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Netscape shuffles loss

Netscape Communications breaks even for its second fiscal quarter but sees a $54.2 million loss for January.

Netscape Communications broke even today for its second fiscal quarter but reported a $54.2 million loss for the month of January.

The software company eked out a net income of $8,000, or zero cents a share, for the three months ending April 30, along with an operating loss of $10.1 million for this April quarter.

This compares with a net profit of $7.3 million, or 8 cents per diluted share, for a slightly different period--the three months ending March 31, 1997.

Analysts had expected the company to report a loss of 10 cents a share for the three-month period ending in April, according to First Call.

Due to a change in the company's fiscal year, the month of January was reported separately. For that month, Netscape reported a loss of $54.2 million, or 58 cents a share, which dwarfs the reported three-month net income of $8,000. Analysts were expecting a loss of 29 cents a share for January, excluding charges.

Netscape shares were down 1.8 percent this morning, sliding from yesterday's close of 23.88 to 23.44 as of 7:29 a.m. PT.

The company had a restructuring charge of $12 million during that month, attributed to devoting more efforts to enterprise software and Netcenter. In addition, it announced it would be giving away its browser software for free and laying off 300 employees.

Netscape reported revenues of $127.2 million for the three months ending April 30, compared with revenue of $120.5 million for the March quarter last year.

Product revenue dropped to $77 million for the quarter, compared with $90 million a year ago. Service revenue, meanwhile, grew to $50.2 million, compared with $30.6 million in the March quarter of 1997.

In the month of January, product revenue was $4.6 million and service revenue amounted to $3.7 million.

While the numbers for the month of January included one-time charges, Netscape's chief administrative officer Peter Currie asserted during a conference call that it is not a proper representation of the company's standing.

"The current quarter is unaffected by extraordinary events," he said. "January was affected by [such] events, a restructuring charge, and other income [such as interest income and money generated from the sale of securities]."

Netscape reported a total of $10.1 million in interest and other income for the April quarter. For instance, Netscape and its chief executive, Jim Barksdale, filed in late April to sell as much as half of their stakes--or 200,000 shares--in high-speed cable Net access provider @Home.

As for the revenue generated in January--$8.3 million--it was less than 7 percent of the revenue reported for the full April quarter, during which the monthly average was about $42 million.

"There was not much business that got done [in January]," said Currie. "We had just announced a missed quarter and restructuring. We had our sales force in training, and the first month of the quarter is characteristically weak."

Moreover, the April quarter experienced "comparative weakness overseas as the Asian economy continues to be weak," he added.

The reporting change drew some criticism. "Netscape just ran a clinic in how not to report earnings," the Web site charged.

"In what has to be the worst attempt at concealing a lousy quarter in recent memory, Netscape lumped a quarter's worth of losses into a black hole called January," it added. "The company reported a $10.1 million operating loss in Q2, but an $8 million sale of unnamed securities helped take the final number up to break-even."

It warned: "As for that 1/4 point gain [in Netscape's stock] in after-hours trading, we suspect that it will be a very different story tomorrow."

Another analyst, however, took a different tack. "I think they were fairly healthy and solid," Daniel Rimer, who follows Netscape for Hambrecht & Quist, said of the earnings. "They beat our top-line and bottom-line [estimates]."

Regarding Netcenter, the company's Web site, revenue was $31.1 million for the three months ending April 30, up from $21.3 million for the three months ending December 31.

About $20 million generated from Netcenter came from advertising and search revenue, while $10 million was from sponsorship packages that use the Netscape real estate and the Netscape trademark to do business.

"Netcenter has always been a key part of our company," said Barksdale during a conference call, noting that the site was the focal point of the company's free software strategy.

While the company said that its decision to make the reporting change was an attempt to be more like its competitors in the software business, the tone of the analyst conference call was very different, according to one analyst who asked not to be named.

Netscape executives "are trying to position the company as an Internet portal to get the valuation" of players like Yahoo, but 60 percent of the revenue is still from software, a competitive business, the analyst noted.

The key going forward for the company is that they need to maintain their share of the browser market, the analyst added.

"They are saying that they can maintain the browser share, but the unanswered question is, what if market share continues to decline? If the browser share continues to deteriorate, the value of Netcenter deteriorates as well and the less they can charge for advertising and real estate," the analyst noted. In addition, "it is going to be tough when every PC has the browser preinstalled on Windows 98."

Netscape said that 25 million unique users visited the site per month during the quarter and that it attracts about 8 million visitors per day. The company added that there are about 5 million Netcenter members.

Netcenter's $31.1 million was about 25 percent of the company's revenue for the quarter. Currie said that going forward--at least in the near or intermediate term--"a quarter of the business sounds about right."

While analysts have expressed concerned over the lack of browser sales contributing to the company's revenue, Netscape said it remains an important business and tool for attracting new customers.

"We are doing a lot of things to keep and hold market share even though it isn't a revenue source for us," Currie added, noting that more than 250,000 copies have been downloaded since the code was released for free. "It is important to us because it is the seed to us for introducing us to people and increase the value of Netcenter." Barksdale said that Netscape has given VARs (value-added resellers) an enormous revenue opportunity, despite losing the Navigator sales.

"We are replacing [the missing browser revenue] with higher-end products, like the application server and messaging mail products," he explained.

"The results announced today signal two important points: First, that Netscape's strategy is resonating with in the marketplace, and second, that Netscape is executing well against that strategy," said Barksdale. "Our decisions to broaden our enterprise solutions business through acquisitions and to invest in our Internet portal site are now bearing fruit."

During the quarter, Netscape said it released its first new products resulting from its acquisition of Kiva Software and Actra at the end of 1997. In February, the company introduced its Application Server 2.0 software, a scalable Internet application server. Then in April, Netscape released PublishingXpert 2.2, an online sales solution within its CommerceXpert suite of applications for online commerce.

Earlier this month, Netscape announced that it had chosen Excite as the partner for its Netscape-branded search engine and portal to the Web, Netcenter.

Powered by Excite, the site is expected to launch by the end of next month and will work to recirculate traffic back to Netcenter information and services.

Excite paid Netscape an up-front sum of $50 million and owes the company another $20 million by June 30. In exchange, Netscape guaranteed a certain quantity of traffic in order for Excite to earn its money back. Netscape also will gain what it described as a "single-digit" equity stake in Excite.

Netscape plans to outline a better picture of its business strategy for industry and financial analysts on June 4.

Business editor Jeff Pelline contributed to this report.