RealTime IT News

Lycos: Partner or Perish

A year ago this month, No. 2 search portal Lycos (LCOS) was being battered by negative reaction to a proposed buyout by USA Networks. The deal, which prompted a lawsuit from Lycos shareholders, was eventually abandoned, and LCOS shares spent most of the spring and summer treading water as investors waited to see if the company would go it alone or find another buyer.

After a fall run-up and a surge Wednesday in the wake of a Q2 earnings report that exceeded analysts' expectations, Lycos is hot again.

Shares were up more than 7% to 74 at noon on Wednesday, down from the Dec. 21 close of 92 1/8, but well above the split-adjusted closing price of 43 5/8 on Feb. 10, 1999, the day the USA Networks acquisition was announced.

In addition, several analysts upgraded their stock ratings and earnings estimates for Lycos in response to Tuesday's quarterly report, which showed Q2 revenues of $68.6 million (120% above sales in the year-ago quarter) and a profit of $3 million, or 3 cents per share, beating the street's projection of a 1 cent per share profit.

That profit figure, however, excludes amortization of goodwill, merger-related expenses and other non-recurring items. The bottom-line net loss for the quarter ended Jan. 31 was $31 million, or 31 cents per share, compared to $13.9 million, or 16 cents per share, in Q2 1999.

Much of the loss is due to the doubling of sales and marketing expenditures, which rose from $18.1 million in last year's second quarter to $35.4 million in the recent Q2. The goal of this effort is to close the traffic gap on No. 1 portal Lycos and America Online, the single most-visited digital property.

And that's where Lycos has a big problem. In the past year, the company's traffic growth has not kept pace with Yahoo! (YHOO), America Online (AOL) or some other fast-gaining contenders.

Let's look at unique visitors for the current top digital properties in December 1998 and December 1999, as reported by Media Metrix (MMXI):

Unique Visitors
(millions)
% Increase
Dec. '98Dec. '99
AOL31.053.874%
Yahoo!27.442.455%
Microsoft27.540.547%
Lycos26.430.315%
Excite@Home16.627.767%

A year ago, Lycos clearly was in the top tier of Web properties. Now it has fallen into the second tier, and is being challenged for fourth place by Excite@Home (XCIT).

In terms of market cap, Lycos is dwarfed by No. 1 portal Yahoo, which is valued at $88 billion, a whopping 11 times Lycos' $8 billion capitalization, while AOL is valued at $118 billion. Which means Lycos can't afford to buy traffic as Yahoo! did with its purchase of GeoCities and AOL did with its buyout of Netscape.

The contest to determine the general-purpose portal winners is over. The victors are AOL and Yahoo!. Everyone else, including Lycos, must find a niche strategy or a partner. Go.com did so in January, announcing it would evolve into a entertainment portal to leverage the name of its owner, Disney.

It's true that Lycos is aggressively pursuing e-commerce opportuniti