Davis steps down at Terra Lycos, 2001 outlook uncertain

Terra Lycos (Nasdaq: TRLY) confirmed Thursday that CEO Robert Davis was stepping down amid management shakeup. The company, which topped estimates for the fourth quarter, said it was comfortable with first quarter targets, but was mum on the outlook for fiscal 2001.

Investors have become increasingly skittish about Terra Lycos as a number of the company's competitors have warned of rough times ahead. Terra Lycos, formed from the merger at Terra and Lycos, is only three months old and facing management upheaval. Shares of Terra Lycos were off $0.75 to $15.56 at midday.

The company reported a fourth quarter loss of $96 million, or 17 cents a share, excluding charges on sales of $164 million. Earnings tracking firm First Call projected a loss of 22 cents a share on sales of $151 million. Officials said the company was comfortable consensus estimates for the first quarter. According to First Call, the company is expected to lose 14 cents a share on sales of $177 million. However, Lycos officials said the couldn't predict 2001 results due to "softness in the market."

In the shakeup, Davis steps down as CEO to become an non-executive vice chairman at the company. Davis will become a partner at venture capital firm Highland Capital Partners. Executive Chairman Joaquim Agut will take the reins at Terra Lycos. CFO Ted Philip will become vice president of strategic planning and M&A. Elias Rodriguez-Vina will replace Philip as CFO.

On a conference call with analysts, Davis said reports of a rift between him and Agut were overblown, but noted that having two chiefs doesn't work well in practice. "This is a day that holds a lot of mixed emotions for me," said Davis, who reiterated that he will still be involved with strategic planning.

Davis' tenure was marked by his signature scrappiness that turned an obscure Web search engine developed at Carnegie Mellon University into a new media company. As the first employee at Lycos, Davis also shepherded the company through times of turmoil, from the embarrassing failed merger with USA Networks and the collapse of the Web stock bubble.

The rise of Lycos was largely marked by Davis' growth-at-all-cost attitude that kept the company afloat despite the difficulty in competing in the Web portal sector. Much of the company growth was fueled by acquiring smaller-scale Web companies, such as Wired Digital, Quote.com, Sonique, Gamesville and this week's purchase of Raging Bull.

But over the past couple of years, the leaders such as Yahoo, America Online and MSN got bigger and distanced their lead. The stragglers meanwhile either threw in the towel or have turned their attention away from competing with the top. Just this week, Walt Disney announced it would shutter its Go.com Web portal and lay off 400 employees.

Just when it seemed Lycos would also fall into the turmoil that struck second tier portals, Davis sold the company to ISP Terra Networks, a subsidiary of Spanish telecommunications giant Telefonica. Given Terra's dominant footprint in the developing Latin American region, the acquisition was viewed as one possible answer to AOL's mega-merger with Time Warner. German media giant Bertelsmann pledged to buy nearly $1 billion in advertising on Terra Lycos and supply the company with its content.

But a rift developed among top executives. When Terra and Lycos merged former Telefonica chairman Juan Villalonga had forged a power sharing pact with Davis. However, Villalonga was ousted in a boardroom coup shortly thereafter, and Davis had reportedly had differences with Joaquim Agut, the man Telefonica appointed chairman of Terra.

But don't cry for Davis. In October, Lycos' first employee sold more than 3.45 million shares in a transaction valued at about $72 million at the time, according to regulatory filings. In November, Philip cashed in shares in a transaction valued at $6.5 million.

As for the future of Terra Lycos, Agut has a lot of raw material to work with. Terra Lycos has $2.4 billion in cash, a strong partnership with European media giant Bertelsmann and a good position as a global Internet player.

Page views rose 227 percent from the previous year to 350 million average daily page views in December. Subscribers increased 336 percent from the previous year to 6.1 million in December. In addition, Terra Lycos' joint venture with Telefonica Moviles, S.A., Terra Mobile now has more than 3 million registered users.

But there were a few problems. Of Terra Lycos revenue, $121 million derived from the company's media business. That figure was below Goldman Sachs projections of $127 million. Internet access revenue was $42 million, a bit higher than projections. Philip said Terra Lycos was de-emphasizing free access and moving customers to the subscription model.

For the year, Lycos reported a loss of $348 million, or 67 cents a share, excluding charges on sales of $398 million.

Agut's biggest job will be selling the company's new management team to Wall Street. Analysts questioned who would be watching Terra Lycos' portal operations since the company's top executives will be in Madrid.

The company said it will be reorganizing its portal operations to keep things buzzing. Agut said the fourth quarter and first quarter results will speak for themselves.

"`Our strong financial performance this quarter lends credibility to this merger,'' said Agut, who at times sounded defensive about analysts' barrage of questions. "The most important thing is that everyone will be accountable for every single thing," he added. "This machine will be working in a perfect way." >