Advertising Is Driving Growth at Internet
Firms
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By Joelle Tessler
Staff Reporter of The Wall Street Journal
10/6/97
NEW YORK -- Despite the seasonal summer
slowdown in on-line traffic, the explosive
growth of cyberspace should mean higher
year-over-year earnings for most Internet
companies in the third quarter.
The growth of advertising and
electronic-commerce revenue is driving results
at America Online Inc. and other search engines.
The Internet-service providers are controlling
expenses by leveraging off their fixed-network
investments to add customers at a lower cost.
And the growing acceptance of electronic
commerce is lifting numbers at most of the
on-line commerce players.
While not all companies in the sector are making
money, most of those not yet in the black
narrowed their losses in the latest quarter.
Although many Internet companies are still
spending significant sums to build up their
infrastructures and brands, someincluding
America Online -- have invested enough to face
smaller, incremental costs as they go forward,
said Robertson Stephens & Co. analyst Keith
Benjamin.
Looking at the on-line service sector, Nesbitt
Burns Securities Inc. analyst Abhishek Gami
estimated America Online earned 11 cents a
share in its fiscal first quarter ended Sept. 30.
The company earned 17 cents a share, excluding
writeoffs in the year-earlier first quarter,
although that figure was calculated under a
different accounting method and is not
comparable.
The key to the America Online story is that
nonsubscriber revenue, which comes largely
from advertising and electronic commerce, is
growing faster than subscriber-fee revenue, said
Montgomery Securities Inc. analyst David
Readerman.
As the subscriber numbers continue to grow, the
company is using its massive customer base to
attract more advertising and
electronic-commerce partners, including
Tel-Save Holdings Inc., CUC International Inc.,
Preview Travel Inc., Barnes & Noble Inc.,
1-800-Flowers and Amazon.com Inc.
Mr. Readerman estimated America Online's
first-quarter subscriber revenue increased to
about $405 million from $311 million a year
earlier, while other revenue more than doubled
to about $104 million from $40 million.
Gerard Klauer Mattison & Co. analyst Arthur
Newman noted that although subscriber fees still
account for the bulk of AOL's revenue, they are
not as profitable as the other business since the
company must make significant investments to
maintain its network and provide subscriber
services.
The commerce and advertising agreements, on
the other hand, require little additional
investment.
Mr. Newman expects these emerging revenue
streams to affect America Online's results more
sharply in the current quarter, which includes
the holiday season, than in the seasonally slow
third quarter.
Yet Mr. Benjamin noted the seasonal upturn in
ad spending beginning in September did help
boost ad revenue in the latest period above the
previous quarter's levels.
Despite the summer slowdown, Mr. Gami of
Nesbitt Burns said America Online also saw
steady subscriber growth in the latest quarter
after a mandated slowdown earlier in the year
until the company expanded its network
capacity to handle increased usage under its
flat-rate pricing plan.
Mr.Benjamin of Robertson Stephens estimates
AOL's subscriber base rose to more than 9.1
milllion at the end of the September quarter from
8.6 million at end of the June quarter.
Third-quarter results from the searchengine
companies should also show increased growth in
advertising and commerce revenue, especially as
ad spending picked up at the end of the summer.
"Many of these companies were legitimized
during the quarter" with the announcement of
several key advertising and electronic-commerce
deals, Mr. Gami said. The deals, which raised
hopes that these companies will be able to
translate users into dollars, sent their stocks
through the roof.
In July, for instance, both Yahoo! Inc. and
Excite Inc. entered into marketing agreements
with Amazon.com to provide users of their
search services with direct links to related
Amazon.com book titles for sale.
In August, Lycos Inc. entered a marketing
agreement to direct its users to Barnes & Noble's
on-line store and provide its search technology
for the bookseller's Web site.
And in September, Excite signed a deal to sell
Barnes & Noble books through its
Webcrawler-search service. That same month,
the company also agreed to launch an on-line
travel service with Preview Travel Inc. in a deal
that will be worth more than $15 million over
five years for Excite.
"People are seeing that some of these companies
are getting big enough to attract significant
levels of E-commerce and advertising," Mr.
Gami said, adding that investors now ask "how
many more deals and how big" will they be?
Although those deals will produce more revenue
based on a percentage of sales in coming
quarters, upfront fees from many of the
arrangements should show up in third-quarter
results, Mr. Benjamin said.
And these agreements should contribute even
more to earnings in the quarters ahead, analysts
said.
Montgomery's Mr. Readerman expects Yahoo to
earn one cent a share for the third quarter,
compared with a loss of three cents a year
earlier, both adjusted for a stock split. The
company turned narrowly profitable in the
year-earlier fourth quarter with net income of
$96,000, breaking even on a per-share basis.
The analyst estimated Yahoo's ad revenue rose
to $14.6 million in the third quarter from $13.5
million in the prior quarter.
Mr. Gami estimated Excite narrowed its
third-quarter loss to 48 cents a share from 59
cents, excluding charges, from a year earlier.
And Mr. Benjamin said he expects Lycos to post
a loss of six cents a share in its fiscal first quarter
ending in October, compared with a loss of 20
cents a share a year earlier. |
