Internet Companies Track Path To Wall St.
Internet Companies Track Path To Wall St.
By Richard McCaffery, Staff Writer
When National Information Consortium Inc. splashed into the public market in July and emerged with a street value near $1 billion, e-government companies across the country felt the spray.
The stock offering by NIC of Overland Park, Kan., which designs and operates Internet portals for state and local governments, marked the first by a company focused exclusively on the public sector in more than a year. And it has been watched closely by other government companies in the electronic commerce business.
"That has been the most inspiring thing for us this month," said Kelly Kimball, chief executive officer of SDR Technologies Inc., West Lake Village, Calif. "The opportunity that's out there in e-government is so dramatic that even at 200 percent or 300 percent annual growth, we're falling behind."
SDR, which makes e-commerce software that takes the pain out of grueling tasks such as registering a car, is angling for an initial public offering in the first quarter of 2000. After all, NIC debuted on the Nasdaq National Market July 14 at $12 a share. When the market closed a few hours later, NIC's price had jumped to $17.31. It has since fallen, along with the rest of the Internet market, and is now trading in the $14 range.
SDR is not the only player with its eye on the pipeline. Ezgov.com in Atlanta turned on the lights in March and already has raised $3 million from private investors.
The company's advisory board includes John Reed, chairman and chief executive of Citigroup Inc., and Charles Conn, chief executive of Ticketmaster Online-CitySearch Inc. Ezgov.com makes applications that enable citizens to pay parking tickets, property taxes and other fees online.
It plans to launch a second round of venture financing in the coming months and an initial public offering is part of the plan as well, though it is too soon to name a date, said Ed Trimble, Ezgov's president and chief executive.
Or consider Digital Commerce Corp. of Reston, Va. The company has run an e-government Web site, FedCenter.com, since 1995, and recently stepped up efforts to increase brand awareness through a radio, print and Internet advertising campaign.
The company is in discussions with investment bankers regarding a possible IPO, said Tony Bansal, Digital's chief executive. Bansal said it is still early in the process but the company expects to go public. "We've attracted some interest from bankers," he said.
However, Internet stocks have looked like road kill since mid-July. Competition is fierce, and no one knows where the e-commerce market is headed. But why not think big? Industry analysts said the electronic government market looms large.
"I'm seeing increased action in that space," said Todd Weller, an analyst at Legg Mason Inc. in Baltimore. "The numbers I've seen, in terms of the potential, are pretty good. Plus the government has mandated going to a [paperless system]."
Federal Sources Inc. of McLean, Va., a market research firm, estimated in a report last February that the federal e-government market will grow from $679 million in 1998 to $2.9 billion in 2003.
Payton Smith, an analyst at Federal Sources, said the state and local government market is even larger. "State and local governments have more opportunities for service to the citizen," Smith said.
E-government may be a new market, but the checkout lines are full. Established players like American Management Systems Inc., IBM Corp., and Unisys Corp. have strong public-sector relationships, market share and IT savvy in the government space.
Still, Ezgov's Trimble, who used to work at Andersen Consulting, said the traditional strength of most integrators is in back-office applications, in other words, applications that never touch the citizen. Since e-government is all about reaching the citizen, new players have room to compete, he said. Established integrators "have not really moved aggressively into Internet delivery," he said.
Smith disagreed, citing bold e-commerce moves by companies such as IBM. He said that newer players probably will compete most effectively in state and local markets, where their names carry some weight.
Enter SDR, Digital Commerce and Ezgov.com. Founded in 1991, SDR started out developing software that agencies use to digitize the process political candidates use to file campaign contribution information. The company landed contracts with the states of Hawaii and California and the city of Seattle. By 1995, the Internet had emerged as an electronic medium, and SDR moved to Web-enable its software.
"That changed our lives," Kimball said. Hawaii became the first state to adopt the Internet version of SDR's software.
Since then, the company has landed contracts with Illinois, Louisiana, Michigan and Missouri, as well as with the Federal Election Commission, which paid $1.8 million for SDR's Web-enabled election software in 1997. In 1998, SDR added applications that allow citizens to renew driver's licenses online and register cars and boats, as well as other services.
E-government applications fall into three areas, Kimball said: Government to government, business to government and citizen to government. SDR offers applications in all three.
The company had $2 million in revenue last year, and Kimball expects up to $6 million this year. It just received $1 million in angel financing from a private investor, and Kimball plans to start the company's second round of financing this fall. He is looking to secure $15 million to $20 million in venture capital.
"We are now on a sprint to an IPO," he said.
Ezgov.com installed its first e-government application in DeKalb County, Ga., in May, and the system went live in early August. It lets citizens pay property taxes online using electronic checks, and also allows access to property deed information.
The second phase of the project will allow businesses, such as real estate companies and mortgage brokers, to access sophisticated property tax and deed information online.
The good news for the county is that the software and implementation did not cost it a dime. Ezgov.com is banking on subscription fees from businesses and small, one-shot fees from citizens to generate revenue.
Trimble did not disclose the company's estimated 1999 revenue, but he is optimistic. "The opportunity is enormous," he said, noting there are 3,153 counties in the United States and less than 1 percent have Web sites with e-commerce capabilities.
"We believe, 20 years from now, we'll all be doing these things online," he said. Ezgov.com is targeting Los Angeles, Miami, Philadelphia, San Francisco and Washington.
Digital Commerce Corp. is taking a different approach. FedCenter.com basically is an online shopping center for federal buyers. Unlike SDR and Ezgov.com, the company is not selling e-government applications to government agencies. Rather, it has developed an online portal for the government buyer.
The site brings together government workers and vendors supplying everything from janitorial supplies to IT equipment, office furniture and screws. "The federal government buys more than $200 billion worth of products a year," Bansal said.
The site gets nearly 1 million hits a month, has more than 7,000 registered users from 1,100 different agencies and offers nearly 2 million items.
Bansal's belief is that every company will have e-commerce capabilities in two years. That alone will not differentiate one competitor from another. Instead, those companies need hubs to shop at, places that introduce thousands of buyers and sellers.
Bansal declined to disclose the company's revenue. He did say sales increased 170 percent from the first quarter to the second, and he expects sales to double in the third quarter and again in the fourth. The company is well backed by private investors, who have kicked in close to $20 million so far.
Digital Commerce also is rolling out so-called Internet hubs for other markets. On July 21, it switched on PowerTrust.com, which allows Georgia's citizens to purchase electricity, natural gas and other products online. Bansal said 1,000 customers signed up in the first 10 days.