Internet Firms May Not Beat
Profit Expectations for Quarter
By PETER LOFTUS
Dow Jones Newswires
NEW YORK -- Internet-service providers signed up new customers at a rapid pace in the second quarter, while Web-portal operators boosted advertising and e-commerce revenue. But some analysts think the top companies may not beat expectations as strongly as they did in past quarters.
"I think everybody's expecting fairly strong results ... but the days of blowout quarters may be over," said PaineWebber Inc. analyst James Preissler. "As the numbers get bigger, it's more difficult to beat expectations by such a large amount."
At the start of the quarter ended June 30, some analysts had predicted strong paying-subscriber growth for leading Internet-service providers like America Online Inc. and MindSpring Enterprises Inc., counting on momentum from a strong March quarter. But that expectation subsequently waned, as heightened competition, seasonal factors and slumping personal-computer sales led analysts to conclude that the rate of growth wouldn't be so robust.
Meanwhile, the leading Web-portal companies attracted more visitors and expanded through acquisitions of other search-engine companies in the quarter. The burst of activity means analysts will keep a close eye on how well sector leaders like Yahoo! Inc. and Lycos Inc. are able to digest recent and pending acquisitions.
The latest quarterly reports, no doubt, will reflect the continued popularity of the Web. Overall Internet usage continues to grow, according to Forrester Research, a Boston market-research firm that predicts that 38.8 million U.S. households will be connected to the Internet by the end of 1999, up 17% from 33.3 million households in 1998.
AOL, the top Internet-service provider, is expected to report the addition of 750,000 to 850,000 paying subscribers in the period ended June 30, said Youssef Squali, analyst with Ladenburg Thalman & Co. AOL reported it had a world-wide base of 19 million paying members, including its CompuServe unit, as of March 31.
Mr. Squali had initially predicted AOL would add about 1.2 million subscribers for the quarter. He later downgraded his expectations, citing limited international growth due to the advent of free ISP service in Europe and a slowdown in PC sales.
Friedman Billings Ramsey Group analyst Ulric Weil also lowered expectations for AOL's subscriber growth in the quarter, citing heightened competition from other ISPs. He noted that AOL responded to its competitors with promotions offering free service for three- to six-month periods. Subscribers who take the offer aren't counted as paying customers.
"Originally, I just was too bullish because the March quarter growth had been so huge that it looked like there was such momentum," Mr. Weil said. AOL added 1.8 million subscribers in the March quarter.
Mr. Weil expects AOL to report fourth-quarter earnings of 11 cents a share, matching the mean estimate of analysts surveyed by First Call. The company reported operating earnings of six cents a share in the 1998 fourth quarter, adjusted for stock splits, according to First Call. AOL should report fourth-quarter revenue of about $1.34 billion, up from $941 million a year ago, Mr. Weil said.
The strongest growth area for AOL is its advertising and e-commerce unit, which should report revenue of $285 million, up from $162 million a year ago, Mr. Weil said. In addition to being a top ISP, AOL's position as a top portal operator has been bolstered by its acquisition of Netscape.
Yahoo, the top Web portal, is scheduled to report its earnings Wednesday. The company is expected to report an average of 259 million page views per day for the second quarter, up from 235 million daily page views in the first quarter, PaineWebber's Mr. Preissler said. A page view is one electronic page of information displayed in response to a user request.
Mr. Preissler attributed Yahoo's page-view growth to the portal's addition of features such as e-mail and stock quotes that attract repeat visitors. That growth, he estimated, helped generate second-quarter operating earnings of nine cents a share -- a penny above the mean estimate.
In last year's June quarter, Yahoo had adjusted operating earnings of one cent a share.
Mr. Preissler said Yahoo pulled in estimated second-quarter revenue of $102 million in the latest quarter, compared with $41.2 million a year ago, before certain acquisitions.
Merrill Lynch analyst Henry Blodget estimates Yahoo earned eight cents a share on revenue of $103 million. But given the company's history of beating expectations, he said, he wouldn't be surprised if the company earned 10 cents a share on revenue of $110 million to $112 million.
Analysts are keeping a close watch on Yahoo's effort to integrate acquisitions, including GeoCities and Broadcast.com Inc.
Another top Web-portal operator, Infoseek Corp., may not have had as strong a quarter as Yahoo. BancBoston Robertson Stephens analyst Keith Benjamin believes Infoseek's alliance with Walt Disney Co. is slowing down its ability to "move as fast as its competitors."
Mr. Benjamin said he expects Infoseek to post a loss of 43 cents a share for its third quarter ended June 30, a penny wider than the mean estimate. That would compare with an operating loss of four cents a share a year ago. Mr. Benjamin is expecting Infoseek to post revenue of $35.5 million, up from $17.1 million a year earlier.
MindSpring should report adding about 60,000 new subscribers during the second quarter, building on its base of about 1.1 million, said Ladenburg Thalman's Mr. Squali. He initially expected subscriber growth of about 80,000 customers, but cut his expectations due to concerns about ISP competition and slow PC sales.
Mr. Squali expects MindSpring to report second-quarter operating earnings of seven cents a share, excluding the amortization of goodwill from acquisitions. The mean estimate of analysts is nine cents a share, compared with four cents a share a year ago, adjusted to reflect a stock split. Mr. Squali estimated MindSpring will report revenue of about $81.5 million. A year ago, the company reported $25 million in revenue, before certain acquisitions.
MindSpring's rival Internet-service provider, EarthLink Network Inc., should meet Mr. Squali's expectation of between 170,000 and 180,000 new customers in the second quarter, adding to its base of 1.1 million, he said. He estimated EarthLink lost 19 cents a share, compared with the mean estimate of analysts of a loss of 22 cents a share and a loss of 20 cents a share a year ago. Mr. Squali put revenue at $77.1 million, up from $38 million a year ago.
Mr. Benjamin expects Excite At Home Corp., formed by the May merger of Web portal Excite Corp. and broadband ISP At Home Corp., to report a loss of two cents a share -- a penny narrower than the mean estimate of analysts. That would compare with a loss of five cents a share a year ago, adjusted for a stock split. He expects revenue of $90.5 million.
Lycos, the No. 2 Web portal, should report earnings of one cent a share, on revenue of $38.8 million for its fourth quarter ending July 31, said Mr. Preissler. The mean estimate of analysts is for break-even results, compared with an operating loss of five cents a share a year ago. Lycos reported revenue of $19 million in the year-ago fourth quarter, before certain acquisitions.
CNET Inc., which operates the Snap.com portal with General Electric Co.'s NBC unit and provides other Web content, should report second-quarter earnings of five cents a share on revenue of $23.4 million, Mr. Benjamin estimated, matching the First Call mean estimate. The company had an operating loss of seven cents a share a year ago, split-adjusted, First Call said, on reported revenue of $13.1 million.
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