Description

Communicate.com (CMNN) is an undiscovered, rapidly growing e-commerce company that trades below asset value.  Communicate owns, develops and markets approximately 900 websites, including: Perfume.com, Importers.com, Karate.com, Body.com, Boxing.com, Brazil.com, etc. The Company generates revenues from e-commerce, advertising and domain name sales.  The Company has been developing its crown jewel, Perfume.com very successfully while starting to rollout Importers.com and Body.com.  The other domains they are starting to sell off selectively. Recently they sold Wrestling.com for $500K.  According to management, they recently turned down an offer to sell Boxing.com for $980K. 

 

Communicate.com is a simple story with very little downside risk that in our opinion is worth at least $2 (48% upside) today.   The Company has $2.5M in cash, no debt, 3 yrs profitability, and many short and long term catalysts.   With the continued growth of the Internet and limited supply of top domain names, these properties will only become more valuable over time.  The biggest negative is that the market cap is small and doesn’t trade too many shares.

 

 

Overview of CMNN Valuation:

 

Est. Value ($ in M)         Assumptions

20.0       -    30.0            Perfume.com; ~$10M CY06 revs; 2.0x – 3.0x CY 06 rev.

8.9         -    13.7           16 *.com domains (~$500K - $750K per domain)

2.5         -      5.0           10 *.com domains (~$250K – $500K per domain) 

1.0         -      3.0           Importers.com; 110K members; new site launch Oct 2006

0.5         -      1.0           China portfolio (99 domains) and 780 misc domains

2.5         -      2.5           Cash

$35.4M   -    $55.2M       Market Value (17.7M shares outstanding)

                                   

$1.99     -     $3.11         Implied Price / Share

 

 

Perfume.com

Perfume.com, the Company’s primary e-commerce site has grown YOY revenues ~140+% from just $530K in revenues in 2003 to over $4.7M in 2005, accounting for 66% of total 2005 revenues. The site generated $2.8M revs for the first half of the year and accounted for roughly 80+% of Q1, Q2 revenues.  We expect Perfume.com to do at least $10M in sales this year.  According to the Company’s blog (run by the Director of Communications): “Q4 should be the biggest sales quarter in history; Expected to account for about 45% of fiscal 2006 revenues, and to be profitable.” Assuming the Company posts a $4.5M quarter, this would imply a 64% increase from $2.7M Q4 05, which seems to be on the conservative side given the Company’s historical growth trajectory.

 

The Company has done very little marketing of Perfume.com, yet the site has drawn over 150K customers (many repeat customers referring friends) and a 250K person mailing list/newsletter, which has grown 3x since Q2 05.  The Company plans to spend up to 10% of gross product sales for marketing in 2006 and 2007 with a push in Q4 for holiday sales.  As of this past week, the Company began sending weekly emails instead of biweekly emails to its customer list. 

 

Operationally, Perfume.com’s gross margins run at ~20%, which is above average for an e-commerce site. Perfume.com does not hold any inventory and has signed up a total of six major vendors that they work with (up from only two a year ago). The Company has built optimization software to scour the web and find the lowest possible prices available and to competitively price match with other sites. A comparison search on “Dolce & Gabbana Light Blue 3.4 oz Spray” yielded a price of $55.48 ($5.99 flat rate shipping anywhere in US) on Perfume.com vs. $80.00 at Macys.com, $80.00 at Sephora.com; $80.00 at Amazon.com, and $59.39 at fragrancenet.com.  Perfume.com guarantees the best perfume deals on the web, and will match any competitor’s price.  As the site expands vendor partnerships, the Company should be able to reduce COGs and SG&A.

 

As an aside, an interesting revenue trajectory comparable to Perfume.com is Zappos.com, the Sequoia Capital backed online shoe store which grew revenues from $1.6M in 2000 to $8.6M in 2001, $32M in 2002, $70M in 2003, $184M in 2004, $370M in 2005 and an estimated $600+M this year. Zappos has done very little marketing and has grown by focusing on offering an exceptional customer experience. For this reason, a lot of their new business comes through referrals.

 

Perfume.com Valuation: We estimate the value of Perfume.com to be worth at least $20M (~$1.12 / share), or a conservative 2.0x CY 06 revs of $10M. Perfume.com is experiencing high growth (having grown revenues 270+% from 03 to 04, 140+% from 04 to 05; 100+% from 05 to 06E) and should command a growth and profitability ($81K in profit for Q2 06) premium. Current comps trade at 2.4x EV / CY 07 revs with growth at 21%. Most of these companies have low gross margins 10-15% and are not profitable.  If we assume $15.0 CY 07E revenues for Perfume.com (50% growth from $10M 06revs) and apply a 2.4x ’07 rev. multiple, Perfume.com would be worth ~$36M or ~$2.03 / share.   

 

 

 

		Price		Enterprise		Revs ($mm)				EV / Revs				LT
Company		10/17/06		Value		CY '06E		CY '07E		CY '06E		CY '07E		Growth
eBay		28.78		37,900		5,890		7,350		6.4x		5.2x		30%
Amazon		32.47		13,560		10,350		12,160		1.3x		1.1x		18%
Digital River		53.06		1,810		305		365		5.9x		5.0x		25%
FTD		15.84		655		630		678		1.0x		1.0x		10%
Blue Nile		36.61		532		248		295		2.1x		1.8x		20%
Drugstore.com		3.58		311		418		454		0.7x		0.7x		20%
								Mean		2.9x		2.4x		21%

Source:  First Call rev. est.

 

 

Valuable Domain Portfolio

Communicate.com’s core domain portfolio should be worth a minimum $8M ($0.45 / share).  The Company was offered this amount for only sixteen of their *.com domains (roughly ~$500K per domain) in 2004, not including Perfume.com, which accounts for ~$10M in CY 06E revenues. The acquisition offer also did not include an additional 10 single word domains, which we estimate to be worth at least $250K each, according to domain comparables (see list of acquisition comps below).

 

Communicate owns a portfolio of 900 domains - 28 highly valuable *.com; 99 *.cn (china), and 780 other domains including many popular, single word, *.com names like boxing.com, brazil.com, body.com, perfume.com, cricket.com, boxing.com, vietnam.com, karate.com, number.com, yen.com, mouse.com, keyboard.com, leisure.com, stereos.com, etc. These domain names are for sale by the Company and they also generate revenue from site advertising (direct navigation/pay per click through partnerships with Yahoo! Overture and Google Adsense). See list of domains and the Company’s website for additional details. 

 

Single word, *.com domains command a significant premium in the domain marketplace and there have been a quite a few domain acquisitions this year. Recent acquisition comparables include Diamond.com ($7.5M; 5/06), Cameras.com ($1.5M; 10/06), Cat.com ($1M; 9/05), Local.com ($700K; 3/05), On.com ($635K; 3/06), Macau.com ($550K; 2/06), Bike.com ($500K; 6/06), Blue.com ($500K; 3/06), Templates.com ($450K; 9/06) according to Domain Journal.

 

The Company recently sold one of its domains, Wrestling.com for $500K (This revenue will be recognized in Q3 ’06). Wrestling.com currently ranks #547,650 in Alexa and ran 3,715 keyword queries on Overture for the month of Sept. According to management, the Company recently turned down an offer to sell Boxing.com for $980K.   We have provided a range of $900K - $1.25M (the Company is asking for $1.25M), for Boxing.com’s valuation. Other past sales that the Company has made include Rugby.com ($350K) and 4 sites (Automobile.com, Exercise.com, Call.com, Makeup.com) for $1M and 5% royalties in 2003. 

 

The domain industry will generate revenues of $600M this year and will reach $1.2B within three years according to Jordan Rohan (RBC), a noted analyst in the space.  Susquehanna Financial is more bullish and estimates the industry could hit $1 billion by next year. According to a recent Forbes article, domain name sales generated $29 million in 2005.  Rohan estimates that the revenue pool could double in the next three years if direct navigation companies can refine their processes and develop e-commerce portals on their sites.  Communicate has taken this approach and transformed Perfume.com, Importers.com, Body.com, Cologne.com into e-commerce/B2B sites in the past couple of years.

 

Part of the reason for the rise of M&A activity is the recent entry of venture-backed domain aggregators, who have raised a significant amount of capital  in the past year in attempts to consolidate the space and grab valuable domain property.  These companies have been paying hefty premiums for popular domain names, since return on capital for these sites are rather high.  Some of companies include: 

 

Demand Media - $220M raised since 5/06 (3i Group, Oak, Spectrum Equity). Led by former chairman of MySpace. 250k domains, 35m visitors monthly.  Sites include enom.com, eHow.com, HillClimbMedia.com (trails.com, golflink.com).

 

Name Media - $80M raised in 2/05 (Summit Partners, Highland Capital). Led by former CEO of IDG and Primedia. 650k domains, 25m visitors monthly.

 

InternetREIT - ~$20M+ raised since 10/04 (Maveron, Perot Investments). 400k domains, 50m visitors monthly. Sites include netster.com, bands.com; creditreports.com, shows.com, vietnamwar.com, etc.

 

Another major player is publicly traded Marchex (MCHX; $670M mkt cap; 4.4x EV / CY 06 Revs), which acquired 100,000 domains for $164M in late 2005 at a rev multiple of 8.6x ($19M revs at time of acquisition).

 

The entrance of these companies into the market positively affects domain holders, such as Communicate.com, and we believe sets a floor for pricing of their domain portfolio. We estimate an $8M floor on sixteen of the properties with additional upside to $12M for these sites. Additionally, we value the remaining portfolio (the other 10 single word domains, China portfolio, 780 other properties) at a minimum of $3-$6M. It is highly conceivable that the entire Company is acquired by one of these domain aggregators in the next 1-2 years.

 

 

Communicate Valuation

($ in thousands)

 

 

						Traffic	Searches /
	Current Properties		Estimated Value			Ranking (a)	Month (b)
1	Malaysia.com		500	-	750	112,475	1,014
2	Cricket.com		500	-	750	128,541	22,926
3	Boxing.com*		900	-	1,250	253,967	3,399
4	Yen.com		500	-	750	272,172	58
5	Vietnam.com		500	-	750	317,934	1,528
6	Indonesia.com		500	-	750	415,171	467
7	Canadian.com		500	-	750	415,777	218
8	Brazil.com		500	-	750	429,673	2,328
9	Karate.com		500	-	750	506,391	519
10	Body.com		1,000	-	2,000	520,171	1,137
11	Greatbritain.com		500	-	750	1,114,913	35
12	Overseas.com		500	-	750	1,950,716	217
13	Call.com		500	-	750	2,928,152	115
14	Rodeo.com		500	-	750	3,300,829	468
15	Stereos.com		500	-	750	3,866,379	33
16	Leisure.com		500	-	750	3,117,779	124
		Subtotal	$8,900		$13,750
18	Perfume.com		20,000	-	30,000	34,906	1,900
17	Importers.com		1,000	-	3,000	20,208	196
		Subtotal	21,000		33,000
19	Communicate.com		250	-	500	1,046,815	35
20	Mouse.com		250	-	500	1,384,990	241
21	Keyboard.com		250	-	500	1,453,605	210
22	Electronic.com		250	-	500	2,035,240	504
23	Number.com		250	-	500	3,683,866	128
24	Cologne.com		250	-	500	3,690,279	239
25	Veggie.com		250	-	500	No Data	32
26	Surrey.com		250	-	500	No Data	101
27	Burnaby.com		250	-	500	No Data	32
28	Veg.com		250	-	500	6,859,951	37
29	China Portfolio		250	-	500	NA
30	Other		250	-	500	NA
			3,000		6,000
		Cash	$2,500		$2,500
		Market Value	$35,400	-	$55,250
		Implied Price / Share	$1.99	-	$3.11

 

 

* Boxing.com recently received an offer for $980K; the Company is asking for $1.25M for the property. (a) Alexa Traffic Ranking  (b) # searches done in September 2006 on Overture. (c) We do not know the exact 16 companies that were part of the $8M offer in 2004.

 

 

 

Recent Domain Name Transactions

($ in thousands)

 

 

	Domain	Value	Date		Acquiror
1	Diamond.com	$7,500	May-06		Ice.com; $2.5m for customer list
2	Cat.com	1,000	Sep-05		Pets United
3	Local.com	700	Mar-05		Pvt Sale
4	On.com	635	Mar-06		Moniker/ DomainSystems
5	Macau.com	550	Feb-06		Pvt Sale
6	Wrestling.com	500	Aug-06		Pvt Sale
7	Bike.com	500	Jun-06		Sedo
8	Blue.com	500	Mar-06		Sedo
9	Sex.net	455	May-06		Moniker/Traffic
10	Templates.com	450	Sep-06		Pvt Sale
11	WirelessPhone.com	355	Jun-06		Afternic
12	FunGames.com	350	Oct-06		Pvt Sale
13	Jasmin.com	310	Feb-06		SnapNames
14	Blackjack.de	300	Jun-06		NameDrive
15	Brown.com	300	Feb-06		Pvt Sale
16	CD.com	278	Jul-06		Moniker/Traffic
17	Malta.com	250	Jun-06		Sedo
18	WiFi.com	225	Jul-06		Sedo
19	Nasty.com	200	Jul-06		Sedo
20	Farm.com	200	Apr-06		Afternic
21	Paraguay.com	150	Jun-05		Pvt Sale

 

Source: Domain Journal

 

Potential Upside from other eCommerce Platforms – Importers.com, Body.com, Cologne.com, Karate.com, Brazil.com

Communicate recently re-launched Importers.com, which aims to be one of the leading B2B trade portals connecting import / exporters, similar to Alibaba.com (Yahoo! invested $1B for 40% stake in 8/05). Importers.com already has 110K total members with 200 - 300 members signing up per day. Membership is ~$800 / year per customer, with only a handful of paying subscribers so far. The site is extremely viral and many users return multiple times. The average user generates 25 leads per month, according to the Company. 

 

In August, Importers.com had a record month of $10K in US membership sales. The Company also recently signed an agreement with a Chinese reseller, Goldkey which should lead to additional revenues down the road. By the way of background, Goldkey is located in Shenzen, China with 26 FTE, most of whom are telemarketers. Goldkey has over four years experience selling B2B trade site memberships and they earn 50% commission for each membership sign up.

 

Assuming a $10 ARPU with 110K members, we can value Importers.com at $1M now.  We believe there is significant potential upside in the next year or so.

 

Communicate.com also generates revenues through other sites including Body.com, Cologne.com, Karate.com, and Brazil.com.  The Company has done very little marketing on these sites, as they have been focused primarily on the success of Perfume.com and Importers.com in the near term. 

 

Body.com soft launched in March 2006 with 30k brand beauty, fitness, fashion, jewelry, nutrition items for sales from 1k+ designers.  The site offers a similar model to Perfume.com, where they work with partner vendors and do not hold any inventory. What is interesting is Body.com offers a more diversified product line than Perfume.com including clothing, nutritional items, and high margin jewelry products.   We believe there is significant potential upside to the Body.com story.

 

Brazil.com is another property which we view has upside potential.  The site will be launched as a B2B directory tied to Importers.com for Brazil.

 

Additional Upside from FrequentTraveller.com subsidiary

Communicate owns a 50.4% interest in Frequenttravel.com, which sells travel services for Indonesia.com, Malaysia.com, Vietnam.com, Canadian.com (2007 launch) and GreatBritain.com (2007 launch). Under the terms of the agreement, FrequentTraveller pays Communicate a royalty based on net revenues off the site – 5% on the first $20M. FrequentTraveller is currently raising additional financing (having filed an SB-2), and Communicate has waived all royalties for 2006. Beginning 2007 however, the annual royalty payment will be a min. $150K, regardless of net revenues generated.  The travel sites have generated de minimis revenues since their launch a couple years ago, but with an infusion of capital, should be able to generate meaningful revenues down the road. 

 

Large and Growing E-commerce Market

JupiterResearch forecasts that 2006 online holiday retail sales will grow to $32B, an increase of 18 percent over last year's holiday season. According to JupiterResearch's "Online Retail Holiday Forecast, 2006," a record 114 million users, a 6% increase over last year, will buy online this holiday season. The perfume market stands at roughly $2.9B (NDP Group).

 

Management Ownership

The CEO and CFO each own about 4% of the stock.

 

 

 

 

Risks

1) Increased competition from e-commerce sites with larger audience, traffic, pricing power, marketing budgets. Perfume.com has done a great job, however, at retaining customers (over 150k).

2) Potential cost and margin pressure as vendors the Company works with may raise prices.

3) Domain name market risk – prices for the Company’s domains may decrease in the near and long term. Frequency of domain name sales could pose an issue. Management has begun acquiring new domains (china portfolio) and selling domains opportunistically (wrestling.com for $500K).

4) The Company’s advertising revenue, which is a small part of total revenues, may continue to decline as search results changes made by Yahoo and Google have reduced the volume of Internet traffic directed to Communicate’s network of advertising sites.

 

Catalyst

1) Story getting discovered, company initiating modest IR program.
2) Anticipated strong Q3 and esecially Q4 earnings.
3) Continued momitization of domain properties.
4) Upside from additional ecommerce platforms-importers.com, body.com, karate.com, cologne.com and brazil.com
5) Potential name change of the company to Perfume.com
6) Potential acquisition target.