Network Solutions Answering Questions (Fool Plate Special) October 28, 1999

An Investment Opinion

Network Solutions Answering Questions

By Dave Marino-Nachison (TMF Braden)
October 28, 1999

When the U.S. Government officially lifted Network Solutions' (Nasdaq: NSOL) monopoly on the Internet domain name registry and registrar businesses this spring, investors were tripping over each other getting out of the stock. The worry of many was that with competition would come the end of any advantage the company had built up while it had free reign from the feds.

We dueled over the company's prospects in April, and the bears outnumbered the bulls two to one; the company's shares were more than halved by midsummer. Now Network Solutions (NSI) stock is clawing its way back, having passed pre-Duel levels following a steady rise that began in August.

A combination of factors appears to be fueling NSI's resurgence. First, much of the specter of the effect that regulation might have held over the company over the next several years was lifted last month when the company agreed to a pact with the International Corporation of Assigned Names and Numbers and the Commerce Department that gave NSI a registry contract through 2003 in exchange for competitor access to NSI's Whois database (for an annual fee).

That registry contract, good for $6 in revenue per address per year, could be extended through 2007 if NSI splits up its registry and registrar businesses within a year-and-a-half. As registry, NSI maintains a database of "second-level" names for its top-level domains (the "fool" in the, while as registrar, it enters second-level names into a master database, which it operates.

With the legislative load lightened, so to speak, investors are for some time now free to worry about operations -- making their job considerably easier.

And more pleasant, given today's release of third-quarter results. The company turned in net income of $0.21 per share, up from $0.09 last year and three pennies better than Wall Street expected as revenue, gross profit, operating income and net income rose 133%, 148%, 134% and 142%, respectively. On the balance sheet side -- which CFO Robert Korzeniewski said is "the strongest it has ever been" -- NSI reported cash and investments of $234 million and no long-term debt as the company generated free cash flow of more than $81 million.

The company's Internet Technology Services (ITS) turned in revenues of $2.9 million, up 27% from a year ago. For the first nine months of the year, ITS revenues are ahead 87% year-over-year at $8.8 million. That's nice growth, and some (OK, me, in my April Bull argument) believed this division would have to grow like crazy to overcome potential lost business at the registry and registrar business post-monopoly.

And signs are encouraging. "In addition to domain name registration," said CEO Jim Rutt, "we sold value added services to approximately 15% of our 1.3 million new registrations in the third quarter, which highlights a potential future growth area for the company."

But momentum at the latter divisions has kept up nevertheless. The company's registrar operation registered 1.3 million new domain names in Q3, not only beating the 1998 figure by 160% but the second-quarter number by 12%. International registrations in the .com, .net, and .org domains rose 194% from Q3 1998 to 406,000 with strong performance in Australia, Japan, China, and Hong Kong. Non-NSI registrars chipped in another 190,000 names to the company's registry.

And NSI continues to add new wrinkles to its service offerings, during the quarter firing up the "dot com directory" for online businesses now boasting more than 2 million listings, the "dot com essentials" turnkey system for small businesses and individuals looking to get started on the Internet, and "dot com ISP Tools," software Internet service providers and Web-hosting companies can use to streamline the Web address registration procedure.

Despite a lack of investor confidence that hurt NSI shares this summer, the company has responded well to the competitive threat and appears to be firing on all cylinders. Though the midyear buying opportunity appears to have come and gone, NSI certainly seems poised to deliver investors further growth.

Related Links:
Network Solutions Web Page
Network Solutions Message Board
Dueling Fools, 4/28/99, Network Solutions