A Market Leader And A Premature Play

Two weeks ago I didn’t think it would be possible, but a torrid
second-half pace has put July in a long-shot position to break the
record set in June for most Internet IPOs in one month.

With two companies – Net2Phone and Perficient — beginning trading Thursday, we will have seen 28 Internet IPOs in July, with one market day
to go.

That’s still four short of June’s record 32 ‘Net IPOs, but the real
heavy action in recent months has been coming on Fridays. Sixteen of
those 32 Internet IPOs in June, for example, were made on a Friday.

Nasdaq small-capper Perficient (PRFT) opened Thursday at $11.50 after 1
million shares were offered at $8 each, but headed south fast, dropping
below $10 a share by 1 p.m.

Based in Austin, Texas, Perficient is an Internet services company that
targets fast-growing Web software vendors who need help providing their
clients with installation and onsite technical assistance.

That’s a nice niche – employees of any company that just installed new
major software can tell you how critical support is. Perficient’s
problem is that it has barely penetrated that niche. Sales in ’98 were
$826,000, of which 91% came from just one customer, Vignette, a maker of
Web business software.

Worse, all of Perficient’s $312,000 in revenue from this year’s first
quarter were from Vignette. The company needs to broaden customer base,
not narrow it.

With only 19 employees, Perficient is a roll-up candidate for any number
of larger Internet service companies or even Vignette. But it’s a
premature — and, with 71% dilution based on the $8 offer price, a risky
– bet for investors.

Net2Phone is no small-capper. The company’s IPO raised $81 million with
an offering of 5.4 million shares at $15 under the Nasdaq ticker (NTOP).

After opening at $20.75, NTOP shares were trading near $22 a share early
Thursday afternoon.

With $12 million in ’98 revenue and $22.2 million in the nine months
ended April 30, Net2Phone also is no neophyte. A study by research firm
Frost & Sullivan shows that the company, based in Hackensack, N.J.,
owned 30% of the market for Internet calls in 1997.

Net2Phone’s products enable customers to make phone calls via the ‘Net
for far less than the cost of land-based or cellular service. The
company claims 250,000 customers and offers service through major
portals such as Yahoo! and Excite.

However, the company faces intense competition in the near-future from
large telcos and equipment vendors (Cisco, Lucent, Nortel and others)
which plan to enter the Internet telephony market. Existing Internet
telephony vendors such as VocalTec also are fighting for market share.

Overall, though, Net2Phone is well-positioned, with a large and growing
customer base and a deal with Netscape that would embed the company’s
PC2Phone software in its browsers. I expect decent after-marketperformance from this “ready for prime time” player.

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