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Netscape expected to post loss

Revenues are of the essence as the company prepares for its Netcenter launch while giving away its browser software.

Revenues are of the essence for Netscape Communications.

The company is ramping up for the launch of its Netcenter portal site while forgoing income from its browser software, as it decided in January to give the Communicator code away for free.

The enterprise software firm is expected to announce its earnings for the second fiscal quarter of 1998 today. The quarter should be one of both transition and renewal for the company, which recently outlined its plans to build out Netcenter through a $70 million partnership with Excite.

The second quarter will not include revenue from the Excite deal, said Allison Johnson, a company spokeswoman. Excite has paid $50 million to Netscape and will pay an additional $20 million by June 30 as part of the Netcenter partnership.

Analysts, however, said that the decrease in revenue from the loss of the company's browser sales, along with declining market share, could prove detrimental to Netscape's outlook.

The company's stock lost about 6 percent Friday from Thursday's close of 26.38 and dropped as much as 9 percent this morning to a low of 22.63, from Friday's close of 24.88.

Netscape shares traded as low as 14.88 in January but saw some momentum recently, in light of the Excite deal and Microsoft's looming legal troubles. Microsoft competes directly with Netscape in the Internet browser and messaging markets.

Wall Street is expecting a loss of 10 cents per share for the quarter, according to Chuck Hill, director of research at First Call. That figure compares to net profits of $7.9 million, or 9 cents per share, that Netscape posted for the same quarter a year ago.

As early as last week, analysts had predicted a loss of 3 cents per share.

Netscape recently announced that it was adjusting its fiscal year to begin in November. Johnson said that the decision was made to align itself to use the same cycles as its competitors in the enterprise software market. The first quarter is now November, December, and January, instead of January, February, and March.

The second quarter, being reported today, includes February, March, and April. That means the month of January is being reported separately.

The company reported total revenue of $120.2 million for the March quarter of 1997. About $89.8 million, or 75 percent of that, came from product revenue, while $30.5 million came from service revenue, meaning that the bulk of Netscape's business is facing big challenges going forward.

The enterprise software side of Netscape's business, for example, isn't gaining much momentum, and analysts have estimated that it is likely to remain relatively flat at least through 1999.

Software sales, therefore, remain the key to the company's fortunes, Marc Usem, a Salomon Smith Barney analyst, said in a report.

He cited recent surveys suggesting that Netscape is losing share in the messaging market to IBM's Lotus Notes and Microsoft Exchange. Netscape's SuiteSpot servers also continue to lag behind Lotus and Microsoft by "a significant margin," he added.

Nevertheless, at least three analysts upgraded their ratings on Netscape's stock on news of the company's deal with Excite. They remain cautious about the company's outlook, however, because of the intense competition in both the portal and enterprise software spaces.

Usem called Netscape's arrangement with Excite a "long overdue step" to leverage the full potential of its Netcenter site and traffic.

He said the inking of the deal does not translate into a long-term revenue stream, though, despite the $70 million that Excite paid for the two-year relationship.

In addition, the deal is by no means a sure thing.

Hambrecht & Quist analyst Daniel Rimer said Netcenter's revenue should jump 50 percent this year compared to a year ago.

But "Netscape's declining browser share, Microsoft's continued assault, and mixed results on the software front tempers our expectations for a quick turnaround," Usem noted.