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NSI could see downside

The domain registrar's stock is sliding as investors become increasingly concerned about impending federal action.

Network Solutions' stock has fallen more than 35 percent since mid-April, as investors become increasingly concerned about an impending federal report on domain names.

The stock was off 1.13 in trading today to as low as 35.88, down about 3 percent from yesterday's close of 37. NSI shares recently have traded as high as 58.

Network Solutions is among the top appreciating Net stocks, with a big run-up earlier this year. As of April 1, NSI was up 183 percent for 1998 alone. But since mid-April, investors have grown skittish and have deflated the stock because of the unknown surrounding Internet domain name registration, which has provided the bulk of NSI's revenue. In the company's most recent quarter, for example, revenue from the registration of domain names was $15.5 million out of $16.5 million total revenues.

The U.S. government in February published a report called "A Proposal to Improve Technical Management of Internet Names and Addresses." An updated version of that report, intended to nail down a final plan for the registration of domain names, is set to be released as early as next week, said Bill Noxon, a National Science Foundation spokesman.

The plan could mean trouble for NSI, which since 1993 has held a valuable contract with the National Science Foundation to administer InterNIC, a company that holds a monopoly on the registration of the most popular top-level domain names: ".com," ".org," ".net," and ".edu." That contract is set to expire September 30.

Uncertainty surrounding the registration system may continue to "create some pressure on [Network Solutions'] stock," said James Preissler, an analyst at PaineWebber. Because most of NSI's revenue comes from the registration of domain names, there is concern that any change to the current system could disrupt that revenue stream, hurting the company's business.

The government's recently outlined plan would, over time, transfer the administration of Internet domain names to a new private, not-for-profit corporation, in an effort to increase competition in the administration of top-level-domains and the registration of second-level domain names, according to a filing with the Securities and Exchange Commission.

Despite the question of what the updated proposal will hold in store for NSI, Preissler noted that the company's recent quarterly results beat his expectations, and that deferred revenue increased to $72.5 million, up from $61.5 million reported for the previous quarter. He also pointed out that value-added services, as well as a greater variety of domain names, ultimately will be beneficial to NSI.

In addition to Web name registration, Network Solutions has a consulting service division, Web site design and hosting services, and plans to offer outsourcing for business users' email accounts.

"All of those valued-added services are so important," Preissler said. "People are putting too much focus on registration. That is not the market. It is value-added services."

"There is going to be more people [registering domain names], but at the same time, the market is going to get bigger, with more domain names," such as ".web" and ".store," he added.

Yesterday, Preissler reiterated his "buy" rating on Network Solutions, as well as his $70 12-month price target on its stock.

In a recent quarterly filing with the SEC, the company acknowledged that, as long as the final outcome of the government's proposal is unknown, NSI faces the prospect of competition in the domain name registration business, which could have a negative impact on its business.

"The company's revenue and registration fees could be reduced due to increased competition or pricing pressures," the government document said. "For example, other entities may bundle domain name registrations with other products or services, effectively providing such registration services for free."

Indeed, Preissler said he expects that there will be negative coverage following the announcement of a final government plan, which could in turn have a negative impact on NSI's stock.