H&Q comments on NSOL from this morning
**** Hambrecht & Quist **** Hambrecht & Quist **** Hambrecht & Quist ****
Company: Network Solutions, Inc.
Price: 244.75
Recommendation: STRONG BUY
Notes: a, b
Firm: Hambrecht & Quist
Department: Information Services
Industry: Business & IT Services
Date: 3/23/99
Q1 Q2 Q3 Q4 FY
1998A 0.13A 0.15A 0.18A 0.22A 0.67A
1999E 0.23 0.27 0.31 0.35 1.16
2000E 0.38 0.42 0.45 0.50 1.75
52-Week Range 23-300 ** Market Cap 4210
Shares Out 17.2 ** Book Value $8.72
Net Cash/Share $7.67 ** 3-Year EPS Growth 60%
CY00 P/E-to-Growth NM ** FY Revs 94A
CY EPS 0.67A ** CY P/E NM
New Web Site Ruffles Feathers; Fundamentals Unchanged; Maintain Strong Buy
NSOL was down 15% late yesterday following mixed reactions in the press to the
Company's new Web site (www.netsol.com). The site: 1) adds 2 new product
offerings (8 now in total), 2) simplifies purchasing, and updating domain name
information, and 3) redirects customers who were previously going to
Internic.net via their ISP to NSOL's new Web site. We would note that NSOL
recently moved up from $222 to $265 between Fri. 3/12 - and Mon. 3/15, and that
profit taking, with the stock recently hitting $300, appears reasonable
following NSOL's 80% + move in the past 15 sessions.
Recap of Events: Yesterday morning NSOL announced the launch of a new
completely redesigned Web site to help customers with finding the basic
information, services and tools they need to get up and running on-line. The
new site (www.netsol.com) makes it easier to: 1) register or reserve a Web
address, 2) sign up for the Company's growing suite of service offerings, and 3)
make changes to an existing account. In addition, NSOL's new site funnels the
Company's previous maintenance efforts at Internic.net, a bare bones registry
back-end that ISP's have used in the past to direct their customers to for
simple registration service, into the new Network Solutions consolidated Web
site.
New Service Offerings Announced. With the new launch, NSOL also introduced
two new value added services to add to its growing suite of small business
solutions (now totaling 8 in all): 1) a "biz card service" and 2) the "dot com
forwarding service." The "biz card service" offers an upgrade from the current
default "Under Construction" page for NSOL customers who reserve a name, but
hold off on putting up a Web page. The service allows NSOL customers to now be
able to create a "virtual business card"-complete with company information and a
logo through an easy to use Web interface. Down the road, the dot com biz card
will serve as the "entry screen" for NSOL's upcoming dot com directory service
expected later on this year. Secondarily, the Company's new "dot com forwarding
service" enables customers to forward or point one or more NSI hosted Web
addresses (reserved through the Company's RegistrationPlus product) to another
(already existing) Web address, allowing customers to buy multiple addresses and
point them at a single site. For instance, www.netsol.com,
www.thedotcompeople.com, and www.theemailpeople.com, all point to
www.networksolutions.com.
Mixed Reaction in the Press. Two articles came out yesterday, intra-day,
that we believe could have spooked investors, one in news.com (CNET/BUY
Rated/$93.25) and one in the Industry Standard (www.thestandard.net). Both
articles highlighted the criticism mounted by some of NSI's rivals with respect
to their authority to redirect ISP customers, who previously had gone directly
to the Internic, to instead be brought into NSOL's web site. Importantly, the
Internic "simple" service is still offered through NSOL's Web site, however it
forces intermediaries who would soon like to be competitors to shuttle their
customers through NSOL's front-end registrar gate. In the future, competitors
will be able to direct their customers to their own front-end registration
means, and work out the back-end details with NSOL. Notably, under an exclusive
contract with the Commerce Department, NSI formally maintains the Internic, and
also owns the "internic.net" domain name, giving them in most all respects, the
authority to make such a move.
Internet Governance: Review of Expected Timeline Over the Next Few Months.
- Monday, March 29, 1999 is the current deadline for companies interested in
competing with NSOL as one of the 5 testbed registrars.
- Monday, April 12, 1999 is the date the 5 testbed registrars will be selected
and announced by the ICANN.
- Monday, April 26, 1999 is the date that the proposed two month testbed period,
complete with 5 competing registrars (most likely geographically dispersed) is
set to begin.
Key Questions Still Remain That Could Delay Competition.
- NSOL and the NTIA (part of the Department of Commerce) still have to agree on
the back-end registry fee per domain name registered by the yet-to-be-appointed
registrars.
- The 5 testbed registrars still need to be selected, free of what we believe
could be stifling litigation, and then must proceed to negotiate their business
terms with Network Solutions.
Conclusion:
- No fundamental change to NSOL's investment thesis. Current business momentum
for the quarter is very, very strong and tracking ahead of current estimates.
- While a fairly aggressive move for NSOL in terms of testing the latitude of
the cooperative agreement, we believe NSOL had the authority to make this move.
- Expect NSOL shares to remain volatile over the next several weeks in front of:
1) 2:1 stock split (effective tomorrow), 2) potential positive partnership news
and 3) the continued transition of the Domain Name System.
Reiterate Strong Buy.
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