ANALYST WATCH: CMGI''s baby steps not good enough

COMMENTARY--CMGI’s first-quarter report was better than most analysts expected but not nearly good enough to renew faith in a stock that best exemplifies all that went so terribly wrong in the past eight months.

In the height of the Internet insanity, CMGI shares rocketed up to levels that confounded even the most optimistic Internet analysts. Holding large stakes in companies such as Lycos and Engage, it seemed no price was too high to pay for this monster.

Unfortunately for CMGI and its shareholders, it now appears that investors, those savvy veterans of the dot-com war, aren’t willing to get back on this one at any price.

After the bell Thursday, CMGI (Nasdaq: CMGI) posted a loss of $74 million, or 25 cents a share, excluding charges, on sales of $366.1 million.

Including those charges, it lost $636.6 million, or $2.07 a share, pushing its net loss for the past five quarters to a staggering $2 billion.

Analysts weren’t too concerned with the sales, which fell 3 percent from the fourth quarter.

“Revenue isn’t that big of an issue,” said Safa Rashtchy, an analyst at USB Piper Jaffray. “It’s more important to see if it’s able to cut down its losses and at least show some path toward profitability.”

It’s fascinating that the back when these stocks were soaring through the stratosphere, sales growth was the only thing analysts cared about. All that red ink didn’t matter if sales were improving 300 percent or more year-over-year.

Now it’s all about reducing those enormous losses. Who cares about the sales growth?

CMGI tried to calm everyone down after the earnings report, boldly predicting that its cash reserves, in excess of $800 million not counting its subsidiaries, will keep things running smoothly for the next 30 months.

That’s all well and good, but those predictions of profitability by the end of the fiscal year still ring hollow. No one can believe that whopper at this point.

It’s nice that CMGI plans to cut its cash-burn rate to $45 million a quarter, but if Engage (Nasdaq: ENGA), which plans to enlighten us all sometime next month, and NaviSite (Nasdaq: NAVI) keep sticking their hand out, it will still be talking about profitability in a theoretical sense.

Robertson Stephens analyst Lowell Singer cut the stock Friday from a “buy” recommendation to long-term “attractive.”

“We believe that unfavorable public markets, overall deterioration of dot-com businesses and weakness in the online advertising market, which many of CMGI’s companies are dependant upon, could drive risk to our estimates during the next few quarters,” he said in a research note. “We encourage investors to remain on the sidelines until we see incremental evidence of CMGI’s success in its new operating strategy.”

That strategy means less is more, as in only 13 companies rather than 17. Maybe even fewer. And these companies are, according to CMGI, going to be the cream of the crop and less dependant on advertising revenue than most of its current holdings.

In the quarter, CMGI’s operating expenses came in at $609.3 million, up 158 percent from the year-ago quarter but only up 1 percent from the prior quarter.

That’s a step in the right direction, at least on a sequential basis, but last time I checked investors weren’t too keen on companies that took pride in losing close to $200 million a year.

“I wouldn’t recommend that anyone buy this stock right now,” Rashtchy said. “Until the company not only slows its operating expenses but builds a core of companies that have a distinct competitive advantage over the competition, there’s no reason to get excited.”

CMGI is essentially asking Wall Street to be patient while it gets its act together.

Certainly there are some fine gems hidden among the white elephants in its holdings, but not enough to generate the kind of enthusiasm that can help this downtrodden stock.

But that's appropriate considering there weren't that many legitimate reasons to get fired up about the stock back in its heyday.

Meanwhile, the losses keep mounting.