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<StockTalk>
TMF Interview With
NetGravity Inc. CFO Stephen Recht
November 12, 1998
With Brian Graney (TMF Panic)
NetGravity Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NETG)") else Response.Write("(Nasdaq: NETG)") end if %> is a San Mateo, California-based provider of software and services that help several of the most visited sites on the Internet with their advertising needs. Founded in September 1995, the company went public this past June. In this interview, CFO Stephen Recht discusses NetGravity's business model, its products, and its competitors.
| "NetGravity is the leader in online advertising and direct marketing software solutions." |
TMF: NetGravity definitely seems like an interesting company to us. Can you tell us a little bit more about what you're trying to do?
Recht: NetGravity is the leader in online advertising and direct marketing software solutions. NetGravity develops AdServer software that is sold to large publishers, merchants, and agencies. That software is then used to manage and report on advertising and promotions that are done by sites and/or agencies.
TMF: I see. So, who are some of your biggest clients?
Recht: We have about 40% of the top 50 ad-revenue publisher types in the Internet. They include CNN Interactive, Netscape <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NSCP)") else Response.Write("(Nasdaq: NSCP)") end if %>, Time Inc. New Media, USA Today -- all of those are primarily on the publisher side. We also have a significant number of merchant customers. E*Trade <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EGRP)") else Response.Write("(Nasdaq: EGRP)") end if %>, Onsale <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ONSL)") else Response.Write("(Nasdaq: ONSL)") end if %>, CDNow <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CDNW)") else Response.Write("(Nasdaq: CDNW)") end if %>, and N2K <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NTKI)") else Response.Write("(Nasdaq: NTKI)") end if %> are examples of that type of customer.
TMF: What are the big differences between those two types of customers and which do you think is going to grow fastest?
Recht: Much of that is dependent upon how rapidly the Internet grows and how rapidly commerce on the Internet grows. They're integrated in many ways. We have more publisher customers than we do merchant customers at this point in time. And we have been seeing more growth on the merchant side as more and more companies realize that a significant amount of commerce can be conducted over the Internet. And there are probably more large merchants that are coming to the Internet than there are large publishers on the Internet at this point in time.
TMF: And do you think that NetGravity's profitability really depends on the growth of the Internet? Or are there other factors that are going to determine your performance down the road?
| "The business model that NetGravity pursues is one in which we sell software and related services to help people do online advertising and direct marketing." |
Recht: The business model that NetGravity pursues is one in which we sell software and related services to help people do online advertising and direct marketing. The number of ad servers that are required in order to accomplish that task depends on the volume of a particular site, or the volume of a particular campaign, or the volume of the number of promotions that are done. So, to the extent that the Internet grows, demand for NetGravity ad servers grows as well.
TMF: Turning to your business plan, it's a little bit different from some of the other advertising companies in the area, such as DoubleClick <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DCLK)") else Response.Write("(Nasdaq: DCLK)") end if %> -- they have a completely different model from how you do it. In fact, they have the outsourcing model, I guess, and you have more of the software in-house model. Why do you think your model is superior to theirs and do you see your model changing at all over time?
Recht: They are two very different models. DoubleClick is an advertising/sales-oriented company and the vast majority of their revenues -- 90% or so -- comes from advertising sales. The revenues for NetGravity come from the sale of software and services. Those are very different business models. The advertising/sales model is typically a lower-margin model. Software companies or software companies that also provide services typically have higher gross margins. So, we approach the market in a very different way.
We also really serve different segments of the market in terms of the primary focus of the business model. NetGravity is focused on the largest sites on the Internet, where the vast majority of the growth in terms of advertising revenues is taking place. We serve 40% of the top 50 Net companies and ad revenues on the Net. So, with respect to our business model, we feel like we're well-positioned to capitalize on the growth of the Internet because the growth of the Internet is reflected in the growth of those very large sites -- differentiating us from DoubleClick. DoubleClick has a sales model that often times has focused on middle to smaller sites and it takes a large number of those smaller sites to make up for the same amount of volume that exists in the top part of the Internet.
The only place in which DoubleClick and NetGravity overlap is in the service offering that's provided by DoubleClick, [which] competes with the AdCenter that is provided by NetGravity. AdCenter is our service bureau where we have placed copies of our AdServer software and companies that do wish to outsource can still use NetGravity's state-of-the-art software in order to do their ad serving. So, that's the only place that we would overlap with DoubleClick -- in the lower to middle portion of the marketplace where there is a competition for this outsourcing piece of services.
In addition to NetGravity providing software, we also provide the AdCenter service that I mentioned and we are beginning to provide a Global Profile Service that will assist customers in doing additional, more precise targeting of their advertisements. So, our model's focused around software and provides additional services to try to make our customers more successful. And it's very focused on the top end of the marketplace versus the lower-end, smaller sites on the Net.
TMF: Will the service offerings really help in the company's growth in the future? Are they going to become a bigger factor?
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"From a business model point-of-view, NetGravity is trying to provide a direct set of solutions to the marketplace."
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Recht: From a business model point-of-view, NetGravity is trying to provide a direct set of solutions to the marketplace. We started initially by providing software. It became clear in the course of providing software to customers that certain services were beneficial and necessary for them to be successful. So, we put in place a full-scope support organization providing worldwide, 24/7 support. We put in place a full-scope professional services organization to assist people to get up and running and also really perfect their efforts in advertising.
Now, recently we have announced the AdCenter, which is the service bureau that allows people to outsource campaigns if they happen to be an advertising agency or a smaller site. And then most recently we announced the Global Profile Service. So, the model that we have is focused on trying to provide the right solutions for each of the significant players in the publisher, agency, and merchant sectors in the Internet.
TMF: One of the big issues with software, especially Internet software, is the issue of scalability. How is NetGravity addressing that issue, and how do you actually make your software more scaleable?
NetGravity: As I mentioned earlier, we're very focused on the large, very high-volume sites on the Internet. We have been very focused in that fashion since our very inception, so some of the larger sites that I mentioned earlier -- CNN or Netscape or Time Inc. New Media -- run significant volumes on an ongoing basis and have experienced very significant growth over the last two to three years that we've been serving them. They have given us the experience base to really be able to mature, [so] we can scale our solution with the growth of the sites. Our AdServer software is designed in a fashion that as the volume goes up, you can add AdServers to allow you to handle the volume. So, it's set up in a fashion so that to the extent that there is continuing rapid growth in the Internet, purchasing an initial AdServer allows you to scale with that growth.
TMF: Do you see the advertising business on the Internet consolidating at all in the future? Is this going to be an area where a lot of companies can compete or are there going to be just a couple of big players five, ten years from now?
Recht: In terms of providing the solutions, it seems pretty clear that there's room for a couple of companies. There's a very decent market into lower end for the type of ad business that DoubleClick pursues. There's clearly a substantial business in the top end for NetGravity to sell its software to the large sites that can really benefit from that. The honest answer, I think, is that both NetGravity and DoubleClick have such a lead in each of those two markets, basically, that it is more difficult for others to compete with us.
TMF: Does that mean it is going to be more of a Netscape versus Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> kind of battle going forward?
Recht: (Laughter.) I'm not sure I'd characterize it in quite those terms. We believe there is a good marketplace out there, and that companies that execute effectively on a well-thought-out business model are going to be effective. And there is a significant advantage that goes to the "first mover" in these spaces and we think we've been able to capture that advantage and our focus is on executing properly and maintaining that advantage.
TMF: Since I brought up Microsoft, maybe we should just tie it all up with this question. Is Microsoft indeed a threat to NetGravity, especially considering its purchase of LinkExchange?
Recht: Microsoft's efforts and focus to date with respect to advertising in the Internet have been at a much, much lower level and consistent with Microsoft's strategy with being on every desktop, not necessarily competing with [our] type of business model at this point in time.
We don't perceive competing with them because what we're providing is an in-depth solution throughout the most sophisticated piece in the advertising market -- a vertical market, if you will. And our perception is that Microsoft tends to be horizontal, if you will, across all desktops and try to compete to provide functionality there. Our focus is to provide very sophisticated, high feature, high-functionality software and services to those very large sites that require and need it in order to survive.
So, while that was a very interesting purchase [of LinkExchange] by Microsoft, we had never really competed with LinkExchange previously and don't necessarily see that as a particular threat in one direction or the other.
TMF: Great. It's certainly been interesting learning more about your company and I appreciate you sitting down and talking with us.
Recht: My pleasure.
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