Poised to reverse course
NewsEdge: Company's strategy may pay off
By Thom Calandra, CBS MarketWatch
Last Update: 01:59 PM July 14, 1998
SAN FRANCISCO (CBS.MW) -- The next big
stock might be off, not on, the Internet.
NewsEdge Corp. (NEWZ) is the Massachusetts
company whose shares are getting knocked
around by the prospect of free financial content on
the World Wide Web.
Once known as Desktop Data, NewsEdge earlier
this year bought Individual Inc., a company best
known for customizing data and content for those
with a voracious appetite for news on their
personal computers.
Alas, Internet companies such as Yahoo! (YHOO), enjoying the
tremendous success of free news stories and stock quotes on its
quote.yahoo.com Web site, are rattling NewsEdge shares. "Free" news is
not a concept that justifies the Fortune 1000 selling strategy of executives
at NewsEdge, namely CEO Don McLagan.
On the financial end, NewsEdge, a distributor of hard-core news and soft
stuff like Faith Popcorn's trend-spotting reports, claims 1 million paying
users, many of them at brokerages and Fortune 1000 companies. Yet
capital expenses are weighing heavily on free cash flow, even as the
company this month prepares to unveil what some analysts say could be a
break-even quarter, maybe even a tiny profit.
"The numbers had been bloody awful," said Robert Gay, director of
research at Global Equity Analystics & Research Service in New York.
"Costs went up. Their gross margins were falling and their operating
(profit) margins got clobbered."
(Editor's note: After this column was published Tuesday, NewsEdge said
it had penned a contract to sell real-time news to 2,700 terminals at
Chase Manhattan Bank (CMB). The stock rose 15 percent to 10 1/2.)
Those operating margins fell as low as 2.2 percent, Gay said. This led
executives at the company to pledge recently that "every member of
management has personal incentives to bring the company to our internal
goals of positive cash flow, profitability and accelerating growth," in the
words of McLagan.
Executives at NewsEdge, including McLagan and chief financial officer Ed
Siegfried, declined to return my phone calls this week. In an investment
presentation in New York City last year, McLagan said he was confident
the company's strategy of selling specialized news stories and
industry-specific news wires to brokers, health care companies and others
would prove to be a money-making one.
At the time, McLagan, a bearded, affable fellow, told me his company
boasted a 90 percent customer renewal rate. He was proud of his
company's ability to turn a profit even as competitors, which included
MAID Plc, now Dialog (DIALY), and Wavephore (WAVO), posted
losses.
Alas, NewsEdge posted its own quarterly loss in April, one that amounted
to $13.8 million. McLagan called it a "transition" period. Executives were
dealing with the purchase of Individual and another unit, the Investment
Software Services business of Automatic Data Processing (AUD).
Now, one influential Wall Street analyst says NewsEdge, its shares
enjoying none of the vigor of Internet distribution and content companies
such as Yahoo and CNET (CNWK), is close to a rebound.
Robertson Stephens analyst Keith Benjamin sees the stock reaching 30 in
one year from its forlorn 9.
"They will get pretty close to break-even next quarter," says Benjamin. A
survey of four analysts shows a consensus NewsEdge will earn 55 cents a
share in its 1999 fiscal year. In the June quarter, the company is seen
losing 5 cents a share.
"Desktop Data had a great run and then the business slowed down," said
Benjamin, who sees a profit as soon as the December quarter. "Free
news feeds from Yahoo confused people."
Gay at Global Equity Analytics, which scrutinizes company's balances
sheets, says NewsEdge could pleasantly surprise investors. "This
company has changed its stripes in one fell swoop (with the acquisition of
Individual). If costs go down and margins go up, look out."
Benjamin says NewsEdge needs to prove it can "consistently" deliver the
hundreds of news sources the company has aggregated under its roof. "I
think their concept of delivering news to professionals' PCs works,"
Benjamin said from San Francisco. "It's a pretty simple business."
Let's hope investors see it that way after the company sheds light on its
performance later this month. |
