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Can Netcenter turn Netscape around?

The jury is still out on whether Netscape is on its way to becoming a top-flight Internet portal despite entering the space later than many industry players.

Netscape Communications' quarterly earnings report was supposed to provide a clear sign of whether the company is on its way to becoming a top-flight Internet portal, despite entering the space later than many industry players.

Based on the results provided in Tuesday's earnings report, the jury is still out.

Some analysts argue that the financial results for the company's Netcenter Internet directory show promise, perhaps even making the Web site a spin-off candidate down the road. (Barnes and Noble announced today that it would sell shares in its online unit to the public.) Others, however, contend that the site isn't growing fast enough compared with heavy hitters such as Yahoo and Excite.

Although Netscape posted better-than-expected third-quarter results Tuesday and touted strong traffic numbers for its recently revamped Netcenter, the youthful Net directory is not showing the kind of growth numbers that the biggest portal sites have in recent months.

Netcenter's quarterly revenue of $38.6 million rivals that of market leader Yahoo at $41.2 million, which is impressive given that Netcenter is only part of Netscape's business. Business software still accounts for the bulk of the company's sales.

But Yahoo's year-over-year revenue growth was 192 percent for the latest quarter, while Netcenter has grown only 56 percent on a year-over-year basis. Excite's quarterly growth rate was a whopping 227 percent improvement over the like period a year ago.

Netcenter also generates significantly fewer page views than either of these companies, which are its main competitors.

Mike Homer, executive vice president and general manager for Netcenter, said Yahoo and Excite were much smaller than Netcenter last year, accounting for their larger growth curves.

"We got big faster," he added. "We made it a goal to grow revenue more last year."

Indeed, Netcenter didn't even exist as a portal site last year, but Netscape still had a corporate Web site that generated $95 million in revenue. Analysts are projecting that Netcenter will garner about $150 million in revenue this year.

This week's earnings report was supposed to offer the first real glimpse at how Netcenter has been performing, because the company posted results for its two businesses--the Web site and its enterprise software operations--separately for the first time. Netscape turned to this strategy after it decided to give away its browser for free in the face of stiff competition from Microsoft.

The results prompted financial Web site Briefing.com to take the company to task for its portal strategy.

"In a critical quarter, Netscape posts a zero. Zero earnings and zero confirmation that Netcenter will become a major Internet portal," the Briefing.com report stated. "Although the zero cents per share report is better than analysts' expectations of a 2 cent loss per share, it isn't enough to proclaim that Netscape has arrived as a true portal company.

"Netscape should be in the same category as Yahoo, AOL, Excite, and the other portals," it continued. "Until then, investors buying the stock with anticipation that Netscape will be a portal are speculating."

Netscape's advantage is that its browsers still account for about half of the browser market, making Netcenter the default home page for millions of computer users. The Briefing.com jab implied that the default advantage accounts for the majority of Netcenter's traffic, rather than content that makes it "worth sticking around."

Netscape, for its part, said it is aware of such criticism and knows that quality content is the key to retaining eyeballs going forward.

"That's why we're building out our content and making these partnerships," Homer noted.

To its credit, Netcenter has been busy lately. For example, the company recently announced that America Online's Digital City guides will contribute content to Netcenter.

Also, InfoSpace signed on last month to provide phone directory services for Netcenter. (CNET: The Computer Network, publisher of News.com, also has struck a deal to provide content for Netcenter).

Then last week the company announced that Citibank will be the so-called anchor tenant, or sponsor, for the Netcenter personal finance channel following an earlier enterprise software deal forged with the company.

Netcenter's expansion is continuing on other fronts as well. Homer is looking to hire a senior vice president of content programming by the end of the fourth fiscal quarter. In addition, Netscape is spending $10 million in advertising this quarter and is increasing its Netcenter advertising sales force.

"It's early, but the early indications are positive," said Andrea Williams, an analyst at investment bank Volpe Brown Whelan. "They are a legitimate portal...The browser is an advantage for them. They do have 50 percent of the browser market, so they are the first stop for many people coming onto the Web."

She added Netcenter's early numbers are positive, especially in the area of new registrations, which topped 500,000 in July, bringing the total number of users to 6.2 million.

"They're on a good ramp there," noted Williams, who has a "neutral" rating on the company's stock. "They're seeing growth in average daily page views, so people aren't just passing through."

In July, Netcenter saw a 10 percent increase in page views, and the daily average increased to 22 million page views from 20 million in June, according to Homer.

But like any new rollout, those numbers are likely to fall as the novelty of the new site wears off.

"July was the largest month we've ever had on the site," Homer said. "I expect that to cool off a little bit going forward."

Netcenter gets considerably less page views than say, Yahoo, but the revenue per page is more concentrated. Much of that has to do with the so-called Net Search button on Netscape browsers.

The company outsources most of its searching to Excite, Infoseek, Lycos, AltaVista, and LookSmart. The way the search is structured allows Netcenter only to record one page view for every four or five page views other search engines record each time a user conducts a query.

But the Net Search function, which Homer likes to call "a portal of portals," is a big moneymaker, he said.

Many Netcenter visitors use the site to download the company's free browsers. Homer said Netscape recorded 1.5 million downloads of its new Communicator 4.5 beta last month alone. The company recorded a total of 5.2 million downloads for all its software products in July, Homer added.

He noted Netcenter is working on a process that would "make it as easy as clicking a button to register for Netcenter" when users download a browser or other software.

But challenges lie ahead. Volpe's Williams says it will be difficult for Netscape to compete as both a business software company and an Internet media company, and to do both well. She pointed out that even Microsoft has yet to be as successful in the media business as it has been in the software business.

Some analysts think Netcenter will do more to boost the company's stock price than its bottom line. The site posted a $199,000 net loss for the three months ended July 31.

Drake & Company research director Steven Frenkel said that Netcenter will remain unprofitable for a while--like most Internet portals. But the effort nevertheless allows Netscape to be perceived as an Internet stock.

"I think Netscape [entered the portal space] to raise their stock price," he added. "If the market is crazy they might as well play the game. They didn't create this insanity. I applaud them."

The company's stock price is up sharply since bottoming out in February. In midday trading today, it was down 0.8750 at 30. The shares have traded as high as 44.625 and as low as 14.875 during the past 52 weeks.

"If they were just a software company, marginally profitable, the stock would have stayed under 22," Frenkel elaborated.

As far as Netcenter's potential should it be spun off in the future, he said: "They could realize half a billion dollars" if they timed it right.