<<More comments from Briefing.Com:>> Updated 27-May-98
Netscape: Being First Doesn't Matter
It must be a strange feeling to virtually create an entire industry, one
which is now sometimes heralded as the greatest economic shift in our
history, and then be faced with the possibility of being left behind.
In April, 1994, Netscape released Version 1.0 of its browser. Netscape
was still a private company, and it initially boomed with revenues. The
browser was its principal product, which individuals could get for free,
but corporations paid for, on a per-seat basis. Back then, Bill Gates
was still dismissing the Internet as unimportant. In fact, less than
four years ago, the term "information superhighway" was more prominent
than the term "Internet." Netscape seemed destiny to rule this brave,
new world all by itself.
What a difference a few years makes. Microsoft is being sued for using
its monopoly to control the future of the Internet. The "highway"
metaphor has been dropped from everyone's lips, (except Al Gore's). And
Netscape's future looks bleaker than ever.
In plain and simple terms, the question of the day is, how is Netscape
going to make money and grow?
Netscape yesterday released a complicated earnings report, having
changed their fiscal year to one ending in October instead of one ending
in December. Because of this, they reported January as a standalone
month, and then reported February through April as their "most recent
quarter," which is technically Q2 of fiscal year 98. Here's a table of
the report.
Q1 FY97January, 1998Q2 FY98Revenue (thousands)120,5338,320127,230Gross
Margin86.7%84.0%18.9%Earnings per share0.08(0.58)0.00
But if you roll in the January month with the February-April quarter,
and calculate the average month revenue for both quarters, things look
very different.
Average Month Q1 FY97Average Month Jan + Q2 FY98Revenue (thousands)
40,17833,888Gross Margin86.7%80.0%Earnings per share0.03(0.14)
But we are supposed to forget about January.
In last night's invitation-only conference call, Peter Currie, CAO of
Netscape, attributed January to being the first quarter of the quarter
(always slow) and to restructuring (although only $12MM of charges were
booked in the $54MM loss.)
Another interesting feature of last night's conference call was the
explanation for the "Other Income" line. Netscape's operating loss for
the Q2 FY98 quarter was $10.08 million. Offsetting that, to achieve the
"break-even" numbers, was interest income of $1.763 million, and a
$8.325 million gain from the sale of investment securities. Currie
declined to identify what stock(s) or bonds Netscape sold.
Currie also outlined the company's strategy as being two pronged:
Enterprise Solutions, and NetCenter.
Netscape's revenues are currently derived from three sources:
Software Sales: browsers, web servers, and other Internet related
software products Solutions Services Provider: consulting and systems
integration work for corporations NetCenter: Advertising and e-commerce
revenue from online service at www.netscape.com
The Enterprise Solutions business comprises the first two categories.
For the most recent quarter, this made up $96.1 MM in business, or 76%
of Netscape revenues. NetCenter brought in $31.1 MM, or 24% of revenues.
According to Netscape's own press release of May 26, the software and
services business is only growing at a 5.1% rate, year-over-year. But Q4
FY97 included $13 million in sales of the browser. Assuming that Q2 FY98
would also have $13 million in browser sales, the growth rate, would
have been 19% year-over-year. Although positive, this is not the kind of
growth rate other system integrators have been experiencing lately. If
Netscape is going to be three-quarter solutions provider, they need to
show stronger growth here.
NetCenter is Netscape's way of creating a online community for
personalized news, electronic commerce, travel reservations, online
communication with others, user forums, and more. If this sounds exactly
like AOL, Yahoo, and many others, it is. NetCenter revenues are growing
year-over-year at 45%, but at $31 million for the February-April
quarter, NetCenter is only 5% of the size of AOL, although roughly the
same size as Yahoo.
One interesting fact from the conference call: $20 million of
NetCenter's $31 million came from advertising and other recurring
sources. The rest came from "sponsorship fees" paid by others to have
placement on NetCenter. Whether these have a recurring nature is
unclear.
Also, no revenue from the recent deal with Excite has yet been
recognized. No details were given for a schedule of how the $70 million
deal will be recorded.
With NetCenter, Netscape is laying out as its business plan a direction
that AOL and Yahoo have already trailblazed and which is already crowded
with imitators. If only Netscape had chosen this direction in 1995!
Yahoo might not even exist.
At the core of the portal strategy is that there are only a few of them.
You can't exploit being a portal if there are dozens of them.
NetCenter's principal advantage is that Netscape comes preprogrammed to
default to NetCenter as the home page.
Where is Netscape's "sustainable competitive advantage?" This key
concept, the one thing venture capitalists look for in every business
plan, seems to be missing from Netscape's arsenal. Yahoo and AOL can
answer that their brand name is their advantage. Netscape simply can't
make that claim for the portal business. What have they got for the
Enterprise Solutions business? Presumably the experience with Netscape
products, but this was the same advantage Novell had in building
networks.
Takeover rumors have been a hope for Netscape stockholders, but who
would Netscape fit in with? There may be someone willing to take them
on, but we confess to not seeing an elegant fit. Unless IBM buys
Netscape, Oracle, Sun, Dell, and Yahoo... but we are dreaming now.
So what does Netscape have going for it that exploits it's
"creator-of-the-Internet" role?
We desperately wanted to hear an answer to this in last night's
conference call. Unfortunately, none was forthcoming. Netscape was first
in the Internet marketplace, but while the Internet booms, Netscape
appears to be spinning its wheels. After all, Q3 of 1997 had revenues of
$150 million, 18% higher than this report. All this while Internet
traffic doubles every 100 days.
Being first is definitely an advantage in the early stages of any
marketplace, but it simply doesn't matter, if you don't capitalize on
it. Just ask anyone at Apple.
It will be a tough day for all us long's !! |
