Written by: Zack Miller | July 18, 2007
Zack Miller
www.IsraelNewsletter.com
I wanted to let the dust clear a bit before positing my opinion on Answers.com’s (ANSW) acquisition of top 30 (in terms of traffic) website, Dictionary.com. Readers of IsraelNewsletter.com know that I’ve written somewhat critically on Answers.com before and I wanted to provide an update on my thesis.
See what I’ve written previously here; the crux of my point could have been summarized as the following: while Answers.com’s content model is very much Web 2.0, its revenue model isn’t.
Now, purists can take issue with whether or not Answers really is Web 2.0. given the fact that there is no user participation, data-sharing, social networking, etc. Fine. My point was merely that Answers is competing on the Web 2.0 playing field. Essentially, Answers is aggregating Web 2.0 content and that in an of itself, means it competes against the same companies it aggregates.
But as I said previously, I believe that the company’s revenue model is very much Web 1.0. Why the distinction, you ask? Because while Web 2.0 companies can very quickly scale their content models via user-generated content and social networking (see in point, Facebook’s recent meteoric rise in value), not many Web 2.0 companies have levered revenue models. Traditionally, to make money with straight-ahead advertising (whether that’s TV, radio, Internet, video, whatever), you need to execute on the ad sales side. Nothing 2.0 about that: selling ads is all about hiring people and squeezing dollars out of partners. Ultimately, both activities hit a huge wall with CPMs eventually plateauing.
Michael Eisenberg has written a great article on Answers but I have to disagree with his point regarding scalability: getting a top 100 web site does not mean ad sales becomes scalable. It just means that the publisher may get a larger piece of advertisers’ wallets. True, large advertisers frequently don’t even want to talk to smaller publisher fish. Getting big gets you in front of their marketing/advertising team but the same problem of scalability remains and this is a question of human execution, not economies of scale.
So, what do I think was actually behind Answers’ purchase of Dictionary.com? Paul Kedrosky had a keen comment that this was a story about a record-setting domain name purchase. I think Paul’s partly right. But it’s also about the the traffic that came along with the domain name. From all accounts (including Answers’ own CEO), Dictionary came at a hefty price tag and a poor history of monetization and I’m not even talking about the cost of capital that Answers is going to incur (sorry, that investors in Answers are going to have to incur) when they buy a company at 1X their market cap and almost 10X their cash position.
But how many of us actually saw that within the announcement of the impending purchase, Answers pre-announced to the downside. If this is a game about optimizing ad sales, Answers is having a hard go at it.
By the way, in Answers defense, Google has the most successful ad sales team on the planet for its network and although sell-through for a network is a different game of optimization, Google is spending heavily on this non-scaleable activity. Their secret sauce is working and good as they are at sales, this will return less and less over time. To bring in big Fortune 500 advertisers, Google is wooing them with a direct sales force and packaging together vertical groups of publishers for larger buys.
So, if advertising revenues = page views X cost per impression, Answers has decided that growth is not going to come from boosting its own cost per impression, but rather by boosting its impressions. Answers has a lot of dependence on Google for impressions and like most non-Facebook websites, occurs significant TAC (traffic acquisition costs). Doing the math, management must have decided that making a huge acquisition is a better investment than making the tough ad sales slog.
This puts Answers.com right back where it started. This is an admission that ad sales is very much a question about execution and that Answers was completely dependent on this non-scaleable, Web 1.0 activity.
In some sense, this was the only way to grow, albeit at investors’ expense.
Disclosure: Author’s fund does not have a position in any of the stocks mentioned here as of 7/18/07.
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Zack Miller is the lead equity analyst for America Israel Investment Associates, LLC. and a former equity analyst for a leading multinational hedge fund. For more information, go to www.israelnewsletter.com or call 1-888-327-6179, or email zack@profile-financial.com
Written by: Aaron Katsman | July 17, 2007
By Aaron Katsman
www.IsraelNewsletter.com
As I posted over a month ago, the Israeli Shekel continues it’s drop against the US Dollar. Today it’s trading right around the important psychological barrier of 4.30, and a break above and we may just see the greenback head all the way back to the 4.40-4.50 area. Strat’s Place says according to the Economist’s Big-Mac index, the shekel is still about 10% overvalued.
Last week UBS admitted their mistake when just a few days earlier they said the USD stength was temporary and it was time to go long the Shekel. Well, it took less than a week for them to disclose that they had closed the long shekel position and took a loss. Now we have Citigroup stepping up saying in effect the exact same thing. They have made a comparision to the Polish Zloty: sighting similarities in both trading patterns and the domestic economic situation.
As I predicted, June inflation numbers picked up to 0.7%, surprising economists. Not sure what the big surprise was. There has been an undercurrent of inflation running at about 4% for a while, and since the USD strengthened, and the USD is over 30% of CPI, it shouldn’t have been much of a surprise. Note that the Bank of Israel has been doing whatever they can in trying to talk up the Dollar. Some may expect the BOI to start to raise rates to fend off inflation, but I wouldn’t hold my breath. The BOI wants the Shekel to continue it’s depreciation, to help local exporters who claim to have lost hundreds of millions of dollars due to the strong currency.
Let’s hope Citigroup isn’t pulling a UBS and trying to pump up the Shekel to save their losing position. After all, a large global investment bank wouldn’t do that, would they?
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Aaron Katsman is the lead portfolio manager for the Israel Growth Portfolio and Managing Director of America Israel Investment Associates, LLC. For more information, go to www.israelnewsletter.com or call 1-888-327-6179, or email aaron@profile-financial.com
Written by: Zack Miller | July 17, 2007
Big news that we’re all waking up to is Answers.com (ANSW) buying Dictionary.com for $100M in cash. ANSW only has a market cap of $100M, so the deal is contingent on finding financing to buy a site that has 3 times the amount of traffic that Answers currently does. See our previous coverage of the road ahead for Answers.com here. Look for a follow-up from us on our take of the deal.
Verint’s (VRNT.PK) recent purchase of Witness Systems putting the spotlight on stock options practices at Witness. Verint submitted an 8K last week saying that a previously “informal” SEC inquiry has been upgraded to a “formal” inquiry. See IsraelNewsletter.com’s previous coverage of Verint here.
Well, things are getting jiggy for ECI Telecom (ECIL). Reuters out with a story that there is another bid in the making above the current bid on the company at $10/share. See our original coverage of the takeout bid from Shaul Shani’s Swarth Group.
Metalink (MTLK) beginning to get traction on its new chipset with a signed (small) deal. Globes reports receipt of a small deal ($200k) from an ODM for Metalink’s 802.11n-compatible WLANPlus chipset.
Written by: Aaron Katsman | July 13, 2007
By Aaron Katsman
www.IsraelNewsletter.com
As the temperature approaches 100 degrees (it’s not global warming, it’s just what happens in the summer), here are three Israeli stocks that are sure to heat up your portfolio even more.
Commtouch (CTCH), the email defense company, has started the summer with a bang. The stock has surged 35% over the last three weeks, on the prospects of continued strong growth and Google’s (GOOG) purchase of privately held email security firm Postini for $625 million earlier in the week. Commtouch develops and provides proprietary anti-spam solutions to combat over 180 billion email messages per day, 85% of which are spam.
Comverse Technology (CMVT.pk), is a stock that I have written a lot about, mostly in terms of it fitting the bill as an attractive private equity target. Earlier this week there were media reports that the company was looking to be acquired and has hired Deutsche Bank to investigate M&A possibilities. Though the stock is up 10% on the news, I view the company being worth at least $28 in a takeover and that would be a steal (sorry Kobi Alexander, I couldn’t resist).
Retalix (RTLX), a company that automates and synchronizes retail, distribution, and supply chain operations for stores, headquarters, and warehouses, has continued to sign deals, especially in China, and recently they re-affirmed their numbers for 2007. The recent deal with HomeBuy, an operator of 60 stores in Shanghai and eastern China, and plans to open more than 400 stores in the next five years exhibit the dynamic growth of their China business. Coupled with the persistent rumors of an SAP(SAP) bid, Retalix trading under $20, looks like a really cheap buy right now and investors who have some patience may be richly rewarded.
Please see our Disclaimer HERE.
Disclosure: Author’s fund is long CTCH, CMVT.pk, RTLX as of 7/13/07. He doesn’t own any other positions in companies mentioned in this article.
Like what you see? Sign up to receive daily updates from IsraelNewsletter here
Aaron Katsman is the lead portfolio manager for the Israel Growth Portfolio and Managing Director of America Israel Investment Associates, LLC. For more information, go to www.israelnewsletter.com or call 1-888-327-6179, or email aaron@profile-financial.com.
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