Here's NBMO, but IMO MMPT isn't even CLOSE to DCLK:
Initiating Coverage with a BUY and a $38 Price Target.
-Initiating with a BUY and a $38 price target. Our $38 price target is predicated on a proposed
revenue multiple of 8x applied to our calendar 1999 revenue estimate of $53 million. This multiple
represents a 22% discount to the comparable group's 10.3x 1999 revenue multiple. We believe there
is upside potential to our conservative 1999 revenue growth estimate of 25%, but we remain
conservative to reflect the company's excess capacity post acquisition of Poppe Tyson.
- Leader in rapidly growing Internet E-commerce Services market. The company provides
"mission critical" creative/systems integration services to Fortune 500 companies seeking to
establish large-scale web-based points of presence to exploit the full range of web-based applications
from branding to direct selling and after-sale customer service and support. IDC estimates the
Internet and E-commerce services market to grow from $4.7 billion in 1998 to $22.1 billion by
2002 - a 48% compound annual growth rate (CAGR).
- Blue-chip client base represents large re-occurring revenue stream. The company has
approximately 34 domestic clients and 20 international clients, including blue-chip clients in the
financial services, communications, retail and electronics industries (the top 5 customers accounted
for 57% and 55% of revenue for 1997 and the nine months ended 9/30/98). Customers include AT&T,
Citibank, IBM, JC Penney, John Hancock and Sony. The company's established 1997 relationships
accounted for roughly 85% of revenue during 1998 and we expect this trend to continue.
Valuation and Model Discussion
Attractive Valuation. We believe Modem Media.Poppe Tyson's shares are currently trading at a
discount to the company's closest comparables which provides a good opportunity for share appreciation.
MMPT is currently trading at 6.1x and 4.7x calendar 1999 and 2000 revenue estimates of $53.3 million
and $70.0 million versus the comparable universe of 10.3x and 5.8x. We are establishing a $38 price
target representing a 26% appreciation from the 3/1/99 closing price of $30 1/8.
Price Mkt Val
Company Ticker 03/02/99 ($MM) C99E C00E C99E C00E C98E C99E C00E C98E C99E C00E
24/7 Media TFSM 27 321 (2.05) (1.11) -- -- 19 32 -- 16.9 9.9 --
Double Click DCLK 93 1,602 (0.86) (0.06) -- -- 80 131 267 20.0 12.3 6.0
Net Gravity NETG 21 276 (0.91) 0.05 -- -- 12 25 45 23.9 11.0 6.1
Sapient SAPE 68 1,955 1.05 1.51 65 45 160 253 378 12.2 7.7 5.2
US Web (1) USWB 35 2,367 0.43 0.66 81 54 229 400 560 10.4 5.9 4.2
AVERAGE: 18.7x 10.3x 5.8x
Modem Media.Poppe Tyson MMPT 30 328 (0.10) 0.22 -- 135 43 53 70 7.7 6.1 4.7
EPS P/E Revenue Revenue Multiple
Note: Estimates are NMS or First Call.
(1) USWEB EPS excludes merger costs
Model Basics. The following is an explanation for line items within the P&L and our assumptions:
- Revenue seasonality. We are modeling a 13.6% sequential decline in revenue from 4Q98 to
1Q99 ($12.1 million to $10.5 million). This decline reflects the recent acquisition of Poppe Tyson
and the conservative nature of our model.
- Increased amortization. In connection with the Modem partnership combination, True North is
obligated to pay the former owners of the Modem partnership up to $18.6 million as additional
consideration upon completion of the IPO. The amount will increase amortization of goodwill by
roughly $300k per quarter for the next 18 years.
- Taxes. The company is paying taxes, despite pretax losses, because of issues relating to its
foreign subsidiaries. The company's domestic operations are profitable, generating taxes
payable, but MMPT did not recognize a tax benefit from the losses on foreign subsidiaries and
amortization of goodwill is a non-deductible expense.
Key Selling Points
Leadership Position. Modem Media is a leading, full service provider of digital interactive
marketing solutions for Fortune 500 companies, and emerging companies with online business models.
The company has approximately 34 domestic clients and 20 international clients, including blue-chip
clients in the financial services, communications, retail and electronics industries. Customers include
AT&T, Citibank, Compaq, JC Penney, John Hancock and Sony. The company has won numerous
industry awards and currently has four offices in the U.S., three offices internationally (Toronto, Hong
Kong, London), and an affiliate in Sao Paulo Brazil.
Large, Rapidly Growing Market for Services. The demand for digital interactive marketing
services is expected to grow as consumers and businesses increasingly rely on the Internet for
communications, commerce and after-sale customer service and support. As large multinational
companies realize the complexity of implementing global Internet-based “points of presence” that
support the full range of marketing-communications functions, they turn to specialized providers of
large-scale digital interactive marketing solutions. We have seen dramatic evidence of this trend over
the past 18 months as the average size of larger engagements has increased from under $1.0 million to
the $5.0 million to $10.0 million range. The trend is toward concentration of revenue among market
leaders, as large companies reduce the number of Internet implementation providers at the same time
that they increase spending. For example, IBM recently reduced its number of such service providers
from 100 to 5, of which MMPT is a leader.
A December 1998 report issued by IDC estimated the U.S. Internet and E-commerce services market
growing to $22.1 billion by 2002. This large and rapidly growing market (48% CAGR 1998-2002) is also
highly fragmented. We estimate the largest player, IBM Global Services (IDC estimated 1998 Internet
services revenue of roughly $500 million), had a 1998 market penetration of less than 12%. We believe
as companies concentrate their Internet and E-commerce services spending towards fewer vendors,
there is significant upside potential for the market leaders to take share. Modem Media.Poppe Tyson,
with its larger referencable customer base of Fortune 500 customers, is well positioned to capitalize on
the trends within the Internet and E-commerce services market, in our opinion.
Table 1
U.S. Internet and E-commerce Services Spending
($ millions)
1996 1997 1998 1999E 2000E 2001E 2002E CAGR
$1,734 $2,912 $4,569 $7,009 $10,551 $15,604 $22,071 52.8%
Yr/yr growth 68% 57% 53% 51% 48% 41%
Source IDC, December 1998.
Large, Rapidly Growing Underlying Market. In the previous paragraphs we discussed the
company's main market growing at a 48% CAGR during 1998 through 2002. To understand why its
market is growing at a rapid pace, it is useful to analyze the underlying market trends driving the rapid
growth. MMPT provides mission critical solutions that enable the execution of advertising, commerce
and customer support on the Internet. As such, MMPT is both a driver of, and a beneficiary of the
dramatic growth in Internet usage, advertising, and commerce.
Table 2
Estimated Internet Growth Metrics
1997 2002 CAGR
Number of Internet users 75 million 320 million 34%
Business-to-business commerce $7 billion $330 billion 116%
Business-to-consumer commerce $5 billion $95 billion 80%
Online US advertising revenue
Source: International Data Corporation
$1.1 billion $5 billion (2000) 66%
Close Strategic Fit with Customer Objectives. In order to achieve strong revenue growth and
compete effectively for limited resource (dollars) it is imperative for companies to align their product
offerings with their customer's business objectives. We believe Modem Media.Poppe Tyson's product and
services offerings are well aligned with industry's near and long term strategic objectives. According to
an Information Week survey, Table 3 (missing in this post), E-commerce (#2), improving customer service
(#3) creating marketing advantages (#6) and organize and utilize customer data (#7) are top 10 objectives
for companies in the coming year.
Strong Financial Performance. Modem Media is expected to maintain its solid revenue growth
clip. Revenues in 1998 were $42.5 million, a 44.6% increase over full year 1997 revenues. In addition,
4Q98 annual run rate increased 11% over September's run rate. Revenues in 1999 are expected to
increase 25% to approximately $53.3 million. Modem Media's growth is organic; no acquisitions are
included in the company's projections. We expect the company will turn profitable on a net basis in late
2000, with EBITA break-even estimated for 3Q99. Importantly MMPT has shown the ability to migrate
multi-national organizations through MMPT's global presence. The company is increasing its share of
the customers worldwide spending, as evidenced by the rapid profitability increase in the London
operation (from $50k revenue per employee in 4Q97 to $98k per employee in 4Q98 on an annualized
basis).
Blue-Chip Customer Base. The company derives the vast majority of its revenue from a select
number of Fortune 500 companies. Key industries and clients include: financial services (John Hancock,
Citibank); communications (AT&T); retail (JC Penney); and consumer electronics and entertainment
(Sony). The company prides itself on building and enhancing its relationships with its clients over time:
JC Penney (10 years); AT&T (7 years); Delta (3 years) and Sony (2 years). MMPT recently ended two
high profile relationships: Compaq, in order to win the IBM business, and 3COM due to that company's
reluctance to commit to a large profitable engagement.
Experienced, Proven Senior Management. Modem Media's senior management team is
comprised of experienced business managers, with considerable experience in electronic media and
advertising. Gerald M. O'Connell co-founded Modem Media in 1987, was a Managing Partner through
1996, and is now President and COO. Douglas C. Ahlers also co-founded the company in 1987 and was a
Managing Partner through 1996, and now serves as the Vice Chairman of Technology. Bob Allen joined
the company in 1989 as Director of Business Development, became a Managing Partner in 1992, and
now serves as Chief Operating Officer. (See appendix D for more complete biographies)
TABLE 4
MODEM MEDIA.POPPE TYSON MANAGEMENT TEAM
Age Position
Gerald M. O'Connell 37 CEO, Director
Douglas C. Ahlers 38 Executive VP
Robert C. Allen, II 31 President, Director
Steven C. Roberts 37 CFO
Donald M Elliman, Jr. 53 Director
Donald L. Seeley 54 Director
Theodore J. Thoephilos 45 Director
Issues to Consider/Risk Factors:
Revenue Concentration. The company's five largest clients accounted for 56.8% and 54.8% of the
company's revenues in 1997 and for the nine months ended September 30, 1998, respectively. AT&T
accounted for 31.4% and 20.4% of the company's revenues in 1997 and for the nine months ended
September 30, 1998, respectively. Loss of a major contract could adversely impact operating results as it
is difficult to replace significant customers and grow revenue according to projections. That said, the
company has a proven track record of working with its larger customers over an extended periods of
time (JC Penney for 10 years, AT&T for 7 years, Delta for 3 years and Sony for 2 years)
There has been recent speculation that the company has lost the Delta Airlines business to iXL
which, according to management, is inaccurate. iXL is providing technical services to Delta such as
Intranet web applications and MMPT has always been on the marketing side of the Delta relationship.
The company is not changing its assumptions regarding the level of revenue contribution from Delta in
its internal projections.
Competition. The market for the company's services is very competitive and characterized by
pressures to incorporate new capabilities, accelerate job completion schedules and reduce prices.
Competitors include conventional advertising and marketing firms, project-oriented interactive
marketing firms and IT service providers. The primary competitors are: USWeb/CKS, Think New Ideas,
Organic, Agency.com, iXL, 24/7 Media and to lesser extent the traditional IT services providers such as
Sapient, IBM Global Services and Andersen Consulting.
Control by True North. True North (which owns all of the Class B stock with five votes per share
versus. Class A stock with one vote per share ) will have approximately 85% of the voting power post-IPO.
True North will also own approximately 53% of the company post-IPO.
Fixed Fee Contracts. Approximately 74% of the company's revenues during the nine months
ended September 30, 1998 were derived from fixed fee assignments. These engagements require the
accurate estimation of numerous variables before terms are reached. The failure to accurately estimate
costs (including anticipation of technical difficulties) would adversely impact operating results in the
event the company cannot negotiate fee adjustments.
Ability to Retain/Hire Talented Staff. The company's ability to hire/retain staff is crucial in
achieving revenue growth during the coming years. It continues to be a challenge to hire qualified
candidates, especially in the technology area. To date, the company has retained employees well despite
a recent merger, especially senior managers. That said, increased competition from rivals and a limited
applicant pool may limit the rate at which modem can hire qualified staff. The company's current
headcount is approximately 400.
Company Overview and Business Description:
The company provides "mission critical" creative/systems integration services to
Fortune 500 companies seeking to establish large-scale web-based points of presence
to exploit the full range of web-based applications from branding to direct selling and
after-sale customer service and support.
Market Opportunity. There are a number of trends currently stimulating demand for large-scale,
Internet-based marketing solutions which span the full "continuum" for advertising through direct
selling to aftermarket service and support:
· Need To Provide Large Scale Marketing Solutions in Support of World-Class Brands. Neither
traditional advertising agencies nor systems integration firms have the combined technical and
creative expertise, particularly as it relates to interactive implementations, to deliver optimally
effective Internet-based points of presence in support of world-class brands. MMPT has a full-service,
global network of offices to support this caliber of business.
· Increased Emphasis on Consistent Global Marketing for Brands. As companies extend brand
franchises into worldwide markets via the Internet, they require Internet-based points of presence
which will enable communication with customers in ways that are consistent with brand
positioning. The Internet's worldwide reach provides a cost-effective medium for implementing one-to-
one, interactive global marketing programs.
Company Fundamentals. The company as it exists today was formed in June 1998 to combine
the digital interactive marketing operations of True North Communications (the 6th largest advertising
agency) with certain of the strategic interactive marketing operations of Poppe Tyson (the London and
Hong Kong offices and the domestic operations related to serving three specific clients: Sony, Robertson
Stephens and the National Federation of Independent Businesses or "NFIB"). The company's
predecessor, Modem Media, was founded more than ten years ago (1987) by G. M. O'Connell (President
and COO) and Douglas Ahlers (Vice Chairman of Technology) to provide the first electronic commerce
applications and the first electronic, interactive marketing solutions and is the core engine of the MMPT
business.
By developing marketing programs that incorporate advanced communication technologies, the
company enables its clients to establish, retain and manage one-to-one customer relationships, design
and implement electronic business programs, and support and leverage its world-class brands.
Headquartered in Westport, CT, the company combines its substantial expertise in strategic marketing,
creative design and digital technology to deliver on a worldwide basis a complete range of digital
interactive marketing services, including the following:
- Strategic consulting and research - Website design
- E-business implementation - Interactive advertising/promotions
- Data collection and analysis
The company's marketing programs are designed to enable its clients to target narrowly-defined
market segments, provide its customers with detailed product and service information, sell products and
services and provide post-sale customer support, and engage in ongoing promotional and cross-selling
activities. Marketing programs developed by the company are delivered primarily through the Internet,
but also through other digital channels such as corporate intranets, proprietary online services,
CD-ROMs and interactive kiosks. The company works primarily with a select group of established
Fortune 500 clients with world-class brands committed to interactive marketing, as well as companies
with new online business models. The company's clients include Amazon.com, AT&T, Citibank, Delta
Air Lines, E*Trade, IBM, Intel, JC Penney, John Hancock, Sony and Unilever.
Growth Strategy. The company's objective is to be the leading provider of digital interactive
marketing solutions by executing the following strategy:
· Develop and Maintain Long-Term Client Relationships. MMPT account professionals pursue close
relationships with each client's senior management. MMPT began its relationship with JC Penney
in 1988 and with AT&T in 1991. The company has acted as AT&T's interactive agency of record
since 1995. The company has also developed ongoing, long-term relationships with Citibank, Delta
Airlines, IBM and John Hancock.
· Maintain Leadership Position in Digital Interactive Marketing. The company intends to maintain its
leadership position through the continuing development of new service offerings, the establishment
of strategic relationships with leading technology companies to improve and expand service
offerings, and the rapid adoption of emerging technologies, including Internet tools, data
management solutions and customization technologies.
· Continue to Attract and Retain Superior Professional Talent. MMPT coordinates numerous
programs to attract and retain the best talent available including the following: rewarding
innovation and creativity, an aggressive recruiting campaign, competitive compensation packages, a
company-wide incentive stock option plan, an internal employee referral program, and an extensive
in-house training program.
· Continue to Expand Global Office Network. MMPT believes that rapidly building a critical mass of
strategic, technical and creative talent on a worldwide basis will provide a substantial competitive
advantage. Specifically, MMPT intends to grow its presence in Europe and Asia.
Management. The company's senior management team is comprised of experienced business
managers with considerable expertise in electronic media and advertising. Gerald M. O'Connell co-founded
Modem Media in 1987, was a Managing Partner through 1996, and is now President and COO.
Douglas C. Ahlers also co-founded the company in 1987 and was a Managing Partner through 1996, and
now serves as the Vice Chairman of Technology. Bob Allen joined the company in 1989 as Director of
Business Development, became a Managing Partner in 1992, and now serves as Chief Operating Officer.
Steve Roberts served as Vice President, Operations, of TN Technologies for approximately 12 months
prior to assuming his current role as the CFO of the company.
Use of Proceeds. The company will use approximately $6 million of the net proceeds to repay
indebtedness to True North, and the balance for general corporate purposes, including working capital
and capital expenditures.
NationsBanc Montgomery's Investment Thesis For Internet Services
The Internet is rapidly emerging as the most effective one-to-one direct marketing
channel in history (please see figure below). We believe that the Internet has inherent strengths
that position it as a superior direct marketing platform versus traditional channels that are static. The
Internet's interactive nature enables company's to pro-actively customize the merchandise selection and
advertising message for each individual visitor in real-time based on past buying patterns or the
originating link. We believe that this high degree of customization will increase response rates in an
already pre-qualified base of customers.
On the Internet, audiences self-qualify, in that end-users pro-actively navigate to specific product or
service sets. Data can be captured from each interaction and analyzed to optimize subsequent
advertising or promotional messages. Such optimization increases response rates, moving end-users
toward the "buying" end of the continuum. In addition, this “data feedback loop” can be used to increase
repeat purchases, average order size and to support real-time market research.
It's a High-Growth Market: By all measures, traffic, commerce and advertising revenues
grew dramatically during 1996 and it continued to expand in 1997 (please see the table
below). According to IDC's most recent survey (March 1998), the total time spent on the Web by U.S.
users grew by 219% in 1996 to 371 million hours per month. It is important to note that 1996 Internet
advertising of $314 million, or 0.18% or total advertising spending, was insignificant when compared to
total advertising spending in 1996 of $173 billion with Direct Mail and Magazines accounting for $34.8
billion and $9.2 billion, respectively. With 1998 advertising projected at ~$200 billion online advertising
will account for an estimated $2.1 billion or 1% of total spending; still insignificant but growing rapidly.
INTERACTIVE MEDIA AND ONLINE COMMERCE GROWTH RATES
($ in millions) 1995 1996 1997 1998E 1999E 2000E 2001E
Audience Statistics
U.S. Web Users (MM) 9.7 23.2 38.7 51.6 66.5 84.3 106.8
% change from prior period 139.2% 66.8% 33.3% 28.9% 26.8% 26.7%
Total Hours per Month (MM) 116.4 371.2 696.6 1,032.0 1,463.0 2,023.2 2,776.8
% change from prior period 218.9% 87.7% 48.1% 41.8% 38.3% 37.2%
Advertising
Ad Revenue N/A $314 $1,026 $2,062 $3,340 $4,984
% change from prior period N/A N/A 226.8% 101.0% 62.0% 49.2%
Commerce
Web Transaction Volume (MM) 290 2,451 10,652 26,469 50,777 93,898 158,359
% change from prior period 745.1% 334.6% 148.5% 91.8% 84.9% 68.7%
Source: NationsBanc Montgomery Securities LLC, IDC, Jupiter Communications.
Cost structure is superior to traditional platforms, which should result in faster margin
expansion once break-even is achieved. With respect to Web-based direct marketing businesses,
delivery of impressions is nearly costless vs. an average of $1.00 to $1.25 in PPD for print catalogues,
and on-line order entry by customers is free to merchants vs. the costs of inbound telesales rep's incurred
by traditional direct marketers. In addition, the industry average cost for in-bound tele-sales (800
numbers) ranges from $0.80 per minute to $1.25 depending on volume and complexity (i.e., the salary
rate for the operator). Even the simplest calls take at least 2 - 3 minutes.
Summary of 4Q98 and Full Year Results*
Total 4Q98 revenue was 9% ahead of our estimate. The company reported total revenue and
EPS (excluding amortization) of $12.1 million and ($0.08) respectively versus our $11.1 million and
($0.25) estimates. Total revenue increased 41% year-over-year and 11% sequentially to $12.1 million.
EBITA loss for the fourth quarter narrowed to ($0.8) million from ($0.9) million a year ago¾smaller
than our estimated 4Q98 EBITA loss of ($1.9) million. EBITA loss as a percentage of revenue decreased
from 10.1% during 4Q97 to 7.0% for 4Q98.
Revenue for the full year 1999 was $42.5 million, up 45% year-over-year. The company reported
EPS (excluding amortization of goodwill) of ($0.16) versus ($0.28) a year ago. EBITA loss for the full
year 1998 was ($1.6) million compared to a loss of ($2.0) million for 1997. EBITA loss as a percentage of
revenue decreased from 6.9% during 1997 to 3.7% for the full year 1998. |
