SAN FRANCISCO -- Last year, Network Solutions (NSOL) was the belle of the Internet ball. Among all publicly traded companies in the U.S., Network Solutions' stock skyrocketed a brain-curdling 897%, ranking second right behind Amazon.com (AMZN) - Get Report. But some money managers are starting to wonder if the Network Solutions party is starting to fizzle.
Contrary to conventional wisdom, their chief concern is not new government-mandated competition to be announced in the coming weeks. Instead, in interviews with NSOL shareholders past and present, they've found growing concern that the company is adrift, without a CEO and struggling with a weak management team through the most critical juncture in the company's short history.
Few Net companies have to worry about what professional money managers think, because the volatility of Net stocks has kept the pros on the sidelines. Institutions, for instance, own less than 5% of such Internet highfliers as
. But Network Solutions has better than 20% institutional ownership, on par with other .com faves like Amazon,
. To such shareholders, attention must be paid.
"The feeling was that the management wasn't high-quality enough for the business going forward," says Fritz Linkner, an analyst with
Husic Capital Management
, who just unloaded his NSOL position.
In fact, Network Solutions has been without a full-time chief executive since Nov. 16 of last year, when Gabriel Battista announced his resignation. Battista, who had been at the helm for two years, left to become CEO of
beleaguered long-distance provider. Battista's abrupt departure raised eyebrows on the Street, coming at such a sensitive time for Network Solutions. In 1992 Network Solutions won a contract from the
National Science Foundation
that gave it the exclusive franchise on assigning domain names. But at the end of April this year, the
Internet Corporation for Assigned Names and Numbers
will announce five NSOL competitors, with more to come in June. When Battista fled to Tel-Save, some investors smelled trouble, but he claimed Tel-Save made him an offer he couldn't refuse.
"There hasn't really been a class-A management team in place even when Battista was there," says one of NSOL's largest shareholders, who requested anonymity.
Since November, the company has been run by Michael Daniels, Network Solutions' chairman who is serving as acting CEO, and by Robert Korzeniewski, the chief financial officer and acting chief operating officer. Network Solutions has hired a high-powered executive search firm,
Christian and Timbers
, and CEO Jeff Christian is personally conducting the search.
Mark Lewis, a Christian and Timbers managing director, declines to comment on the specifics of the search, but says, "we aim to complete searches in under 100 days." As of Tuesday, Network Solutions has been CEO-less for 113 days and counting.
Network Solutions CFO Korzeniewski says the company is interviewing a short list of candidates and plans to fill the slot by April. "We're more focused on finding the right candidate instead of doing it too fast," he says.
To some investors, that's too little, too late. Husic Capital Management's Linkner says that's why the stock fell so precipitously after the company's recent secondary offering. "Some people get nervous when they see a decline so much under the offering price," says Linkner, who noted that Husic sold its shares before the secondary offering. "If the underwriters aren't strong enough to support the deal, it's typically seen as a negative sign."
Network Solutions held its secondary offering on Feb. 9, selling 4.58 million shares at $170. The offering raised nearly $800 million and enabled Network Solutions' parent company,
Science Applications International
, to recoup some of its investment and reduce its stake from 72% to 45%. But the offering took some wind out of Network Solutions' sails. As the
rose 0.2%, NSOL fell 19.9% from Feb. 1 to March 5.
Lately the stock has recovered on par with the Net sector. And despite management concerns, Network Solutions is not hurting for fans.
"I'm shocked that
management is brought up as an issue," grumbles James Pettit, an analyst with
Hambrecht & Quist
, which acted as the joint lead manager of the secondary. "Bob is as rock solid a manager as I've ever seen."
Two days after the offering, Pettit reiterated his strong buy on the company, raising his 1999 EPS estimate by 12 cents to $1.16. Pettit has a 12-month price target of 250 on Network Solutions, which he says is trading at a 60% discount to similar leading Internet infrastructure plays.
The chief manifestation of Network Solutions' rocky management has been a reputation for delivering less-than-stellar customer service, say money managers and analysts. "For the past three weeks I have been trying to get my personal information on my domain names updated, with no response from
Network Solutions except to say that they are running a few days behind schedule," wrote Nicholas Patinkin, a Network Solutions customer, in an email to
. "I'm reminded of my experiences with my cable service. Service was never so good as when the threat of satellite service was real to cable." With new competition on the horizon, shabby service won't fly.
Other customers gripe about billing problems, too. "We've got some accounts payable problems with them going back months," wrote John O'Donnell of
Tyrconnell Computer Services
in an email. "If we have them, so do thousands of others. The only way I got attention ... was to go to the
Science Applications International Web page and write to senior people there."
Company management admits to sub par service. "We have the second-largest paying-customer base on the Internet after
," defends Korzeniewski. "That kind of growth will strain any company."
To enhance its service, Korzeniewski says the company is upgrading billing and other back-end functions. However, with almost 50% of its 400-plus employees in customer service already, Korzeniewski says the company's new hires won't be headed for the back office.
"It's not so much a body-count issue," he claims. "We need to work on the systems and procedures."
But the clock is ticking. "Network Solutions is fortunate enough to have one of those rare business models that runs itself," says Pamela Cutrell, an analyst with
Essex Investment Management
, which is long Network Solutions. "It's a good thing that they're taking time to search for the right CEO, but if it keeps dragging out -- that wouldn't be good."