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Engage IPO, An Engaging Debut?

Venture investor firm CMGI (NASDAQ:CMGI) plans on spinning out 18% of its interest in Engage and keep 82% in an IPO priced at a target $14 per share, valuing the ad/marketing solution firm at $656 million market capitalization, or what I estimate may be 55x annualized revenue or 36x my estimated 1999 calendar revenue.

Compare that to peers DoubleClick (NASDAQ:DCLK) at 40x annualized and 24/7 (NASDAQ:TFSM) at 15x and it seems Engage falls in the range of what I dub "high expectation but comparable multiple."

One key difference, however, about Engage is its multiple service/products that run the gamut from profiling, ad delivery, targeted marketing, that isn't found in any one other rival -- except perhaps what DoubleClick is doing with Abacus and NetGravity.

For that reason, despite its weaker revenues vs. DCLK and TFSM I think Engage (NASDAQ:ENGA) may find a warm welcome on Wall Street as an "all-in-one" ad/marketing provider.

It helps that Engage acquired I/PRO and folded its audience Website measurement tools into the offering. And CMGI (whose chairman Dave Wetherell serves as chairman of Engage) may be a boost and boon if Engage can be leveraged across AltaVista.

As it stands, AltaVista (which CMGI is acquiring), has an agreement that lasts three years with DoubleClick to provide ad services. AltaVista accounts for 40% of DCLK's revenue. Although I expect Abacus and NetGravity to replace that easily.

Let's check out the numbers:

Engage ENGA
pro forma IPO  
   
Shares offered 6.00
Price target/actual $ 14.00
Proceeds $ 84.00
Shares out 46.91
   
IPO market cap $ 656.77
less working cap $ 87.17
plus LTD $ -
Enterprise value $ 569.60
9mos. To 4/30 rev. $ 9.00
9mos. To 4/30 loss $ (21.17)
Annualized rev. $ 12.00
   
Engage  
Revenue multiple 55
Rev. multiple enterprise 47
Rev. multiple of peers  
DoubleClick 40
24/7 15
all figures in millions, except share price and multiple

Engage has built a database of 30 million anonymous user profiles, collected as the user surfs around the Web (with cookies). Engage engages its knowledge database, profile server, admanager, ad bureau, I/PRO and a Website user analysis software package to provide its suite of offerings.

Engage expects that growth will come via its Engage knowledge service that provides real-time customer profiles.

About 14% of Engage's total revenue through April 30, 1999 have come via CMGI affiliates (recall the several portfolio companies). And fully 87% of Engage's revenue was via products rather than services.

That's an important point in my view since services may be more the future of ad and marketing rather than products. That perhaps explains why Engage revenue was much smaller than rivals DCLK and TFSM as they scaled in services.

The questions an investor should ask about Engage are: 1) are they comfortable with CMGI owning a majority and controlling Engage, with the ability to elect its board? 2) can Engage catch DoubleClick or 24/7 or Net Perceptions (NASDAQ:NETP)?

While Engage may get a lot of attention its first day I think it probably has to catch 24/7 in revenue to start fulfilling valuation expectations.

In other words, I find Engage engaging for its suite of offerings. Now it's time to monetize them and beat the top revenue players in the space. That's the kind of premium I think may already be built into Engage with its IPO market cap target.


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