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Huge Profits in Wireless? You bet your ASP!
by Briton Ryle
Qualcomm finally took one on the chin. I've argued for a while now that the "Q" was pretty richly valued. No secret there. China Unicom putting off the switch to CDMA network technology should've come as no big surprise.
What is a surprise is that so many believed it made economic sense for Unicom to scrap a GSM network that is nowhere near obsolete. Especially right before Unicom's IPO. Gotta think that China was ready to promise the moon in exchange for favored trade status.
Like it or not, GSM is the worldwide wireless standard for the next couple of years. The controversy surrounding wireless standards is why I try to remain neutral. And if I do recommend something that's standard-specific, I'll choose the bigger proven market opportunity, such as CellPoint (CLPT:OTC-BB) and GSM.
Which leads me to one of the best opportunities in wireless: Application Service Providers, or ASPs. Most ASPs are standard-agnostic — that is, the technology will work on any standard, provided, of course, there's sufficient bandwidth for the application.
More wireless
There's already one wireless ASP in my Taipan portfolio — GeoWorks (GWRX:NASDAQ). In case you don't recall, GeoWorks has a wireless advertising service that targets cell phone users. GeoWorks also makes a WAP (wireless application protocol) server that allows companies to deliver WAP content to subscribers.
I think it's time to add another — Datalink.net (DLK:AMX). Datalink is a young company with patented technology and seasoned, well-connected leadership that's about to land a huge contract with Chase Manhattan Bank. And, by the way, Chase is giving the boot to a subsidiary of wireless powerhouse Aether Systems (AETH:NASDAQ) to run with Datalink.
Datalink.net has the usual neat apps for mobile users — stock quotes, alerts, breaking news, etc. But Datalink is focusing on a far more lucrative market — business applications, specifically financial services and healthcare. Make no mistake, business apps are a huge opportunity, largely because businesses are willing to pay more for value-added services. Datalink is going to rock'n'roll.
Inventory tracking, dynamic scheduling, e-mail, a constantly informed and connected sales force, fleet management — the possibilities are endless. And the bottom line is: doing better business. Because more efficient use of data translates directly into stronger connections with customers and their needs.
Lean, mean capital machines
If you think about it, economic revolutions have all been about connectivity. Opening up new markets, finding a better way to transport goods, speeding up the channels of communications — each advance sparked an economic explosion for the people who were in the right place at the right time.
Improved ship design and food storage made global exploration feasible. Raw materials from newly discovered (and settled) lands were shipped back to Europe to be made into fancy clothes and teapots. Demand for goods put pressure on manufacturers to find better, more efficient ways to produce, and the Industrial Revolution was born. This is a simplistic view of things, I know, but I think you get the point.
The biggest advance in connectivity since spoken language is the Internet. And some still doubt the boost in productivity brought on by computing and the Internet. Yeah, and the moon landing was a hoax and the world is flat, too.
This ten-year bull market is the direct consequence of corporate restructuring. The result — increased efficiency, greater profit margins, higher employment and higher stock prices. Oh, and cooler gadgets for me to write about.
Underlying it all is a massive investment in IT (information technology) that is already paying huge dividends. This "New" economy, as it is called by proponents and detractors alike, is built on computing and the Internet. But just wait until the Internet is seamlessly integrated with wireless.
The next business revolution
The most visible wireless apps are targeted to the consumer. Comparison shopping, weather and traffic reports, news headlines, stock quotes and so on. And this area still represents a growing market for wireless ASPs. Revenues from US wireless subscribers are growing 25% a year, and topped US$40 billion in 1999. At the same time, the total cumulative investment in wireless hit US$70 billion.
Clearly, wireless has a pretty good return on investment. Now you know why you see so many ads on TV and special offers in your local paper. All these companies have to do is sign people up. Capital expenditures will be paid off almost immediately. The rest is gravy.
Now, US$40 billion in subscriber revenue is nothing to sneeze at. But take a look at what business revenues look like. In 1999, businesses of 100 or more employees spent US$66 billion on wireless equipment and service. That number is expected to grow to US$117 billion by 2002. Conclusion: buy wireless ASPs that target the corporate market.
The driver's seat
Two things will drive companies to adopt wireless as part of their overall strategy: a mobile workforce and the competitive advantage.
The mobile workforce is probably bigger than you think. I saw one estimate from the Yankee Group that pegged it at 60 million people. That's a lot of Palm Pilots. And a lot of subscriber revenues. I bet the numbers are growing faster than we think, too.
I'll join the mobile workers as soon as they get the bullet train running between Baltimore and New York City. I plan on taking a fat-paying New York job and live like a king in Baltimore with its relatively low cost of living.
For three hours a day, the train will be my office. I'll be surrounded by a dizzying array of wireless modems, cell phones and pagers. There'll be enough microwaves flying around to keep my coffee warm on the way into The City.
 The competitive advantage
I don't know about your boss, but mine just loves to cough up all the dough I need to buy gadgets so I can stay away from the office as much as possible. Yeah, right.
Truth is, the things my work buys me inevitably make me work more. I'm working on the plane, in the hotel room, at the convention center. I usually can't wait to get home from a business trip so I can just get some rest.
It sounds obvious, but a mobile work force can spend more time working out of the office. And that means more time building strong relationships with customers. And with financial services and healthcare, the need to get mission critical data anywhere, anytime is probably at the top of the list.
Say a trader who manages millions for, I don't know, Chase Manhattan Bank or whatever is having a late dinner. About the time the crËme bršlČe arrives, the Hong Kong market starts taking a nosedive. By the time someone calls him, it's probably going to be too late. With a service like Datalink's, he could be protecting his investments within seconds of getting the news, at the same time as it hits the wires.
But that's not all. Traders on the floor could also get breaking news in real time. While others stare at their monitors, they're already trading on the information. Or maybe a big client has a special order that needs filling immediately. Soon, not getting breaking news will be a huge competitive disadvantage. You won't be able to compete without real-time data feeds.
The healthy choice
You can probably imagine some pretty important applications for the healthcare industry as well. People don't always wear a medic-alert bracelet when they ought to. Lives could be saved with easy access to a patient's file while he's still in the back of an ambulance.
Bedside charts could be replaced by a digital device directly connected to the hospital database. Changes to the patient's log would be immediately recorded in the archived file. Fewer filing cabinets could mean more beds, and bigger revenues.
And the great thing for Datalink.net is that once a system is in place, it can be reused at relatively little extra cost. Datalink.net only has to customize the service to meet the needs of the next customer. This maximizes Datalink's return on investment and means margins will be huge, probably in the 50% range.
The value puzzle
Corporate America is only just discovering the advantages of going mobile. It's a new industry that's struggling to gain acceptance as well as hone its efficiency. Market leader Aether Systems only generates US$11 million a year in revenues and still commands a US$7 billion market cap. Aether is embarking on a US$15 million ad campaign that should help raise the visibility and acceptance of the sector as a whole.
Still, revenue models aren't in place yet. Putting a value on companies in this space is difficult. But I think there are some hints that allow us to set a good ball park figure. The first is from Datalink.net itself. Datalink believes it should generate US$25,000 a month for each installation. Over the course of a year, a deal like the one with Chase should be worth a minimum of US$260,000. A huge organization like Chase would undoubtedly generate more revenue than that, but it gives us a benchmark for making conservative estimates of revenue potential.
Chase is just one company. According to somewhat dated material from the Small Business Association, there are around 15,000 companies in the US with more than 500 employees, and financial services account for 20% of the total. That makes 3,000 businesses.
Now, suppose just 10% of these companies adopt a wireless strategy, which I think is a ridiculously low estimate. If Datalink can capture even 10% of that market, we're talking US$50 million in annual revenues. And that's just the financial sector. I haven't even included healthcare. Another US$25 million a year doesn't seem overly optimistic.
The bigger opportunity is among companies with fewer than 500 employees. There's more than 5 million of 'em. Now, I'm sure "companies with fewer than 500 employees" can include an elderly couple sitting at a fold-up card table selling Sno-Balls on the corner, so let's cut the number in half to be safe. If even 1% of those had a sizable mobile workforce, there's another 20,000 potential customers for Datalink.net.
All the pieces in place
The product is there, the market is there. All that remains is getting the dollars onto the bottom line. And right now is the absolute worst time to be looking at Datalink's revenues. The company began restructuring about six months ago to focus on the business market. Though its consumer-oriented business is still operational, it's no longer being marketed. Revenues from the consumer business have dropped substantially, but they'll still be around US$1.5 million for fiscal 2000, which ended in March.
You might think it's a little nutty to turn your back on a business that more than doubled revenues to US$2.1 million in 1999. But I applaud their having the foresight to see that the real market for data delivery is to businesses.
Datalink has taken the necessary steps to preserve cash until the reorganization begins to bears fruit, which will occur any day now when the deal with Chase gets finalized. Advertising has been cancelled, but even so Datalink retains most of its subscriber base, a testament to the company's brand recognition and loyalty.
The projection
It will take some time for this market to play out. I anticipate Datalink.net growing revenues at a rate of 200% for fiscal 2001 and 300% for both 2002 and 2003. I'm going to apply a one-year price target of US$72 and a three-year target of US$260. This is based on 13x sales for 2001 and 6x sales for 2003.
I give this fiscal year a higher sales multiple largely because of Christian DeHaemer's identification of the next "new thing" in his June article. I can't think of a better buzz phrase than "wireless application service provider." It just rolls right off the tongue.
My estimates for fiscal 2001 may already be low, but that's fine. Datalink recently signed a contract with WizShop.com to provide WAP and wireless e-commerce functionality for WizShop.com shopping portals. The deal is valued at US$1 million, or nearly a quarter of my fiscal year revenue estimate.
And don't forget, once Datalink.net creates a new application, the development costs are slashed for the next customer. All that's required is customization of the service. I think Datalink is going to be a big winner in the wireless ASP space. And investors who get in before the Chase contract is finalized are going to win big too.
Buy Datalink.net (DLK:AMEX) under US$12. Hold for my one-year price target of US$72. You can contact Datalink.net at 1735 Technology Drive, San Jose, CA 90115. That's Silicon Valley, my friend. Telephone number is 408-367-1700. You can also visit the investor relations department or e-mail them at ir@datalink.net.
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