Communicte.com CMNN
December 21, 2007 - 10:50am EST by
bruin821
2007 2008
Price: 2.05 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 45 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

Sign up for free guest access to view investment idea with a 45 days delay.

 

Description

Communicate.com is a completely undiscovered ecommerce companies whose assets are conservatively worth 50% more than the current market cap and could be a 3-5 bagger over the next 2-3 years.

 

We originally wrote up the idea ($1.35) a little over one year ago, but feel it is a dramatically better idea now despite the stock moving up some.  Given the size of the opportunities on the company’s plate, the talented management team which has a proven track record for execution in the space, and the backstop of the value of its assets we feel that it is currently the best risk/reward idea we own. 

 

Please refer to the original write up for a more detailed description of the business.  The three new key points are: 1) the market for internet domains continues to strengthen 2) more importantly, the company has put together an A plus management team that is highly incentivized 3) the company has raised capital ($7mm in cash and no debt) and now has the resources to build out their most promising websites.  All of the key executives have bought a substantial amount of stock, mostly around the current stock price.  If management can not execute, which we think is extremely unlikely due to their respective backgrounds, the company could be liquidated for at least $3 by our conservative estimates.  If the company does a reasonable job of executing, the stock could be a five bagger (only $200mm market cap) with a submarket multiple. 

 

Communicate.com is under the conventional Wall Street radar screen, as the company is in Canada (even worse, it’s in Vancouver!) and currently trades on the Canadian bulletin boards.  But given the recent pullback and the upcoming catalysts, we believe the timing is right for investors to take a hard look.  The company has applied for an AMEX listing with intentions of ultimately moving to the NASDAQ.  They have hired an IR firm to begin to tell their story starting in January.  We believe they are also on the radar screen of some analysts which specialize in the space.  Also, the company has an unannounced name change which will better describe themselves and probably resonate more with the investment community.

 

In sum, Communicate.com is an Internet retailer that owns over 1100 domain sites.  We believe that about 30 of them are valuable; although with the strength of the domain resale market we are starting to believe some of the smaller domains may have some economic value as well.   The crown jewels are Perfume.com, Cricket.com and a collection of six international sites (including Brazil.com and Vietnam.com).   We believe that these three unique verticals could represent a $150mm revenue opportunity for the company over the next 3 years.

 

Based on our discussions with industry veterans we believe that Internet commerce is still in its infancy, as online advertising continues to grow.  According to eMarketer, U.S. online advertising as a percent of total advertising is estimated to climb from 6% in 2006 to 16% in 2007.  Because of this, domains that have an obvious commercial appeal continue to appreciate in value every year.  This year Scotland.com got bid $3mm and the tiny city of Vancouver.com sold for $3mm.  We estimate the company’s six travel sites to be currently worth at least $25mm which represents half the market cap!

 

After observing some of the Internet/Domain transactions in 2007 it is clear that larger bidders are underpinning this market.  Though some of these sites had some revenues and a lot of unique visitors, there was substantial blue sky associated with these purchases.

Business.com - $350mm (acquired 2007)

Ancestry.com - $300mm (majority interest acquired 2007)

Howstuffworks.com - $250mm (acquired 2007)

Dictionary.com - $100mm (acquired 2007)

 

Over the past year, management has been content to squat on the assets, while barely operating Pefume.com.  From our experiences, the Perfume.com site was woefully-hard to navigate; it was difficult to purchase items and had no banner advertising or even affiliate programs.  Despite almost no marketing efforts, Perfume.com should do about $10mm in revenues for 2007.

 

While operating Perfume.com and to an even lesser extent Importers.com, the company broke even last year.  However, the value of their assets have appreciated considerably.  Please refer to the previous write up for estimates of the value of the all the assets, but below is our current estimates of the main sites, which we think are conservative:

 

Pefume.com                 $20mm    Two times ‘07 revs, should be up sharply in ‘08

Cricket.com                 $6mm      Recently rejected a $6mm offer according to Mgt.

Six Travel sites             $25mm    Scotland.com was bid/Vancouver.com sold $3mm 

Balance portfolio          $10mm    Includes boxing.com, importers.com, body.com, etc

Cash                            $7mm

 

Total                            $68mm            

 

New Management:  The new CEO, Geoff Hampson, is the key to the story as the previous CEO and founder decided to step aside and hire the most qualified person to build out the company to its full capacity.  Immediately upon being hired Hampson bought $1mm of stock at only a slight discount to the market.

 

Geoff Hampson built out Peer 1 Network Enterprises, an Internet infrastructure company from almost nothing to a $150mm market cap company.  He is not only a seasoned Internet executive, but is very familiar with Communicate as they were a client of his previous company.  According to Hampson, he fully recognized the value of the Internet properties and the vast potential of Perfume.com, Importers.com, Cricket.com and the six main country sites.  Since coming aboard, he has been highly focused on upgrading the management team and Board of Directors. 

 

Soon after being hired, Hansen named Jonathan Ehrlich as the company’s President and Chief Operating Officer.  Ehrlich has a similarly impressive background most recently being the Executive Vice President at Indigo Books and Music.  He was widely credited with being one of the main drivers in Indigo becoming the largest Canadian seller of books and music online.

 

Mark Melville was named as Chief Corporate Development Officer. Most recently Melville was a partner at Monitor Consulting and formerly the CEO of Steel Track. He also has an MBA from Harvard Business School.  We met with him recently and found him to be extremely impressive and already had a portfolio of potential ideas to develop shareholder value.

 

Hampson also named Mark Benham to the Board of Directors.  Benham is an extremely well respected venture capitalist at Solarity Partners.

 

In less than six months, Communicate has gone from having almost no management talent (still able to generate $10mm in perfume.com revs) to a very strong, experienced management team.

 

Insider buying.   Hampson, Ehrlich and Benham all put their money where their mouth is buying stock in the recent offering ($5mm) of straight equity at $2 with no warrant coverage, etc.  Mark Melville was hired after the offering, but said he intends to buy stock as soon as he can. Additionally, we feel the management team has been judicious in its awarding of options, which all have a strike price (~$2.40/2.50) about 20% above the current stock price.

 

Corporate Strategy: The company has not yet announced too many details about their development, but they have given some indications.  Building out Perfume.com is job one as they feel that selling perfume on the Internet is a natural like books and music.  It should not be difficult to substantially increase revenues and gross margins.  Customers know exactly what they want and it is a consumable that needs to be regularly refilled.  The company has already relaunched the site and procured new suppliers which will significantly increase gross margins.  Currently, gross margins are only in the low 20% range, but the opportunity for margin expansion is huge, as other competitors realize gross margins of 50-70%.  Additionally, the company is pursuing affiliate programs and banner advertising.  They are also beginning to engage in basic, low cost retention tools such as sending email reminders to customers with coupons whose previous supplies should be running low.  And Hampson hired Creative Good in NYC to improve the usability of the website and increase conversion rates, which he thinks could ultimately double. 

 

We anticipate that Perfume.com will become the online sales leader in the perfume space in the next few years.  As an example of an independent website that is clearly the leader in its space is Zappos.com, which is on track to sell $600mm in shoes in 2007.  This is up from just $1.6mm in sales just six yrs ago. Zappos.com has achieved this high degree of success despite shoes being such an “unnatural internet sale” (most people like to try on shoes before buying).  Plus, shoes have a longer user cycle vs. perfume.

 

Cricket.com: Cricinfo.com was purchased by ESPN for $35 mm in 2006 as a vehicle to reach the huge Indian cricket fan base.  Cricket is the second most watched sport in the world and the most popular sport in India.  Large corporate advertisers are increasingly looking to capitalize on the growing discretionary income of India.  Currently Cricinfo.com is the most recognized cricket site, but there clearly is a lot of opportunity in the underserved cricket space.  The company’s new management team, having wisely shunned a $6mm bid for the Cricket.com domain, has begun discussions with key players in the Cricket world to build out the site and we believe the business model for this site will be predicated on high margin advertising revenues.

 

The company hasn’t said much about the other sites, some will simply be licensed (perhaps boxing.com) and some of the non-core ones will be sold.  We should hear more about their strategies for sites such as importers.com, body.com, call.com etc soon.

 

Comps:            EV       2007 Rev est.               P/S

Kaboose     $217mm        30mm                      7.2x

Marchex     $383mm       134mm                      2.9x

 

Investment Risks:  We feel that the biggest risk is that the company hasn’t yet fully described their corporate strategy and could potentially spend huge amounts of money building out sites unsuccessfully.  New management has only been on the job for a very short period of time, but we are expecting to hear a more comprehensive plan in early ‘08.  After multiple meetings with management we find it very unlikely they will be undisciplined in their capital allocation.   Hampson anticipates that the company will go from breaking even to possibly burning a few million dollars in the early part of 2008 as they recognize the incremental costs of new management salaries and the activities of building out the sites.  But, offsetting that will be the ramping of revenues and margins in 2008. 

 

In sum, Communicate.com is an extremely attractive risk/reward idea in which the portfolio assets are in our view conservatively worth more than the market cap. The upside, though not without some risk, could easily be 3-5x the current stock price assuming reasonable execution.  The experienced management team is aligned with shareholders with their options and a large amount of stock purchased at current levels.

 

 

 

 

 

 

 

 

 

Catalyst

1) Migration to AMEX and ultimately NASDAQ (application with AMEX done)
2) Company name change which should be announced soon
3) Analysts’ coverage-we believe analysts in the space are already following the story closely
4) Announcement of Holiday orders which should already show sales traction in perfume.com and gross margin improvement
5) Development of core sites
6) Monetization of non-core sites
    sort by   Expand   New

    Description

    Communicate.com is a completely undiscovered ecommerce companies whose assets are conservatively worth 50% more than the current market cap and could be a 3-5 bagger over the next 2-3 years.

     

    We originally wrote up the idea ($1.35) a little over one year ago, but feel it is a dramatically better idea now despite the stock moving up some.  Given the size of the opportunities on the company’s plate, the talented management team which has a proven track record for execution in the space, and the backstop of the value of its assets we feel that it is currently the best risk/reward idea we own. 

     

    Please refer to the original write up for a more detailed description of the business.  The three new key points are: 1) the market for internet domains continues to strengthen 2) more importantly, the company has put together an A plus management team that is highly incentivized 3) the company has raised capital ($7mm in cash and no debt) and now has the resources to build out their most promising websites.  All of the key executives have bought a substantial amount of stock, mostly around the current stock price.  If management can not execute, which we think is extremely unlikely due to their respective backgrounds, the company could be liquidated for at least $3 by our conservative estimates.  If the company does a reasonable job of executing, the stock could be a five bagger (only $200mm market cap) with a submarket multiple. 

     

    Communicate.com is under the conventional Wall Street radar screen, as the company is in Canada (even worse, it’s in Vancouver!) and currently trades on the Canadian bulletin boards.  But given the recent pullback and the upcoming catalysts, we believe the timing is right for investors to take a hard look.  The company has applied for an AMEX listing with intentions of ultimately moving to the NASDAQ.  They have hired an IR firm to begin to tell their story starting in January.  We believe they are also on the radar screen of some analysts which specialize in the space.  Also, the company has an unannounced name change which will better describe themselves and probably resonate more with the investment community.

     

    In sum, Communicate.com is an Internet retailer that owns over 1100 domain sites.  We believe that about 30 of them are valuable; although with the strength of the domain resale market we are starting to believe some of the smaller domains may have some economic value as well.   The crown jewels are Perfume.com, Cricket.com and a collection of six international sites (including Brazil.com and Vietnam.com).   We believe that these three unique verticals could represent a $150mm revenue opportunity for the company over the next 3 years.

     

    Based on our discussions with industry veterans we believe that Internet commerce is still in its infancy, as online advertising continues to grow.  According to eMarketer, U.S. online advertising as a percent of total advertising is estimated to climb from 6% in 2006 to 16% in 2007.  Because of this, domains that have an obvious commercial appeal continue to appreciate in value every year.  This year Scotland.com got bid $3mm and the tiny city of Vancouver.com sold for $3mm.  We estimate the company’s six travel sites to be currently worth at least $25mm which represents half the market cap!

     

    After observing some of the Internet/Domain transactions in 2007 it is clear that larger bidders are underpinning this market.  Though some of these sites had some revenues and a lot of unique visitors, there was substantial blue sky associated with these purchases.

    Business.com - $350mm (acquired 2007)

    Ancestry.com - $300mm (majority interest acquired 2007)

    Howstuffworks.com - $250mm (acquired 2007)

    Dictionary.com - $100mm (acquired 2007)

     

    Over the past year, management has been content to squat on the assets, while barely operating Pefume.com.  From our experiences, the Perfume.com site was woefully-hard to navigate; it was difficult to purchase items and had no banner advertising or even affiliate programs.  Despite almost no marketing efforts, Perfume.com should do about $10mm in revenues for 2007.

     

    While operating Perfume.com and to an even lesser extent Importers.com, the company broke even last year.  However, the value of their assets have appreciated considerably.  Please refer to the previous write up for estimates of the value of the all the assets, but below is our current estimates of the main sites, which we think are conservative:

     

    Pefume.com                 $20mm    Two times ‘07 revs, should be up sharply in ‘08

    Cricket.com                 $6mm      Recently rejected a $6mm offer according to Mgt.

    Six Travel sites             $25mm    Scotland.com was bid/Vancouver.com sold $3mm 

    Balance portfolio          $10mm    Includes boxing.com, importers.com, body.com, etc

    Cash                            $7mm

     

    Total                            $68mm            

     

    New Management:  The new CEO, Geoff Hampson, is the key to the story as the previous CEO and founder decided to step aside and hire the most qualified person to build out the company to its full capacity.  Immediately upon being hired Hampson bought $1mm of stock at only a slight discount to the market.

     

    Geoff Hampson built out Peer 1 Network Enterprises, an Internet infrastructure company from almost nothing to a $150mm market cap company.  He is not only a seasoned Internet executive, but is very familiar with Communicate as they were a client of his previous company.  According to Hampson, he fully recognized the value of the Internet properties and the vast potential of Perfume.com, Importers.com, Cricket.com and the six main country sites.  Since coming aboard, he has been highly focused on upgrading the management team and Board of Directors. 

     

    Soon after being hired, Hansen named Jonathan Ehrlich as the company’s President and Chief Operating Officer.  Ehrlich has a similarly impressive background most recently being the Executive Vice President at Indigo Books and Music.  He was widely credited with being one of the main drivers in Indigo becoming the largest Canadian seller of books and music online.

     

    Mark Melville was named as Chief Corporate Development Officer. Most recently Melville was a partner at Monitor Consulting and formerly the CEO of Steel Track. He also has an MBA from Harvard Business School.  We met with him recently and found him to be extremely impressive and already had a portfolio of potential ideas to develop shareholder value.

     

    Hampson also named Mark Benham to the Board of Directors.  Benham is an extremely well respected venture capitalist at Solarity Partners.

     

    In less than six months, Communicate has gone from having almost no management talent (still able to generate $10mm in perfume.com revs) to a very strong, experienced management team.

     

    Insider buying.   Hampson, Ehrlich and Benham all put their money where their mouth is buying stock in the recent offering ($5mm) of straight equity at $2 with no warrant coverage, etc.  Mark Melville was hired after the offering, but said he intends to buy stock as soon as he can. Additionally, we feel the management team has been judicious in its awarding of options, which all have a strike price (~$2.40/2.50) about 20% above the current stock price.

     

    Corporate Strategy: The company has not yet announced too many details about their development, but they have given some indications.  Building out Perfume.com is job one as they feel that selling perfume on the Internet is a natural like books and music.  It should not be difficult to substantially increase revenues and gross margins.  Customers know exactly what they want and it is a consumable that needs to be regularly refilled.  The company has already relaunched the site and procured new suppliers which will significantly increase gross margins.  Currently, gross margins are only in the low 20% range, but the opportunity for margin expansion is huge, as other competitors realize gross margins of 50-70%.  Additionally, the company is pursuing affiliate programs and banner advertising.  They are also beginning to engage in basic, low cost retention tools such as sending email reminders to customers with coupons whose previous supplies should be running low.  And Hampson hired Creative Good in NYC to improve the usability of the website and increase conversion rates, which he thinks could ultimately double. 

     

    We anticipate that Perfume.com will become the online sales leader in the perfume space in the next few years.  As an example of an independent website that is clearly the leader in its space is Zappos.com, which is on track to sell $600mm in shoes in 2007.  This is up from just $1.6mm in sales just six yrs ago. Zappos.com has achieved this high degree of success despite shoes being such an “unnatural internet sale” (most people like to try on shoes before buying).  Plus, shoes have a longer user cycle vs. perfume.

     

    Cricket.com: Cricinfo.com was purchased by ESPN for $35 mm in 2006 as a vehicle to reach the huge Indian cricket fan base.  Cricket is the second most watched sport in the world and the most popular sport in India.  Large corporate advertisers are increasingly looking to capitalize on the growing discretionary income of India.  Currently Cricinfo.com is the most recognized cricket site, but there clearly is a lot of opportunity in the underserved cricket space.  The company’s new management team, having wisely shunned a $6mm bid for the Cricket.com domain, has begun discussions with key players in the Cricket world to build out the site and we believe the business model for this site will be predicated on high margin advertising revenues.

     

    The company hasn’t said much about the other sites, some will simply be licensed (perhaps boxing.com) and some of the non-core ones will be sold.  We should hear more about their strategies for sites such as importers.com, body.com, call.com etc soon.

     

    Comps:            EV       2007 Rev est.               P/S

    Kaboose     $217mm        30mm                      7.2x

    Marchex     $383mm       134mm                      2.9x

     

    Investment Risks:  We feel that the biggest risk is that the company hasn’t yet fully described their corporate strategy and could potentially spend huge amounts of money building out sites unsuccessfully.  New management has only been on the job for a very short period of time, but we are expecting to hear a more comprehensive plan in early ‘08.  After multiple meetings with management we find it very unlikely they will be undisciplined in their capital allocation.   Hampson anticipates that the company will go from breaking even to possibly burning a few million dollars in the early part of 2008 as they recognize the incremental costs of new management salaries and the activities of building out the sites.  But, offsetting that will be the ramping of revenues and margins in 2008. 

     

    In sum, Communicate.com is an extremely attractive risk/reward idea in which the portfolio assets are in our view conservatively worth more than the market cap. The upside, though not without some risk, could easily be 3-5x the current stock price assuming reasonable execution.  The experienced management team is aligned with shareholders with their options and a large amount of stock purchased at current levels.

     

     

     

     

     

     

     

     

     

    Catalyst

    1) Migration to AMEX and ultimately NASDAQ (application with AMEX done)
    2) Company name change which should be announced soon
    3) Analysts’ coverage-we believe analysts in the space are already following the story closely
    4) Announcement of Holiday orders which should already show sales traction in perfume.com and gross margin improvement
    5) Development of core sites
    6) Monetization of non-core sites

    Messages


    SubjectUpdate on CMNN
    Entry01/30/2008 02:12 PM
    Memberbruin821
    Despite new management being on the job for not even a fully quarter, CMNN reported y/y holiday revenue growth of nearly 40%. This confirmed our suspicion that ramping up perfume.com sales is very doable.

    CEO Geo Hampson, who owns a lot of shares bought an additional 10k.

    They also hired an IR firm to start getting the story out.

    SubjectUpdate?
    Entry10/31/2008 11:13 AM
    Membertrev62
    Bruin,

    Has anything changed fundamentally here? What do you think about their plans to sell 6 of their domain names? Any other updated thoughts would be appreciated.

    SubjectRE: Update?
    Entry10/31/2008 02:26 PM
    Memberbruin821
    Fundamentally the story has gotten much better. Apparently there was a distressed seller in the stock that should have been done this week and there is a percpetion that they are gong out of business. According to management, there has been some large one time only charges and current burn is only about $1.5mm per year. They should raise between $8-$10m by selling off six sites and keeping the other 23 including perfume.com, cricket.com, rodeo.com, boxing.com etc.

    The cricket enterprise should be enormous and IMO the upside in the stock is pretty massive.

    SubjectRE: Cricket revenue
    Entry11/21/2008 07:23 PM
    Memberbruin821
    Management has said goal for next year is $15mm and for the year after $40-$50mm in revs. This was a while ago so could be accelerated with the new league they have signed up and the success of the league. TV advertising I believe is sold out for the IPL league starting next May.
      Back to top