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THE DAY AHEAD: Go2Net poised to benefit from the dot-com shakeout

As the dot-com shakeout continues, few companies can afford to be as opportunistic as Go2Net (Nasdaq: GNET). And Go2Net execs intend to take full advantage of the dot-com malaise to grow the company's network.

Cash is king and Go2Net has a lot of it. Go2Net also has profits, which is already distancing the company from the dot-com pack. The Internet portal has posted a profit in each of the last five quarters. Only Web titans Yahoo! Inc. (Nasdaq: YHOO) and America Online (NYSE: AOL) can say that.

Go2Net: Ready to rocket?

Go2Net's latest quarter was stellar. The company reported a fiscal second quarter profit of 18 cents a share, excluding charges. Wall Street was expecting earnings of 11 cents a share. Sales were up 34 percent sequentially to $18.7 million. To put the quarter in perspective, consider that Go2Net didn't have any acquisitions this quarter. The strong sales growth was all organic.

Go2Net is also scaling its business well. Officials upped operating margin targets to 33 percent to 38 percent from a previous target of 30 percent. The company also has a diversified revenue base with e-commerce, subscription, advertising and licensing revenue. By the end of the year, Go2Net will drive half of its sales from e-commerce, subscriptions and licensing.

Although officials continued to preach the virtues of profit, the real action will be on the merger and acquisition front.

The dot-com shakeout has left Go2Net in a great position. Private firms, which will have a tough time getting funding, are looking to buyouts as an exit strategy. Public companies have had their shares decimated. Go2Net, with its $285 million in cash and cash equivalents, is ready to go bargain hunting.

In an interview with ZDII, Go2Net CEO Russell Horowitz said the company would step up its acquisition pace and buy complementary companies and technologies to benefit its network. Go2Net will also acquire technologies for its platform via minority investments.

"We're in a strong position to acquire key pieces for the network," said Horowitz. The reason for the strength is clear -- Go2Net has plenty of cash from its partnership with Paul Allen's Vulcan Ventures and a decent stock currency.

Horowitz said acquisitions will be used to consolidate some of its key verticals and gain technology that can be licensed. Bargains are everywhere. "A number of companies went public and probably shouldn't have," said Horowitz. "We're also seeing more private companies being acquired.

"The volume of calls is higher than usual," said Horowitz. "There's an increasing receptiveness by private companies to be acquired. The market is looking for substance and strong market position."

Preaching profits

Horowitz and company pulled off a rare coup for dot-com firms. They said "profits" or some derivative of it at least two dozen times on the analyst conference call.

"We're big believers that Internet companies would be valued based on a P/E multiple, growth rates and defensible market," said Horowitz. "The Wall Street standard is being raised."

What's amusing about Horowitz's sermon is that it is finally on target. Go2Net was reporting profits even as its dot-com peers laughed off the company's strategy. The conventional wisdom went like this: Why post a profit when you can invest heavily now and investors look the other way?

Now we see Go2Net was on target. As for the outlook, Horowitz said its current quarter is off to a strong start and has the same trend of the second quarter. Translation: Another strong quarter.

And if yesterday's trading was indicator, Go2Net is viewed as one of the Net's blue-chip companies. Only the strong ran up on Monday. Go2Net surged 15 percent, but peers (Nasdaq: BOUT), Ask Jeeves (Nasdaq: ASKJ), (NYSE: GO), (Nasdaq: GOTO), Looksmart (Nasdaq: LOOK) and NBCI (Nasdaq: NBCI) remained mired in a slump. Lycos (Nasdaq: LCOS) and Excite@Home (Nasdaq: ATHM) also slipped Monday.

But Wall Street still doesn't notice Go2Net

What does a high-profile partnership with Paul Allen, plans to roll out a broadband portal this summer and sustainable sequential sales growth of 15 percent to 20 percent get Go2Net?

Just about everything but Wall Street attention.

We've pointed this out before, but it bears repeating. The big brokerage houses -- Goldman Sachs, Morgan Stanley, Chase H&Q and Robertson Stephens -- still refuse to cover Go2Net because the company hasn't sent any underwriting work their way.

As the dot-com shakeout continues, it only makes these brokerages -- and their analysts -- look worse. How many profitable quarters can these guys ignore?