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ANALYST WATCH: Lycos ready for next stage

Lycos posted better-than-expected sales and earnings in its fourth quarter this week, its last as an independent company. Analysts had generally positive comments about the quarter and its impending merger with Terra Networks.

After the $12.5 billion merger was announced in mid-May, both stocks went into a tailspin.

Terra (Nasdaq: TRRA), which raced up to a 52-week high of 145 1/4 in February, was widely viewed as overvalued at the time the deal was announced. And its shares have continued to wither, falling to around $31 a share in July and making scarce progress since.

Terra agreed to pay a premium of around 80 percent above Lycos stock price, roughly $97.55 a share. The deal also includes a $1 billion commitment to purchase Lycos services from German media giant Bertelsmann.

Lycos (Nasdaq: LCOS) shares have been just as volatile, bouncing between $45 to $70 in the past three months.

Despite the uncertainty, analysts remain optimistic about the future growth for the combined company.

"Lycos is cash-flow positive which will really help out the Terra side," said David Joyce, an analyst at Guzman & Co. "And Terra's huge presence in Latin America and Spain will make it the third largest portal in the world."

Lycos and Terra have both been punished in the past three months by the overall sell-off in Internet stocks, particularly those that continue to rack up huge quarterly losses and burn cash at a frightening pace.

But Lycos certainly went out with a bang in its fourth quarter, posting a profit of $13 million, or 12 cents a share, on sales of $88 million.

Analysts were looking for a profit of 8 cents a share in the quarter.

More impressive, Lycos recorded an average of 201 million page views a day in July, up 36 percent from the third quarter. Its registered user base improved 17 percent to 61 million.

That $88 million in sales marked an 89 percent jump from the year-ago quarter and a 12 percent improvement from the third quarter. Operating margins grew by 500 basis points sequentially.

"All eyes are still on the Terra-Lycos transaction," wrote ABN AMRO's Arthur Newman in a research note. "Lycos reported earnings that significantly exceeding forecast earnings, indicating operations are clearly in great shape. We maintain our buy rating."

Lycos is projected to earn 57 cents a share in fiscal 2001 while Terra Networks is expected to lose $1.34 a share over this same period.

"There's no question this merger will help accelerate Terra's timeframe for profitability," Joyce said. "Terra's revenue is growing at a 90 percent clip. This is an entity that will survive while other stand-alone portals may not be as fortunate."

Joyce rates Lycos a "strong buy" while he maintains an "attractive" rating on Terra.

"The market always over-buys and over-sells," he said. "We think there's still a lot of upside in both these stocks."

Ten of the 15 analysts following the stock rate it either a "buy" or "strong buy."

The stock moved as high as 93 5/8 in December before falling to a 52-week low of 34 1/8 in April.