Who Will Survive?

Some internet firms bouncing back

A stock price is supposed to be a good indicator of a companys future prospects. Investors pay up for rapid growth; they sell when growth stops. The dot-com boom blew huge holes in that theory — but only for a while.

By the end of 2000, the stock market was saying that scores of Internet-related companies were doomed. At the start of this year, more than 60 such companies were close to being delisted by the Nasdaq because their shares had fallen to less than $1. Those companies included e-tailers, communications carriers, systems integrators, information portals and others.

The bleak future predicted at the end of 2000 has come to pass for many of these companies. More than half have been delisted, been warned about being delisted, gone into bankruptcy or been acquired — at prices far lower than when they went public.

Still, there are signs that some of the companies on that original list may survive and possibly flourish. Cost-cutting, price increases, more concentration on high-margin business, sales partnerships with major corporations and fresh blood in the form of new executives are strategies that appear to be paying off for some of the beleaguered bunch.

Of course, money from big partners helps. Audible, which delivers books, music and other information in the form of digital audio content over the Internet, received a boost in February, when Microsoft invested $10 million. The $20 million Audible had in its bank account at the end of March should see the company into early 2002, says Andrew Kaplan, executive vice president of finance at Audible.

For the first quarter, Audible reported that revenue grew to $2.1 million, a 195 percent increase over the first quarter of 2000, and 14 percent ahead of the last quarter of 2000. The number of customers rose 36 percent from the end of the fourth quarter to almost 70,000. Content and service revenue rose 29 percent from the fourth quarter, but the sale of hardware dropped by 8 percent. The company heavily discounts listening devices as a loss leader.

Audible is trying to grow a base of subscribers to its listening service, so it can have a source of recurring revenue. The service was introduced last August, and the company had 15,000 subscribers at the end of the quarter. Audible was also able to raise its prices for some products without diminishing sales, notes Thomas Baxter, the companys president.

Audible is also trying to sell news services to corporations, but admits the business did not do well in the first quarter. It hopes that partnering with Microsoft and other major companies will help boost sales. While the picture is much brighter, Audible says it will lose money for the rest of the year.

Aspirin Please

Drugstore.Com has been a headache for investors for more than a year. Its stock is worth barely more than $1 per share, well below the $70 or so it fetched late in 1999. But the company still has $113 million in cash, or $40 million more than its stock is worth. Drugstore.com says its cash horde will see it through at least 2004, and it is cutting costs, stressing high-margin products and growing its customer base.

Drugstore.coms revenue for the first quarter was up 44 percent, to $32.8 million, and its gross profit margin rose 0.8 percent, to 15.3 percent, from the fourth quarter. Operating expenses fell 29 percent from a year ago, and 21 percent from fourth-quarter levels. The company says it added 171,000 new customers in the quarter, bringing its total base to 1.8 million. Average order size in the first quarter rose 1.5 times the average size from a year ago, to $62, while repeat business was 68 percent of total order volume, an all-time high, says Peter Neupert, Drugstore.coms chairman.

Gross margins have been improved by giving fewer discounts and concentrating on higher-margin products, Neupert adds, and shipping costs have been raised from $3.95 to $4.95, without hurting orders or traffic.

Drugstore.com President Kai Raman estimated revenue for the year at $135 million to $145 million and an operating loss, excluding noncash items, of $55 million to $60 million for the year.

Coming Up Roses

FTD.com is an unusual dot-com. It is profitable and predicts more black ink in its future. For the third quarter ended March 31, revenue rose 36 percent, to $36.1 million, generating a profit of $2.4 million. That compares with an $8.5 million loss a year ago. Operating expenses fell 49 percent, to $8.5 million, in the quarter because of lower marketing and promotion expenses, and paying less attention to simply acquiring customers and putting more emphasis on keeping them. The Downers Grove, Ill., company says customer acquisition costs fell 67 percent, but the number of accounts still grew 51 percent, to 2.1 million, from a year ago.

FTD.com estimates that its fourth-quarter revenue will be 15 percent to 20 percent ahead of last year, and that it will be profitable for the year. Wall Street likes the news. Since Jan. 2, the stock has surged from $1.38 per share to more than $6.

PFSweb is a company in transition that has managed to stay on Nasdaq and win a $20 million, three-year contract with the federal government. It offers electronic commerce consulting services, and outsourcing of certain aspects of a companys Web operations, including order management and customer contact centers. In May, PFSweb signed an agreement with Hewlett-Packard that could expand services that it currently offers to four HP business units to other HP units. PFSweb provides fulfillment, call center and logistics services to HP.

Service is a business from which Mediaplex is trying to escape, to concentrate on sales of its higher-margin software for managing advertising and media projects via the Internet. The shift has hurt overall revenue, which was down 51 percent, to $8 million, in the most recent quarter, but the company raised gross margins to 47 percent, up from 27 percent a year ago. Net loss was $6.1 million.

Mediaplex expects its second-quarter revenue to be up 12 percent, to $4.5 million, from the first quarter, and to continue losing money — even though it intends to cut staff by 20 percent. For the year, the New York company is projecting revenue of $25 million to $26 million. Mediaplex has $53.7 million in what it calls cash, though $19 million is parked in long-term investments.

Mediaplex named Thom Vadnais as president and CEO, taking over those two slots from Gregory Raifman, who remains chairman. Raifman says he will concentrate on strategy, rather than the day-to-day operations.

As hopeful as the executives of these companies often sound, Drugstore.coms Raman sounded the right note recently, when giving analysts guidance about the companys future. "We are a young company with no experience on what the impact will be of a slowdown in the economy, the adverse publicity about e-commerce, a reduction in marketing and a reduction in work force," Raman said.