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Netscape takes analysts' lumps

In announcing a larger loss and its first job cuts, Netscape is "up to its eyeballs in alligators," as the company's CEO Jim Barksdale might put it.

More than a year ago, Netscape Communications (NSCP) laid out a bold strategy to focus on the enterprise software market, largely because Microsoft was cutting into the business of its flagship product, the Navigator browser.

Now, having announced a wider-than-expected quarterly loss and its first round of job cuts, See special coverage: Netscape's sea change Netscape is "up to its eyeballs in alligators," as the company's plain-spoken chief executive Jim Barksdale might put it.

Not only is Netscape suffering from a drop in standalone client revenue, but also it is seeing slower-than-expected growth in enterprise sales and support revenue, leaving the company short of its goal for the fourth quarter, Barksdale said today. The company's stock hit a new 52-week low of 16-7/8 today, down from more than 80 two years ago.

Many analysts are disappointed. "They're losing share to Microsoft and are in a difficult transition period," said Charles Drummond, an analyst with Waldron and Company. "I'm maintaining my 'hold' recommendation on the stock until further notice."

Added David Locke, analyst with Volpe, Brown, and Whelan: "The company's been at a crossroads a while, since they did the whole restructuring of their product line. Clearly, they haven't negotiated that very well to date."

But Netscape executives remain optimistic, and the company still has fans on Wall Street who think the company should not be expected to reshape its entire business strategy in "Internet time" even though it is an Internet company.

Daniel Rimer, an analyst for Hambrecht and Quist, still has a "buy" recommendation on the stock. He said today that he hadn't finished his analysis since today's conference call on earnings and withheld any further comment.

Barksdale said the company's previously announced cost-cutting and plans to sharpen its focus on the enterprise market will make the company "well positioned" to return to profitability in 1998, but he did not indicate when. Netscape said its acquisitions of Actra Business Systems and Kiva Software also will help bolster its product line.

Barksdale and the rest of Netscape's top management remains popular on Wall Street, even among the most bearish analysts. As Locke put it: "They've clearly got a top-notch management team."

For his part, Barksdale was approached by AT&T to be the chief executive of the $51 billion-a-year phone giant earlier this year, and his symbolic gesture to bring home only $1 in salary in 1997 (excluding stock compensation) won him widespread praise.

But Barksdale and executive vice presidents Marc Andreessen, Eric Hahn, and Mike Homer have their work cut out for them. They must beat back Microsoft and continue to diversify the company's revenue base--once dominated by Navigator.

In the third quarter of last year, 18 percent of Netscape's revenue came from client software, 54 percent from server software, and the remaining 28 percent came from its Web site and other services. However, the diversification strategy is tricky to execute, because the company risks confusing its customers along the way.

"To some extent, the marketing message may have been confusing to users because Netscape was throwing too much at them," said Locke. "Just as soon as you get used to intranets, a bunch of people come along yelling 'extranet.' Then there's the whole push thing," which hasn't materialized.

A deeper concern to some analysts is a possible decline in what they call "per-seat" pricing of Netscape's enterprise software, fueled by competition from Microsoft and Lotus. That refers to the price that Netscape can get for each "seat" in the workplace that uses its products. The risk is that the products become more like commodities--not priced for free like browsers but still lower than Netscape would like.

The company also faces competition in its other endeavor: generating revenue from its Web site. Last fall, Netscape launched Netcenter, which it bills as a full-fledged online service featuring news, e-commerce, and instant messenging, among other features. Sources say free email is another possibility. Analysts are impressed with the company's efforts in this area, but Netscape faces stiff competition not only from Microsoft but also from Yahoo, Excite, and America Online.

Last week, Netscape announced another bold step: giving away its browser as well as the source code for the next generation of its Communicator suite. The idea is to match Microsoft's plan for developers to use the underlying browser "engine" to power third-party applications.

"This is a great move," said David Smith, vice president of Internet strategies at research firm the Gartner Group. "But the whole effort would have been received so much better a couple of months ago."

Despite Netscape's woes, many analysts and workers remain confident that the company can bounce back, largely because of Barksdale's leadership. And what's his philosophy? "Do or do not; there is no try," he writes in a recent column, borrowing a phrase from Yoda of the Star Wars trilogy.