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Netscape financials are good, not great

Buoyed by growth in its server sales, Netscape reports a 177 percent increase over revenues from the fourth quarter in 1996.

Buoyed by growth in its server sales, Netscape Communications (NSCP) today reported $115.1 million in revenues for the fourth quarter, a 177 percent increase over revenues from the corresponding quarter in 1996.

The company posted $8.8 million, or 10 cents per share, in net income for the fourth quarter, which ended December 31, compared with $500,000 or 1 cent per share in the same period the previous year. The earnings met but did not exceed the expectations of analysts, according to FirstCall.

Netscape's stock perked up this morning after it got a shot of positive reinforcement: Cowen & Company announced analyst Jamie Kiggen had started covering Netscape with a rating of "buy."

Shares traded as high as 38-3/4 and closed at 37-7/8, up from yesterday's close of 35-5/8.

Revenues, meanwhile, reached $115.1 million in revenues for the fourth quarter, a 177 percent increase over revenues from the corresponding quarter last year.

Netscape also announced that revenues for the entire year totaled $346.2 million, compared with $85.4 million for the same period in 1995. Net income for the year was $20.9 million, or 24 cents a share, compared with a net loss of $6.6 million, or 9 cents per share, for the same period in 1995.

Netscape executives attributed the company's revenue growth to especially strong sales of its Internet servers within the corporate market and growing business in international markets. They also said their momentum was spurred by the introduction of new client and server software.

"Our strategy in 1996 was to focus on bringing the Web inside of the enterprise, providing the software to give rise to the corporate intranet," said Jim Barksdale, president and chief executive officer of Netscape, in a phone conference with reporters today. "I think we've proven not only that the corporate market has arrived but that Netscape's products are leading the charge. We think 1997 is all about Web-based email, groupware, and applications."

Barksdale said sales of its Navigator software accounted for 51 percent of its revenues in the fourth quarter, versus 59 percent in the third quarter of 1996. In contrast, server sales grew, accounting for 33 percent of revenue vs. 25 percent in the third quarter of 1996. Barksdale said server sales experienced 50 growth in sequential quarters last year.

Analysts said that Netscape's revenue growth appears to be slowing from its early days as a fast-paced, flashy Internet start-up company. In recent weeks, the stock market has reacted to negative financial reports from two investment banks, Deutsche Morgan Grenfell and Merrill Lynch, by driving Netscape shares down to as low as 37-1/8.

Some analysts fear that Netscape's sales growth is imperiled by Microsoft and Lotus Development, two companies that have significantly ramped up their Internet efforts in the past year. Netscape is also beginning to battle those companies more fiercely on their own turf. Last quarter, the company released beta versions of its new client and server software--Communicator and SuiteSpot 3.0--that compete more directly with groupware packages like Lotus Notes and Microsoft Exchange.

"They're doing a great job, but the bottom line is that they are just a software company," said Richard Scocozza, a software analyst at Brown Brothers Harriman. "It's not like when they first IPO'ed and there was some question about whether Microsoft would be able to answer the challenge; they have. The competitive landscape has changed.

"I think they will do just fine, but they shouldn't be awarded a premium valuation anymore."

Even Netscape executives concede that it will be difficult to keep up the frenzied pace of its early growth. But they say that some slowdown is only natural.

"It's harder to grow the same percentage growth rate as we showed in early 1996 in future periods just because the base of the business has grown," said Peter Currie, chief financial officer.

Several analysts said the early mania for Internet stocks has dissipated, adding that they expect to see Netscape's stock valuation better reflect its earnings potential in the future. "I think the stock has good support in the $35 to $40 area," said Rick Berry, director of equity research at Murphey, Marseilles, Smith.

Netscape also announced today that is has elected Eric A. Benhamou, the chief executive officer of 3Com, to its board of directors.