revenue growth curve, with slightly lower gross margin, but
with stronger expense control. Probably slightly positive overall for the stock.
Intuit (INTU)
Highlights from the presentation:
Revenue in Q4 was $117 million, +17% annual growth over last year.
EPS was (0.45) due to seasonality.
Traditional business line is Quicken/TurboTax/Quickbooks. New product line is financial
products, such as internet based mortgage origination, insurance sales, and internet based tax
filing and internet based payroll processing
10 million cumulative Quicken users, 3 million cumulative TurboTax users, 2.5 million
QuickBooks users
Now have segmentation of all products: $25, $50, $70, $90 versions of Quicken. 75% of all
Quicken revenue comes from the higher priced products
Internet tax filing system allows for TurboTax output files to be submitted online, for a fee,
with faster refund as result
Also available: 1040EZ complete internet based filing. Only browser required. $9.95 fee
Internet Payroll business: leveraged off of QuickBooks: Allows Online payment system,
automatic deposit in employee accounts, automatic employer tax payments: Will
revolutionize payroll systems. Costs 1/3 traditional systems (meaning ADP)
Quicken.com Internet site: Page Views 120 million in November, growth rate 225%
Reach at Quicken.com is 5% of all Internet users.
72% of users visit Quicken.com every day.
94% of users make online financial transactions; average income is $93,000.
Internet Based Financial Services:
Mortgages: $225 million originated in Q4
Insurance: Don't have registration yet in all 50 states, but currently reach 45% of the
population. No numbers given for insurance sales
TurboTax filings: Electronic filing gives them a per-user fee model, instead of per package.
Leverages the fact that multiple filings can be created with a single TurboTax package.
Briefing.com commentary: Bill Harris, CEO, gave this presentation to a SRO crowd. Intuit, over
the past two years, has managed to transfer its image from a software vendor to an integrated
financial services and internet company. However, the promise of revenues from the additional
business line are still not fulfilled. The mortgage origination figure of $225 million represents only
1,000 mortgages, if the average size is $225,000. While impressive as a raw number, particularly
for a quarter, the total commission revenue to Intuit is still pretty small as percentage of their
overall revenues. Notable in the presentation is the fact that no numbers were given for the amount
or number of insurance policies issued. If the number looked good, you can bet it would have been
mentioned. Also payroll based on internet system is great idea, but with ADP and PayChex as
competition, it is not open territory, as are most internet businesses. At 1/3 the cost of ADP it is
efficient, but ADP at the low end is not that expensive, and the company must use QuickBooks. The
most likely customer base is the current QuickBooks user base, which is still good incremental
revenue, but they are not likely to be a threat to ADP.
Note: Briefing.com has a business relationship with Quicken.com. Briefing.com information is
reprinted on the Quicken.com site.
ONSALE (ONSL)
Well attended presentation by Jerry Kaplan, CEO. Interest probably higher than at previous
conferences because of ONSALE's recent announcement of "At-Cost" product sales of new
equipment, in addition to existing product line of auction of close-out or refurb equipment.
Two lines of business now: Auction and At-Cost
AT-COST business is transaction fee based. Sells new computer equipment, supplies
Transaction fee is $5 - $10, Cost figure is verified by PriceWaterhouse, auditors
Shipping Fee also added, has a profit component
Credit Card processing fee also added, no profit included. 2.4%
Stated auction service did not meet needs of customers since inventory varied. Made analogy
to "Russian Store" where many shelves are bare, but when an item comes in, there are long
lines. This analogy got a lot of laughs
Revenue Sources for AT-COST business are: Transaction fee, shipping, advertising, Vendor
Co-Op, Rebates, Warranty sales
Takes legal title to goods sold AT-COST, but does not warehouse or personally ship.
Everything is drop-shipped from distributor.
AUCTION BUSINESS: Largest seller of computer goods on the internet. Bigger than uBid
Average customer buys 2.5 times, spends $750.
139,000 daily visitors, 1 million registered users
77% of all auction sales come from repeat buyers
Top 10% of customers spend $4,000
Top 1% spend $15,000
Top 0.1% spend $45,000 (Clearly business buyers)
Customer acquisition cost: $15 ..Gross profit per customer is $75 (10% margin on $750
average spending) Customer acq cost recovered immediately (unlike other internet sites)
Current financial model:
Revenue
100%
Gross Margin
9.7%
Sales & Marketing
3.7%
Engineering (R&D)
1.0%
General & Administrative
1.7%
Operating Income
3.3%
Revenue expansion possibilities: Membership fees (ala COSTCO), new categories of product
(expand beyond computers)
Fixed cost nature of business allows large leverage if additional products can generate new
revenues
Briefing.com commentary: ONSALE's move, announced just two weeks ago, to sell items at cost at
first seemed like a desperate act, viewed as a reaction to EBay. However, ONSALE now has to be
watched as a leading indicator of trends on the Internet, because if successful, it may change the
entire nature of retailing. The Internet's primary virtue is leverage, particularly for retail
products. Once you have built a web site, represented as fixed costs, incremental sales cost nothing.
Traditional sales margins were percentage based because there was (is) incremental cost to
producing or storing additional product. If ONSALE succeeds at selling AT-COST, will it force
Amazon.com to sell any book at cost plus a buck? Will Internet based retailing move to the
transaction model?
For any industry where leverage can be achieved by the internet, fee based retailing may be
possible. If a $60 shirt can be sold just as easily as a $20 shirt, do you need to make $20 profit on
the first, and only $7 on the latter? If you can sell the $60 shirt for $40 plus $2, you will sell more.
Fee based transaction retailing is so radically different from traditional retailing, ONSALE (and
BUY.COM) need to watched closely as leaders. If they can profitably survive, the pricing pressure
on other retailers may be enormous. We haven't liked ONSALE that much in the past, (primarily
because they took title and inventoried half of the auction items), but ONSALE now has to be on
everyone's watch list. Not necessarily as an investment, but as a litmus test for the entirely new
realm of internet retailing. |
