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Refurbishing a real estate fixer-upper

New Homestore CEO Mike Long has had to deal with a restatement of earnings, shareholder lawsuits and an SEC probe. But the veteran exec says the former dot-com darling is working its way back.

Call him crazy, but Homestore Chief Executive Mike Long is quite happy to occupy the hot seat.

Once considered one of the blue chips of the dot-com crowd, online real estate company Homestore has had a rough time of it since announcing last December an internal inquiry into its finances. That led to a subsequent investigation by the Securities and Exchange Commission, an investigation that is still underway. After restating revenue for 2000 and the first nine months of 2001, the company has had to fend off a series of lawsuits from shareholders unhappy about the stock's subsequent price plunge. Meanwhile, the real estate portal has had to face grumbling from realtor partners dissatisfied with the prices Homestore pays them for their listings.

Called in to replace company co-founder Stuart Wolff in January, Long is trying to right Homestore's ship. Under his direction, the company has cut hundreds of jobs, sold off some operations and settled some of its outstanding legal disputes while completing its internal inquiry.

Long is a veteran executive who was formerly chief executive of Continuum, a technology consultancy and software company whose primary clients were insurance and banking corporations. He later served as chief executive of online health site Healtheon and then as chairman of WebMD, after the companies merged. Long spoke with CNET about his plans for Homestore and the future of selling real estate over the Internet.

Q: Do you ever get upset at the mess Stuart Wolff left when he resigned as CEO in January?
A: I try not to personalize it. It doesn't do any good. I still have to get up the next morning and do it.

What's the status of your internal inquiry and of the Securities and Exchange Commission's investigation?
The company--at substantial expense--completed a thorough internal investigation. That was completed as a part of our restatement of our financial results that put us in full compliance with SEC and Nasdaq rules. We have fully cooperated with the SEC.

We turned over the results of our investigation to the SEC. Their policy is to conduct their own investigation. We believe that's ongoing. I can't comment further on that. When they complete their investigation, they will inform us of that, I'm sure.

With all the problems Homestore has experienced since December, what do you say to customers who may fear that Homestore's closure is the next act in the drama?
I think we've been very straightforward with our customers. We went on the road to talk to them, and we've been dealing with their questions directly--many of them hard questions, as you might expect.

We're actually ahead of where I thought we would be at this point in 2002, in terms of stabilizing the company.
Our customers actually like our products and services. Their primary concern was our viability. Many of these customers have annual or multiyear subscription services. What we've been able to demonstrate is that we have dealt with the balance sheet issues that we needed to protect the viability of the company. Our customers ultimately want know if we're going be around to deliver our service.

Do you have the cash flow for the long-term?
We've reduced our burn rate from over $50 million to less than $8 million in the second quarter. We now have greater than $100 million in cash. We plan to be cash flow-positive by the end of the year. There's always going to be exceptions, but I think our customers are assured that we're going be around to deliver our service.

Some of your multiple listing service (MLS) partners, which provide Homestore with their real estate listings, have voiced complaints about Homestore reducing how much it pays per listing. What do you think about that?
The market has changed from five years ago to today. We're not the only company that had to lower our rates. The MLS's have been great. As a general rule, they've been responsive. And we've developed some new programs. We've been working with the Houston MLS, which is considered to be the market leader. We've developed a program there, where in exchange for us paying for their listings, they pay us to drive traffic to their site.

There's going be some out there--any time you cut prices, they're not going to like it. But overall, the response has been great. (The price reductions) are all about renegotiations as they come up. We've honored all of our (current) obligations. Because our traffic has increased so dramatically, that's one of the primary benefits we provide to realtors. The traffic increase is worth more to them than any fees we might pay for their data.

Where are you with your turnaround plan?
We're actually ahead of where I thought we would be at this point in 2002, in terms of stabilizing the company, in terms of customer support, in terms of having the financial support to invest in the future. The real estate market has remained very strong, so our customers have remained very optimistic. We're ahead of plan.

What specifically is going on?
There are two processes underway here. One is the classic turnaround: We've had to strengthen our balance sheet, clean up our income statements and get in compliance with the regulatory world.

The market has changed from five years ago to today. We're not the only company that had to lower our rates.
The next phase is positioning the company for growth again. We've been selling off nonstrategic assets. We have re-evaluated and studied every aspect of the business from customer satisfaction to producing profits, to confirming what services we can provide to the real estate industry, to what price we can charge that's a value to our customers and will make a profit for us. We're in the middle of this second phase. We've been doing both in parallel.

That makes for a smaller company, doesn't it?
We're a smaller company than where we were six months ago, or a year ago, but our balance sheet is in good shape. Our negative cash flow has been managed quite effectively. We feel some financial security that wasn't there six months ago. Headcount is down from 3,500 to about 2,350. We have a goal for this year of 2,200, so we think we're on course to achieving that.

What's the difference between the old and new product strategies?
We have a strategy that was developed by embracing the ideas of a lot of people inside our company, the tribal knowledge of what worked and what hasn't worked over last five years. It also involved literally hundreds of customers, talking to them about what they liked and didn't like about products.

To simplify the outcome, we will have a strong focus on unbundling our media products from our technology products. In the realtor space, to get access to our media products--such as our virtual home tours--you had to buy a Web site from us. We're unbundling that. That's a fairly dramatic change. I think it's going to enhance customer choice and allow us to reach down into large and small segments of the market.

What other changes are you making?
We're also going to increase our investment into inside sales. Our sales costs are way too high as a percentage of our revenue. We were using a direct field force to reach 800,000 realtors. We're going to maintain a smaller field force, but we're going to focus on selling through the Web and over the telephone. We think it's going to lower our sales costs and our customer support costs.

With the cutbacks you've made, when do you expect to hit profitability?
We've made one financial forecast, and that is that we would exit 2002 cash flow-positive. That means that our results from operations, excluding depreciation and noncash stock charges, will be positive for the month of December. We've not forecast beyond that...We want to upgrade our corporate systems substantially, and we're going to incur some capital expenditures in 2003 to do that.

Do you plan to sell off any more of Homestore's businesses?
They would be on a smaller scale at this point. The major segments of our business are all strategic to us. These would be all smaller operations that would not be classified as even material in our financial reporting. Homestore did a lot of transactions over a short period of time. A few were large, while some were very small. I think the major divestitures have occurred.

What do you make of Microsoft's
Actually, HomeAdvisor has not been a major factor competitively. They may very well be pursuing a different agenda than us. The indications are that that might be case. We don't view HomeAdvisor as a major competitive threat at this point. That being said, you always have to respect Microsoft.