4) Is it important that none of your portfolio companies are No. 1 in their fields?
a) This is an important, and frequent question. Leadership is rarely defined on a singular basis. We would suggest that several of our companies are among the leaders within their respective disciplines. We believe that the market is amply large to support a number of top-tier product and services providers - and we aim, in every instance to be represented in this grouping.
b) Take, for example, the search space. AltaVista's search engine fulfills fully one third of the world's search referrals on the web, more than Lycos, Excite, and GoTo combined. Although the market's revenue drivers have changed recently - focusing on technology and software licensing and de-emphasizing advertising / media based fund flows, we believe that AltaVista stands among the very best products and companies on a global basis.
c) Engage Technologies, similarly is in the top of their market space. True, Wall Street is not rewarding technical breadth or depth today, but the complex nature of the advertising / media profiling and services space further raises the competitive bar each day.
d) Engage has the largest database and number of anonymous profiles for interactive marketing in the world. This is a key asset today that grows in value as more users of the Internet get high bandwidth connections capable of carrying rich media ads. Also, these profiles will play an increasing role in the efficient serving of applications, content and advertising at the "edges" of the Internet, such as edge servers and network appliances.
e) NaviSite and Activate have demonstrated the power and potential of streaming services over the medium of the Internet. Today, this space remains fairly nascent, but it is easy to observe current indications of high-powered growth forthcoming as more content is 'webbified.' The Security and Exchange Commission's institution of "Regulation FD" has, single-handedly, driven the growth of this space as public companies must now stream in order to meet the SEC requirements.
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5) Where are the opportunities to build market leaders?
a) I think we may have covered this in part earlier, but to recap, we see managed hosted services, edge-networking (device) tools, technologies and services, software licensing (e.g. AltaVista and Engage) as spaces where CMGI can demonstrate leadership on a product and technical basis. As for revenue leadership, we are very confident that a number of our companies and segments will do well, but it would not be appropriate to comment on that in this forum.
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6) How well has the transition from an investment company to an operating company worked?
a) First, I would appreciate the opportunity to set the record straight on this subject. While CMGI may be best known for the success we enjoyed in the Venture and Capital Markets of 1996-2000, first, and foremost, CMGI is an operating company, perhaps more like a conglomerate holding entity. Some of our companies, Saleslink, for example, have always been "brick-and-mortar" companies. NaviSite and Engage represent examples of companies that we conceived, incubated and developed over the preceding several years - yet today, we are very much in the business of operating each of these entities. Each of these companies has their own, highly focused management teams, and boards of directors to ensure a level of independence and insulation from the CMGI corporate entity.
b) Clearly we encourage companies to work with one another, and often, CMGI acts in a facilitation / coordination role in accomplishing these objectives. The challenge, for each of us, and the Internet world, at large, is to manage the various life-, and business-cycles that affect each of these entities at specific points in time. After five years of hypergrowth, we, like the market overall, are taking a step back - planning the coming steps and phases that can/will maximize growth and enhance investor support. These changes do not come rapidly and some require external catalysts. We are excited about the success rate(s) we now enjoy within and between our companies. Yes, we have a number of hurdles to face, as does any emerging industry company. Our foundation is solid and missions clear. So, we are excited about where we are at a corporate and individual level, and, more importantly, where we are going.
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7) What are the strengths and weaknesses of the central CMGI management?
a) Directly, CMGI's central communication, beginning with our weekly (Monday) CEO meetings offer venues for communication within- and between segment areas. The CEO meetings have proven an extraordinary forum for one-to-one communication amongst top company officials - reducing time to execute when inter-company opportunities arise. Another key strength is the use of centralized services such as finance, IT and HR. While we do not seek to set policy in an autocratic fashion, the use of common tools, systems, and platforms makes a key difference as CMGI and our operating companies continue to develop.
b) Early on, our management ranks stood apart for the strong representation of entrepreneurs. These leaders took concepts and built products and companies. They secured the vision to create entities from ideas and organizations from a few personnel. Today, I would characterize our ability to recognize the limitations of the 'entrepreneurial' types, and the need for new management systems, people and ideas as a key strength. Rarely can one point to an instance where the founding management team was able to address each of the life-stages of a business with success. CMGI, today, is facing a point of life-cycle transition for several of our companies. The installation of new management teams and resources is now underway in several instances, including Engage and AltaVista - as those companies prepare for the next wave of the Internet's growth and their own development.
c) Of course, looking into the mirror and acknowledging one's own weaknesses is often a difficult task. We have, perhaps, not responded as effectively as perhaps we might have in addressing the transitional life-cycle stages for CMGI, specific operating companies and/or the market itself. In maintaining pace with the Internet's growth, we made errors, and did not stop to really fix them as perhaps we could have - had the pace been slower. Today we are far more concise and decisive in our decision making process. We are far more disciplined in strategy and execution, skills borne out of our experiences of surviving the hypergrowth five-year period just complete.
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8) How would you define your own role?
a) My role is primarily one of providing ideas, strategic direction and vision and facilitating the building of relationships with partners and between our companies. I also get involved with reviewing acquisitions and investment opportunities from a macro perspective.
b) Of course, this opens the question about who is operating CMGI on a day-to-day basis. I am exceptionally fortunate to have a team of extraordinary senior managers. Andy Hajducky is a CFO's CFO and clearly an executive. Andy's team has kept up with the explosive growth of acquisitions, IPO's and strategic alliances and transactions without missing a beat. Andy truly is the central nervous system of CMGI. David Andonian, Hans Hawrysz, and Peter Mills have each developed spectacular teams that address the operating units, strategy and venture-related activities, respectively.
c) We are now in the process of conducting a search for a COO for CMGI as we recognize that CMGI is now entering a new phase of it's lifecycle as well.
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9) Is there a need for a senior operating executive?
a) I believe this was answered above. To expand, however, we are seeking to add key senior managerial positions within CMGI and several of the operating companies. Today's teams have growth through the early-development phases of the 'Net - but it is now appropriate to augment these teams with experienced managers and experts who possess the operational expertise and know-how to help pilot CMGI though the next stage of development.
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10) What is your philosophy about how CMGI companies should do business with each other and are combined with each other?
a) As the CMGI@Ventures group formed and developed, we quickly recognized the potential value-add of a 'kiretsu' model - bringing partners together in an effective way to catalyze business opportunities within and between them. As CMGI has developed we have seen this operational leverage become even more clearly apparent.
b) For example, connecting GeoCities with Lycos enabled more user-based web pages to be identified, indexed and made available for search. NaviSite was created to offer CMGI and it's affiliates a best-in-class, managed services and hosting environment - and was, in some measure, created in response to the then high costs of outside hosting services. Today, CMGI represents only 40% of NaviSite's business, down from nearly 100% just a few years ago.
c) Companies should only do business with one another at arm's length, and only if it is in their best interest.
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11) What is the trade off between independence and synergy?
a) There really is not, or at least, should not be any 'trade off' between independence and synergy. Each operating company is independent by definition, yet, they must also come together, communicate amongst themselves and with corporate, and present the most effective business plan and execution possible.
b) To this end, if synergies are possible and do not interfere with key business objectives and timing then CMGI corporate encourages the adoption of common practices, tools, and platforms - which can yield considerable synergistic benefit to each of the entities and shareholders, alike.
c) Clearly, as a company is in its earliest stages, the use of CMGI's corporate products and services can off-load considerable time, and costs - allowing the young company to focus on their primary charter. Over time, as specific needs and demands change, we, as CMGI, fully recognize and support the use of appropriate tools, products and services - even if they do not fully interact with currently deployed tools. While this flexibility can create difficulties in integration and/or reporting (generally recognized as reporting delay factors), our focus is almost singularly on supporting each entity to make the best and "right" decision for their stated business objectives and shareholders, alike.
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12) Are there financial reporting issues?
a) From a GAAP reporting perspective there are no issues. Each company communicates their budgets and reports results in accordance with GAAP and other regulatory requirements. It is worth noting, however, that the nature of many of the businesses is quite different from one another. CMGI is in the process of completing the deployment of Oracle financials with that company's "Hyperion" modules.
b) Once complete, this integrated system will greatly reduce the time and labor necessary to allow CMGI's financial unit(s) to close their monthly and quaterly books, update budget forecasting systems, and communicate status more effectively. This said, a common chart-of-accounts and software do not resolve the complex process of managing and integrating financial results on a daily, monthly and quarterly basis.
c) Each subsidiary company has its own financials that role up to corporate CMGI financials. The financial reporting of the subs is as it is with any other company. For the parent, CMGI needs to be mindful to eliminate intercompany revenues through consolidation. I'm sure our finance department would add a few other items to this list, but for the most part, we function like any other holding company and are subject to the same accounting rules and regulations.
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13) Many people say the strength and weakness of CMGI has been its quickness to adapt to new circumstances and modify its strategy? I'm interested in your reaction to this thought.
a) Our strategy has been largely the same over the years - to leverage the rapid growth of the Internet across a diverse set of related and complementary companies to the collective benefit of as many of our companies and venture investments as possible.
b) We have adapted to the changing times and tides. We were early to the B2C movement - and benefited handsomely via Lycos and GeoCities. As our attention turned to infrastructure with Engage, NaviSite, and NaviPath the market chastised us for missing the B2B play. Today, the market is interested most in the infrastructure - so we see a 'leap-frog' effect in play. We aim to stay well in front of the curve - and have done very well on that score. We may not bat 1,000, but our ROI and IRR results speak for themselves.
c) CMGI was fortunate to start down this path as early as it did, enabling us to reach a critical mass with many of our companies and secure a strong cash position. When the markets turn South, as they are today, we have enough companies with strong revenues and profits (or that were on a near term path to profitability).
d) Unlike many recent additions to the Internet market, CMGI does not need the open capital markets in order to succeed. We are well capitalized with nearly $900 million in cash, not including nearly $200mm in our subsidiaries, and roughly $200 million in available for sale securities. In times such as these we are able to leverage these strengths, remain focused on the real business at hand, and weather the storm.
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14) I am also interested in your thoughts on the relationship between the company and its stock price and the impact of such a great rise and fall?
a) With a lower stock price, we are less acquisitive. While this lessens market interest and the frenzy, too, it affords us an opportunity to focus on the assimilation of many of our recent acquisitions and segment realignments. That being said, even though our shares are much lower today than in the past, so are the shares of most other Internet companies. This leaves the possibility of continuing to grow through strategic acquisitions where appropriate.
b) With the market turn down on such a broad basis, and concern over longer-term macroeconomic issues such as interest rates, we have taken the pause as an opportunity to stand back and survey the landscape. More, we are taking actions.
c) In some instances, some companies with longer paths to profitability and higher burn rates needed to be sold or shelved. In other cases, we are accelerating our investment rates in operating. Again, our longevity and diversity in the Internet gave us the luxury of having a set of strong companies that we could focus on and develop while the markets for tech stocks return to health.
d) Clearly, one impact from the precipitous share price decline has been employee morale. As you might expect, people (myself included) were none-to-happy to see shares plummet and, in some instances, options go 'under water.' We have addressed the option issue with additional grants. With the initial shock now wearing off, in the instances where morale was impacted, it is returning as the CMGI team is energizing for the next Internet wave.
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15) State and prospects for Engage?
a) Engage, as you may know, was developed to address the simultaneous, and often conflicting needs for user privacy and profiling. Without question, Engage is inextricably linked to the online, interactive advertising market. Today, that sector is universally out-of-favor as the decline in the capital markets resulted in the erasure of capital used to fund the many dot-com budgets for interactive marketing services.
b) As the Internet reaches to new audiences and deepens relationships with existing users, traditional advertisers are incrementally shifting marketing funds to the interactive medium. We see this as a strong trend-line for future growth, and note that many analysts have reported expectations that interactive media will represent well over ¼ to ½ of total advertising budgets within five years.
c) Increases in connectivity - both in terms of numbers of users and
connection rates (speed of the connection) are expected to drive traditional advertisers to put more of their advertising dollars on the Web, employing rich media advertising in efforts to bolster one-to-one marketing efforts (and improve their own ROI).
d) These trends, as well as the expansion of interactive media advertising to television and wireless devices further the need for user profiling and affiliated ad management / insertion services. The role of one-to-one marketing will, we expect, grow, dramatically over the coming 2-5 years in the interactive world as it did in the physical world. All of these trends bode well for Engage.
e) As for the revenue streams, we are very excited about Engage's acquisition and integration of MediaBridge. Now, Engage can (and is) positioned to leverage multiple revenue streams - from advertising as indicated previously, and on a software license / technology license basis. We see early signs that software licensing, which enjoys 80%+ gross margins and strong long-term operating margins, could have a materially positive impact on Engage's blended revenue stream and longer term cash-flow potential.
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16) What about AltaVista?
a) AltaVista represents a golden opportunity for CMGI today. While it is true that the advertising, consumer-focused models have been under pressure across the Internet today, AltaVista enjoys the luxury of having recurring revenues from licensing its search engine to other web sites and enterprises. Internationally, AltaVista remains one of the premier search portals - supporting over twenty-five languages.
b) We are really excited about the business oriented licensing opportunity for AltaVista's technology and product portfolios. Many organizations are discovering a need to organize and make searchable thousands of gigabytes of unstructured data, particularly as the interactive "web interface" becomes an ever growing vehicle for disseminating information within and between organizations.
c) Unstructured content represents roughly 70% of the databased content in organizations today. These business databases match the early requirements of web searching, cataloging and querying. AltaVista, with over 38 patents and six years of technology development stands among the best positioned companies to offer licensed software to meet these needs. Through annual licensing agreements and expectations for expanded applications within current- and new-customer bases, we believe AltaVista could enjoy a strong dual-track revenue model, significant long-term operating expense leverage, positive, predictable cash flows and profitability.
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17) What happened with iCast, MyWay and 1stup?
a) iCast and 1stUp were early stage businesses that depended heavily on advertising models. With the slowdown in advertising sales on the Internet, we decided it was best to reduce our reliance on advertising based models.
b) MyWay is still very much alive and well. We discontinued the advertising based service and are concentrating on the licensed based services of the company, which are doing very well and are on a short path to profitability.
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18) Other questions: CMGI Stadium and other marketing strategies?
a) We see CMGI as a 'hub brand' with spokes attaching various operating companies and affiliates. You may notice the affiliation "a CMGI Company" on the logo's and marketing materials of our wholly-owned, affiliate and portfolio companies. While the Internet space may be familiar with the CMGI name, we recognize that many corporate and individual users are not.
b) It is as important for CMGI to have a trusted, known brand as it is for GE, or any other conglomerate. We want people to know when they are dealing with a CMGI company, it is a mark of quality, with a strong company behind it.
c) Just as individuals may know the name "Otis" as an elevator company, they may not have associated the brand to United Technologies. Similarly, we are seeking to develop the CMGI brand name and thorough associations - bilateral value.
d) CMGI Field represents a low-cost, high yield opportunity to jump-start this effort. Our annual $7.6 million payment (beginning in 2002) offers us over 2 billion impressions per year. The audiences for football cross all sections of the national markets, and we expect that daily replays carried on local and national news / sports networks will help expose millions of people to the CMGI name and brand.
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19) Your compensation structure?
a) I am paid a salary and bonus with stock options. I did receive a carry on venture investments made in CMGI@Ventures funds up through CMGI@Ventures III, but beginning with our latest venture fund, that is no longer the case.
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20) Capital resources and burn rate?
a) We have more than enough cash - $900mm in the parent and roughly $200mm in our subsidiaries, along with over $200mm in other marketable securities to comfortably take the companies we have for at least 30 months or to breakeven, whichever comes first.
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21) What do you make of the fact that the people who have joined CMGI from larger companies--Neil Braun, Jeff Cunningham and Rod Schrock--have all left?
a) We have over 60 CEOs in our subsidiaries and our investments, the vast
majority of which have remained in place. I believe that given the rapid
growth and dynamic, high stress, nature of the Internet that it is not for
everyone. Those like Neil and Jeff had never had a job in the Internet
prior to CMGI, and I believe they found it to be foreign territory. Rod had
14 years of intense operations responsibility and wanted to take a break.
Given the demands of running such organizations, I find this understandable
and normal.
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22) Regarding conflicts between CMGI companies, some CMGI CEOs have wondered why you and other CMGI board members didn't recuse yourselves when deals between CMGI companies were discussed. Isn't that a conflict of interest? Similarly, why didn't you recuse yourself from the GeoCities board discussions of the Yahoo bid, considering that Lycos was a possible bidder?
a) I offered to recuse myself, but I stated that I thought I had the best
interests of GeoCities shareholders in mind. No one fought that position.
In fact, the day before we settled to sell GeoCities to Yahoo for $4B,
management recommended that we accept a $2.3B offer from a suitor. Another board member and I argued that GeoCities was a kingmaker and was worth more. The next day we settled on the deal with Yahoo.
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23) What do you make of the money expended towards strategies you have now abandoned? Specifically, the $120 million portal advertising campaign by Alta Vista. Also, the money invested in iCAST, MyWay, and the now closed @Ventures companies. How much do you expect to write off as a result of these changes?
a) First of all, AltaVista was not abandoned. It is the 8th most visited
site on the Internet, according to Media Metrix. It is a very successful
search portal fulfilling one third of all search referrals on the Web.
AltaVista's ad campaign was extremely successful in driving traffic to the
site. When we started the campaign, AltaVista had 38mm unique users per month. When we completed the campaign, this had risen to roughly 60mm users per month, and we have been able to sustain and build upon this since then.
MyWay is still a very successful business. As I stated before, we have
closed the advertising based business and focussed on the licensing based model. We have been able to convert the largest advertising based customers to the licensing model.
iCAST was an idea that was not able to get off the ground, because of the weakness in advertising spending on the Internet. CMGI has conciously reduced its exposure to advertising based models, such that we now derive over 73% of our revenues and growing from other models than advertising. One year ago auctions accounted for 0% or our revenues. Today it is over 28% and growing rapidly. We are concentrating on what works in both today's and tomorrow's Internet. Advertising will continue to be a major force for the Web, but it will be slower to develop than other revenue sources. When it does take off more strongly, we are well positioned to benefit.
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24) People who have worked with you characterize your style as impulsive, making decisions based on enthusiasm for technology and a sense of the market's appetite of the moment. Does that sound accurate and to the extent you think it is, how do you feel your decision making style has served you and CMGI?
a) I try to use technology to solve tough problems that have broad market appeal. This provides high barriers to entry, providing there is a first mover advantage and proper leverage from other CMGI companies. When all of these elements exist, we have a formula for success. Sometimes we are able to deliver on this, sometimes we do not, but we have enough such opportunities in development that we have more revenue than Yahoo, and we are growing faster from year to year. Those results speak for themselves.
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25) David Wetherell's (closing) remarks to Saul Hansell
Saul - CMGI is in a unique position - we are fully capitalized for the coming 30+ months. This assumes we never sell another asset or raise capital on the open or private markets. We are not aware of any other similar firm who, today, can make this claim.
Our cash burn is dropping dramatically as we concentrate on the companies that are more mature within the portfolio and have clear paths to profitability on an EBITDA basis. We have intentionally reduced our focus on advertising based models.
We expect to see our quarterly cash burn from operations reduce to $45mm per quarter by our fiscal fourth quarter ending July, 2001 from $225mm this past July.
Incidentally, we expect that four of our five business segments will be cash positive by our fiscal year end. The moves necessary to realize this reduction have already been largely made. To reiterate an earlier point, we are divesting, and/or shelving initiatives that are either not strategic, or carry too long a runway to profitability. We are an operating company focused on building value for shareholders.
In closing and divesting certain businesses we have created impacts to our revenue growth. We have working diligently to right-size the business, and make sure that revenues and expenses are in line with one another. We continue to fund and invest our CMGI@Ventures initiatives and are advancing funding to companies which we expect to be the big winners longer-term.
In a market that is turbulent, we know that the Internet is growing rapidly. Yes, we are going through a transition period, but we feel confident that we are emerging as a stronger company with solid footings and a solid portfolio of revenues, growth and people. With cash not a concern, we are focused on running the businesses that, together, comprise CMGI.
Saul, I hope this has been helpful. I look forward to seeing your article on Sunday.
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Top execs from the CMGI network of companies talk about their visions of CMGI and the future. |
