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GiftCertificates.com: The Arbitrageur

GiftCertificates.com was founded in October 1997, although it was originally focused on telemarketing. But by 1999, the company underwent a reorganization -- going digital. To this end, the company purchased Giftpoint.com and GiftSpot.com.

Now, the company is preparing to go public. The lead underwriter is Donaldson, Lufkin & Jenrette and the proposed ticker symbol is GCRT. No price range has been set.

As the name implies, GiftCertificates.com is a marketplace for e-mailable, as well as physical, gift certificates. The company has deals for gift certificates with over 500 merchants. There is also the SuperCertificate, which is redeemable for most of the merchant gift certificates of the company.

Basically, the company makes money by arbitrage. That is, GiftCertificates.com buys gift certificates from merchants (at a discount) and then sells them for face value. What's more, GiftCertificates.com provides outsourcing services to corporate clients that want to administer gift certificate programs. There are over 1,000 such clients.

Of course, the gift certificate industry is highly competitive. But there are barriers to entry. That is, a company will need to build a network of merchants, as well as develop the necessary infrastructure to handle large volumes of transactions.

In the past quarter, revenues were $4.8 million, which was up from $700,000 in the same time last year. Although, the company had a net loss of $9.2 million.

However, the company is a cash machine. On a pro forma basis, cash receipts were $7.4 million in the first quarter of 2000. In 1999, cash receipts were $18.3 million. Basically, cash receipts have been exceeding revenues. The reason is that revenues are not recognized until redemption. In other words, GiftCertificates.com generates substantial cash floats.

Unfortunately, investors have been losing interest in consumer-oriented plays. So even though GiftCertificates.com has great technology and a strong business model, the IPO will likely be under pressure.