| 2007 | 2008 | ||||||
| Price: | 2.05 | EPS | |||||
| Shares Out. (in M): | 0 | P/E | |||||
| Market Cap (in $M): | 45 | P/FCF | |||||
| Net Debt (in $M): | 0 | EBIT | 0 | 0 | |||
| TEV (in $M): | 0 | TEV/EBIT | |||||
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Communicate.com is a completely undiscovered ecommerce companies whose assets are conservatively worth 50% more than the current market cap and could be a 3-5 bagger over the next 2-3 years.
We originally wrote up the idea ($1.35) a little over one year ago, but feel it is a dramatically better idea now despite the stock moving up some. Given the size of the opportunities on the company’s plate, the talented management team which has a proven track record for execution in the space, and the backstop of the value of its assets we feel that it is currently the best risk/reward idea we own.
Please refer to the original write up for a more detailed description of the business. The three new key points are: 1) the market for internet domains continues to strengthen 2) more importantly, the company has put together an A plus management team that is highly incentivized 3) the company has raised capital ($7mm in cash and no debt) and now has the resources to build out their most promising websites. All of the key executives have bought a substantial amount of stock, mostly around the current stock price. If management can not execute, which we think is extremely unlikely due to their respective backgrounds, the company could be liquidated for at least $3 by our conservative estimates. If the company does a reasonable job of executing, the stock could be a five bagger (only $200mm market cap) with a submarket multiple.
Communicate.com is under the conventional Wall Street radar screen, as the company is in
In sum, Communicate.com is an Internet retailer that owns over 1100 domain sites. We believe that about 30 of them are valuable; although with the strength of the domain resale market we are starting to believe some of the smaller domains may have some economic value as well. The crown jewels are Perfume.com, Cricket.com and a collection of six international sites (including Brazil.com and Vietnam.com). We believe that these three unique verticals could represent a $150mm revenue opportunity for the company over the next 3 years.
Based on our discussions with industry veterans we believe that Internet commerce is still in its infancy, as online advertising continues to grow. According to eMarketer,
After observing some of the Internet/Domain transactions in 2007 it is clear that larger bidders are underpinning this market. Though some of these sites had some revenues and a lot of unique visitors, there was substantial blue sky associated with these purchases.
Business.com - $350mm (acquired 2007)
Ancestry.com - $300mm (majority interest acquired 2007)
Howstuffworks.com - $250mm (acquired 2007)
Dictionary.com - $100mm (acquired 2007)
Over the past year, management has been content to squat on the assets, while barely operating Pefume.com. From our experiences, the Perfume.com site was woefully-hard to navigate; it was difficult to purchase items and had no banner advertising or even affiliate programs. Despite almost no marketing efforts, Perfume.com should do about $10mm in revenues for 2007.
While operating Perfume.com and to an even lesser extent Importers.com, the company broke even last year. However, the value of their assets have appreciated considerably. Please refer to the previous write up for estimates of the value of the all the assets, but below is our current estimates of the main sites, which we think are conservative:
Pefume.com $20mm Two times ‘07 revs, should be up sharply in ‘08
Cricket.com $6mm Recently rejected a $6mm offer according to Mgt.
Six Travel sites $25mm Scotland.com was bid/Vancouver.com sold $3mm
Balance portfolio $10mm Includes boxing.com, importers.com, body.com, etc
Cash $7mm
Total $68mm
New Management: The new CEO, Geoff Hampson, is the key to the story as the previous CEO and founder decided to step aside and hire the most qualified person to build out the company to its full capacity. Immediately upon being hired Hampson bought $1mm of stock at only a slight discount to the market.
Geoff Hampson built out Peer 1 Network Enterprises, an Internet infrastructure company from almost nothing to a $150mm market cap company. He is not only a seasoned Internet executive, but is very familiar with Communicate as they were a client of his previous company. According to Hampson, he fully recognized the value of the Internet properties and the vast potential of Perfume.com, Importers.com, Cricket.com and the six main country sites. Since coming aboard, he has been highly focused on upgrading the management team and Board of Directors.
Soon after being hired, Hansen named Jonathan Ehrlich as the company’s President and Chief Operating Officer. Ehrlich has a similarly impressive background most recently being the Executive Vice President at Indigo Books and Music. He was widely credited with being one of the main drivers in Indigo becoming the largest Canadian seller of books and music online.
Mark Melville was named as Chief Corporate Development Officer. Most recently Melville was a partner at Monitor Consulting and formerly the CEO of Steel Track. He also has an MBA from
Hampson also named Mark Benham to the Board of Directors. Benham is an extremely well respected venture capitalist at Solarity Partners.
In less than six months, Communicate has gone from having almost no management talent (still able to generate $10mm in perfume.com revs) to a very strong, experienced management team.
Insider buying. Hampson, Ehrlich and Benham all put their money where their mouth is buying stock in the recent offering ($5mm) of straight equity at $2 with no warrant coverage, etc. Mark Melville was hired after the offering, but said he intends to buy stock as soon as he can. Additionally, we feel the management team has been judicious in its awarding of options, which all have a strike price (~$2.40/2.50) about 20% above the current stock price.
Corporate Strategy: The company has not yet announced too many details about their development, but they have given some indications. Building out Perfume.com is job one as they feel that selling perfume on the Internet is a natural like books and music. It should not be difficult to substantially increase revenues and gross margins. Customers know exactly what they want and it is a consumable that needs to be regularly refilled. The company has already relaunched the site and procured new suppliers which will significantly increase gross margins. Currently, gross margins are only in the low 20% range, but the opportunity for margin expansion is huge, as other competitors realize gross margins of 50-70%. Additionally, the company is pursuing affiliate programs and banner advertising. They are also beginning to engage in basic, low cost retention tools such as sending email reminders to customers with coupons whose previous supplies should be running low. And Hampson hired Creative Good in NYC to improve the usability of the website and increase conversion rates, which he thinks could ultimately double.
We anticipate that Perfume.com will become the online sales leader in the perfume space in the next few years. As an example of an independent website that is clearly the leader in its space is Zappos.com, which is on track to sell $600mm in shoes in 2007. This is up from just $1.6mm in sales just six yrs ago. Zappos.com has achieved this high degree of success despite shoes being such an “unnatural internet sale” (most people like to try on shoes before buying). Plus, shoes have a longer user cycle vs. perfume.
Cricket.com: Cricinfo.com was purchased by ESPN for $35 mm in 2006 as a vehicle to reach the huge Indian cricket fan base. Cricket is the second most watched sport in the world and the most popular sport in
The company hasn’t said much about the other sites, some will simply be licensed (perhaps boxing.com) and some of the non-core ones will be sold. We should hear more about their strategies for sites such as importers.com, body.com, call.com etc soon.
Comps: EV 2007 Rev est. P/S
Kaboose $217mm 30mm 7.2x
Marchex $383mm 134mm 2.9x
Investment Risks: We feel that the biggest risk is that the company hasn’t yet fully described their corporate strategy and could potentially spend huge amounts of money building out sites unsuccessfully. New management has only been on the job for a very short period of time, but we are expecting to hear a more comprehensive plan in early ‘08. After multiple meetings with management we find it very unlikely they will be undisciplined in their capital allocation. Hampson anticipates that the company will go from breaking even to possibly burning a few million dollars in the early part of 2008 as they recognize the incremental costs of new management salaries and the activities of building out the sites. But, offsetting that will be the ramping of revenues and margins in 2008.
In sum, Communicate.com is an extremely attractive risk/reward idea in which the portfolio assets are in our view conservatively worth more than the market cap. The upside, though not without some risk, could easily be 3-5x the current stock price assuming reasonable execution. The experienced management team is aligned with shareholders with their options and a large amount of stock purchased at current levels.
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