NEW YORK–Internet companies are expected to post poor results for the second quarter as a result of a weak advertising market and reduced technology spending.
Web portals, Internet access providers and Internet infrastructure firms have been hit hard by the weak market conditions, with few exceptions. Many companies saw revenue drop from year-earlier periods, and most experienced earnings declines or widening losses, analysts say.
“Those exposed to ad revenue of any kind will continue to feel the effects of a weakened economy, and thus lower demand and lower prices for ad inventory,” said John Corcoran, analyst with CIBC World Markets.
Yahoo! Inc., the Santa Clara, Calif. Web portal continues to struggle because of substantial exposure to ad revenue. The firm, which reports results Wednesday, said in April it expected to break even,excluding goodwill amortization and other items, on revenue of $165 million to $185 million in the second quarter ended June 30. That would represent a sharp decline from a year earlier, when it earned 12 cents a share, excluding goodwill and other items, on revenue of $270.1 million.
Yahoo has bumped up against difficult market conditions. Total online ad spending in June was $1.48 billion, down 21% from January levels, according to AdZone Interactive, a New York research firm.
But AdZone’s research also turned up a trend that could bode well for Yahoo: online ad spending appeared to stabilize in the second quarter. June’s ad spending levels were roughly flat with May, and 3.5% higher than April, AdZone said.
U.S. Bancorp Piper Jaffray analyst Safa Rashtchy is relatively optimistic about Yahoo. He estimated Yahoo earned a penny a share,excluding items, ahead of the Thomson Financial/First Call consensus of breakeven. He put revenue at $180.1 million in the second quarter, also above the consensus.
“Our conversations with advertisers indicate prices have largely stabilized,” Mr. Rashtchy said. Still, a huge improvement probably won’t happen anytime soon, as Mr. Rashtchy predicts full-year online ad spending will fall 30% to 40% from 2000 levels.
One bright spot in the Internet sector is VeriSign Inc.,the Mountain View, Calif.seller of Web addresses and Internet security software. VeriSign continued to boost earnings and revenue in the second quarter, analysts estimated. The company has never issued a profit warning, even as customer demand for its services has softened.
Last month, VeriSign Chief Executive Stratton Sclavos reiterated forecasts that the company would earn 14 cents a share, excluding goodwill amortization and other items, on revenue of $225 million to $230 million for the quarter ended June 30. VeriSign earned 14 cents a share, excluding items, on $213.4 million in revenue in the first quarter. Year-earlier comparisons aren’t meaningful because VeriSign acquired Network Solutions in June 2000.
Bear Stearns & Co. analyst Robert Fagin is even more optimistic about VeriSign’s second-quarter results than the company. He estimated the company earned 15 cents a share on revenue of $235.5 million.
Several factors helped VeriSign’s second quarter, including the pending introduction of the new Web address suffixes “.biz,” “.info,” and “.pro,” for which VeriSign has begun selling preliminary registrations. VeriSign is scheduled to report second-quarter results July 26.
Other areas of the Internet infrastructure sector haven’t been as fortunate as VeriSign. Web-hosting companies, which operate facilities that store Web sites and other services, have seen a sharp decline in demand in recent months.
One reason for the drop is the continued implosion of the dot-com sector, which has deprived Web hosters of customers or made some customers unable to pay their bills. In June, at least 53 Internet firms shut down or declared bankruptcy, roughly flat with May’s level but up from 17 shutdowns a year earlier, according to Webmergers.com,which tracks Web firm closures.
The largest Web hoster, Exodus Communications Inc., Santa Clara, Calif., warned last month that its second-quarter results would miss analysts’ estimates. The company said it expected to report revenue of $315 million, or 13% lower than its previous target. It predicted a loss of 24 cents a share, excluding special items, wider than the previous forecast of 19 cents to 20 cents a share. A year earlier,Exodus lost 10 cents a share on revenue of $179.6 million.
Exodus, which reports results later in July, blamed the shortfall on a decrease in the rate of new customer installations and in new orders from existing customers. It also cited an increase in reserves for dot-com failures and in the rate of customer cancellations.
Analysts are slightly more pessimistic than the company. The First Call estimate calls for a loss of 26 cents a share.
Exodus is also facing a cash crunch. It said it expects its cash balance to be $550 million at June 30, down from $1.04 billion at March 31. Merrill Lynch & Co. analyst Tom Watts said there’s a risk that Exodus won’t boost cash flow fast enough to become self-funding before the company runs out of cash.
A slowdown in the growth of U.S. Internet users has hurt many providers of Internet access. The number of U.S. Web subscribers fell slightly in the first quarter from fourth-quarter levels, marking the first decline since trade publisher Telecommunications Reports International began keeping track 21 years ago. Second-quarter figures haven’t been compiled yet, but it’s unlikely that it will match the high growth rates seen in the late 1990s.
TRI attributed the first-quarter decline to the continued demise of providers of free Internet access.
Despite the slowdown, EarthLink Inc., the largest pure-play Internet service provider, is expected to show modest improvement in its second-quarter results. The Atlanta company, which is scheduled to release results July 19, has targeted a second-quarter loss excluding items of 24 cents to 27 cents a share on revenue of $300 million. A year earlier, it lost 29 cents a share on $230.9 million in revenue.
The key to EarthLink’s modest improvement is its high-speed, or broadband, Internet-access business. Jefferies & Co. analyst Fred Moran estimated the Atlanta company added 65,000 broadband subscribers in the second quarter.Overall, including dial-up customers, EarthLink’s subscriber base should rise 2% to 4.9 million from first-quarter levels, he estimated.
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