The RagasReport on Fri, 24 Aug 2001 18:18:58 +0200 (CEST)


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[Nettime-bold] THE RAGAS REPORT - Inside the Net's Traffic Cops


Title: RagasReport
Knowledge Capital For Next Economy Architects
Editor: Matt Ragas
"Now read by over 25,000 next economy leaders"


In This Issue  
  Commentary: Content Delivery Stocks: Inside the Net's Traffic Cops
More Knowledge Capital: Siebel Systems, Cisco and Liberty Media
Quote of the Week: Chambers Claims "Business is Stabilizing"
RagasReport Watch List: Adds Akamai and CacheFlow


This Week's Commentary

Content Delivery Stocks: Inside the Net's Traffic Cops

Forget about the dozens of failed broadband entertainment startups that we've all seen flameout over the past 18 months. Let's not even focus on the struggling remaining new media firms like Salon [SALN] and TheStreet.com [TSCM] for a second.

This is NOT where the real growth for broadband content and applications is likely to originate from in the next year or so. Look inside of your own companies. Broadband content, services and applications are alive and well inside the enterprise. Thriving in fact!

Of course, with the dot com bubble burst, most investors still think of broadband content (and all of its related sectors) as being dead and buried for at least the time being. Not surprisingly, stock valuations in the content delivery and caching sectors have been obliterated.

Once towering giants like Akamai [AKAM] and Inktomi [INKT] have been brutally chopped down to size.

Clearly, a year or so ago, we felt that the content delivery sector was still hopelessly overvalued. This area was "froth central" in our book. Now, though, when we look through the caching wreckage we find an entirely different story.

Let's be clear. We've never questioned this group's business models - or essential place in the Net infrastructure food chain- just this sector's valuations. After all, research shops like the Aberdeen Group still see digital content delivery as a $6 billion business by 2005.

With this in mind, we've decided to play the contrarian role as usual and put three of the most well known content delivery and caching names under our analytical microscope for this week.

Let's see what we could find out.

Inktomi [INKT]

Lots of questions, but very few real answers. This is the tough situation that Inktomi investors face right now. After all, in less than 18 months, Inktomi has gone from being the poster child of "Internet infrastructure stocks" to a troubled network software shop struggling to re-gain stability among its end customers. Today, Inktomi's operations can essentially be divided into two core businesses: network products (think caching software) and portal services (i.e. search engine solutions).

For the fiscal third quarter, Inktomi's pro forma sales dropped 31% to $39.6 million and the company reported a loss of $21.4 million or $0.17 per share. To understand just how rapidly Inktomi's business has deteriorated, the firm posted a profit of $4.1 million this same time last year. On the plus side, Inktomi was able to sign up two important new content networking clients in Williams Communications and PanAmSat during the third quarter. In addition, Inktomi added computer giant Dell [DELL] as a new OEM hardware partner during the period.

At this point, it's hard to tell if the worst is really over for Inktomi. While the firm already laid off 25% of its workforce back in April, company CEO David Peterschmidt has so far declined to offer any future guidance. Not surprisingly, 16 of 23 analysts currently have a HOLD on INKT's shares. At roughly $4 bucks a share, Inktomi currently checks in with a $550 million market cap and over $215 million in cash still on hand. Unfortunately, until Inktomi can show its business improving again, I'll sit and watch this mess from the sideline.

RagasRating: HOLD


Akamai [AKAM]

Akamai (which is a Hawaiian word that means "clever") certainly hasn't lived up to its name lately. In fact, the content delivery player's shares have plummeted a staggering 95% over the past year! Much like Inktomi, Akamai shares have been tossed into the gutter as of late. Stock price aside, though, the fact remains that Akamai now operates the largest content delivery network on the planet. Akamai's network has now grown to over 11,600 servers in over 60 countries.

More importantly, Akamai is so far keeping its promises on the financial front. Akamai's sales jumped 137 percent to $43.1 million in the second quarter, while the company's EBITDA loss narrowed sequentially from $36.5 million to $26.5 million. In addition, the firm's gross margin increased from 59% to 68% quarter-over-quarter as well. While this is obviously still not a firm on the brink of profitability, we are encouraged by Akamai's narrowing losses and promises of hitting cash flow break even by the second quarter of next year.

Valuation wise, we like what we see right now in AKAM. At $4.50 per share and with a $512 million market capitalization, Akamai is trading for less than two times next year's projected sales ($290 million). Having ended last quarter with $267 million still in the bank and $25 million in vendor financing available, we believe Akamai holds a "fully funded" business plan. In addition, Akamai's new EdgeSuite service has so far received great initial acceptance in the marketplace (75 customers to date). Forget the naysayers. We're placing our bets now!

RagasRating: BUY

CacheFlow [CFLO]

While the company is a virtual unknown compared to the likes of Inktomi and Akamai, CacheFlow has nevertheless carved out a solid niche in the content networking business. In fact, IDC recently announced that CacheFlow was the worldwide market share leader (35.2%) in caching appliances for 2000. Caching appliances essentially are used by enterprise customers and ISPs to speed site response times and handle traffic surges. In addition to its hardware business, CacheFlow is becoming increasingly focused on content delivery software solutions.

So far, CacheFlow has largely managed to tread water amidst the current IT spending slowdown. Sales drooped from $22.4 million to $20.4 million in the most recent quarter as the pro forma loss for the period widened 78% to $8.4 million. CacheFlow has reacted to the slowdown by firing 18 percent of its 500-person staff and now believes that it can reach operating breakeven at about $30 million in quarterly revenue. While the company has reiterated its commitment to return to profitability, it's a crapshoot guessing how soon this might happen.

This much we do know. The caching king ended last quarter with over $68 million in cash and short-term investments still on hand. This is a management team that has tasted profitability previously and still has a nice cash cushion to work with. In fact, at a recent price of $3 bucks per share, CFLO is now sitting with more than half of its value in cash. Sales are still expected to grow 5% to $103 million this year. Okay. Let's review. Over $100 million in sales, a $130 million market cap, smart cost cutting, a healthy cash position and no debt. Sign me up!

RagasRating: BUY

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Buy It Here!
More Knowledge Capital

 

WE'RE STABILIZING, NO WE'RE STILL IMPLODING: That was essentially the very divergent viewpoints that two of the tech industry's biggest players offered up this week. On Wednesday, Siebel Systems [SEBL] chief Thomas Siebel told investors that he believes the worst is still yet to come for tech companies. In the words of Siebel, "the world went crazy in the last two years" and he doesn't expect to see a turnaround "until Q3 of next year." Maybe Siebel is simply more negative lately because his own baby, SEBL, has cratered 60% since July - then again, maybe not.

In the other corner, we had somewhat bullish comments come later in the week from Cisco head John Chambers. In the eyes of Chambers, he is beginning to see signs that "business is stabilizing." Of course, after watching CSCO's once high growth business essentially fall off the cliff in under a year, I'll take these comments with a grain of salt right now. My own viewpoint on the tech sector remains virtually unchanged. Enterprise software is going to recover much faster then the burned out networking equipment and next generation carrier sectors. Sorry, John. Rough seas are still ahead.


Buy It Here!

LIBERTY WAISTS LITTLE TIME: John Malone is finally getting to live up to his company's name once again. With the long awaited split-off from AT&T [T] completed last week, Liberty Media [LMCa] is once again a "free" and independent company. AT&T had acquired Liberty through its buyout of Malone's Tele-Communications, Inc. (TCI) back in March of 1999. We think it's only a matter of time now before the deal-making Malone finds himself right back "creating shareholder value" in the middle of some major cable/communications deals (think European cable, DirecTV with News Corp etc).

Last week, Liberty announced plans to raise an additional $1 billion through a shelf offering of debt and stock. The company already filed an initial shelf for $2 billion back in July. Combine this with the $2.5 billion cash war chest that Liberty already controls, and one can see how Malone is legitimately positioned to rebuild a TCI-like cable empire all over again across Europe. Currently, Liberty claims that it is still on track to complete its purchase of six cable systems from Deutsche Telekom [DT] in the next few weeks. Watch LMCa shares very closely.

Quote of the Week

 

"We are making these changes at a time when we are beginning to see signs that our business is stabilizing. We were pleased with July's linearity and we've been pleased so far with August."

-- Comments made this week by Cisco chief John Chambers upon announcing that the networking giant would be restructuring into 11 new technology groups.

The RagasReport Watch List
Company Ticker Date Added Price Then Price Now Gain/Loss
Akamai AKAM 8/24/2001 $4.45 $4.45 0%
provider of global delivery services for content and applications
           
CacheFlow CFLO 8/24/2001 $3.00 $3.00
0%
provider of caching appliances and content delivery technologies
           
L90 Inc. LNTY 8/10/2001 $1.77 $1.30
26%
provider of Internet marketing technology and services
           
Apple Computer AAPL 7/27/2001 $18.96 $17.81
6%
niche designer and manufacturer of personal computers
 
August 24, 2001

 


 

 


 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Note: All of The RagasReport Watch List's "Price Now" are based on Thursday's closing prices.

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About Matthew W. Ragas: Ragas is President and Chief Analyst of Matthew Ragas & Associates, an Orlando, FL based strategic advisory and venture development firm. Ragas is also President of iBrand Marketing Inc., a marketing technology consultancy. He was previously the founding editor of Raging Bull, has worked for a tech-focused venture capital firm, and is the author of the critically-acclaimed new e-business book Lessons From the E-Front from Prima Publishing (2001). He is currently at work on a new book titled The Power of Cult Branding for release in the summer of 2002.


DISCLAIMER:
The RagasReport and Matthew Ragas and Associates, are not a registered Investment Adviser or a Broker/Dealer. Readers are advised that the report is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy. The opinions and analyses included herein are based from sources believed to be reliable and written in good faith, but no representation or warranty, expressed or implied is made as to their accuracy, completeness or correctness. Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report should be independently verified with the companies mentioned. In addition, we receive no compensation of any kind from any companies that we mention in this report.




Copyright (c) 2000-2001, Matthew Ragas & Associates.
(http://www.ragasreport.com) All Rights Reserved.




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