Internet Gold Golden Lines: Aggressive, successful
Internet Gold – Golden Lines (Nasdaq:IGLD)
Petach-tikva, Israel
Rating: Buy
Initial Coverage: $11.68 – March 16, 2007
Price Target: $16.00
52-week low / high: $4.20 / $15.63
Shares Outstanding: 18.59 million
Market Capitalization: $217.13 million
NOTE: Conversion Rate of 4.20 Israeli New Shekel (NIS) to $1.00 USD Applied to Financials
Why We Like Internet Gold - Golden Lines:
- Record of profitability in highly competitive space
- Strategic acquisition of Golden Lines
- Successful record of business integration
Internet Gold - Golden Lines is one of the most aggressive and successful new media and internet service providers (ISPs) in Israel.
Market Overview
To say the Internet has become ubiquitous is to belabor the obvious, yet it bears repeating. For businesses, the Internet has created a significant communications and sales channel, enabling organizations to reach and engage with geographically dispersed consumers, suppliers and business customers in real-time. In terms of consumers, according to a Yankee Group survey, European broadband users spend more time on the Internet than watching TV.
An increasing number of companies provide information and conduct e-Commerce over the Internet, and as a result, Internet operations are critical to the commercial and communications operations of most businesses. Most businesses seek outsourcing arrangements to assure their Web presence because they lack the resources and expertise to develop, maintain and improve the facilities and systems necessary for successful Internet operations.
Thus, there is increasing demand for ISPs such as Internet Gold to offer turnkey Internet services, including Web hosting, server co-location, remote account management, e-Commerce and other value-added services. This, in turn expands an ISP’s potential revenue streams from basic monthly access fees to other fees, including set-up and maintenance charges.
Israel’s Unique Demographics
Israel has a population of more than 6.99 million people living in approximately 2 million households, and boasts a highly educated workforce. One-third of Israel’s labor force has a higher education degree. As a result, the Israeli market adapts quickly to new technologies, especially in the communications technology field. According to the Israeli Ministry of Communications, the Israeli broadband Internet market increased by 25% to 1,180,000 subscribers in 2005, as compared with 2004. That built on a 50% increase in the number of broadband subscribers in 2004 as opposed to 2003. This gives Israel an interpolated broadband penetration rate of 65%, one of the highest in the world.
The Company
Internet Gold operates ten subsidiaries, broadly categorized in two distinct streams of business: communications (i.e., Internet access, international telephony and IT integration businesses) and media (Web content, Web portal operations, search engines, e-Commerce and paid content, for example). The company is currently reorganizing into these two categories to allow greater focus and to better measure its performance against peers.
The firm competes in six Internet/New Media markets, what the Company calls its 6-points of presence. They include: Internet Access, Value Added Services, International Telephony Services, Content and E-Advertising, E-Commerce and various Internet Properties.
Internet Access: Internet Gold offers high-speed, continuous access Internet connections employing digital leased lines as well as asymmetrical digital subscriber lines (ADSL) and cable television access service. The company also offers dial-up modem Internet access to subscribers.
Value Added Services: The company introduced a variety of enhanced, value-added services that enable its residential and business subscribers to obtain high-speed Internet access, outsource their Internet facilities and undertake e-Commerce initiatives. Specific business services include: Website hosting and server co-location; global Wi-Fi access; consulting; security services and products; messaging; virtual magazines; anti-virus protection; filtering, and online backup.
International Telephony Services: In December 2006, the company completed the acquisition of Golden Lines, which has competed in the international telephony market in Israel since its opening in 1996. The market, estimated to be two billion minutes and $440 million per year, was equally divided between three companies, Bezeq International, Golden Lines and Barak.
The company offers international telephony alternatives to its residential and business subscriber base. The international telephony market is highly competitive in Israel and all major competitors have had to offer low introductory prices to “buy” market share.
Content and E-Advertising: Through MSN Israel, Internet Gold offer personalized services using MSN features and Internet content including four of Microsoft Internet's e-mail platforms: Hotmail, Messenger, Passport, and MSN Search. The company’s Internet properties target both young and adult users and reflect Israel’s diverse user base addressing the Hebrew, Russian and Arabic-speaking populations. Its Websites capitalize on a variety of user interests, including search, comparison shopping, news, weather, travel, sports, education, finance, technology, cooking, entertainment, classifieds, job postings and video games.
E-Commerce: Through Smile.Communications, Internet Gold offers online shopping and transactional opportunities for a range of other products and services. The company continually generates new e-commerce solutions and evaluates third-party products and technology for incorporation into its systems and services.
Internet Properties: Internet Gold has interests and/or rights in 33 Internet properties, including 19 general and vertical portals, three e-Commerce properties and 11 paid content properties. The online advertising properties include MSN Israel, Vgames, Start, Zahav.ru., Netex, Nirshamim, Goop.co.il, Tipo, Yahala, Seret, TheMoney and GPG Network. The e-commerce properties include P1000, MSN Shops, P1000.ru, Dbook.co.il, and Getprice, MSN Compare. The online paid content properties include Mapa, SpiderNet, Economics and Business, The Ruth Sirkis Food Magazine, Kidnet, BigOne, Magnet, Globes, Ynet Encyclopedia, Masa Aher and Galim.
Financial Results
Revenues for the year ended 2006 were a record $98.1 million, up 39% from the year before. Net Income for the year was $6.3 million, or $0.34 per share, including a one-time charge of US$ 3.0 million, mostly related to the merger of Smile.Communications and Golden Lines. Excluding these one-time expenses, net income for the year was $9.3 million, or $0.50 per share, an increase of 114% over 2005.
Due to the distinct nature of Internet Gold – Golden Lines’ communications (ISP and Telephony) and media (all other) businesses, we present a brief overview of their individual results and key measures of performance.
Smile.Communications
Internet Gold, through its 100% ownership of Smile.Communications, commands a one-third share in both the ISP and international long distance markets.
Smile.Communications’ revenues increased to $81.2 million in 2006, up 39% from 2005. Operating income in 2006 was $7.6 million, an increase of 57% over 2005.
As of December 31, 2006, the company's broadband customer base grew by 29% compared with the end of 2005. Revenues from the international telephony business grew by 135% during 2006. The group's business service revenues for the twelve-month period ending in December 2006 rose 21% compared with the same period in 2005.
Smile.Media
Revenues for Smile.Media in 2006 increased to $16.9 million, up 40% from 2005. Operating income for 2006 increased to $3.4 million, up 73%. The company’s e-Advertising revenues rose by 47% during the year. e-Commerce revenues were up by 15%.
Golden Lines
Golden Lines saw record revenues in 2006 of $170.2 million, an increase of 12% over $152.1 million in 2005. Net income for the year was $9.8 million, but excluding a one-time charge, the company's net income totaled $11.2 million, an increase of 74% from $6.4 million in 2005.
Outlook and Prospects
As in the United States, the Internet media industry in Israel is very competitive and still developing. Companies compete for frequent users who have a broad range of interests. Internet Gold competes with Bezeq International NetVision, Barak, Bezeq International, Netvision, Yediot Ahronoth, Yahoo!, MSN.com, MSN Israel, Netex, Start, Google and OLSALE.
The primary factors determining success as an Internet service provider are competitive pricing, reliability, high-quality service, customer support, access speed, customer acquisitions, and ease of use. To date, Internet Gold has competed favorably based on its strong brand recognition, innovative marketing programs, and by providing fast and reliable, high quality services and superior customer service and support.
In addition, the company expects to face competition from telecommunications providers, direct broadcasting satellite and cable companies. It’s likely that these providers will offer bundling packages and will increase competition in the future.
Internet Gold – Golden Lines is well positioned with a variety of offerings to go head-to-head in these markets. The firm’s demonstrated ability to deliver profits year in and year out is due to outstanding management, and suggests an ability to thrive in highly competitive environments.
With the acquisition of Golden Lines, the sole analyst firm covering Internet Gold, Dutton Associates, is projecting extraordinary growth in 2007. Dutton is projecting 2007 combined revenues of $299.5 million, a 213.5% increase over Internet Gold’s 2006 results.
Dutton is calling for earnings of $1.04 per share in 2007. We are initiating coverage of Internet Gold – Golden Lines with a Buy rating and price target of $16.00, which translates into a pricing multiple of approximately 15X the 2007 earnings estimate. A price of $16.00 represents price appreciation potential of 37% from the current price of $11.68.
Note: This article is from the April 2007 issue of Growth Report, a leading independent investment advisory focusing on uncovering small cap stocks with substantial growth potential. Growth Report provides individual investors with proprietary research and analysis on small cap companies that have yet to be picked up by Wall Street radar. Growth Report is published monthly with weekly updates and periodic special reports. Visit www.GrowthReport.com for more information.
About the Author
Ian Wyatt is a co-founder and President of Business Financial Publishing and the Chief Investment Strategist and Publisher of SmallCapInvestor.com and SmallCapInvestor.com PRO.
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