Transcript Internet Industry - Beedie School of Business

Internet Industry
Paul Bridges
Beverly Chin
Xinlin Huang
Julia Lee
Akif Unal
1
Outline




Industry Overview: Beverly Chin and Akif Unal
Xinlin Huang
Julia Lee
Paul Bridges
2
History of the Internet
Started in the 1960s
 Nov 1990 – 1st Web Server
 Aug 1991 – FTP
 1992 “www” was released
 1993 – 1st Browser

3
Internet Overview (World)




679.7 Million people use the internet for various
purposes.
%10.76 of the population uses internet
Market => Not saturated yet, opportunities in the
market still exist
2004 estimate of internet users is 940 M. (with a
growth rate of 38.29%)
4
Internet Usage
5
Worldwide eCommerce Growth
Revenues
2001
2002
2003
2004
North America
$908.6
$1,498.2
$2,339.0
$3,456.4
Asia Pacific
$117.2
$286.6
$724.2
$1,649.8
Western Europe
$194.8
$422.1
$853.3
$1,533.2
Latin America
$6.8
$13.7
$31.8
$81.8
Total ($ B)
$1,233.6
$2,231.2
$3,979.7
$6,789.8
6
Size of the Internet Business

To illustrate the massive market size of the
internet business, in 2003:

Forecasted Canadian GDP=>$ 860 Billion

Internet Business Revenue=>$3,980 Billion
7
Internet Overview (USA)

2002 Internet Users => 118 million

2003 Internet Users => 151 million

%27.9 Growth from 2002-2003
8
Significance of the US
The online markets in the USA are still
witnessing strong growth as demand for
the services continue to grow.
 %22.2 of all internet users are in the US.
 Americans form%4.4 of the world
population.

9
Growth in Selected Online Activities by U.S. Consumers: 20002002
2000
Growth rate
(2000 -2002) (%)
(% of all U.S.
Users)
Number of
U.S. Users,
2000
2002
(% of all
U.S. Users)
Number of
U.S. Users,
2002
Bank online
164
17
14 million
32
37 million
Buy or make a reservation for
travel
Buy a product
90
36
31 million
50
59 million
78
48
41 million
62
73 million
Participate in an online auction
69
15
13 million
20
22 million
Play a game
45
34
29 million
37
42 million
Buy or sell stocks
40
12
10 million
12
14 million
Get hobby information
38
76
65 million
77
90 million
Get financial information
32
44
37 million
42
49 million
10
Hypes of the Internet Industry
1995 - $5.3 Billion of revenues
 1996 – Internet stocks filled the market


Demand > Supply
1997 – New Co. gains of 200%
 1998 - $301 Billion of revenues

11
National Survey of Canada
Geographical Coverage
 Full – Time Employees
 Age of Companies
 Most Widely Used Web Server Software
 Most Widely Used Web Operating System

12
Crash of the Internet Industry

1999 – Supply greater than
demand

Major price correction
 Common stock fell as much as
80%

2000 – Crash of the Internet
Industry
13
Reasons for the Crash

Assuming the publishing model will work
 Based
solely on advertising
 Inefficient strategies
14
US Online Advertising Spending
15
Reasons for the Crash

Getting there first
 Try
to get the first mover advantage
 Little or no planning

Flying blind: No business success metrics
 Try

to get into market quickly
Unstable business models
 Assumed
to be infinitely scalable
 No realistic plan for achieving profitability
16
Reasons for the Crash (con’t)

Build IT and the rest will come
 Absences
of market testing
 Belief that Internet itself will create value

Old economy business principle ignored
 Thought
that the industry was immune to
normal business principles
17
Reasons for the Crash (con’t)

New investment strategy
 Market

inefficiency
Growth at any cost
 Thought
dominant market share as route to
profitability

Inexperienced management
 Lack
of business knowledge
18
Current Trend
Companies are careful about IT spending
 Past  didn’t look at the cost of IT
 Present  Value cost very carefully

 Crash
back to reality
19
Current Trend (con’t)
Technology spending rebounding
 1st gradual increases of tech spending
since 2000
 However no chance of returning to the
free-spending days in 1990’s

20
Future Trends

Personalization will increase

Security / Confidentiality will continue to be
an issue

Wireless connections will be the norm
21
Netopia (Utopia and Network)

In the near future the world will find itself in
the Net’s embrace.

2005 – Sony One => telephone, a
television set and a computer in one
revolutionary set
22
Netopia – (predictions)

Virtual education will be common 2010

In 2015 there will be so many viewers on the
Web that television will be absorbed

In 2017, Japanese companies will offer virtual
reality systems for home use
23
24
Yahoo! Company Briefs
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
Conceived by co-founders Yang and Filo in a
Stanford trailer in 1994; IPO in April 1996
The first online navigational guide to the Web
No. 1 Internet brand with the largest audience
worldwide
One of few profitable, publicly traded Internet
companies
Much of its popularity built on its search
directory
Major competitor: Google – currently the most
popular destination for Web searches
25
Yahoo! Company Briefs (Con’t)

Management Team
 Chairman
and CEO: globally-respected media and
entertainment executive, 24 years at Warner Bros.,
joined in May, 2001
 Co-founders as director and chief technologist
 Management team young and all joined after 2000
26
Yahoo! Products


Basic Products and Services free to
customers
Revenue from fee-based premium services
 Marketing
services: paid search and online
advertising
 Fees: personals, enhanced email and DSL, event
Webcasting
 Listing: consumer and business listings-based
services such as HotJobs, Yahoo!Autos,
Yahoo!Real Estate
27
Key Income Statement Items
$ Million
Sales
Cost of Sales
Gross Profit
SGA Expenses
EBITDA
Dep. & Amort
EBIT
Other Income
Interest Exp
Net Income Cont. Op
Net Income
Dividends/Share
Basic EPS from
Cont. Op.
Dec-02
Dec-01
Dec-00
Dec-99
Dec-98
953.1
74.7
878.4
680.8
197.6
109.4
88.2
91.6
0
717.4 1,110.20
90.5
109
626.9 1,001.20
592.4
611.5
34.5
389.7
130.6
69.1
-96.1
320.6
77.1
-33.7
0
0
588.6
73.3
515.3
318.7
196.6
42.3
154.3
37.7
0
203.3
18.6
184.7
126.3
58.4
10.2
48.2
14.6
0
106.9
42.8
0
-92.8
-92.8
0
70.8
70.8
0
61.1
61.1
0
25.6
25.6
0
0.18
-0.16
0.13
0.12
0.07 28
EBITDA Margin
0.93
0.92
0.91
0.9
0.89
0.88
0.87
0.86
0.85
1998
1999
2000
2001
2002
29
Key Balance Sheet Items
$thousands
2002
2001
$ 310,972
$ 372,632
Short-term investments in marketable securities
463,204
553,795
Accounts receivable
113,612
68,648
82,216
56,458
Long-term investments in marketable securities
763,408
580,418
Property and equipment, net
371,272
131,648
Goodwill
415,225
192,987
96,252
19,457
$ 18,738
$ 13,218
Accrued expenses and other current liabilities
257,575
235,897
Deferred revenue
135,501
109,402
31,557
30,006
611
581
2,430,222
2,067,410
-159,988
-59,988
Cash and cash equivalents
Prepaid expenses and other current assets
Intangible assets, net
Accounts payable
Minority interests in consolidated subsidiaries
Common Stock
Additional paid-in capital
Treasury stock
30
Ratios from Balance Sheet
2002
2001
A/R Bad Account Ratio
0.17
0.23
Intangible/Total Assets
$0.18
$0.09
Debt/Equity
0
0
31
Consumers and Customers
- Steady Growth; Product Monetization
Ending Users
Q3'02 Q4'02 Q1'03 Q2'03 Q3'03
Unique (M)
201
213
232
236
245
Active Reg (M)
93
101
112
116
123
Daily Views (M)
1,504 1,598 1,865 1,914 2,041
Total (M)
1,798 1,912 2,209 2,266
2,409
FeePaying Cust.(Th) 1,550 2,200 2,900 3,500 4,200
Total User Growth = 34%; Rev Customer Growth = 171%
32
Rev. per Avg Unique User per Month
0.5$
0.48
0.46
0.44
0.42
0.4
0.38
Q3'02
Q2'03
Q3'03
33
Quarterly Revenue Trend by Product
34
Quarterly Revenue Trend by Region
- Significant Growth both in US and
internationally for 2003
$ in Millions
USA
International
Total
Q3'02
210.1
38.7
248.8
Q2'03
271.3
50.1
321.4
Q3'03
299.8
57.1
356.9
YOY
43%
47%
43%
QOQ
10%
14%
11%
35
Operating Cash Flow Trend
$million
140
120
100
80
60
40
20
0
Q1'02
Q2'02
Q3'02
Q4'02
Q1'03
Q2'03
Q3'03
36
5 Yr Stock Performance
37
1 Yr Stock Performance
38
Fundamental Data
P/E
EPS
Div/Sh
Cur Div.Yield
125.10
0.34
NA
NA
Mkt Cap.
27.36 Bil
Shares Out. 657.3 Mil
Exchange NASDAQ
Ticker
YHOO
39
5 Yr Comparison to Ind. and S&P 500
Sales growth
Dividends Growth Rate
EPS Growth Rate
Avg Gross Margin
Avg Net Profit Margin
Avg Return on Equity
Avg Return on Assets
Avg Return on Capital
Yahoo!
37.08
NA
NA
89.8
4.8
2.2
1.8
2.2
Industry S&P 500
13.63
5.41
NA
0.48
NA
-11.66
68.3
47.4
-93.8
5.4
NA
12.1
-27.6
2
-33.4
5.8
40
Current Comparison w/ Ind. and S&P 500 -1
Sales Growth (yr ago qtr) (%)
EPS Growth (vs yr ago qtr) (%)
Current P/E Ratio
Market to Book Value
Gross Margin (%)
Net Profit Margin (%)
Return on Equity
Return on Assets
Return on Capital
Yahoo!
43.4
126.4
125.1
10.25
93.2
16.8
7.7
5.1
6
Industry S&P 500
7
29.5
31.4
NA
33.7
NA
3.03
8.27
47.8
76
4.6
-3.9
9
NA
1.4
-1.7
4
-2.1
41
Current Comparison w/ Ind. and S&P 500 - 2
Yahoo!
Debt/Equity Ratio
0.28
Current Ratio
3.1
Quick Ratio
2.8
Interest Coverage
NA
Leverage Ratio
1.5
Book Value/Share
4.15
Industry S&P 500
0.28
1.24
2.9
1.6
2.7
1.1
2.3
2.8
1.6
6.2
2.44
11.11
42
Using the Pricing Model

P(0) = FCFE(0)*g/(k-g)/#of com shares outstanding

Exp FCFE = 323.8*1.35/657.3 = $0.665
g = 0.35 (next 5 year avg.)
Average k = 40% for 1997 - 2002





on the conservative side – excluding the price rise from end of 02
P(0) = $13.3
Current Price = $40
43
EVA Analysis
EVA = IC*(ROIC – WACC)
 There has been no long term debt and no
interest expense
 ROIC = ROE = 7.7%
 WACC >>7.7%
 EVA <0

44
Prospects


Growth – imperative for success
Revenue Generating Product:
1.



2.
3.
Marketing Service:
New marketing and business solutions for both
small and medium-sized companies
Upsurge in the realization of internet
advertisement usefulness
Researchers expect the paid search market to
quadruple in 2005 from 2002.
Fees and Listing product volume also increasing
because of the overall demand and Yahoo!’s
acquisitions.
Revenue per charged user is increasing
45
Prospects (Con’t)



International Expansion: sales steadily
increasing in the past; increasing opportunity
to tap into foreign advertising markets, esp. in
Europe and Asia
Alliances: myriad globally for technology and
strategic Cooperation; the leading position in
the industry enhances alliance opportunities –
5 in 3 months internationally
New Acquisitions:


Overture: specializing in selling advertising links that
accompany search results on sites such as Yahoo and MSN
Inktomi: Web search technology company, potential to
replace Google as Yahoo’s default provider
46
Investor Recommendations

Positive:
 Profitable
 Growth
Opportunities
 Solid Financials

Negative:
 P/B
very high
 Most recent growth largely fueled by acquisition of
Overture; what if nothing left to acquire?
 $19 million sold by insiders – sign of potential
slowdown/liquidity needs?

Recommendation:
Hold - for the balancing forces
47
48
Company Overview




Founded in July 1994 by Jeffrey Bezos
Opened the “door” in July 1995 in Bezos’
400-square-foot garage (“Earth’s Biggest
Bookstore”)
Went public in 1997
Initial mission: to become a leader in online
bookselling
49
Company Overview

Jeffrey Bezos
- 32-years-old when he found Amazon
- drew up a list of 20 retail categories, and
finally chose bookselling
- now 39-years-old CEO of Amazon.com
50
Amazon.Com Today

“Selling anything you want to buy online”
- music, DVDs, videos, photo items, toy, baby items, software,
computer, video games, cell phones, travel service and so on….


Operates the Internet Movie Database at
www.imdb.com – provide varied service for
entertainment industry
Operates six global websites : US, Canada, UK,
Germany, Japan, and France
51
Financials ( as of Nov. 13)







Ticker Symbol : AMZN
Listed in Nasdaq
# of shares outstanding : 401.1M
Stock price : $ 54.80
Market Capitalization : $21.98 B
52-week high : $61.15
low : $18.43
Dividend : never paid cash dividend
52
Financial Highlights
(All data for latest 12 months)









Sales : 4.75 B
Income : –35.2 M
Net Profit Margin: -0.70%
Return on Equity : NA
D/E ratio : NA
Revenue/Share : 11.83
Earning/Share : -0.09
Book Value /Share : -2.89
Dividend : 0
53
Ratio Comparison
Amazon
Industry
S&P500
EPS
na
na
43.30
P/E
na
na
35.4
ROE
na
na
8.6
BV/share
-3.14
2.51
11.14
54
Price History
55
Income Statement
(Values in Millions)
Dec-02
Sales
Cost of Sales
Gross Profit
SGA Expenses
EBITDA
Dep. & Amort
EBIT
Other Income
Interest Exp
Net Income
Dividends/Share
Dec-99
Dec-98
3,932.90 3,122.40 2,762.00 1,639.80
2,858.00 2,375.00 2,105.20 1,281.80
1,074.9
747.4
656.8
358.0
881.4
848.2
997.6
673.7
193.5
-100.8
-340.8
-315.7
87.8
129.9
322.8
282.1
105.7
-230.7
-663.6
-597.8
-71.2
-5.2
-273.9
-29.6
142.9
139.2
130.9
84.6
610
145.9
464.1
195.6
-49.7
12.1
-61.8
14.1
26.6
-149.1
0
Dec-01
-567.3
0
Dec-00
-1411.3
0
-720
0
-124.5
56
0
Performance Trend –Quarterly Results
57
Segment Highlights
58
Segment Highlights
59
Balance Sheet
2002
2001
2000
Total Assets
1,990.4
1,637.5
2,135.2
Total Liability
3,343.2
3,077.5
3,102.5
Total Equity
(1,352.8)
(1,440.0)
(967.3)
Debt to Equity ratio : NA
Asset turnover : 2.9
60
Cash Flow Statement

Basic Free Cash Flow
= operating cash flow less purchases of
fixed assets
= 174,291,000 – 39,163,000
= $135,128,000
61
Prospects

Began selling gourmet food on its Web store

Established a beachhead in Silicon Valley to
develop a subsidiary called A9.
 A9
will be a new, separately branded and
operated company.
 Enables the company to invent and develop the
best e-commerce search technology for the
Amazon.com Web site and to license to thirdparty firms as well
62
Prospects (con’t)

Launched its new Sporting Goods store
- teamed with leading sporting goods merchants to offer
more than 3,000 brands covering more than 50 sports
- announced strategic alliance with the Nautilus Group :
its line of branded fitness products are available in
Amazon’s new Sporting Goods store
63
Valuation

Traditional valuation model not applicable
- net loss for past years
- significant stock price fluctuation
- no dividend
 no reliable K can be calculated for the
purpose
64
Valuation (con’t)
+ Internet’s No.1 retailer
+ Customer centered company
+ Strong brand recognition
-
Accumulated Deficit
Intense competition
Significant indebtedness
Highly volatile stock price
65
Recommendation
Hold
66
67
United Online Inc.



Ticker Symbol
Traded
Stock Price




UNTD
NASDAQ
$17.71
November 3, 2003 3:2 stock split
Shares Outstanding
Market Cap
52 week range
46,800,000
1,348,800,000
$8.47-29.09
68
Company Overview


Internet Service Provider (ISP)
Specializing in value and free internet access packages


Brands





Only national ISP to offer free internet access
NetZero
Juno
BlueLight
Most common pay package $9.95
Premier Speed Enhanced $29.95
69
Company Overview

2.5 million active pay subscribers
 150%

5.2 million active free access subscribers
 -16%

increase (2002 1 million)
increase from 2002
11% of the estimated 70 million
households with internet access
 15%
of the narrow band households
70
History NetZero
March Pay subscription Platinum service launched
2001
April
QUALCOMM invests $144 million in NetZero
2000
September NetZero stock begins trading publicly on
1999 NASDAQ under symbol NZRO
October Free Internet service launched
1998
July NetZero founded
1997
71
History United Online
April
2003
Company launches dial-up accelerator services NetZero HiSpeed
and Juno SpeedBand
March
2003
Juno and NetZero announce value-priced Platinum Internet Access
for Mac users
November United Online acquires Internet access and email assets of
2002 Bluelight.com from Kmart Corporation
September
2002
March
2002
September
2001
June
2001
United Online reports first GAAP Net Income
United Online announces first EBITDA profit
United Online begins trading on NASDAQ under symbol UNTD after
the successful merger of NetZero and Juno
NetZero and Juno announce strategic merger, forming United
Online
72
Business Strategy


Use free access to entice
Turn free subscribers to pay subscribers


2003 turned over ½ million
Don’t use costly wide spread marketing


CD mail-outs
Free trial period



Lower Brand Recognition
Lower Cost of Subscriber
Compete on Price


Majority of competitors charge over $20
$9.71 average price per pay subscriber
73
Possible Threats

Move towards broad band


Competitors may decrease price


UNTD’s competitive advantage is price
Decrease in ad rev



Total narrow band users decreased in 2003
GM not re-signing advertising relationship
Change in demand and mrkt for internet advertising
Increase usage of subscribers
74
Possible Threats


Telecommunication providers may change term
of agreements
Possible litigation
 Copyright


infringement
Seasonality
Political instability in India
 30%
of work force located in India
75
Possible Growth

Increase of low-income households accessing internet




Historically low penetration rate (for internet)
Price sensitive
Large market
Release of accelerated internet access

Compete with broad band



Large free subscriber base


NetZero HiSpeed
Juno SpeedBand
If convert to pay subscribers
Large database of subscribers

Able to use in target marketing
76
Management

CEO


Bounced around before joining March 1999
Chief Strategy Officer Jon O. Fetveit
 May

Mark R. Goldston
CFO
 April
1999
Charles S. Hilliard
1999
77
Ratios








P/E :
ROE
Dividends:
Net Income:
NI –ESOP
EPS 2003:
2002
P/BV
FCF 2003
2002
26
12.9%
N/A
27,792,000
6,299,000
.68
(1.35)
6.63
59,123,000
(4,935,000)
78
79
80
Balance Sheet

There is no loan and very few liabilities
 Liability/Assets=

22%
High amount of current assets
 Cur Asset/Tot Asset=

77%
Asset Turnover
 .98
81
I/S and Cash Flow

65% Increase in Rev
 75%




increase Billable Services
Expenses only increased 15%
89% of revenue is from pay services
Positive net income and cash from operations
Increased purchases of PP&E
 300%
increase
82
Strength and Weakness

Strength
 No
real debt to speak of
 Large base of subscribers
 New service package

Weakness
 Volatile
stock price
 Intense competition
 Accumulated Deficit

Profitable in 2003
83
Equity Valuation

Traditional valuation model not applicable
- annual net loss up until FY02
- significant stock price fluctuation
- no dividend
 no reliable K can be calculated for the
purpose
84
Recommendation
BUY
85