As interactive shops wrapped up reporting second-quarter results last week, the overall picture is of a business sliding into an abyss. Investors have mostly given up: Four of seven prominent public i-shops analyzed by Advertising Age now trade below 50 cents a share.
Only one of the seven, Digitas, posted a year-on-year increase in revenue for the first six months-but only 3%. Most endured double-digit declines, including a startling 83% drop at Scient, which saw its revenue plummet from $157.2 million to $27.1 million. Its merger partner, iXL, saw revenue crash 67%. IXL once stood for "Internet Excellence."
In fact, it's typical of the sad state in the industry that when the two companies announced a merger proposal in July, the union was met with disdain by Wall Street. The day of the announcement, iXL stock dropped 47%. The math is depressingly easy. Starting at $1, iXL dropped to 53 cents.
Stephen Mucchetti, Scient's president-chief operating officer, remains bullish on the merger. "This is an excellent marriage, not a shotgun wedding," he says. Mr. Mucchetti says the two companies will realize $120 million in savings annually from the union and that their cash position is "certainly enough" to weather the storm.
The problem is, to say it in the lingua franca of financial analysts, there's little visibility on when interactive revenue will brighten. Mr. Mucchetti notes companies in the sector "can't cut their way to prosperity."
The revenue fall hasn't been as bad at Modem Media, partly owned by Interpublic Group of Cos. First-half revenue dropped about 3% vs. last year. However, second-quarter revenue fell 20% from the first quarter; CEO Marc Particelli, who joined the company early this year, attributes that drop to clients' cost-cutting. "They've just reduced their priority [on Internet spending] and truly cut back on their spending," he says.
To that end, i-shops are throwing solutions at the wall, hoping something sticks. Organic revamped its business-development organization in late December, shifting to incentive-based compensation for sales staff and a model that focuses on helping clients maximize existing e-investments.
"Our [return on investment] focus is really resonating," says Organic CEO Mark Kingdon, who was hired in December. He admits this new breed of client relationship-which includes work for Domino's Pizza, Dow Automotive and the MONY Group-doesn't carry the "mega-fees associated with the first [site] build."
Seneca Investments LLC-backed Organic's year-on-year revenue for the first six months fell 58%. Still, Mr. Kingdon believes the December revamp resulted in a fairly good-by current standards-performance in the second quarter, since revenue declined from the first quarter by only 4%. New clients accounted for about 10% of the second quarter's $13.8 million in revenue. "If we meet our revenue projections, then we have the cash necessary to make it to profitability," Mr. Kingdon says.
But the key word is "if." Though i-shops have taken a conservative tack this year in projecting revenue, recent history shows that in the land of i-shops, past is not exactly prologue. In the fourth quarter of 1999, Razorfish, once the hottest i-shop of them all, grew revenue year-on-year by 1,015% from $4.7 million to $52.7 million. In the second quarter of 2001, the shop reported only $28.7 million in revenue.
That manic ride is as good an explanation as any of why making the cash last till a turnaround will probably prove impossible for some i-shops. The biggest i-shop, MarchFirst, filed for bankruptcy liquidation in April.
In an industry where astounding increases in revenue were once the norm, the focus on expansion, literally at all costs, was catching. I-shops are holding the bag. Razorfish last quarter closed offices in Helsinki and Milan. A cost saving? Certainly. But the fact that it was ever considered a good idea for the young company to open offices in such small markets shows how far the industry expanded.
Razorfish last quarter had a net loss of $137.1 million, including a $70 million restructuring charge. As of June 30, it had only $15.1 million left in cash, cash equivalents and short-term investments, and $23.3 million in accounts and unbilled receivables; one can only hope that none of the receivables is from dot-coms.
Razorfish's second-quarter 10-Q warns: "We may need additional capital that may not be available to us." The company has contracted with Ladenburg Thalmann & Co. to look for money. Razorfish CEO Jean-Philippe Maheu, contacted via e-mail, admits the financing environment is "challenging" but adds: "Clearly the strength of the Razorfish brand and the strength of our client roster ... helps in getting people's attention." Razorfish stock Aug. 17 hit an all-time low of 24 cents before closing at 25 cents.
THEM'S THE BRAKES
IXL may be the best example of the troubles involved in slamming the brakes on expenditures when a market turns so radically. Since it began restructuring last year, the i-shop has shed 1,000 employees and now only has eight primary offices, down from 23. The company says in its 10-Q that "we continue to pay for office space that we are not currently using."
It's easy to wonder whether the industry now wishes its origins as a gaggle of quirky design shops had never given way to the halcyon days of 1999 and early 2000. There may be no good way to turn back. As Scient's Mr. Mucchetti notes, "You could inevitably put yourself back to five people in Poughkeepsie, but who cares?"
Contributing: Mercedes M. Cardona