Communicate.com CMNN
October 30, 2006 - 7:10pm EST by
bruin821
2006 2007
Price: 1.35 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 24 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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  • Ecommerce
  • No Debt
  • Nano Cap
  • Insider Ownership
  • Potential Acquisition Target

Description

Communicate.com (CMNN) is an undiscovered, rapidly growing e-commerce company that trades below asset value.  Communicate owns, develops and markets approximately 900 websites, including: Perfume.com, Importers.com, Karate.com, Body.com, Boxing.com, Brazil.com, etc. The Company generates revenues from e-commerce, advertising and domain name sales.  The Company has been developing its crown jewel, Perfume.com very successfully while starting to rollout Importers.com and Body.com.  The other domains they are starting to sell off selectively. Recently they sold Wrestling.com for $500K.  According to management, they recently turned down an offer to sell Boxing.com for $980K. 

 

Communicate.com is a simple story with very little downside risk that in our opinion is worth at least $2 (48% upside) today.   The Company has $2.5M in cash, no debt, 3 yrs profitability, and many short and long term catalysts.   With the continued growth of the Internet and limited supply of top domain names, these properties will only become more valuable over time.  The biggest negative is that the market cap is small and doesn’t trade too many shares.

 

 

Overview of CMNN Valuation:

 

Est. Value ($ in M)         Assumptions

20.0       -    30.0            Perfume.com; ~$10M CY06 revs; 2.0x – 3.0x CY 06 rev.

8.9         -    13.7           16 *.com domains (~$500K - $750K per domain)

2.5         -      5.0           10 *.com domains (~$250K – $500K per domain) 

1.0         -      3.0           Importers.com; 110K members; new site launch Oct 2006

0.5         -      1.0           China portfolio (99 domains) and 780 misc domains

2.5         -      2.5           Cash

$35.4M   -    $55.2M       Market Value (17.7M shares outstanding)

                                   

$1.99     -     $3.11         Implied Price / Share

 

 

Perfume.com

Perfume.com, the Company’s primary e-commerce site has grown YOY revenues ~140+% from just $530K in revenues in 2003 to over $4.7M in 2005, accounting for 66% of total 2005 revenues. The site generated $2.8M revs for the first half of the year and accounted for roughly 80+% of Q1, Q2 revenues.  We expect Perfume.com to do at least $10M in sales this year.  According to the Company’s blog (run by the Director of Communications): “Q4 should be the biggest sales quarter in history; Expected to account for about 45% of fiscal 2006 revenues, and to be profitable.” Assuming the Company posts a $4.5M quarter, this would imply a 64% increase from $2.7M Q4 05, which seems to be on the conservative side given the Company’s historical growth trajectory.

 

The Company has done very little marketing of Perfume.com, yet the site has drawn over 150K customers (many repeat customers referring friends) and a 250K person mailing list/newsletter, which has grown 3x since Q2 05.  The Company plans to spend up to 10% of gross product sales for marketing in 2006 and 2007 with a push in Q4 for holiday sales.  As of this past week, the Company began sending weekly emails instead of biweekly emails to its customer list. 

 

Operationally, Perfume.com’s gross margins run at ~20%, which is above average for an e-commerce site. Perfume.com does not hold any inventory and has signed up a total of six major vendors that they work with (up from only two a year ago). The Company has built optimization software to scour the web and find the lowest possible prices available and to competitively price match with other sites. A comparison search on “Dolce & Gabbana Light Blue 3.4 oz Spray” yielded a price of $55.48 ($5.99 flat rate shipping anywhere in US) on Perfume.com vs. $80.00 at Macys.com, $80.00 at Sephora.com; $80.00 at Amazon.com, and $59.39 at fragrancenet.com.  Perfume.com guarantees the best perfume deals on the web, and will match any competitor’s price.  As the site expands vendor partnerships, the Company should be able to reduce COGs and SG&A.

 

As an aside, an interesting revenue trajectory comparable to Perfume.com is Zappos.com, the Sequoia Capital backed online shoe store which grew revenues from $1.6M in 2000 to $8.6M in 2001, $32M in 2002, $70M in 2003, $184M in 2004, $370M in 2005 and an estimated $600+M this year. Zappos has done very little marketing and has grown by focusing on offering an exceptional customer experience. For this reason, a lot of their new business comes through referrals.

 

Perfume.com Valuation: We estimate the value of Perfume.com to be worth at least $20M (~$1.12 / share), or a conservative 2.0x CY 06 revs of $10M. Perfume.com is experiencing high growth (having grown revenues 270+% from 03 to 04, 140+% from 04 to 05; 100+% from 05 to 06E) and should command a growth and profitability ($81K in profit for Q2 06) premium. Current comps trade at 2.4x EV / CY 07 revs with growth at 21%. Most of these companies have low gross margins 10-15% and are not profitable.  If we assume $15.0 CY 07E revenues for Perfume.com (50% growth from $10M 06revs) and apply a 2.4x ’07 rev. multiple, Perfume.com would be worth ~$36M or ~$2.03 / share.   

 

 

 

 

 

Price

 

Enterprise

 

Revs ($mm)

 

EV / Revs

 

LT

Company

 

10/17/06

 

Value

 

CY '06E

 

CY '07E

 

CY '06E

 

CY '07E

 

Growth

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

eBay

 

28.78

 

37,900

 

     5,890

 

   7,350

 

6.4x

 

5.2x

 

30%

Amazon

 

32.47

 

13,560

 

   10,350

 

 12,160

 

1.3x

 

1.1x

 

18%

Digital River

 

53.06

 

1,810

 

       305

 

     365

 

5.9x

 

5.0x

 

25%

FTD

 

15.84

 

655

 

       630

 

     678

 

1.0x

 

1.0x

 

10%

Blue Nile

 

36.61

 

532

 

       248

 

     295

 

2.1x

 

1.8x

 

20%

Drugstore.com

 

3.58

 

311

 

       418

 

     454

 

0.7x

 

0.7x

 

20%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mean

 

2.9x

 

2.4x

 

21%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Source:  First Call rev. est.

 

 

Valuable Domain Portfolio

Communicate.com’s core domain portfolio should be worth a minimum $8M ($0.45 / share).  The Company was offered this amount for only sixteen of their *.com domains (roughly ~$500K per domain) in 2004, not including Perfume.com, which accounts for ~$10M in CY 06E revenues. The acquisition offer also did not include an additional 10 single word domains, which we estimate to be worth at least $250K each, according to domain comparables (see list of acquisition comps below).

 

Communicate owns a portfolio of 900 domains - 28 highly valuable *.com; 99 *.cn (china), and 780 other domains including many popular, single word, *.com names like boxing.com, brazil.com, body.com, perfume.com, cricket.com, boxing.com, vietnam.com, karate.com, number.com, yen.com, mouse.com, keyboard.com, leisure.com, stereos.com, etc. These domain names are for sale by the Company and they also generate revenue from site advertising (direct navigation/pay per click through partnerships with Yahoo! Overture and Google Adsense). See list of domains and the Company’s website for additional details. 

 

Single word, *.com domains command a significant premium in the domain marketplace and there have been a quite a few domain acquisitions this year. Recent acquisition comparables include Diamond.com ($7.5M; 5/06), Cameras.com ($1.5M; 10/06), Cat.com ($1M; 9/05), Local.com ($700K; 3/05), On.com ($635K; 3/06), Macau.com ($550K; 2/06), Bike.com ($500K; 6/06), Blue.com ($500K; 3/06), Templates.com ($450K; 9/06) according to Domain Journal.

 

The Company recently sold one of its domains, Wrestling.com for $500K (This revenue will be recognized in Q3 ’06). Wrestling.com currently ranks #547,650 in Alexa and ran 3,715 keyword queries on Overture for the month of Sept. According to management, the Company recently turned down an offer to sell Boxing.com for $980K.   We have provided a range of $900K - $1.25M (the Company is asking for $1.25M), for Boxing.com’s valuation. Other past sales that the Company has made include Rugby.com ($350K) and 4 sites (Automobile.com, Exercise.com, Call.com, Makeup.com) for $1M and 5% royalties in 2003. 

 

The domain industry will generate revenues of $600M this year and will reach $1.2B within three years according to Jordan Rohan (RBC), a noted analyst in the space.  Susquehanna Financial is more bullish and estimates the industry could hit $1 billion by next year. According to a recent Forbes article, domain name sales generated $29 million in 2005.  Rohan estimates that the revenue pool could double in the next three years if direct navigation companies can refine their processes and develop e-commerce portals on their sites.  Communicate has taken this approach and transformed Perfume.com, Importers.com, Body.com, Cologne.com into e-commerce/B2B sites in the past couple of years.

 

Part of the reason for the rise of M&A activity is the recent entry of venture-backed domain aggregators, who have raised a significant amount of capital  in the past year in attempts to consolidate the space and grab valuable domain property.  These companies have been paying hefty premiums for popular domain names, since return on capital for these sites are rather high.  Some of companies include: 

 

Demand Media - $220M raised since 5/06 (3i Group, Oak, Spectrum Equity). Led by former chairman of MySpace. 250k domains, 35m visitors monthly.  Sites include enom.com, eHow.com, HillClimbMedia.com (trails.com, golflink.com).

 

Name Media - $80M raised in 2/05 (Summit Partners, Highland Capital). Led by former CEO of IDG and Primedia. 650k domains, 25m visitors monthly.

 

InternetREIT - ~$20M+ raised since 10/04 (Maveron, Perot Investments). 400k domains, 50m visitors monthly. Sites include netster.com, bands.com; creditreports.com, shows.com, vietnamwar.com, etc.

 

Another major player is publicly traded Marchex (MCHX; $670M mkt cap; 4.4x EV / CY 06 Revs), which acquired 100,000 domains for $164M in late 2005 at a rev multiple of 8.6x ($19M revs at time of acquisition).

 

The entrance of these companies into the market positively affects domain holders, such as Communicate.com, and we believe sets a floor for pricing of their domain portfolio. We estimate an $8M floor on sixteen of the properties with additional upside to $12M for these sites. Additionally, we value the remaining portfolio (the other 10 single word domains, China portfolio, 780 other properties) at a minimum of $3-$6M. It is highly conceivable that the entire Company is acquired by one of these domain aggregators in the next 1-2 years.

 

 

Communicate Valuation

($ in thousands)

 

 

 

 

 

 

 

 

Traffic

Searches /

 

Current Properties

 

Estimated Value

Ranking (a)

Month (b)

1

Malaysia.com

 

                   500

 -

       750

112,475

1,014

2

Cricket.com

 

                   500

 -

       750

128,541

22,926

3

Boxing.com*

 

                   900

 -

     1,250

253,967

3,399

4

Yen.com

 

                   500

 -

       750

272,172

58

5

Vietnam.com

 

                   500

 -

       750

317,934

1,528

6

Indonesia.com

 

                   500

 -

       750

415,171

467

7

Canadian.com

 

                   500

 -

       750

415,777

218

8

Brazil.com

 

                   500

 -

       750

429,673

2,328

9

Karate.com

 

                   500

 -

       750

506,391

519

10

Body.com

 

                1,000

 -

     2,000

520,171

1,137

11

Greatbritain.com

 

                   500

 -

       750

1,114,913

35

12

Overseas.com

 

                   500

 -

       750

1,950,716

217

13

Call.com

 

                   500

 -

       750

2,928,152

115

14

Rodeo.com

 

                   500

 -

       750

3,300,829

468

15

Stereos.com

 

                   500

 -

       750

3,866,379

33

16

Leisure.com

 

                   500

 -

       750

3,117,779

124

 

 

Subtotal

               $8,900

 

$13,750

 

 

 

 

 

 

 

 

 

 

18

Perfume.com

 

               20,000

-

   30,000

34,906

1,900

17

Importers.com

 

                1,000

-

     3,000

20,208

196

 

 

Subtotal

               21,000

 

   33,000

 

 

 

 

 

 

 

 

 

 

19

Communicate.com

 

                   250

-

       500

1,046,815

35

20

Mouse.com

 

                   250

-

       500

1,384,990

241

21

Keyboard.com

 

                   250

-

       500

1,453,605

210

22

Electronic.com

 

                   250

-

       500

2,035,240

504

23

Number.com

 

                   250

-

       500

3,683,866

128

24

Cologne.com

 

                   250

-

       500

3,690,279

239

25

Veggie.com

 

                   250

-

       500

No Data

32

26

Surrey.com

 

                   250

-

       500

No Data

101

27

Burnaby.com

 

                   250

-

       500

No Data

32

28

Veg.com

 

                   250

-

       500

6,859,951

37

29

China Portfolio

 

                   250

-

       500

NA

 

30

Other

 

                   250

-

       500

NA

 

 

 

 

                3,000

 

     6,000

 

 

 

 

 

 

 

 

 

 

 

 

 Cash

$2,500

 

$2,500

 

 

 

 

 

 

 

 

 

 

 

 

Market Value

$35,400

 -

$55,250

 

 

 

 

 

 

 

 

 

 

 

 

Implied

Price / Share

                $1.99

 -

      $3.11

 

 

 

 

* Boxing.com recently received an offer for $980K; the Company is asking for $1.25M for the property. (a) Alexa Traffic Ranking  (b) # searches done in September 2006 on Overture. (c) We do not know the exact 16 companies that were part of the $8M offer in 2004.

 

 

 

Recent Domain Name Transactions

($ in thousands)

 

 

 

Domain

       Value

          Date

 

Acquiror

 

1

Diamond.com

$7,500

May-06

 

Ice.com; $2.5m for customer list

2

Cat.com

1,000

Sep-05

 

Pets United

 

3

Local.com

700

       Mar-05

 

Pvt Sale

 

4

On.com

635

Mar-06

 

Moniker/ DomainSystems

 

5

Macau.com

550

Feb-06

 

Pvt Sale

 

6

Wrestling.com

500

Aug-06

 

Pvt Sale

 

7

Bike.com

500

Jun-06

 

Sedo

 

8

Blue.com

500

Mar-06

 

Sedo

 

9

Sex.net

455

May-06

 

Moniker/Traffic

 

10

Templates.com

450

Sep-06

 

Pvt Sale

 

11

WirelessPhone.com

355

Jun-06

 

Afternic

 

12

FunGames.com

350

Oct-06

 

Pvt Sale

 

13

Jasmin.com

310

Feb-06

 

SnapNames

 

14

Blackjack.de

300

Jun-06

 

NameDrive

 

15

Brown.com

300

Feb-06

 

Pvt Sale

 

16

CD.com

278

Jul-06

 

Moniker/Traffic

 

17

Malta.com

250

Jun-06

 

Sedo

 

18

WiFi.com

225

Jul-06

 

Sedo

 

19

Nasty.com

200

Jul-06

 

Sedo

 

20

Farm.com

200

Apr-06

 

Afternic

 

21

Paraguay.com

150

        Jun-05

 

Pvt Sale

 

 

Source: Domain Journal

 

Potential Upside from other eCommerce Platforms – Importers.com, Body.com, Cologne.com, Karate.com, Brazil.com

Communicate recently re-launched Importers.com, which aims to be one of the leading B2B trade portals connecting import / exporters, similar to Alibaba.com (Yahoo! invested $1B for 40% stake in 8/05). Importers.com already has 110K total members with 200 - 300 members signing up per day. Membership is ~$800 / year per customer, with only a handful of paying subscribers so far. The site is extremely viral and many users return multiple times. The average user generates 25 leads per month, according to the Company. 

 

In August, Importers.com had a record month of $10K in US membership sales. The Company also recently signed an agreement with a Chinese reseller, Goldkey which should lead to additional revenues down the road. By the way of background, Goldkey is located in Shenzen, China with 26 FTE, most of whom are telemarketers. Goldkey has over four years experience selling B2B trade site memberships and they earn 50% commission for each membership sign up.

 

Assuming a $10 ARPU with 110K members, we can value Importers.com at $1M now.  We believe there is significant potential upside in the next year or so.

 

Communicate.com also generates revenues through other sites including Body.com, Cologne.com, Karate.com, and Brazil.com.  The Company has done very little marketing on these sites, as they have been focused primarily on the success of Perfume.com and Importers.com in the near term. 

 

Body.com soft launched in March 2006 with 30k brand beauty, fitness, fashion, jewelry, nutrition items for sales from 1k+ designers.  The site offers a similar model to Perfume.com, where they work with partner vendors and do not hold any inventory. What is interesting is Body.com offers a more diversified product line than Perfume.com including clothing, nutritional items, and high margin jewelry products.   We believe there is significant potential upside to the Body.com story.

 

Brazil.com is another property which we view has upside potential.  The site will be launched as a B2B directory tied to Importers.com for Brazil.

 

Additional Upside from FrequentTraveller.com subsidiary

Communicate owns a 50.4% interest in Frequenttravel.com, which sells travel services for Indonesia.com, Malaysia.com, Vietnam.com, Canadian.com (2007 launch) and GreatBritain.com (2007 launch). Under the terms of the agreement, FrequentTraveller pays Communicate a royalty based on net revenues off the site – 5% on the first $20M. FrequentTraveller is currently raising additional financing (having filed an SB-2), and Communicate has waived all royalties for 2006. Beginning 2007 however, the annual royalty payment will be a min. $150K, regardless of net revenues generated.  The travel sites have generated de minimis revenues since their launch a couple years ago, but with an infusion of capital, should be able to generate meaningful revenues down the road. 

 

Large and Growing E-commerce Market

JupiterResearch forecasts that 2006 online holiday retail sales will grow to $32B, an increase of 18 percent over last year's holiday season. According to JupiterResearch's "Online Retail Holiday Forecast, 2006," a record 114 million users, a 6% increase over last year, will buy online this holiday season. The perfume market stands at roughly $2.9B (NDP Group).

 

Management Ownership

The CEO and CFO each own about 4% of the stock.

 

 

 

 

Risks

1) Increased competition from e-commerce sites with larger audience, traffic, pricing power, marketing budgets. Perfume.com has done a great job, however, at retaining customers (over 150k).

2) Potential cost and margin pressure as vendors the Company works with may raise prices.

3) Domain name market risk – prices for the Company’s domains may decrease in the near and long term. Frequency of domain name sales could pose an issue. Management has begun acquiring new domains (china portfolio) and selling domains opportunistically (wrestling.com for $500K).

4) The Company’s advertising revenue, which is a small part of total revenues, may continue to decline as search results changes made by Yahoo and Google have reduced the volume of Internet traffic directed to Communicate’s network of advertising sites.

 

Catalyst

1) Story getting discovered, company initiating modest IR program.
2) Anticipated strong Q3 and esecially Q4 earnings.
3) Continued momitization of domain properties.
4) Upside from additional ecommerce platforms-importers.com, body.com, karate.com, cologne.com and brazil.com
5) Potential name change of the company to Perfume.com
6) Potential acquisition target.
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