2HRS2GO: Investors have better DSL choices than Network Plus
Not since The Shadow's pulp adventures ended has something as powerful as this arisen to cloud the minds of men and women. But investors remain mesmerized by three magic letters:
DSL.
Hype over digital subscriber lines created brief spikes in the stock price over some recent IPOs -- including Covad Communications, Rhythms NetCommunications and MGC Communications -- and it drove one of today new offerings, Network Plus Inc. (Nasdaq: NPLS), to a gain of almost 93 percent at one point. The initial craze has subsided slightly, with Network Plus up a "mere" 73 percent in early afternoon trading.
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(If you don't know what DSL is by now, you probably shouldn't be reading ZDNet. Should you really need a definition, just know that DSL technology allows fast Internet access over a standard telephone line. It costs more than regular Internet access, but it lets you keep your phone for voice, while theoretically providing a constant connection to the Internet at relatively high speeds).
Proponents of DSL tout its broadband capacity as the wave of the future. Fine, but why bet on a small reseller like Network Plus? Unless some act of Congress changes the landscape again, communications -- even in the small- to mid-size business niche targeted by Network Plus -- seems destined to be mainly the province of giants, especially as technologies mature.
Some Davids will win their share of victories against the Philistines. But Network Plus doesn't have much ammo for its sling; according to the IPO prospectus, even with the proceeds from today's offering, the company only has enough money to operate through December. Network Plus doesn't expect to be able to repay an outstanding loan -- which already has been renegotiated once to provide "operational flexibility" for the company -- by its due date next April.
Actually, forget about repaying any loans anytime soon, since the company needs another $150 million for building out its network, including a fiber optic ring planned for New England and the New York City metro area. The company said it expects to get the money from a combination of vendor financing and another loan.
Acquisitions are also part of the company's plan for expansion, which should deliver some shareholder dilution, since the company doesn't generate cash. The first quarter saw a $4.6 million operating loss and a $3.7 million loss before interest, taxes, debt and appreciation.
Network Plus started in 1990 as a reseller of AT&T's long distance service. Since 1994, the company has been a reseller of Sprint's long distance, which still generates 26 percent of revenues, although Network Plus now operates its own switch-based network as well. To date, almost all revenue of Network Plus has come from telephone service. DSL sales started last month.
So when you buy Network Plus stock, you're really buying shares in a traditional competitive local exchange carrier that lacks any demonstrable revenues from reselling Northpoint's DSL service. You're buying shares in a company that still needs outside networks to carry 35 percent of its traffic, a figure projected to fall to 20 percent by year's end. And of course, you're buying a company already struggling to pay its debts and planning to take on even more debt next year just to get in the "one-stop communications" game.
And for all the enthusiasm over DSL, it's not a proven market winner, not with cable and possibly wireless looming as broadband alternatives. Granted, cable doesn't seem likely to make a dent in the business market that provides Network Plus with customers, but still, AT&T won't exactly lie down in that field either. In any case, lots of companies plan to offer DSL, including some that can leverage much larger economies of scale than Network Plus ever could.
Investors who insist on a DSL play can certainly do better than investing in a reseller CLEC. Better to go straight for the source, companies like Northpoint or Covad, or even a strong Baby Bell, such as Bell Atlantic. Unlike Network Plus, those companies are going to win no matter who ultimately win no matter who sells DSL.
Other issues:
Yes, ShowCase boasts an impressive list of 2,000 customers. On the other hand, the company expects to see much of its growth from an agreement that has IBM reselling ShowCase's software -- which results in lower margins for ShowCase than the company gets from direct sales.
Judging by underwriter Merrill Lynch & Co.'s decision to price this IPO at the bottom of its range, people aren't buying into ShowCase. Neither should you.
The overall technology market remained in negative territory going into the last stretch of trading this afternoon. With two hours remaining in the session, the Nasdaq Composite Index was down 10.54 to 2631.57, the S&P 500 had slid 8.68 to 1342.77, and the Dow Jones Industrial Average had fallen 36.41 to 10778.94. 22GO>