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MindSpring tops estimates, predicts negative impact on profit

MindSpring Enterprises Inc. (Nasdaq: MSPG) topped analyst estimates in the second quarter, but don't expect much profit growth over the next few quarters.

In results released after market close Tuesday, the nationwide Internet service provider posted net income of $7.5 million, or 11 cents a share, excluding amortization costs. First Call's survey of 10 analysts predicted a profit of 9 cents for the quarter ended June 30.

Second quarter revenue rose to almost $85.7 million, a 39 percent gain sequentially and a 242 percent increase year-over-year. MindSpring's customer base increased to nearly 1.23 million customers, up from almost 1.16 million at the end of the first quarter. The second quarter customer total includes 55,000 Web hosting clients, up from 47,000 in the previous quarter, and 3,000 dedicated Internet access accounts.

Including acquisition-related amortization costs, MindSpring lost $7.1 million, or 11 cents a share. The second quarter was the first full quarter of writedowns related to the purchase of Netcom earlier this year.

Acquisitions have fueled much of MindSpring's expansion. But to speed up internally-generated growth, MindSpring will add between $45 million and $55 million to its sales and marketing budget over the next three quarters. The company originally intended to spend 20 percent of revenues on that area, said Charles Brewer, chairman and CEO.

The increased spending will hurt profits in the near-term, Brewer said. "We see an important market opportunity to grow significantly faster than we had planned," he said. "We believe that this plan will enable us to build the MindSpring brand nationwide, more rapidly grow our subscriber base, and become a stronger, more valuable company."

MindSpring wants to reach the two million subscriber level by the middle of next year. The company plans a barrage of TV advertising, and has retained the Fallon McElligott ad agency.

Shares of MindSpring inched up 1/16 to 40 1/4 in regular trading prior to the earnings report. Of 15 analysts polled by Zack's Investment Research, eight recommend MindSpring as a "strong buy", five rate the stock a "moderate buy", and two maintain the equivalent of a "hold" rating on the stock.>