H&Q Conference: USWeb/CKS' Long Slog Back
By Spencer E. Ante
Staff Reporter
4/28/99 8:13 AM ET
SAN FRANCISCO -- USWeb/CKS' (USWB:Nasdaq) new CEO, Robert Shaw,
concedes that his firm is in an "ugly period."
Perhaps that explains part of the stock's recent unsightly performance, down 41% from
its record high of 47 reached late last month. In stark contrast to the bulk of Internet
stocks, USWeb/CKS has lagged behind broad stock-market measures. Since the
beginning of the year, USWeb/CKS is up 6.4%, while the S&P 500 is up 10.6% and
TheStreet.com Internet Sector index is up 75.7%.
"We've got a lot of work to do," explained the gray-haired and goateed Shaw, 51,
during a recent interview at the company's headquarters in Santa Clara, Calif.
He's got that right. In addition to merging with the CKS Group, a marketing company
with digital savvy, USWeb has been on an acquisition binge, gobbling up 41 companies
in the last three-and-a-half years. The idea was to create the world's largest professional
services firm for the Internet, a consulting firm that helps Fortune 500 companies
conceive, develop and execute e-commerce strategies.
But while the company's healthy appetite has helped it grow rapidly, the acquisitions
have led to corporate indigestion. "People are concerned about the integration with
CKS," says Cameron Steele, an associate analyst with Dain Rauscher Wessels. "It's a
challenge to meld those two cultures successfully."
Surprisingly, Shaw says USWeb/CKS is not satiated. The company, he says, is looking
to make three to 10 more acquisitions by the end of the year that will deepen
USWeb/CKS' expertise in back-end software systems, and help it build a presence in
more domestic and foreign markets. "As the year progresses we'll move into the
Asia-Pacific markets," Shaw told investors at the Hambrecht & Quist Technology
Conference Tuesday. "We've got to get to a $1 billion run rate as quickly as possible."
For the latest first quarter ended March 31, the company reported revenue of $84.1
million.
To meld all these disparate units into one integrated company, Shaw says USWeb is in
the midst of a six-month restructuring plan. Mostly that means building a back-office
infrastructure, closing redundant offices, and retraining and reassigning workers to avoid
layoffs.
This transition is so important to the company that it's formulated a dorky phrase for a
three-step plan: "forming, norming and storming." Shaw says USWeb/CKS is moving
from the forming to the norming stage now. He predicts it'll be storming by the end of
the summer.
Beyond the integration challenge, analysts say that USWeb/CKS pales next to its
Internet brethren for a few simple reasons. First, the services business isn't as sexy as
consumer-oriented businesses such as Yahoo!'s (YHOO:Nasdaq) or eBay's
(EBAY:Nasdaq).
Second, service businesses are labor intensive and tend to have thinner margins.
USWeb/CKS currently has 2,250 employees; it plans to employ 3,200 by year's end.
Third, investors have felt that USWeb/CKS suffers from a lack of experienced
management. That one of the company's founders, Joe Firmage, dedicated his life to the
pursuit of extraterrestrial intelligence didn't help matters much. Since the entrance of the
seasoned Shaw, who previously managed Oracle's (ORCL:Nasdaq) Worldwide
Consulting Services Group, those concerns have been allayed.
"In the last couple of months they've really turned a corner," says Monument Internet
Fund portfolio manager Alex Cheung, who keeps tabs on the company by interviewing
customers. "Most of their projects are in the pilot stage, but if they can get that work
done right they can move forward and generate new business."
And there's no lack of competition. USWeb/CKS has got competitors nipping at its
heels, torso and head: computer hardware and service vendors such as IBM
(IBM:NYSE) and Compaq (CPQ:Nasdaq); advertising and media agencies such as
Foote Cone & Belding and Ogilvy & Mather; other pure-play Internet service firms like
iXL and Organic Online; large consulting firms such as Andersen Consulting and
Cambridge Technology Partners (CATP:Nasdaq); telecom giants such as AT&T
(T:NYSE) and MCI-Worldcom (WCOM:Nasdaq); and software vendors such as
Microsoft (MSFT:Nasdaq) and Shaw's old stomping ground, Oracle.
USWeb/CKS has its share of advantages. Its early entry helped it stake out a leading
position in the professional services market. It has beaten Wall Street's earnings
estimates four out of the last five quarters. And it continues to evolve, looking for new
revenue streams and better sources of profit. The recently launched e-services business,
for instance, represents an attempt to improve operating margins by developing a
subscription-based model for clients.
"We're taking the intellectual property from professional services, commoditizing it and
making it available to a larger consumer market," explains Bob Wise, the company's
chief operating officer for e-services. "The nice thing about e-services is that you have a
predictable revenue line."
During Tuesday morning's presentation, Shaw also hinted at a promising if fuzzy new
product. He said USWeb/CKS is getting ready to unwrap a "corporate portal" that
helps "empower knowledge workers in every industry."
In the meantime, analysts will be gauging progress on the company's makeover, tracking
revenue growth and average revenue per worker. Between the third quarter in 1998
and the first quarter in 1999, for example, revenue per employee increased from
$139,000 to $148,000. "I think June is an inflection point," says Danny Rimer, an
analyst with Hambrecht & Quist, which has done underwriting for USWeb/CKS. "If
they come out with good numbers, investors will be significantly rewarded."
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