Thursday, November 5, 1998
Inktomi Corp.
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Phone: 650-653-2800
Website: http://www.inktomi.com
Price (11/4/98): $84 1/8
HOW DID IT DOUBLE?
Investors might be forgiven for thinking Inktomi is in the business of printing money. After all, this leading provider of search engines and network caching solutions has been one of the stellar initial public offerings of 1998. Initially priced as low as $12 per share, the stock went public June 10th at $18, doubled its first day, and topped out near $94 in late October.
While this wild ride has included run-ins with the law of gravity, there's nothing counterfeit about Inktomi's story. Named for a Lakota Indian legend about a trickster spider who could defeat powerful adversaries by using wit and cunning, Inktomi has cleverly positioned itself as the Internet provider's best friend.
The company is known for its robust search engine, which replaced Alta Vista on Yahoo!'s <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YHOO)") else Response.Write("(Nasdaq: YHOO)") end if %> portal site and Infoseek <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SEEK)") else Response.Write("(NYSE: SEEK)") end if %> on Snap!, the portal run by CNET <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CNWK)") else Response.Write("(Nasdaq: CNWK)") end if %> in conjunction with General Electric's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GE)") else Response.Write("(NYSE: GE)") end if %> NBC. Its ability to track more Web pages than other search engines was one selling point.
Inktomi has also become the search engine behind the search engines of Wired Digital's HotBot, which was recently acquired by Lycos <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LCOS)") else Response.Write("(Nasdaq: LCOS)") end if %>, as well as Microsoft's <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> MSN Internet Search and search engines at GeoCities <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GCTY)") else Response.Write("(Nasdaq: GCTY)") end if %>, @Home <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ATHM)") else Response.Write("(Nasdaq: ATHM)") end if %>, and Australia's Ozemail <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: OZEMY)") else Response.Write("(Nasdaq: OZEMY)") end if %>. It tailors its product for each customer and has no desire to compete with them by opening its own branded portal site.
Yet, this cunning spider is more than a search engine provider. Its future depends on weaving its Traffic Server caching technology into the Web. This enabling software helps Internet infrastructure providers offer speedier customer access to frequently used data by storing copies close to the user. It's a software solution that saves bandwidth and cuts down on traffic spikes.
America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> implemented Inktomi's cache technology in September, joining a growing list of major customers such as Ameritech <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AIT)") else Response.Write("(NYSE: AIT)") end if %>, BellSouth <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BLS)") else Response.Write("(NYSE: BLS)") end if %>, @Home Network, and Nippon Telegraph and Telephone <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NTT)") else Response.Write("(NYSE: NTT)") end if %>.
This spate of deals was partially reflected in fourth quarter FY98 results reported October 22nd. Sales rose 317% to $8.3 million, driven by a doubling in search engine revenue to $4 million and network applications revenue that jumped to $4.2 million from virtually nothing a year ago. Excluding one-time acquisition-related charges, Inktomi delivered a net loss of $6.6 million or $0.28 per share, beating the First Call consensus earnings estimate of a loss of $0.33 per share.
BUSINESS DESCRIPTION
Pronounced INK-tuh-me, Inktomi develops open architecture, scalable software applications using something called parallel-processing-based coupled-cluster technology to enhance the performance and intelligence of large-scale networks.
A key revenue driver is Traffic Server, a network cache that provides a nimble and less expensive software solution to what looks like a hardware problem of limited bandwidth. Traffic Server alleviates network congestion and increases performance by storing copies of frequently requested Web pages around the network so that they are closer to users. This reduces the transmission of redundant data by perhaps 50%. Telecommunications carriers and large Internet service providers are the initial target customers.
In late September, Inktomi introduced its Traffic Server 2.0, which offers a 25% performance advantage over the initial version. It also supports streaming media caching in conjunction with RealNetworks' <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RNWK)") else Response.Write("(Nasdaq: RNWK)") end if %> new G2 technology, which could accelerate the broad adoption of audio and video on the Web. The media cache option is sold separately, even for customers who get Traffic Server 2.0 as part of an upgrade subscription, signaling Inktomi's add-on strategy going forward.
In September, the company used 2 million shares of stock to acquire C2B Technologies, a developer of online comparison shopping software similar to that of Junglee, which was recently acquired by Amazon.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMZN)") else Response.Write("(Nasdaq: AMZN)") end if %>. C2B's technology will be integrated into Inktomi's search engine and offered to portal sites.
Competitors and potential competitors include Cisco Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %>, Network Appliance <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NTAP)") else Response.Write("(Nasdaq: NTAP)") end if %>, CacheFlow, Ascend Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ASND)") else Response.Write("(Nasdaq: ASND)") end if %>, and Ciena <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CIEN)") else Response.Write("(Nasdaq: CIEN)") end if %>. Insiders own about 45% of the stock.
FINANCIAL FACTS
Income Statement
12-month sales: $20.4 million
12-month income: ($22.4 million)
12-month EPS: ($1.15)
Profit Margin: N/A
Market Cap: $1,957.6 million (Based on 23.27 million shares)
Balance Sheet
Cash: $47.4 million
Current Assets: $53.1 million
Current Liabilities: $18.7 million
Long-term Debt: $8.7 million
Ratios
Price-to-earnings: N/A
Price-to-sales: 96
HOW COULD YOU HAVE FOUND THIS DOUBLE?
Given its splashy IPO, positive press, and big-name customer signings, it's easy to see why Inktomi has become a darling of Internet investors. Still, this is a technology story based on Inktomi's well-respected offerings and analysts' projections that network caching will become a $2.2 billion dollar business in the next few years. Sales so far have been slight but growing quickly. Valuing the firm, then, has been a serious challenge.
WHERE TO FROM HERE?
Though Inktomi's search engine processed a stunning 1.35 billion search requests during the September quarter, the company's business model depends on its network applications, which reported merely $8 million in revenues for FY98. Even with increased sales, analysts still expect the company to lose $0.94 per share in FY99.
Despite 78% gross margins in the latest quarter and the considerable operating leverage Inktomi will no doubt enjoy longer term, it's only reasonable to wonder if Inktomi can scale its business to justify the current stock price anytime soon. With just 2.3 million shares in the float and more than half of that shorted, it seems likely that Inktomi's repeated news-related surges reflect intense demand chasing a small number of shares -- with periodic short squeezes the result. In other words, the market for the stock has been unnatural.
These dynamics are likely to change. On October 22nd, Inktomi announced that Goldman Sachs, the firm's lead underwriter, would release from lockup some 1.1 million shares on October 28. The same day, Inktomi said it would soon register to sell 3 million shares in a secondary offering, with 2.7 million of those shares offered by current shareowners.
Though the list of selling shareowners hasn't been made public, such a sale suggests early investors see the stock priced at an attractive premium that makes this a good time to take profits. Regardless, the supply and demand balance should shift dramatically as the public float increases by as much as 165% in the next month or so.
Despite Inktomi's significant business accomplishments and the bright future that CEO David Peterschmidt outlined in a recent Fool interview, the company's stock is probably best avoided until the new supply of shares is digested by the market.
-- Louis Corrigan
([email protected])