PaineWebber Raise NSOL Price Target to $195!!! Enjoy!
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07:08am EDT 22-Apr-99 PaineWebber (Preissler, James R. 212-713-2060) NSOL
Network Solutions: ICANN Announced New Registrars (Part 1 of 2)
Internet PaineWebber
James Preissler RESEARCH NOTE
212-713-2060/preissj@painewebber.com
Richard Choe, Associate Analyst (212-713-2415) April 22, 1999
Network Solutions Rating: Buy
(NSOL-$92.00)(2,3)
Network Solutions: ICANN Announced New Registrars
KEY POINTS
* On April 20, 1999, ICANN (Internet Corporation for Assigned Names and
Numbers) announced the five registrars participating in the testbed to enter
the domain name registration business, which until now was exclusively run by
Network Solutions, under a contract with the government since 1993.
* The five testbed registrars are, in alphabetical order:
1.America Online
2.CORE (Internet Council of Registrars)
3.France Telecom/Oleane
4.Melbourne IT, an Australian e-commerce services company
5.register.com, a division of Forman Interactive Corp.
* The interim registry fee has been set at $9 per name per year, slightly below
our estimated range of $10-12; the entire range was $2-16
* The testbed program will last from April 26th until June 24th after which an
additional 29 other companies will be admitted and possibly others.
* The 29 other registrars are, in alphabetical order: 9NetAvenue; A Technology
Company; Active ISP; Alldomains.com; All West Communications; American Domain
Name Registry; AT&T; Domain Direct; DomainRegistry.com; eNom, Inc.;
InfoAvenue; InfoNetworks; InfoRamp; Interactive Telecom Network; Interdomain;
Internet Domain Registrars; interQ Incorporated; MS Intergate;
NameSecure.com; Name.Space Inc.; NetBenefit; NetNames; Nominalia; Port
Information System AB; RCN; Telepartner AS; Verio; Virtual Internet; and
WebTrends.
* We continue to believe this is a distribution game and NSOL has the
distribution channel that currently generates 70-80% of new domain names. In
our opinion, the surprises were AOL and AT&T, but to date they have a fairly
limited amount of registrations. In fact, we believe AOL and AT&T will
mainly market to their own subscriber bases and have limited success/ability
in signing up members of other ISPs. Finally, remember NSOL still receives
the interim $9 per year registry fee for every .com, .org. and .net name any
of the new testbed registrars sign up.
* Despite the new entrants into the industry, we believe the company has
considerable competitive advantages going forward, which are also enhanced by
its key acquisitions/partnerships.
* We will provide a detailed report after the company releases its 1Q99
earnings results on tomorrow (4/22/99).
* We maintain our Buy rating and price target at $195 based upon a P/E
valuation of the core domain name registration business and incremental
opportunities.
Key Data Quarterly Earnings Per Share (fiscal year ends December)
52-Wk Range $144-13 1998A 1999E Prev 2000E Eq.Mk
.Cap.(MM) $3,036 1Q $0.07 $0.12
Sh.Out.(MM) 33 2Q 0.07 0.13
Float 47% 3Q 0.09 0.15
Inst.Hldgs. 89.2% 4Q 0.11 0.16
Av.Dly.Vol.(K) 8,420 Year $0.34 $0.56 $0.89
Curr. Div./Yield None/NA FC Cons.: $0.60 $0.94
Sec.Grwth.Rate 50% Revs.(MM): $94 $174 $266
12-mo. Tgt Price $195.00 P/E: 270.6x 164.3x 103.4x
12-mo. Ret. Pot'l 112.0%
Convertible? No
THE DOMAIN NAME REGISTRATION PROCESS IS BEING BIFURCATED INTO TWO PORTIONS:
REGISTRY (DATABASE) AND REGISTRAR (CUSTOMER INTERFACE)
The domain name registration process is being bifurcated into two portions:
registry (database) and registrar (customer interface):
* We believe, the "Registry" portion is an inherent monopoly in that only one
entity can effectively manage the registration database. The registry
maintains the core backend database to keep a uniform master list of all
domain names. NSOL will be the registry for the Top Level Domains (TLD)
.com, .net, and .org until at least September 2000.
* The "Registrar" however, will be open to competition, as multiple entities
can registrar entries into the same registry.
* The registry fee has been set by the Department of Commerce with NSOL's input
at $9 per name per year.
* Note, the registrar's price charged to a customer will be set by the market.
The registrar deals with the customer in signing up domain names in the TLD.
THERE COULD BE CONTINUED UPSIDE TO THE CORE DOMAIN REGISTRATION BUSINESS, EVEN
WITH COMPETITION LOOMING
* WE BELIEVE NSOL KEEPS THE MOST IMPORTANT PIECES OF ITS BUSINESS INTACT, THE
REGISTRY FOR .COM, .NET, AND .ORG AS WELL AS THE ABILITY TO BE ONE OF THE
COMPETITIVE REGISTRARS.
* NSOL HAS OVER 4 MILLION DOMAIN NAME REGISTRATIONS, A LARGE DEFENSIBLE
CUSTOMER BASE, AND A WIDE PORTFOLIO OF VALUE ADDED BUSINESSES.
* The domain name registration business is already effectively a commodity
business (and already commodity priced at $70 per 2-year registration), and
significant amounts of scale are required to reach profitability. We are
modeling a $5 per year price decline going forward (to $60 per 2-year). It
took NSOL approximately 600,000 registrations in order to reach
profitability.
* The domain name registration market could potentially significantly expand in
size. Even though the market is getting more competitive, it is also getting
bigger with the potential addition of new domain names, the international
opportunity becoming competitive as well, and the ability to move more
aggressively. Therefore, we believe even if NSOL sacrifices market share, in
aggregate, the overall opportunity for NSOL could be larger going forward.
* A quick scenario: By virtue of .com, .org, & .net, NSOL has approximately
75%+ marketshare. If we assume that NSOL's approximately 160 partners and
affiliates (typically Internet Service Providers -- ISPs) will register
approximately 20-30% of all names going forward and that a portion of each
registration goes to pay the registrar (NSOL for .com, .org, & .net, which
represents approximately 25% of the registration value) adds an additional
20% of the market. Therefore, even if we assume that NSOL struggles as a
competitive registrar (unlikely)...it will still have approximately 50%
marketshare. Not bad.
INCREMENTAL REVENUE OPPORTUNITIES ARE SIGNIFICANT
We believe that NSOL has the ability to leverage off its core business to build
significant new revenue and up-sell opportunities. Already, NSOL offers a
virtual e-mail for each domain name that it registers, and we believe e-mail
outsourcing could be a large market going forward. Consulting remains a growth
opportunity. Also, the RealNames opportunity (please see our 12/9/98 note for
more details) could ultimately prove to be even larger than the core domain
name registration market...and we are even more convinced of this after
spending time with its management team. While it is still early for these
opportunities, and they are therefore difficult to quantify, NSOL's growth
could still be at the bottom of the curve.
WE BELIEVE THE COMPANY HAS CONSIDERABLE COMPETITIVE ADVANTAGES GOING FORWARD,
WHICH ARE ALSO ENHANCED BY ITS KEY ACQUISITIONS/PARTNERSHIPS
We believe the company has considerable competitive advantages going forward as
the market for domain registration expands, which should continue to drive its
ongoing growth. With over 4million names already registered, NSOL already has
a high marketshare which will make its position strong as the market expands.
In addition to its large existing customer base, its relationships with its
premier partners (mostly ISPs), and its partnerships give NSOL significant
competitive distribution advantages. Also, NSOL has the experienced and proven
management team (from big name companies such as IBM, GEIS, P&G, Cable &
Wireless, SAIC, etc.) and resources required to maintain and extend its
competitive position going forward. Furthermore, NSOL's international premier
partner program has signed up 85 companies at year-end 1998, up from 60 at the
end of Q3, in 22 countries.
WE MAINTAIN OUR BUY RATING AND OUR PRICE TARGET OF $195
Network Solutions is a leading infrastructure provider, offering key services
for the critical, high-growth service areas of the Internet.
* We believe due to NSOL established market leader status, the stock could
warrant a P/E as high as 220x on our 2000 EPS estimate, which produces a
target price of $195.
* Therefore, our price target is $195 per share and we are reiterating our Buy
rating.
If competition is less intense than currently anticipated or the new registrars
have significant difficulties, they may be catalysts for raising our estimates
going forward. We believe NSOL remains a leading investment vehicle as a pure
play on the ongoing organic growth of the Internet.
RISKS
Like all software and Internet companies, Network Solutions competes in a
highly competitive as well as rapidly changing and unregulated marketplace.
Any failure in execution or government intervention could dramatically impact
its revenues. In addition, the company will and could potentially compete with
a number of larger competitors such as Microsoft, IBM, America Online, AT&T,
Oracle, Verio, register.com and others, who all have significantly larger
resources, sales organizations, and customer bases. |
