Summary / Abstract

Title: NETPLIANCE

Synopsis: We are initiating coverage on Netpliance with a Buy rating and a price target of $50. Netpliance is the first company to bundle Internet content, applications, and services specifically for the appliance market. NPLI, Netpliance, appliances, Internet, market, Donaldson Lufkin Jenrette, price target, applications, coverage, REPORT, revenue, customers, business model, trading, platform, mobile phones, Rating Range Earnings, service providers, agreements, investment, anticipate, distribution, subscriber, manufacturers, customer acquisition cost, Lufkin Jenrette Securities, sponsor keys, growth rate, initiating coverage, multiple potential revenue,

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donaldson lufkin jenrette april 12 2000 harry e blount 212 892 6515 greg m kobrick 212 892 5723 cameron b hight 212 892 3228 henry naah 212 892 0589 netpliance npli 10 7 8 initiating coverage buy rating range earnings share 2000 vs 1999 chg 26 1 8 9 1 8 old new p e ratios f1q 0 59 vs na na fy dec 2001e 3 79 f2q 0 71 vs na na 2000e 2 60 f3q 0 51 vs na na 1999 na f4q 0 78 vs na na yield 0 market cap 657 5 yr growth rate nm dividend 0 avg trading vol 000 na book value rating buy change 12 mo target 50 viewpoint initiating coverage netpliance buy rating price target 50 netpliance first company bundle internet content applications services specifically appliance market unique service model blends elements yahoo america line infospace palm company streamlined entire process getting internet consumer purchase pc purchase software choose isp npli elegant package netpliance addressing massive market opportunity npli originally designed service first time internet users npli found strong demand service customers pc outside u believe market internet appliances significantly larger research organizations currently forecasting attractive aspects netpliance business model multiple potential revenue sources addition receiving base monthly subscription fee believe npli generate revenue sale sponsor buttons devices e commerce revenue share application rental believe npli revenue stream advertising comparable subscriber basis aol due ability profile user granular level npli business model scalable mobile phone service model device sold discount cost order capture base monthly service fee incremental revenue streams incremental revenue streams generate exceptionally high incremental margins anticipate significant reductions network costs npli subscriber base grows economies scale gained npli rapidly developing multiple indirect distribution channels reduce customer acquisition cost npli negotiations equipment manufacturers license i opener service platform appliances top boxes mobile phones believe customer churn lower isp model anticipate company ebitda net income positive 2004 believe netpliance current valuation reflect first mover advantage market opportunity business model momentum compared comparable companies investment themes believe average consumer finds task signing internet complex expensive historically consumers required purchase pc load software choose isp hardware big bulky limited number locations reside home software loaded configured annoyingly long time boot consumer choose isp accompanying uncertainty best coverage customer care npli streamlined entire process getting internet netpliance founded goal simplifying access internet i opener service i opener service simple requires software purchase hardware i opener service portable pc designed internet appliances appliances home mobile phones top boxes screen phones personal digital assistants pdas low price consumer purchases i opener appliance plugs electric outlet connects phone line device arrives pre configured user ready internet experience right box netpliance hidden complexities hardware software configuration i opener network consumers perspective complexities setup process eliminated software upgrades handled remotely seamless end user netpliance isp npli features e mail waiting light cached content instant access web channel guides electronic shopping mall addition npli sponsor keys pizza key ebay key come i opener service different type user experience tv watching tends lean back vegetate hardcore websurfing tends lean forward concentrate i opener users machines differently 50 netpliance devices placed kitchen bedroom result suspect i opener usage frequent sessions shorter npli addresses massive market opportunity today approximately 60 million households u internet due affordability complexity desire fear recognizing huge untapped market npli originally designed i opener service first time internet users mind idc expects appliance market grow approximately 11 million units 1999 89 million 5 years npli found strong demand service customers pc pc users enjoy instant access information internet access room cost associated purchasing second third computer businesses finding increasingly imperative employees customers access internet ford recently announced program provide pcs employees fidelity announced intention give internet appliances best customers amway encouraged reps get line quixtar service motivation fidelity clear creating lasting daily bond valued customers amway benefits reduced paperwork errors previous business practices sending orders fax phone mail believe international demand internet access appliances dwarf u demand citizens international countries afford pc accompanying software price point i opener appliances affordable 99 199 unit number internet users worldwide expected grow 196 million 1999 502 million 2003 npli tremendous upsale opportunities multiple potential revenue sources npli charges base monthly subscription fee approximately 21 95 month addition npli generate recurring revenue sources platform rental e commerce revenue share sale rental software applications advertising believe incremental services generate significant incremental margins premium channels cable companies caller id call waiting rbocs npli selling peripheral equipment printers mice 30 appliances ordered platform rental npli goals move i opener software platform internet devices top boxes mobile phones personal digital assistants appliances fact surprised see npli get hardware business completely point exchange licensing i opener platform npli receive licensing fee third party manufacturer continue capture monthly subscription fee npli negotiating final agreements shaw cable canada rogers cable canada thomson rca strike type arrangement e commerce revenue share npli ultimately receive meaningful portion revenue stream e commerce revenue share anticipate npli ultimately 9 sponsor keys appliance addition reducing device subsidy npli receive share revenues generated keys application rental npli intends develop license broad suite applications rental fact npli established developers corner website encourage third party development applications occurred palm operating system examples applications tax software word processing spreadsheet stock tracker family calendar advertising npli utilizes closed network aol company profile users level granularity independent content providers allow npli generate advertising revenue subscriber excess industry average npli highly scalable business model npli business model scalable mobile phone service model device sold discount cost order capture base monthly service fee incremental revenue streams discussed npli focused reducing device subsidy customer acquisition cost npli achieve mechanisms 1 sale sponsor keys device 2 licensing i opener service equipment manufacturers port devices 3 increased brand awareness 4 corporate giveaways employees customers 5 licensing i opener service service cable telecom providers 6 increasing number retail locations current device subsidy 300 400 fall due manufacturing economies scale sale sponsor keys anticipate sponsor key ultimately sold 20 30 device largely eliminating device subsidy npli third party oem introduce devices look smaller device subsidy believe netpliance discussions numerous oems port user interface appliances top boxes mobile phones personal digital assistants devices netpliance reached preliminary agreement thomson port i opener service screen phone distribution u npli national branding campaign place company variety media outlets print infomercials radio tv print npli discussions numerous parties third party distribution agreements corporations financial retail home food delivery service industries agreements largely eliminate npli customer acquisition cost instance u west potentially qwest merger west consummated agreed distribute targeted number iopeners customer base spans 14 states end 2000 netpliance reached preliminary agreements service providers shaw cable rogers cable canada distribute i opener platform top boxes shaw passes 2 2 million homes rogers passes 2 8 million homes addition rogers reached agreement acquire videotron cable add 2 3 million homes passed anticipate npli reach agreements cable telecommunication service providers europe united states netpliance currently distributing i openers circuit city npli ipo company seen significant demand retail chains product comp usa anticipate npli strike additional retail distribution agreements future anticipate significant reductions network costs npli subscriber base grows economies scale gained npli currently utilizing gte uunet primary network providers two networks provide npli extensive coverage united states believe company continue expand coverage necessary improve efficiency lower network costs npli reaches agreement new network provider update field appliances new dial phone numbers effectively switching entire infrastructure new provider relatively short time believe customer churn lower isp model giving npli longer time horizon generate return investment anticipate company achieve ebitda net income positive 2004 valuation netpliance stock gotten rough ipo start attribute three factors 1 weakness technology market 2 recent news reports small community engineers modified device unintended purposes potential risks causes npli business model 3 shortage available units retail stores due flat panel screen supply constraints believe company taken sufficient steps reduce economic attractiveness modifying device believe magnitude modification problem significantly overblown believe uncertainty afforded investors attractive point buy stock unit side npli anticipates increase pace shipments future alleviate current supply shortage anticipate npli comfortably exceed projections current supply constrained environment netpliance come market new business model result difficult benchmark company public company npli business model encompasses aspects companies yahoo aol phone com infospace valued npli three methodologies discounted cash flow public company comparables enterprise value subscriber discounted cash flow 10 year discounted cash flow analysis implies price target approximately 45 assume 10x terminal multiple discount rate 18 5 public company comparables first npli offers customers function driven content npli great level granularity profile customers offer experience yahoo i e local weather local movie listings tailored particular user examples function driven content infospace com yahoo companies currently trading average 55x 2001 revenue second npli service platform ported multiple devices fact npli reached agreements rogers shaw atlinks thomson rca license platform top boxes screen phones public platform companies liberate phone com companies currently trading 97x 2001 revenue apply two metrics npli projected 2001 revenue 65 million get implied price target range 50 85 share respectively enterprise value subscriber subscription access companies trading approximately 5 000 subscriber based 2001 subscriber projections imply base valuation approximately 30 share netpliance valuation technique fails consider npli service platform ported multiple devices case subscription access companies believe ev subscriber low end reference point valuing netpliance forecasting 100 000 subscribers end 2000 400 000 end 2001 number discussions npli oems retail stores service providers corporate partners believe estimates conservative simple average four metrics imply price target approximately 50 two converging data points 45 discounted cash flow 50 function driven content npli model closely tracks function driven content companies chosen primary comparables initiate coverage npli 50 price target risks competition netpliance clearly led pack internet appliance market believe going forward biggest challenge maintaining lead competing effectively large competitors enter market year likely competitors online service providers aol earthlink microsoft software platform providers aether systems liberate technologies internet portals excite home lycos yahoo manufacturers stand internet appliances infogear webtv manufacturers portable internet appliances hewlett packard palm cellular telephone pager manufacturers manufacturers personal computers apple compaq dell gateway hewlett packard ibm netpliance competitors established establish cooperative relationships third parties increase ability products address consumer needs combine hardware product service offerings aol gateway struck agreement jointly offer countertop appliance desktop appliance wireless web pad first two items expected shipped end year web pad expected shipped early 2001 said convinced netpliance survive face competition thrive long company continues build brand name supplement direct consumer distribution method consumer line traditional retailer oems relationships adds planned applications portal leverages considerable technical expertise extend i opener platform new technologies note span four months company managed forge partnerships numerous industry leaders go far assuring netpliance player space partners go com walt disney affiliate west two largest canadian cable companies rogers communications shaw communications atlinks joint venture french telecommunications equipment giant altcatel thomson world fourth largest producer consumer electronics brands rca thompson netpliance established relationships ebay circuit city adding conviction two factors believe market information appliance large support multiple competitors secondly view netpliance excellent consolidation play large service providers hardware companies play catch information appliance race availability supply emerging market opportunity inherent risk demand outstrip supply netpliance case believe company taken steps assure sufficient supply anticipate company comfortably exceeding projections supply constrained environment quanta computer second largest computer notebook manufacturer world manufactures i opener appliance netpliance currently working establish additional relationships addition flexibility company business model eventually enable company port service oem channel mitigate potential supply shortages technology technical issues potentially limit tremendous growth opportunities see company current iopener applications based qnx operating system netpliance wants able applications different devices need make accommodations operating systems linux windows addition current i opener platform currently incompatible internet technologies said netpliance number r d teams addressing issues expect company successfully port i opener interface devices different operating systems expect future releases netpliance platform compatible additional technologies donaldson lufkin jenrette securities corporation affiliate makes market security periodic positions security connection activity past three years donaldson lufkin jenrette securities corporation managing co managing underwriter companies securities copyright donaldson lufkin jenrette securities corporation 2000 additional information available request report distributed united states donaldson lufkin jenrette securities corporation dljsc dljsc accepts responsibility contents u clients wishing effect transactions securities discussed seeking information contact directly u sales representatives dljsc 212 892 3000 report issued approved distribution united kingdom donaldson lufkin jenrette international dlji firm regulated securities futures authority conduct investment business uk private investors obtain advice dlji representatives investments concerned report distributed hong kong donaldson lufkin jenrette asia limited dljal report distributed south africa amb dlj securities pty limited member johannesburg stock exchange joint venture amb holdings ltd donaldson lufkin jenrette inc report disseminated singapore dlj pte limited report prepared sources data believe reliable make representation accuracy completeness additional information available request report published solely information purposes offer buy sell solicitation offer buy sell security derivative report construed providing investment services state country jurisdiction provision services illegal opinions estimates expressed constitute judgement date appearing report subject change notice endeavor update reasonable basis information discussed report regulatory compliance reasons prevent doing dljsc affiliates subsidiaries officers employees time time acquire hold sell position securities mentioned corporate finance relationship companies mentioned report dljsc affiliate act principal account agent buyer seller connection purchase sale security discussed report opinions expressed differ opinions expressed divisions dljsc price value investments mentioned income accrue fluctuate fall rise investor interest past performance 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