Ad networks face troubles as stocks fall

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Online ad networks, whose lifeblood is Internet ad revenue, could be some of the biggest victims of the dot-com shakeout. The litany of layoffs and disappointing financial reports go hand in hand with record-low stock prices. Just who's vulnerable to face a dot-com demise, isn't clear, but analysts are already placing bets on who has the best chance of survival.

Leading ad networks DoubleClick, CMGI's Engage and 24/7 Media have all seen their stocks slide. Last week, DoubleClick's stock was off about 90% from a 52-week high of $135.25. Engage's and 24/7's stocks were both down 98% from 52-week highs, and trading under $2.

"This is a case in which I think what the stock market is setting up is a self-fulfilling prophecy," said Dana Serman, research analyst at Lazard Freres & Co. "Investors, by pricing ad networks low, are saying they'd prefer there be one leader."


According to Mr. Serman, this is why companies' valuations are where they are, and why DoubleClick's valuation is ahead of its competitors. Last week DoubleClick's market capitalization was $1.75 billion, compared with Engage's $356 million and 24/7's $42 million.

Just who is vulnerable in this shakeout of online ad networks? "Everybody but DoubleClick," Mr. Serman said, noting that it's hard to predict which companies will go under because it depends on their cash burn rates and ability to manage securities. Privately held ad networks, such as, he said, might have a harder time of it because they never got a quick cash infusion from an initial public offering and are now faced with having to get more money from investors.

It's been an ugly few months. CMGI-controlled Engage last month warned analysts of a revenue shortfall for the fiscal quarter ended Oct. 31. It reported that revenue is expected to be between $40 million and $42 million - about a 37% drop from the previous quarter. Engage President-CEO Paul Schaut resigned, effective Nov. 20, 2000. Bob Bartlett, chief financial officer at Engage, said many of the current conditions hurting Internet advertising could continue into the next three quarters.

Meanwhile, 24/7 Media is also suffering. Its third-quarter results reported a revenue shortfall. While its revenue was $48.1 million, almost double the $24.3 million in revenue it reported a year ago, its losses widened considerably. For the first nine months of 2000, it reported a net loss of $102.8 million, nearly four times its year-ago loss. It, too, predicted revenue to be flat in the near future. As a result, it announced it would be laying off 200 employees in a cost-cutting move.

DoubleClick is also feeling the downturn in ad sales, but seems to be faring better. In a third-quarter report, it reported revenue of $135.1 million for the quarter ended Sept. 30, up 79% from the same quarter a year ago. It, too, is in a restructuring. It recently put its advertising on hold, which it attributes to a period of review under its new Chief Marketing Officer Susan Sachatello, and made several new appointments, including Ms. Sachatello and Barry Salzman, who was promoted to president of global media from president of international media.

"I am more optimistic than I've ever been about DoubleClick's long-term prospects," said Mr. Salzman, noting that Internet ad sales compose 50% of the company's revenues, with revenue from its data and technology divisions making up the rest.

Mr. Salzman said one way DoubleClick can grow its ad sales is by siphoning business from across the industry - from portals, vertical sites and other areas it's not currently getting business. It plans on doing this by diversifying its range of media products, which it's already been doing over the last 18 months, expanding its products from network sales to e-mail, sweepstakes and other products.

DoubleClick still faces many challenges. The gross margin on its biggest business - its ad network - fell over the past year, which the company attributed to "a less favorable product mix and declining prices, while the costs of ad delivery remained constant." Double-Click's ad network revenue fell in the third quarter from the second quarter, an indication of the pressures it faces. There's little indication Web ad prices will increase any time soon.

DoubleClick's smallest operation - DoubleClick Data Services, which runs the Abacus direct-marketing business - saw its revenue grow just 4% last quarter vs. a year earlier. That unit primarily provides services, such as mailing lists, to catalog retailers. Double-Click's bottom line is still red: The company has seen its net losses grow every year since it began in 1996. Loss to date: $161 million.

Mr. Serman said he believes DoubleClick's huge sales team affords economies of scale. When so many sales people are vying for the attention of media buyers, for instance, it makes more sense to have one person sell a package of Internet products.

"Some of these companies have very strong products and interesting business models. But in the back of my mind, they're probably better off part of DoubleClick."

Copyright December 2000, Crain Communications Inc.

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