Bright prospects, hazy future - InfoSpace officials, investors play waiting game for the profits
2002-10-28 by Cydney Gillis
Journal Business Reporter
"Stock value 1998: $387 million
End of 2000: $2.2 billion
Today: About $48 million"
BELLEVUE -- It was once a dreamy dot-com exploding with growth. Now many shareholders see InfoSpace Inc. as a delusion waiting to die.
Fortunately for InfoSpace, it's good at waiting -- and promising that big things are just around the corner.
For six years, the Bellevue company -- which sells Internet search functions, payment approval and wireless services to Web sites and cell-phone carriers -- has promised profits.
Last year, it lost $502 million. The year before, it lost $282 million.
Founder Naveen Jain once claimed InfoSpace would be the first trillion-dollar company. Last month, after shares traded too long at less than $1 -- they once topped $260 -- InfoSpace, which trades under the stock symbol INSP, barely escaped delisting by the Nasdaq stock market.
The threat of delisting and the move that thwarted it -- a 1-for-10 reverse stock split that boosted shares from 46 cents to $4.60 on Sept. 12 -- led shareholders to start calling the company every day.
They ask when InfoSpace is going bankrupt.
That wait, apparently, is in vain. Analysts say InfoSpace isn't going under now or any time soon. Despite its volatile history -- a revolving door of executives, lawsuits charging fraud, the acquisition of 24 firms, and 540 layoffs -- InfoSpace has nary a dime of long-term debt.
No debt means no bankruptcy, company officials say. On the contrary, they point out an overlooked fact: InfoSpace has a war chest of $275 million in cash and equivalents, only $20 million of which it ``burns,'' or uses, in a given year.
At that rate, InfoSpace could last 14 years.
Add two sharp Microsoft alums who joined InfoSpace as vice presidents last year and the fact that two of the company's three lines of business are making money (at least, on the ``pro forma,'' or operating, basis to which InfoSpace still clings), and InfoSpace's prospects are as bright as ever.
And its future is still just as hazy.
That doesn't mean the company's lights can't go out. Pending lawsuits -- including a class action that claims Jain and others lied and cheated to line their pockets -- could take InfoSpace down.
Or, with more money in the bank than its market value ($229 million at Friday's closing price of $7.41), InfoSpace could be bought and killed for its cash. It's a potential that led the company to recently adopt a so-called ``poison pill'' policy aimed at preventing a hostile takeover.
Jain, InfoSpace's ebullient chairman and chief executive, expresses no worry about either possibility.
``We have so much money in the bank,'' said Jain, a resident of Medina, ``you better start to get used to us because we're not going away.''
The controversial Jain, however, might be.
Byzantine history
A native of India, Jain is a disarming but razor-sharp former Microsoft executive who started battling lawsuits before InfoSpace went public in December 1998, when he started his climb to being a billionaire on paper.
Jain says the recent litigation against InfoSpace is part of a lawsuit mill born in the wake of the dot-com stock crash of 2000.
A September article in Fortune magazine, however, listed Jain as the ninth-most-greedy CEO in America for cashing out $406 million in stock -- a notoriety that prompts Jain and company to cry foul.
Regardless, Jain plans to get out of the limelight. In July, InfoSpace announced it had hired recruiters to find a replacement for Jain, who said he would step down -- but not leave the company -- when one is found.
What leadership a new CEO provides will depend on how long the person lasts: Jain axed a previous replacement in 2001 after only nine months on the job.
That was just the start of a Byzantine year. When CEO Arun Sarin left in January 2001, the company's president and chief financial officer went with him.
That was followed in February 2001 by the exit of a vice president and the layoff of 250 people. Two hundred more were cut last October, then another 90 last week.
The upheaval in 2001 came after a decline in sales -- from $214 million in 2000 to $162 million last year -- and a massive merger with Seattle Web portal Go2Net, which InfoSpace acquired in October 2000 for $1.5 billion.
Until a new leader takes over, analysts say, InfoSpace's future is uncertain. But for ordinary shareholders stuck with the firm's stock, a large question looms over the here and now:
Can InfoSpace ever make money?
Looking to the future
The company, which employs 630, began as a Web ``portal'' that provided searches and directory-type look-ups to other Internet sites. That business, now part of what InfoSpace calls its ``wireline'' division, has blue-chip customers such as America Online, MSN, NBCi and Walt Disney.
From the start, InfoSpace also has tried to sell wireless data services. They include the type of messaging, horoscopes, maps and stock quotes the company provides today through all major cell-phone carriers, including AT&T Wireless, Cingular, Sprint, Verizon and T-Mobile.
Today, after its merger with Go2Net, InfoSpace has a merchant services division that sells online Yellow Page listings, Web site creation and hosting, and payment authorization services to small businesses.
``When I look at InfoSpace, at least in my opinion, we are better positioned today than we have ever been in the last six years,'' Jain said. ``Three businesses means diversified revenue from three different sources. And in any economic cycle, some businesses do better than others.''
So far, however, the wireless division has not done well at all. For two years, InfoSpace has promised a mass market for wireless data was just around the corner. It hasn't shown up, and no one is sure when it will.
In the meantime, the unit is supported by InfoSpace's money-making wireline and merchant divisions. The same is true for a former Go2Net unit that sells broadband or high-speed Internet access.
Thewireline division is run by Executive Vice President York Bauer, an energetic barrel of a salesman who once worked at Microsoft producing telecasts and mass events aimed in part at programmers.
Bauer oversees four of the Internet's most-visited ``meta'' search engines -- Dogpile, Excite, Metacrawler, and Webcrawler -- along with the online ads and paid placements they sell. It's a very lucrative business for InfoSpace, according to Jeff Fieler, an analyst with New York-based investment bank and brokerage house Bear Stearns.
The merchant angle
Online advertising is going nowhere fast these days. But InfoSpace's merchant division has a clever hook: Small businesses get pitched to buy online listings or Web pages through Verizon's SuperPages, a print Yellow Page directory that has an agreement with InfoSpace.
Like many of InfoSpace's services, its Internet Yellow Pages create incremental revenue. For example, a small listing runs about $20 per month, with a simple Web page adding only $12 more.
``If you look at the trend, 10 to 15 percent of the print business is beginning to use Internet Yellow Pages, and of that less than half a percent have a Web page,'' said Prakash Kondepudi, InfoSpace's executive vice president for merchant services. ``There's a huge market to grow.''
Through the purchase of Authorize.Net -- a transaction currently in litigation -- the division has a small but healthy stake in payment approval services.
The services, which are used in about 8 percent of all Web transactions, according to analyst Fieler, are sold to small businesses through banks such as Wells Fargo and Union Bank of California. A wireless form of the service called AirPay also works on hand-held computers.
Kondepudi, an InfoSpace executive who joined the company in 1998 with its acquisition of software service firm Saraide, oversees several major projects on the company's horizon. They include a transaction system for a mobile cash-register device and a universal version of the type of prepaid store cards used today at Starbucks Coffee.
Both will be huge markets, Fieler said, but InfoSpace's success is anything but assured. PayPal and Citibank, he said, already have tried one-for-all ``stored value'' cards, with nothing to indicate InfoSpace will do any better.
Fieler calls the wireless retail system a great product. In theory, it could allow a customer in a dressing room, for instance, to swipe a debit card in a mobile device, which would print a receipt and send her on her way.
But the company has yet to land any retail contracts. It is working to get the system deployed on devices made by manufacturers such as Fujitsu.
Carriers need InfoSpace
InfoSpace's elephant in the closet, as it were, is wireless data services -- where its future is the most bright and still the most elusive.
Given today's tiny cell-phone screens, slow networks and poor economy, sales of subscriptions for wireless horoscopes haven't been as brisk as InfoSpace or the industry once predicted.
But analysts agree with InfoSpace: That will change.
It's all a question of when -- and how long InfoSpace is willing to wait before it cuts its losses.
The man managing this prickly wait is cool and collected Jan Claesson, a former venture capitalist and 11-year veteran of Microsoft, where Claesson was a major player early on. He directed relations with the software maker's biggest U.S. buyers -- computer makers such as Compaq and Dell.
Out of the 140 million wireless handsets in the market now, Claesson said, less than 10 percent have active data users. But few of today's phones are even data-enabled.
With faster networks rolling out this year, Claesson said, wireless carriers are clamoring for content to get their subscribers to pay more -- and upgrade to chip-enabled ``smart'' phones, hand-held devices or new combinations of the two.
Wireless carriers ``want to increase the amount of revenue they get per customer,'' Claesson said. ``Selling data services is incremental revenue. As such, it is very important.
``There's also another aspect: The more data services you and I as end users purchase, the less churn (switching to another carrier) that we have in the eye of the carrier.
``Those two are main drivers today of wireless data,'' Claesson said, ``and the better we make that user experience, the better those numbers come out and the more successful we are.''
InfoSpace staff demonstrated with a software service called Kiss -- a cutesy messaging system that, in essence, allows someone to secretly play a game of tag with a heart throb.
Teenagers are major drivers of wireless services. But Kiss is hardly the ``compelling application'' that will drive adults to buy expensive new cell phones.
Bear Stearns analyst Fieler said a mapping and navigation service InfoSpace provides today through Sprint could drive sales, however.
``It's a lot cheaper to outsource to InfoSpace and spread the development dollars around to other carriers than to spend the development dollars themselves,'' Fieler said of carriers. ``Given how cash-strapped the telcos are, it's likely to remain that way.''
That puts InfoSpace in a very good position -- for a still unknown pay-off.
Data needs `3G' networks
Faster or ``2.5-G'' networks -- industry shorthand for ``two-and-a-half generation,'' as opposed to ``third generation'' -- are, in fact, rolling out this year from every major carrier.
In April, AT&T Wireless introduced mMode, a content-driven network it is rolling out in selected cities. On Aug. 10, Sprint debuted its PCS Vision in a blitz of commercials showing phones that can take and send digital photos. On Oct. 17, Verizon's Express Network launched in Western Washington.
More debuts are expected in the next six months, with Claesson and Jain predicting a mass market to follow in 12 to 18 months.
``They said that 12 months ago,'' Fieler noted flatly.
Still, he and other analysts agree it's a matter of when, not if, data services go mass, though no one knows how soon or how much the services will earn.
``I'm looking to see if consumers will pay,'' said Allyson Rodgers, an analyst with Seattle brokerage house Ragen MacKenzie. ``If you look at what consumers are spending money on now, it's divided between their phone, their cell phone, their Internet connection, and the cost of buying a computer.
``Paid-for data services come on top of that,'' Rodgers said. ``It will be interesting to see how quickly people adopt wireless data services, given all these areas.''
And, given the 18 to 36 months it takes people to buy a new phone, it could also be five or more years before wireless data catches on. So says Becky Diercks, a wireless analyst for Boston-based market research firm In-Stat/MDR.
``It hasn't grown as rapidly as many companies have predicted,'' Diercks said, ``but it has been growing steadily. Now that most carriers have rolled out 2.5-G networks, I still believe it's a good market to be in.
``Once the economy picks up, this market will pick up as well.''
All InfoSpace has to do is wait, the analysts say. And with $275 million on hand and two divisions that are cash-flow positive, Fieler said, the company can afford to wait for a very long time -- something that makes Jain and his current officers breathe easy.
``The keys for me (are) No. 1, of course, the strength of the balance sheet -- no debt, tons of cash,'' said Tammy Halstead, who took over as InfoSpace's chief financial officer in last year's management shakeup. ``All three of our business units are contributing to the top line, and two of our business units are profitable on a pro forma basis.''
``Those are the things,'' Halstead said, ``that make me sleep really well.''
Cydney Gillis can be reached at 425-453-4226 or cydney.gillis@eastsidejournal.com.
Founder responds to `greedy' label
By Cydney Gillis
Journal Business Reporter
BELLEVUE -- Naveen Jain sat in his 12th-floor corner office in downtown Bellevue pointing out the frayed thread at the bottom of his jeans.
It was just a light-hearted joke -- one that InfoSpace investors who have lost money might not laugh at. Many feel betrayed by the megamillions Jain has made as the dot-com's founder, chairman and chief executive.
But then, the 42-year-old CEO's fortunes have changed as well.
In late January 1999, a month and a half after InfoSpace went public, Jain's 48 percent stake in the company was worth $475 million. On paper, that zoomed past $8 billion at the height of $260 a share in March 2000, just before the dot-com stock crash.
Today, Jain's 21 percent stake is worth $47.8 million as of Friday's closing of $7.41.
Shares that Jain sold, however, grossed $406 million -- a price that bought him the No. 9 spot last month on a list in Fortune magazine called ``The Greedy Bunch.''
The list is a ranking by the University of Chicago's Center for Research in Securities Pricing of CEOs and other officers who sold mass stock in their firms.
Jain's spot at No. 9 follows notables such as Qwest Communications director Philip Anschutz at No. 1 (with $1.57 billion in stock sold) and Global Crossing Chairman Gary Winnick at No. 6 (with $508 million in stock sold).
But in the accompanying article on Sept. 2, Fortune castigates Jain for his sell-off, which came in two chunks of about $200 million before the stock plummeted.
``Jain is a particularly egregious case,'' Fortune says. ``He actually got his company's underwriters to let him sell shares in a secondary offering before the (initial public offering) period had ended.''
Jain and his officers respond that Fortune has been grossly unfair. They say he doesn't belong on a list of greedy CEOs.
``These are founder shares, not (stock) options,'' said Tammy Halstead, InfoSpace's chief financial officer. She called it an ``apples-to-oranges comparison because many of the people in that Fortune article, in fact, had received very low-priced options.''
In the wake of the article, Jain added, people have asked him why he doesn't believe in InfoSpace, in which he still holds a 21 percent stake.
``Seventy-five percent of my net worth is tied into one single stock,'' Jain said of his InfoSpace shares. ``And I acquired more.''
``If that's not a belief in something,'' Jain said, ``I don't know what is.''
INFOSPACE'S LEGAL TANGLES
Litigation costs InfoSpace between $3 million and $4 million a quarter -- a huge expense, Bear Stearns analyst Jeff Fieler said, that needs to stop. Below is a partial list of lawsuits in which the firm has been or is still involved.
PENDING CASES:
* June 19, 2001: Horton. Class-action lawsuit accuses CEO Naveen Jain and other InfoSpace executives of violating federal securities law by making false statements about the business and its prospects from January 2000 to January 2001. In May 2002, complaint added Merrill Lynch & Co. Inc. and its analyst, Henry Blodget, who had ``buy'' ratings on InfoSpace when he privately called it a ``piece of junk.''
* March 2001: Youtz (renamed Dreiling). $2 billion derivative shareholder suit claims Jain and other officials profited from illegal insider trading. Also claims Go2Net and Prio mergers were shams to boost stock price. InfoSpace has filed to terminate the suit, with a hearing set for mid-November.
* May 2000: Authorize.Net. Five shareholders of Authorize.Net, a firm InfoSpace acquired in its merger with Go2Net, seek $200 million in damages and reversal of certain Authorize. Net securities transactions on claims of fraud, misrepresentation and breach of fiduciary duty.
* December 2001: boxLot Co. Damages sought over alleged violations of California state law in December 2000 purchase of boxLot assets by InfoSpace.
SETTLED CASES:
* December 2000: Richards. Dismissed July 2002. Claims made by a former InfoSpace vice president of merchant services, John Richards, included breach of contract, unfair dealing and violation of federal racketeering laws by Jain. All claims dismissed, with the exception of misrepresentation. InfoSpace settled in June.
* December 1999: Hoffer. Dismissed September 2000. One of three similar cases early in InfoSpace's history; the company's first vice president of sales, Robert Hoffer, alleged that he was fired without cause two months after the company's founding in 1996 and that Jain had agreed to let him buy 300,000 shares at 10 cents each. A court dismissed his claims for breach of contract, unfair dealing, fraud, misrepresentation and promissory estoppel. InfoSpace settled with Hoffer in January 2001.
* December 1998: Plunkett. Settled 1999 for $10.5 million. InfoSpace's first vice president of marketing, Kent Plunkett, alleged Jain agreed to sell him 2 million shares at 1-cent each. He was fired after only three months.
* April 1998: Kaleem. Settled 1999 for $4.5 million. The first vice president of business development, Mark Kaleem, claimed Jain agreed to sell him 1.25 million shares at a penny each. He was fired in October 1997.
Sources: Journal news archives and Securities and Exchange Commission filings.
NAVEEN JAIN
Age: 42
Residence: Medina
Education: Bachelor of science, University of Roorkee, Roorkee, India; master's degree in business administration, St. Xavier's School of Management, Mumbai, India.
Experience: Worked seven years at Microsoft on Windows NT and Windows 95. Holds two patents. Launched MSN Internet service. Founded InfoSpace 1996. Took company public Dec. 15, 1998.
Hobbies: Minority owner, Seattle Supersonics basketball team
Stock value 1998: $387 million
End of 2000: $2.2 billion
Today: About $48 million
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