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Talk is cheap -- if you buy now!
by Christian DeHaemer
Now, I'd be the first to admit to a standing dislike for phone companies. Every time I move or change phone carriers, my home phone is bombarded with a scavenging pack of sales people trying to get me to switch. And when I do, more flea-bitten curs want me to switch back.
I finally found the least expensive phone carrier out there, Talk.com (TALK:Nasdaq). Talk.com offers five cents a minute rates all the time, anywhere to anybody. They can do this because Talk.com is the low-cost long distance service provider. They have a simple business plan and lack the history of fixed costs that the giants in the industry like AT&T must deal with.
Talk.com knows how to keep costs down by using the Internet. They incur no postage fees because they use real-time online line billing. They are able to beat their competitors on cost as well as ease of use.
But what really sends Murphy Brown and that emasculated goofball from Mad About You into a cage-match death frenzy is the fact that Talk.com has bundled its five cent service with free domain name hosting. That's right, if you use their service you can get your own branded website.
TALK talks the talk -- Free domain names
Just a little more than a month ago, Talk.com gained approval by ICANN as a registrar of domain names. Talk.com is one of less than 100 companies that are allowed by the powers that be to sell domain name registers. The going market rate for domain name registration is US$70-80. The cost to Talk.com is US$18.
Talk.com is planning on giving away the registration for free if you sign up with their low-cost telephone service. It is expected that this will build brand loyalty and reduce the turnover rate per customer, which is currently at 13 months.
.org.com.gov.sex.edu
This is the best marketing strategy I've heard since Cracker Jack put toys in the box. Most people don't know anything about registering a domain name. They don't even know where to start looking. However, every J.Q. Public wants a web site if only to display his baby pictures for grandma.
As you can imagine, the demand for site registration is huge. Network Solutions registered 1.5 million new names in the third quarter alone. This is relevant because the CEO of Talk is the former CEO of Network Solutions (NSOL:Nasdaq).
Network Solutions is the dominant domain name registration company. For the nine months ended 9/30/99, revenues totaled US$144.9 million, up from US$62.4 million. Net income totaled US$17.9 million, up from US$7.5 million. Nice growth, but can it continue?
For this, NSOL is rewarded with a market cap of US$7.74 billion. With such a low barrier to entry, and Network Solution's former CEO now with Talk.com and willing to give away registration services for free, I don't expect Network Solutions to carry such a lofty price tag for long.
The talk on Talk
Talk.com is in a highly competitive business. Long distance service has become a commodity, which is why you see companies like AT&T going into the cable business. In fact, the Baby Bells are now entering the long distance market and will bundle their local, long distance and wireless services in one neat package. This will put more pressure on the industry. However, since Talk.com is the low cost producer it will be the likely beneficiary.
But that's not all, TALK does more. It is now testing "text to voice" messaging, so that you can call someone from your pager. Talk is also planning on offering remote conferencing for consumers.
 New Talk
In the past Talk.com depended heavily on America Online (AOL:Nasdaq) as the exclusive partner to provide AOL's customers with long distance services. Talk.com is the founder of AOL Long Distance, America Online's most successful partner program to date. Talk.com ranks among the top five in consumer e-commerce categories, including revenues, repeat customers, revenue per employee and estimated earnings for 1999. AOL owns 4.1 million shares of Talk.com.
Talk.com is moving away from this dependency and expects that the majority of its customers will be non-AOLers by the end of 2000. To accomplish this goal, it has co-branded with CDNow, offering a US$15 rebate from the purchase of a CD if you pick Talk.com's service.
The big news is that Talk.com struck a deal with FirstUSA Bank, which allows Talk.com to market to FirstUSA Visa's 65 million cardmembers. The deal allows FirstUSA Visa holders to pay their telephone bill directly from their credit card. This makes perfect sense due to both companies' online platforms.
Network news
Talk.com has been building its own Network entitled One Better Network since 1997. The switch and router enthusiasts out there will be glad to know that this new network is being built with Lucent 5ESS-200 switches connected by leased fiber lines. Cool.
Like I said, TALK is cheap
The most compelling part of the Talk.com story is its value. The company is currently trading at a p/e of 20 and just over two times sales with a market cap of US$1.17 billion. Qwest (QWST:Nasdaq), a similar upstart phone company, is trading at a p/e of 116 times sales and a market cap of US$31 billion. That's insane.
I won't go into the litany of dotcom companies that are trading at absurd values. You know it too well. You can imagine what will happen if Talk.com's domain name registration takes off and it gets recognized as belonging in the same league as Network Solutions.
New equals value
I don't expect this, but stranger things have happened. I do expect that Talk.com will gain respect and market share as an innovative, low cost, Internet based, long distance provider.
As such you can expect it to trade at a p/e multiple higher than its peers. It doesn't -- in fact it trades at a multiple less than half the telecom industry, not to mention the Internet industry. To reach parity with other telecoms, TALK would have to rise 120% over current levels. That would give you a share price around US$40.
For the nine months ended 9/30/99, sales rose 13% to US$367.7 million. Net income before extraordinary items totaled US$41 million vs. a loss of US$230.2 million. The street estimates that Talk.com will bring on approximately 150,000 new subscribers in the last quarter of the year (earnings to be announced February 15). That would tack on an additional US$155 million in revenue for the year.
Taipan believes that Talk.com's share price will surge before the earnings announcement. Furthermore, Taipan believes that if the market was is a more bullish mood Talk.com would already be in the mid 30's based on the FirstUSA and domain name announcements.
Real company, real profits
The Company's working capital was US$50.5 million and US$13.1 million on September 30, 1999 and December 31, 1998, respectively. This increase in working capital is primarily a result of the cash generated during the first nine months 1999 from operations. They are making money folks.
Buy Talk.com (TALK:Nasdaq) under US$25. As I write this it is trading at US$18. My 12-month price target is US$45. This is a real deal on a solid, growing company with proven, innovative management that is trading at a substantial (120%) discount to its peers. I urge you to buy some today.
Contact Information: Talk.com, 2020 Sunrise Valley Drive Ste. 250, Reston Virgina 20191, Phone 703-391-7500, Fax: 703-391-7525; Investor Relations Website.
| Talk.com (TALK - NASDAQ)
|
| The market cap: |
$1.17 billion |
|
Telecom Industry 3-year revenue growth: |
26% |
| Shares outstanding: |
64.7 million |
|
Price to sales ’99: |
2.4x |
| Float: |
40 million |
|
Price to sales ’00: |
1.8x |
| Estimated EPS growth: |
34% |
|
Industry p/e ratio: |
44.74 |
| 3-year revenue growth: |
35% |
|
Talk p/e ratio: |
20.4 |
| HISTORICAL QUARTERLY RESULTS REVENUE (Thousands of U.S. Dollars)
|
| |
1996 |
1997 |
1998 |
1999 |
| 1st Qtr MAR |
51,065 |
71,160 |
91,146 |
110,572 |
| 2nd Qtr JUN |
57,015 |
75,032 |
111,098 |
117,139 |
| 3rd Qtr SEP |
60,079 |
80,314 |
122,525 |
140,027 |
| 4th Qtr DEC |
64,265 |
78,262 |
123,831 |
155,000 |
| Est. total: $524,000 |
| EARNINGS PER SHARE (U.S. Dollars per share)
|
| 1st Qtr MAR |
0.08 |
0.08 |
-0.65 |
0.2 |
| 2nd Qtr JUN |
0.07 |
-0.09 |
-1.49 |
0.22 |
| 3rd Qtr SEP |
0.11 |
0.01 |
-1.58 |
0.23 |
| 4th Qtr DEC |
0.09 |
-0.32 |
-1.56 |
|
In addition to his duties at Taipan, Chris DeHaemer is the editor of The Hammer.
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