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Netscape deals pad bottom line

Wall Street approves of Netscape's alliance with Excite, boosting the once-slumping shares of the software maker--at least for now.

Wall Street gave its stamp of approval to Netscape's Web site alliance with Excite today, further boosting the once-slumping shares of the software maker--at least for now.

Netscape is still something of an enterprise software maker dressed in Internet clothing, and it has yet to return to profitability after announcing in January a disappointing quarterly loss and the first layoffs in its history. But analysts are bullish that the company's revenues and stock valuation will rise as it builds out its Web site.

Revenues from the Web site for 1997, 1996, and 1995 were $95.1 million, $23 million, and $1.8 million, or 17.8 percent, 6.7 percent, and 2.1 percent of total revenues, respectively, according to a filing with the Securities and Exchange Commission.

Netscape stock jumped about 7 percent today to trade as high as 31.75, up 2.19 from yesterday's close of 29.56. The shares have been rising for the past month since Netscape outlined plans to turn its Web site into a "portal" to the Internet.

Netscape is facing stiff competition in the portal market from Microsoft, America Online, Yahoo, and Lycos--and Excite, for that matter. But the company's Web site already generates substantial traffic, and industry observers say Netscape simply needs to keep adding features such as content channels and free email to keep people clicking.

At least three analysts upgraded their recommendations on Netscape today in the wake of the deal with Excite.

Hambrecht & Quist analyst Daniel Rimer upgraded the Internet software company today to "buy" from "hold," citing Netcenter's potential. Volpe Brown Whelan analysts Charlie Finnie and Nat Schindler upgraded Netscape to "neutral" from "underperform." (Finnie has been one of Netscape's biggest bears).

BT Alex. Brown analyst Mary McCaffrey said in a research note that she views the announcement as positive for Netscape, "as it helps build a recurring revenue stream and fortifies the Netcenter services, [adding] to its ability to increase Netcenter members."

Netscape generated about $40 million in revenue from search engines in calendar 1997, Schindler estimated. The $70 million deal with Excite alone will generate $35 million a year for Netscape over the next two years.

Netcenter's revenue should jump 50 percent this year compared with a year ago, making it a $150-million-a-year business, Rimer added.

The company still faces big challenges, however. For example, the enterprise software side of Netscape's business isn't gaining much momentum, and is likely to remain relatively flat at least through 1999, Schindler said.

"The enterprise software business is a huge drag on the company's profitability," he added, noting that gains from Netcenter will offset the losses elsewhere.

Another problem: Revenues from Netscape's browser business are falling. Earlier this year, Netscape announced that its standard-edition browser products would be free and that it also would give away the source code for its next-generation Communicator suite.

In addition, Netscape must work harder to convince Wall Street that it should be valued as an Internet stock rather than as a software maker. For example, the company generates more revenue from its Web site than Yahoo does from its site, but its market value is much lower--$3.1 billion for Netscape vs. $5.4 billion for Yahoo.

As with browsers, Netscape could turn out to be its own worst nemesis in the portal wars. As Microsoft's Internet Explorer browser becomes more popular, Netscape's customer base could erode.

"[In order to remain competitive], Netscape needs to produce good content," said Schindler. "We believe Excite is very good at producing appealing stuff."