H&Q Conference: Netopia Aims Small

The Net hardware and software provider wants to capture the massive small-business movement to the Web.
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SAN FRANCISCO --

Netopia

(NTPA)

is winning fans on Wall Street by helping the masses of small-sized businesses get up and running online.

Setting up shop on the Net requires time, expense and technical expertise -- all of which can be in short supply with small companies. Choosing the right kind of connection -- a T1, partial T1, cable access or digital-subscriber line, also called DSL -- can be a formidable decision in itself. Designing a site that keeps customers coming back is another big hurdle. Keeping it running smoothly, yet another.

Netopia saw a fertile niche in handling these tasks for companies. "So many companies talk about the small business market," president and CEO Alan Lefkof told

TSC

following the company's presentation Thursday morning at the

Hambrecht & Quist Technology Conference

. "That is our

total

focus."

To reach out to potential clients, Netopia has inked partnerships with ISPs, such as

UUNet

,

Verio

(VRIO)

,

Concentric

(CNCX)

,

Netcom

and

EarthLink

(ELNK)

. It also works with the CLECs, the local carriers that resell phone access to companies, such as

NorthPoint Communications

,

Covad

(COVD)

,

MCI/Worldcom

(WCOM)

and

Rhythms NetConnections

(RTHM)

.

Netopia gives companies high-speed access via DSL, one of the least expensive means of high-power Net access. Customers use Netopia's hardware and often have access to Web-site building software, Virtual Office.

"The whole DSL market is going to explode," says analyst Greg Loosvelt of

Apodaca Investment Group

, who said he owns the stock. "Small- and medium-sized businesses don't know how to build Web sites." And Netopia's existing content makes it easy for anyone to come in and get a site up quickly. "You just hook it up. It's beautiful," Loosvelt says.

The fastest growing parts of the business are the DSL hardware business and the Web-platform business, says Lefkof. Right now, the Virtual Office business is about 50% of the revenue, while 35% is coming from the hardware business.

Partners are unlikely to offer the same services that Netopia does because they can just license the Web-building product from the company, says Cameron Cooke, a research analyst for

Wells Capital Management

, who sat in on the presentation but doesn't hold the stock. "There's really no one out there of significant size that competes with Netopia," he says.

Netopia now has more than 25,000 paid Web site owners -- up from zero just 10 months ago -- and 40% of those want to add e-commerce to their site. That additional feature will bump up the recurring revenue it receives from customers to about $50 a month, from $20 a month for just hosting and the software.

While the availability of DSL is growing, it isn't everywhere just yet. Lefkof says that each CLEC offers the service in about 20 cities. But any slowdown in the rollout of DSL could inhibit the growth potential for the company. Lefkof says not to worry, because even if DSL expansion ended now, there are still tens of thousands of small businesses within DSL's existing range.

In the past month, the stock has risen more than 200% to Wednesday's close of 23 3/4. Wells' Cooke says he's waiting for a small correction in the share price before jumping in, but says: "I want to own this stock."

Apodaca's Loosvelt is more bullish: "Even at 25, it's got a lot of legs under it."