WSJ:
Ad Strength Will Boost Revenue
At Internet Companies in Period
By JOELLE TESSLER
Dow Jones Newswires
Seasonal strength in advertising spending should drive solid revenue
growth for Internet companies in the second quarter. Many, though, will
still report losses for the period since they are spending heavily to build up
their operations and market their services.
Wall Street, Madison Avenue and even the traditional media giants are
starting to see a handful of Internet companies -- led by the search engines
and Web directories -- as emerging media players as they transform their
sites into gateways onto the Internet for consumers.
These "portal" sites, which seek to keep users loyal by providing such
features as free e-mail and personalized stock quotes, are evolving into
major hubs for Internet traffic -- and so attracting top dollar from
advertisers and electronic retailers eager to rent space on them to reach
consumers.
The usual pickup in advertising spending following the post-Christmas lull,
in combination with heavy summer promotions, should therefore result in
strong growth in ad revenue for the Internet companies in the second
quarter, said William Blair & Co. analyst Abhishek Gami. He estimates ad
revenue will exceed that of the first quarter by 10% to 15%.
CIBC Oppenheimer analyst Henry Blodget said that this growth is
expected even though the overall increase in traffic to many Web sites
"should be lighter than it was last quarter" since people tend to spend less
time on-line during the spring and summer months.
BancAmerica Robertson Stephens & Co. analyst Keith Benjamin
projected that Web traffic grew 30% in the second quarter, compared
with 50% in the first quarter.
AOL Seen Meeting Estimates
Mr. Gami said he is very confident that America Online Inc., the nation's
largest on-line service, will meet the average earnings estimate of 19 cents
a share for its fiscal fourth quarter, ended June 30.
Mr. Blodget said this figure includes a litigation-related charge and a gain
on the sale of shares of Preview Travel Inc. AOL posted operating
earnings of five cents a share, adjusted for a 2-for-1 stock split, in the
year-earlier quarter and 16 cents in the third quarter.
Gerard Klauer Mattison & Co. analyst Arthur Newman estimates AOL
will report subscriber -- or service -- revenue of $673 million in the fourth
quarter, up from $386 million a year earlier and $576 million last quarter.
The service-revenue line will benefit from a full quarter of contributions
from the CompuServe on-line service, which AOL acquired in February,
and from the increase in AOL's monthly subscription fee to $21.95 from
$19.95, which took effect in April.
AOL raised its subscription rate to offset increased network costs, which
have climbed as members spend more time on-line and have cut into
AOL's gross margins over the past year. Mr. Newman expects AOL's
gross margins to come in at 34.7% in the fourth quarter, compared with
38.1% in the year-earlier quarter and 34% in the third quarter.
Mr. Newman added that the price hike doesn't appear to have significantly
increased subscriber churn. He noted, though, that the merger of AT&T
Corp. and Tele-Communications Inc. will create a formidable competitor.
When TCI starts offering broadband Internet connectivity, it could lure
customers away from AOL.
William Blair's Mr. Gami projects AOL could end the fourth quarter with
as many as 12.7 million subscribers, up from 11.87 million at the end of
the third quarter. These figures don't include CompuServe, which Gami
estimates ended the quarter with just under 2.2 million subscribers, about
where it ended the first quarter.
Under $100 Million in Marketing
Gerard Klauer Mattison's Mr. Newman estimates AOL will report
nonsubscriber revenue, which includes revenue from advertising and
electronic commerce, of $122 million in the fourth quarter, up from $90
million a year earlier and $118 million in the prior quarter.
The reason this revenue line will be little changed from that of the previous
quarter is that AOL is selling less AOL-branded merchandise, Mr. Gami
said. But revenue from advertising and e-commerce by other companies --
a higher-margin business for AOL -- should be "up nicely," he added.
Finally, Mr. Gami said this could be the sixth consecutive quarter in which
AOL spends less than $100 million on marketing. He explained that after
spending heavily to promote its service, AOL has finally reached "critical
mass" in its brand power -- enabling the company to drive growth through
word of mouth.
Profit Predicted for Yahoo!
The second quarter should also show strong revenue growth for the Web
navigation services, which -- unlike AOL -- don't offer Internet access and
therefore survive almost entirely on advertising and e-commerce dollars.
The quarter bought major vindication for these companies' efforts to build
themselves into Internet hubs: In June, General Electric Corp.'s NBC
television network said it would take a 4.99% stake in Web content
company CNET Inc. and a 19% stake in its Snap! portal, and Disney Co.
said it was taking a 43% stake in Infoseek Corp., a search engine.
Mr. Blodget estimates Yahoo! Inc., the Web directory company that
consistently ranks among the most heavily trafficked of the portals, earned
nine cents a share in the second quarter, compared with one cent a year
earlier.
Mr. Blodget believes Yahoo's traffic in the last month of the second
quarter was up about 18% from traffic in the last month of the first quarter,
to 112 million page views a day from 95 million, and up about 72% from
the 65 million of the final month of the fourth quarter.
Excite and Lycos
Mr. Gami estimates Excite Inc. lost 37 cents a share in the second quarter,
versus a 43-cent operating loss a year earlier. This estimate does not
include a $57 million writeoff that the company plans to take in the quarter
as part of a $16 million warrant and $70 million payment to Netscape
Communications Corp. The payment is part of an agreement under which
Excite is helping program and sell advertising on Netscape's Netcenter
Web site, which Netscape is also trying to build into an Internet portal.
Spending to promote its own service and start-up costs associated with
such acquisitions as Classifieds2000, which Excite bought in April, have
resulted in losses. But Mr. Gami believes the company is on track to turn
profitable in the fourth quarter.
Mr. Blodget estimates Lycos Inc., which many say could be the next
target for a big media company, lost 13 cents a share in its fiscal fourth
quarter, which ends in July. The company lost four cents a share in the
year-earlier quarter.
Mr. Blodget said Lycos's widening losses are due to its acquisition in
February of Tripod, which provides on-line communities and home pages.
BancAmerica Robertson Stephens's Mr. Benjamin estimates Infoseek lost
nine cents a share in the second quarter, compared with a 17-cent
operating loss last year.
CNET and Netscape
Mr. Benjamin estimates CNET, which produces on-line content about
computers and technology in addition to Snap!, lost 14 cents a share in the
second quarter vs. a 37-cent operating loss last year. Under its deal with
NBC, CNET will no longer have to absorb heavy losses from Snap!,
since the network will handle promotional and other costs to build up the
site.
BT Alex. Brown Inc. analyst Mary McCaffrey estimates Netscape will
lose two cents a share in its fiscal third quarter, which ends in July.
Netscape, which has switched its year-end to October, has recast its
business since Microsoft Corp. began slicing into its share of the browser
market and forcing it to give away its Navigator browser to compete.
In particular, Netscape has been building up its enterprise software
operations and trying to develop Netcenter, the default Web start page for
Navigator users, into a portal. Ms. McCaffrey estimates Netscape will
post $36 million in revenue from Netcenter, $21 million from corporate
services and $87 million from enterprise software sales for the quarter.
Amazon and Onsale
Analysts also expect solid sequential revenue growth from the electronic
retailers in the second quarter.
Mr. Benjamin projects Amazon.com Inc., which went public in May of
1997, lost 38 cents a share in the second quarter versus a split-adjusted
14-cent loss last year. The on-line bookseller's shares have been rising
sharply since the company formally announced on June 11 that it would
start selling music on the Web.
Mr. Benjamin estimates Onsale Inc., which sells everything from
computers to time shares through on-line auctions, lost 19 cents a share in
the second quarter, vs. a one-cent loss last year. The analyst said Onsale,
which went public in April of last year, is progressing in its efforts to
expand its audience and product pipeline, but he is a bit concerned that
Onsale has more demand than supply.
EarthLink and MindSpring
Finally, Robinson-Humphrey analyst Jeff Sadler expects strong subscriber
growth to drive solid results for the Internet-service providers that serve
the consumer market. The big phone companies have invested in some of
these companies in recent months as they try to determine how best to
build their own presence in this market.
Sadler projects EarthLink Network Inc. lost 60 cents a share in the
second quarter, compared to a loss of 80 cents last year. He said the
company's agreement with Sprint Corp., which gave Sprint a nearly 30%
stake in EarthLink and put EarthLink in charge of Sprint's consumer
Internet access operations, is providing EarthLink with more customers
than expected.
Under the agreement, struck in February, Sprint gave EarthLink its existing
130,000 Internet customers and agreed to provide EarthLink with at least
another 150,000 a year for five years. Mr. Sadler believes Sprint has
already provided 36,000 customers toward this year's goal.
The analyst expects EarthLink to finish the quarter with a total of 710,000
customers. He added that the agreement with Sprint should bring down
EarthLink's network costs as the company switches to Sprint's network
facilities.
Mr. Sadler projects MindSpring Enterprises Inc. -- which many believe
could be an acquisition target, since it is one of few sizable independent
service providers left -- earned 18 cents a share in the second quarter vs.
a 19-cent loss last year. He estimates the company added 51,000
customers in the quarter to finish the period with 392,000 subscribers. |
