Earnings Preview: Lycos eyes profits in 4Q

Larry Dignan
3 min read

Lycos Inc. (Nasdaq: LCOS) could post its first profit in a year and a half Tuesday when the company reports its fiscal fourth quarter and 1999 financial results.

First Call consensus calls for Lycos to break even, but some analysts are expecting an upside surprise and a slight profit. "Lycos could surprise us next week by reporting a bit of profitability," said Keith Benjamin, an analyst with BancBoston Robertson Stephens in a recent report.

Lycos (financials) was profitable in the first and second quarters of 1998, reporting earnings of a penny a share for both periods. For Lycos a small profit would be a welcome dose of good news given that the company's stock has been nearly halved from a 52-week high of 72 11/16, set in February.

Lycos (chart) had hit its high just before it announced a merger with Barry Diller's USA Networks Inc. (Nasdaq: USAI). Given the merger speculation ahead of the USA deal much of the Lycos premium was factored in the stock.

Nevertheless, shareholders, notably CMGi Inc. (Nasdaq: CMGI), were against the Lycos-USA deal because it mixed real-world such as Home Shopping Network and Net assets and didn't meet the $6.7 billion benchmark set by the At Home-Excite merger. Diller said he wouldn't budge on the price and said the premium for Lycos was fair. Diller also noted that the Web fever wouldn't last forever and so far has been right on target.

Lycos and USA called off their merger just ahead of Lycos' third quarter results.

4Q blocking and tackling

The fourth quarter has been relatively quiet for the portal. Quiet for Lycos means it wasn't acquiring, being acquired or battling with CMGi. Analysts will take it though.

"This will be a solid blocking and tackling quarter," said Abhishek Gami, an analyst with William Blair. Gami said 1999 was all about Lycos getting Internet users to use the portal and 2000 will be all about engaging users and growing page views.

Gami is expecting revenue of $38.5 million for the quarter and not much in the way of traffic growth. Because Lycos' fourth quarter ended July 31, the portal has the three slowest months (May, June, July) for Web viewing in the quarter.

Gami is looking for pageviews of roughly 10 percent sequentially to 65 million or so. Registered users are expected to be in the 30 million range, he said. In the third quarter, Lycos had 27 million registered users, up from 21 million in the second quarter. This quarter could bring in 4 million to 5 million registered users, said Gami.

"Lycos' year 2000 strategy is to ramp up page views and get customers to go deeper," he said.

What's next?

Dalton Chandler, an analyst at Needham & Co., said the dealing probably isn't over for Lycos because it will have to do something to lessen its dependence on advertising.

Chandler was supportive of the USA deal because made Lycos more of an e-commerce player. To wit, USA's Home Shopping Network had a database larger than the Lycos audience at the time.

"I think all portals that are ad supported need to do something," he said. Chandler projects Lycos to lose a penny a share on revenue of $38 million. "Call me a pessimist," he quipped.

Lycos also will become "poolable" in October and will provide a buyer more favorable accounting in the event of a merger.

The merger options for Lycos in the fall, however, are unclear. The portal is far off its highs and isn't likely to get the USA premium. CMGi would have no choice but to top USA's original bid, but would look foolish doing it at current Lycos valuations.

And CMGi recently bought AltaVista and will compete directly with Lycos in the future. Analysts said bad blood still exists between Lycos and CMGi, but its kept under wraps. "They've done a good job of keeping it private," said Chandler.

Meanwhile, Lycos keeps blocking and tackling.