The Day Ahead: Register.com looks for takeover premium

Register.com presents a great takeover target, Priceline.com debate revenue recognition and Earthlink acquires onemain.com
Written by Larry Dignan, Contributor

Register.com just can't wait to take advantage of being one of the largest "pure play publicly traded domain registrars."

Register.com is so excited to be an independent leader among the domain name crowd that the execs said "pure play" nearly a dozen times in a presentation at the PaineWebber Technology and Growth Conference Thursday. There's a good reason for that -- companies that develop an annuity revenue stream can be nice takeover targets. Just ask Network Solutions, which was acquired by VeriSign for a hefty chunk of change.

The Verisign-Network Solutions merger, which was completed today, "did validate the space" said Alan Breitman, Register.com's finance chief.

Investors have caught on to the Register.com as an ideal takeover target -- shares spiked as soon as Network Solutions was acquired.

And Register.com did its best to sound a lot like Network Solutions. First, comes the annuity revenue stream. Register.com signs up folks for domain names over one to ten years, meaning the revenue visibility is good.

In the first quarter, CEO Richard Forman boasted of $70.2m (£46.7m) in deferred revenue and said the company has plenty of cash to grow its business. In the first quarter, the company reported sales of $12.4 million.

Forman followed up with how the company was layering services on top of domain registrations. The company is also growing abroad with 30 percent of its revenue deriving from overseas.

Of course, there are a few differences. Network Solutions is a cash cow because it had a monopoly of a head start on the rest of the field. Register.com also could face pricing pressure from the competition.

But Register.com, which isn't profitable, said it was pleased with its progress and 18 percent market share in a fragmented market.

As for the profits, Breitman said they are coming too. Analysts are projecting Register.com will turn a profit in 2002, but the company is "assessing how to move that back," said Breitman. "But we don't want to encumber our growth."

Priceline.com chief financial officer Heidi Miller is wondering what all the revenue recognition hubbub is about.

Miller did her best "controversy, what controversy?" routine Thursday as she mulled over how Priceline reports revenue numbers.

The debate is over whether Priceline cites gross revenue or net revenue. It's quite a difference. Under current accounting rules, Priceline has to report gross revenues because it actually take possession of the airline tickets and other items it sells for a short time. The company, however, makes money off the spread between what consumers pay and the price it sells items.

It's a fine point with a big top line effect.

The difference? On a gross revenue basis, Priceline reported 1999 revenue of $482.4 billion. On a net revenue basis, the company had revenue of $72.8 million.

Miller said the company has met with the Securities and Exchange Commission twice, and it appears gross revenues will stick. However, accounting rules can change.

Miller argued the point is merely academic because the bottom line won't change either way. "It has no impact on the bottom line," she said.

PaineWebber e-commerce analyst Sara Farley said the biggest difference would be margins. Instead of looking like Amazon.com , Priceline would have the margins of eBay.

The biggest issue may be psychological. There's a big difference between a company with estimated 2000 sales of $1.4 billion versus one with revenue of $276 million.

Priceline has also taken some heat by setting up its Webhouse (groceries and gas) and international ventures as off-the-balance-sheet ventures.

"These businesses are high risk at this point," said Miller. "We're protecting the public shareholders."

And also making it easier to report profits earlier.

EarthLink's $308 million acquisition of Onemain.com, an Internet service provider makes a lot of sense.

For starters, EarthLink boosts its subscriber base by acquiring the largest independent ISP left. Onemain.com, which had 762,000 subscribers, aggregated a host of small ISPs when it went public.

In addition, EarthLink gets more local. Onemain.com had a strong local portal strategy and focused on small and rural service, which is a growing market.

The move also signifies a changing market. Small independent ISPs are more likely to consolidate now. For EarthLink, it's running out of companies to buy. Now it'll have to market heavily to grow its subscribers.

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