THE DAY AHEAD: USA.Net fumbles for the right IPO timing

Larry Dignan
4 min read

In search of the perfect IPO timing, USA.Net (proposed ticker: MBOX) has quietly delayed its pricing for the last two weeks. It's officially "day by day."

Why the concerns about timing? It's simple -- USA.Net is going to flop and needs all the help it can get. You could blame the delay on market conditions and the dwindling returns of Internet IPOs. Or you could conclude that USA.Net, a free email provider, is a tough sell.

USA.Net: Has the IPO window shut?

Now USA.Net's IPO is going to be an even tougher sell. Mail.com (proposed ticker: MAIL), a USA.Net competitor is also going public this week. Because of USA.Net's delay there'll be two too many free email providers in the IPO market this week.

The USA.Net delays are just postponing the inevitable. When it goes public, look out below.

USA.Net, a free email provider, is a proxy for the myriad of no-name.com IPOs that could be doomed. The excuse for these delayed offerings is "current market conditions." The truth is that many of the companies in the IPO pipeline shouldn't go public. Investors shouldn't be venture capitalists.

Not convinced?

We've done some homework and can give you a few more reasons why USA.Net is a most-likely-to-break candidate. USA.Net can go public this week, next week, or next year. It's still shaky.

Problem 1: We've seen this business model before and Wall Street voted it down. USA.Net wants investors to buy its 8.5 million shares in hopes that it can convince its free email users to trade up to premium offerings such as fax and paging services.

If the free-to-premium service plan sounds vaguely familiar it is. Juno Online (Nasdaq: JWEB) had the same idea and was panned in its market debut. USA.Net could be Juno'ed. Or ZipLink'ed (Nasdaq: ZIPL) for that matter.

Problem 2: No brand name. Who is USA.Net and what do they offer? USA.Net just doesn't stand out in a crowded field. However, USA.Net boasts some impressive user stats. Through April 30, the company managed more than 10.2 million mailboxes across all its service offerings and processed over 172 million messages April. The company boasts a database of 6.7 million subscribers. It's still not enough to make the IPO fly.

Problem 3: USA.Net's growth strategy pits it against some big-time players.

USA.Net's growth strategy is to reel in more business from companies that want to outsource their email services. It's possible that USA.Net's plan for growth will work going forward, but it's going to need more than 258,000 business email boxes to grow. The company began commercial services a year ago and will face off against IBM's Lotus, Novell and others.

Problem 4: The exploding customer syndrome. For a recent example see Adforce (Nasdaq: ADFC) after losing Geocities as a customer.

USA.Net's two largest customers -- American Express and Netscape -- have agreements that will expire in the next year or two. The American Express deal expires Dec. 31 and the pact with Netscape runs out in June 2000.

Netscape could be a big worry since it was acquired by America Online Inc. (NYSE: AOL), which may have other plans for Netcenter e-mail. Advertising revenue from Netscape WebMail accounted for 30 percent of USA.Net's total sales in 1998.

"We do not know what impact America Online's merger with Netscape will have on our relationship with Netscape," said USA.Net in regulatory filings. "America Online provides its subscribers with email services."

Problem 5: The financials. Where's the revenue?

For the quarter ending March 31, the company lost $5.8 million on $1.9 million in sales, compared with losses of $1.98 million on $520,000 in sales for the year-earlier quarter. USA.Net's sales look good compared to Drkoop.com (Nasdaq: KOOP), but that doesn't say much. USA.Net said it will lose money "at least through the end of 2001."

Boring is beautiful

Solectron Corp. (Nasdaq: SLR), an equipment contract manufacturer, isn't the most high-flying tech company, but it definitely rakes in a lot of cash.

Solectron met analysts' estimates in its third quarter Monday, earning $75.7 million, or 29 cents a share, on sales of $2.15 billion.

What does Solectron do? It makes various products for titans such as Cisco Systems Inc. (Nasdaq: CSCO), which is Solectron's largest customer. Tech companies are increasingly farming out work to Solectron and other contract manufacturers.

As a result, Solectron boosted third quarter revenue 68 percent for the quarter and sees more blue skies ahead. Officials actually urged Wall Street analysts to raise their earnings and revenue targets.

Boring is indeed beautiful.