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RealTime IT News

Register.com IPO Rocket Aimed At NSI

Network Solutions Inc. reminds me of Bill Clinton, minus the interns.

For as long as I can remember, people have been proclaiming the Internet domain registrar's doom. Lawsuits, complaints of shoddy customer service, and now wide-open competition - all were supposed to be undoing of the company granted a government-sanctioned monopoly several years ago.

Well, the monopoly ended in November, and though it already has lost 15 percent of new registrations to the nearly 30 competitors it now faces (with more in the pipeline), NSI (NSOL) remains the undefeated 800-pound gorilla of the URL world.

Investors looking at buying into Register.com (RCOM), which went public Friday, should keep this in mind.

The New York-based company is trying to position itself as NSI's chief rival, thus the public offering designed to raise $100 million through the sale of 5 million shares. So far the market is greeting RCOM enthusiastically. Shares, originally priced between $15 and $17 but bumped up to the eventual $24 offer amount, opened at 65 before falling off to 62 by early afternoon.

If it stays at that price, RCOM would end Friday with a market capitalization of nearly $2 billion, based on 30.8 million shares outstanding. It will be a real challenge for the company to sustain that valuation. With revenues of $9.6 million last year, Register.com at $62 per share is trading at 199x trailing 12 months' sales.

In comparison, NSI had $221 million in revenues last year. Given its current market cap of $11.6 billion, the domain registrar market leader is valued at 52x TTM revenue. And this despite the fact that shares of NSOL have skyrocketed 578 percent since last June 4, reaching as high as $351 per share in early trading Friday.

Other comparatives: Register.com has registered 467,000 domains since it became the first NSI challenger to open shop last June, making the No. 2 domain registrar. In the three months ended Dec. 31, the No. 1 domain registrar logged 1.6 million registrations.

Revenue growth: Prior to registering Internet domains, Register.com sold Web site and management software, offered Web hosting and other 'Net services and sold banner ad space on its site. It plans to continue doing all of the above, with an emphasis on domain registrations and Internet services.

Last year's revenues of $9.6 million included $4.5 million in domain registration fees. Though that 638 percent growth over 1998 revenue of $1.3 million is impressive, it's impossible to base any conclusions on it since the company expects several revenue streams to flatten.

NSI, meanwhile, had revenue growth of 136 percent last year and showed no signs of slowing down (Q4 revenue growth was 142 percent).

Profitability: RCOM lost $8.8 million last year and had an accumulated loss of $12.2 million through Dec. 31. Network Solutions, in contrast, has been profitable for each of the last 13 quarters, with earnings per share increasing quarter over quarter for the past four years.

Some market observers think NSI will be forced into a price war that will cut into its healthy margins. Perhaps so, but those margins provide a cushion none of its upstart competitors have. It also is worth noting that victory in price wars almost always goes to the biggest gun.

The one place where NSI is vulnerable is service. Complaints are constant, and turnover within NSI's customer service ranks reportedly is high. The company needs to shake its monopolist's mindset. If it does, many of the Davids slinging rocks at it now could be quickly crushed.


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