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Outsourcing eMail: Critical Path Cuts Path to IPO

San Francisco-based Critical Path filed preliminary papers for an IPO that offered scant else for valuation purposes but how much the company wanted to raise, $51.8 million. For all of 1998 this startup generated $897,000 in revenues and $11.46 million net loss. Will Wall Street be critical of the lack of top line?

Founded in February, 1997, Critical Path provides outsourced e-mail services for corporations, ISPs and enterprises. Sounds simple. But we think its very powerful. Just as the telephone companies provide dial tone we see a trend emerging for outsourcing IP communications within the corporation.

In that arena there's nothing more "critical" in our view than e-mail.

Web financial site E*TRADE and ISP Verio accounted for about 62% and 30%, respectively, of Critical Path's thin revenues,excluding warrant discounts. About two-thirds of all revenue came in fourth-quarter 1998, however, a trend we see as encouraging as CriticalPath signs more deals.

Critical Path charges per e-mailbox in contracts lasting one to two years typically. Performance guarantees are part of the agreement, one reason why we think Critical Path uses a bi-coastal hosting strategy (in addition to load balancing).

So far more than 100 companies use its services, including US West, Network Solutions and Planet Direct.

Critical Path offers several flavors of mail service: POP3 (good for ISPs), Web-interface e-mail (portal friendly), and LDAP (directory services,aimed at the enterprise).

The firm hosts 5 million e-mail accounts now across 100,000 domains and uses load-balancing to keep the mail flow flowing smoothly.

But we think the real market is ahead. If you consider the 10 million small- to medium-sized businesses in the U.S., the Fortune 500, the global companies, the increasingly-sophisticated e-mail offerings to come, then the market for Critical Path seems ahead in many ways. Makes complete sense, rather than have a staff on hand twiddling with the e-mail servers day and night why not let another do it. Same reason why companies don't have telephone technicians standing around keeping the dial-tone going.

Risks? Plenty ofcourse. Rivals aren't idly standing by: USA.NET and iName are two well-known challengers with strong footholds with portals and companies.

There's also the Y2K bug. Nobody really knows what it could do to e-mail routing as the new millennium draws near. And the nearly 5,000 U.S.-based ISPs may be content providing clients with e-mail as part of their daily bread.

Investors in Critical Path include Mohr Davidow Ventures, Benchmark, CMG@Ventures, E*TRADE, US West. While early documents don't say how many shares will be offered at what price. We estimate that based on the IPO market now and given the target amount it wants to raise that Critical Path could seek a valuation of about $300 million on IPO market cap (its pricing).

The after-market has been strong for Internet issues with lesser-potential candidates doing extremely well. This more mission-critical service could offer more bang in our view, especially over time. More analysis as this one makes its way through the IPO pipeline.