Growth in Ad Revenue Means
Solid Quarters for Internet Firms
By JOELLE TESSLER
Dow Jones Newswires
October 9, 1998
NEW YORK -- Despite the typical summer slowdown in Web traffic, Internet companies should meet or beat earnings estimates for the third quarter driven by solid growth in advertising revenue, analysts said.
"We believe the growth reported by Internet companies will stand out during a quarter with increasing concerns regarding macroeconomic trends," said BancBoston Robertson Stephens Inc. analyst Keith Benjamin.
CIBC Oppenheimer Corp. analyst Henry Blodget believes a growing number of Internet companies -- including, notably, Excite Inc. -- will approach profitability in the third quarter. Until now, industry leaders America Online Inc. and Yahoo! Inc. were among the few that were consistently reporting profits.
Mr. Blodget estimates average daily page views, a measure of Web site traffic, grew between 10% and 20% sequentially on average across the industry in the third quarter.
Even with a slowdown in July and August, he noted, traffic growth should actually benefit from a favorable comparison in the third quarter. This is because Internet companies measure quarterly traffic growth by looking at how much page views in the final month of the period grew over page views in the final month of the prior period.
Third-quarter traffic growth thus will measure page views in the month of September -- which is marked by a seasonal uptick after Labor Day as children go back to school and people return to work -- against page views in the seasonally slow summer month of June. Of course, Mr. Blodget noted, these numbers still could reflect the late arrival of Labor Day this year, which extended summer by a week.
Clinton Offsets Summer Lull
But the record levels of traffic drawn to the Internet by Independent Counsel Ken Starr's report on President Clinton and Mr. Clinton's videotaped grand jury testimony probably will offset any summer lull, said Hambrecht & Quist analyst Paul Noglows.
"The Clinton affair has shone a spotlight on the fact that the Internet is increasingly being viewed as a mass medium," Mr. Noglows said.
This should help drive strong growth in advertising and electronic commerce revenue for most Web companies. "The Internet is growing in importance to advertisers and advertisers are becoming more aware of it," Mr. Noglows said.
Mr. Blodget projects advertising and electronic commerce revenue to grow about 15% to 20% sequentially on average in the third quarter, and not to be affected much by third-quarter seasonality since "the market is so young."
William Blair analyst Abhishek Gami estimates America Online Inc., the world's largest online service and a bellwether for the group, earned 23 cents a share in its fiscal first quarter, ended in September. This is up from operating earnings of six cents a share in the year-ago period and 23 cents a share in the fourth quarter.
Mr. Gami said earnings will be about flat sequentially since AOL is increasing marketing spending substantially to distribute millions of free CD-ROMs with version 4.0 of its software, to promote its recently acquired CompuServe online service and to advertise on TV. The analyst estimated AOL lifted marketing spending to about $116 million in the first quarter, up from $95 million last quarter.
William Blair's Mr. Gami estimated AOL's subscriber revenue -- also called service revenue -- came in at $713 million in the first quarter, up from $668 million in the fourth quarter and $434 million in the year-ago period.
Mr. Gami estimated AOL ended the first quarter with about 13.3 million AOL-branded members, up from 12.5 million at the end of the fourth quarter. CompuServe's membership should stay relatively flat at just above two million members, he said.
Nonsubscriber Revenue Jumps
Mr. Gami projected AOL's nonsubscriber revenue -- which includes the high-margin revenue from advertising and electronic commerce on the service -- came in at $136 million this quarter, up from $125 million in the fourth quarter and $88 million in the year-ago period.
Among the Internet "portal" companies -- the Web navigation companies that have developed sites, known as portals, that have become major hubs for online traffic -- late Wednesday, Yahoo reported earnings of 15 cents a share. This is up from one cent a year earlier.
Mr. Gami said Excite, which is officially projected to turn profitable in the fourth quarter, has an "outside chance" of breaking even in the third quarter. Mr. Blodget estimated the company lost three cents a share in the period, compared with a 12-cent loss a year earlier. He said traffic grew 15% sequentially in the period.
Mr. Gami estimated Lycos Inc. would lose seven cents a share in its fiscal first quarter, which ends in October, down from a one-penny profit a year earlier.
The company has moved away from profitability in recent quarters because it has made several dilutive acquisitions. These include Tripod, which provides online communities and home pages, and WhoWhere? Inc., which provides online directory services and home pages and e-mail.
Mr. Benjamin projected Infoseek Corp. lost nine cents a share in the third quarter, compared to a 17-cent loss a year ago. The company will launch a new portal jointly with Walt Disney Co., which is taking a 43% stake in Infoseek, in late 1998.
The Disney partnership "may have distracted results for the quarter," said Mr. Benjamin. He also questioned whether Infoseek -- which has lagged behind the other portals in traffic -- can "manage such an aggressive, come-from-behind strategy, given the momentum of the leaders."
Netscape Seen Having Small Profit
Finally, Volpe Brown Whelan analyst Andrea Williams estimated Netscape Communications Corp. will earn two cents a share in its fiscal fourth quarter, ended October.
Year-ago comparisons aren't available since Netscape recently switched its fiscal year-end to October. Netscape has been rebuilding its business since Microsoft Corp. -- which bundles its Internet Explorer browser with its Windows operating systems for free -- has cut into Netscape's share of the browser market and forced its to give its Navigator browser away to compete.
Netscape has therefore been building up its enterprise software operations and developing its Netcenter Web site -- which still attracts a massive amount of Web traffic as the default start page for Navigator users -- into a portal that can compete with Yahoo and the other Web navigation sites.
Netscape has been aggressively signing up advertisers and electronic commerce partners for Netcenter, and has reached an agreement with Excite to help develop and sell advertising on parts of the site.
But the company is really in "catch-up mode" right now and has been signing a lot of "me-too deals," said Ms. Williams. Its challenge, she said, is to build Netcenter into a viable portal before its share of the browser market -- a key source of traffic -- dwindles.
Ms. Williams estimated Netscape's enterprise software business will contribute $121.5 million in revenue in the fourth quarter, while Netcenter will contribute between $40 million and $40.5 million.
The electronic retailers should show strong revenue growth in the third quarter as "consumers continue to become more comfortable buying things online," said Derek Brown, another Volpe Brown analyst.
Many companies in the group will nevertheless report third-quarter losses that are wider than their year-ago numbers since they are investing heavily in sales and marketing.
Online Retailers to Post Losses
Mr. Benjamin estimated online bookseller Amazon.com Inc. lost 58 cents a share in the third quarter, compared with a split-adjusted 18-cent loss last year.
Mr. Brown said the company is building on its strong brand name and large customer base to expand beyond selling books. Already, Amazon has started selling music online and is expected to start selling videos soon. "It's becoming an electronic commerce hub," Mr. Brown said.
Mr. Brown projects online music retailers CDNow Inc. lost 77 cents a share in the third quarter, while N2K Inc. lost $1.21 a share from continuing operations. CDNow went public in February, while N2K went public in October of last year. Both companies, he said, logged between 40% and 50% of their third-quarter revenue in September.
Internet service providers should report healthy third-quarter results, said Robinson-Humphrey Co. analyst Jeff Sadler. While the summer months tend to be soft for new subscriber growth, these numbers pick up as people buy PCs and get online in the fall, he said.
He said tail end of the quarter was helped by the Clinton/Lewinsky affair.
"People wanted to read the Starr report or watch the four-hour video for themselves," he said. "Getting online was the way to do that."
Mr. Sadler projects Earthlink Network Inc. lost 15 cents a share in the third quarter, compared to a 36-cent loss a year ago. He expected Earthlink to benefit as Sprint Corp., which has about a 30% stake in the company, actively markets its Internet access service to its residential long-distance and corporate customers this fall.
The company's agreement with Apple Computer Inc. to bundle Earthlink's services on Apple's iMac machines is also driving subscriber growth, he said.
Mr. Sadler estimated Earthlink added at least 80,000 subscribers in the third quarter, bringing its membership base to 790,000, even before the iMac deal.
Mr. Sadler estimated Mindspring Enterprises Inc. earned 10 cents a share in the third quarter, up from a three-cent loss last year.
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