I-shops prepare for 2002

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Just like their general-advertising counterparts, interactive agencies are girding themselves for a weak market in 2002.

I-shops have settled into a new way of life as they face a second difficult year after the dot-com boom went bust. In their third-quarter reports, most focused on showing Wall Street that they are determined to become profitable by cutting costs and finding more stable sources of revenue.

Shops have reduced staff and dropped pricey office space. Razorfish closed its London office Aug. 30, Modem Media consolidated its New York operations in Norwalk, Conn., and Organic closed Atlanta, Boston, Chicago and Singapore offices this year.

Agencies are fighting over a smaller pie. Organic's revenue dropped to $13.9 million in the third quarter from $37.4 million in the same period in 2000, and it reduced its net loss to $11.3 million from $16.6 million in 2000. The company had $9.3 million in cash and equivalents at the end of the quarter, down sharply from $83 million a year ago. In its filing with the Securities and Exchange Commission, management stated the company had accumulated a deficit of $205.6 million by Sept. 30, but that its cash on hand and cash flows should be enough to meet its needs through year-end.

Seneca Investments, the same company that acquired Agency.com Oct. 31, has also made a play for Organic, an offer that remains on the table. Seneca, formed by Omnicom Group and limited partnership Pegasus Partners II, obtained a minority stake in Organic when Omnicom contributed its holdings to Seneca.

Most i-shops stated that the fourth quarter remains uncertain, in light of the weakened economy and continued military action in Afghanistan. They said, however, that clients have not cancelled projects, but only delayed them. Razorfish CEO Jean-Phillipe Maheu said the worst is probably past for the interactive industry.

Razorfish posted revenue of $19 million for the third quarter, down 75.3% from $77.1 million a year ago, but managed to shrink its net loss to $453,000 from $14.9 million in 2000. Reducing that burn rate was an important improvement for the company, which had $10.3 million in cash and equivalents at hand at the end of the third quarter.

Shops also announced substantial layoffs. Razorfish alone trimmed down to 489 employees by the end of the quarter from 1,527 during the same time in 2000. Organic on Nov. 1 began cutting up to 50 jobs in its latest reduction.

Modem Media, which laid off 129 employees in the second and third quarters, reported revenue dropped to $23.1 million in the third quarter, from $37.8 million a year ago, but it also halved its net losses to $1.9 million from $3.8 million in 2000. The company boosted cash and equivalents on hand to $40.9 million from $26.4 million at the same time last year.

Consolidation has reduced the competition among the surviving shops, allowing the stronger to take market share. All are seeking new clients among brick-and-mortar companies to replace defunct dot-coms that had been the backbone of the boom.

Financial-services companies are still very active in the online marketplace, said Organic Chief Financial Officer Steve Vattuone. Financial advertisers pulled back after Sept. 11, but business has picked up since then, he said.

Most shops said clients remain slow to commit to ad spending given their own financial straits. That trickles down into shaky bottom lines for the shops.

"We have seen some insight into next year, which says they will be tentative about increasing their spending," said Marc Particelli, Modem Media's CEO. "Our guess is we're going to see more of what we've seen this year, which is no real commitment to extended annual budgets for marketing of any kind until they get a better sense of what the market and what their performance in the business is going to do."

Optimism about long-term prospects is tempered with caution.

"Advertising follows the economy. If you can tell me when Sun [Microsystems] revenues will increase and Merrill Lynch [& Co.] will increase, I can tell you their advertising will increase with that," said Kevin Ryan, CEO of ad-serving company DoubleClick.

DoubleClick reported revenue of $92.7 million for the quarter, down from $135.2 million in 2000. It showed a net loss of $12.6 million compared to net income of $3.7 million in the year-ago quarter. DoubleClick's decision this month to sell its European media unit to AdLink was seen by many in the industry as a sign it will exit the media business in the U.S. as well.

Mr. Ryan would not speculate on a possible sale of any division, saying each one is expected to be profitable.

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