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. ’98 Dec. ’99
AOL 31.0 53.8 74%
Yahoo! 27.4 42.4 55%
Microsoft 27.5 40.5 47%
Lycos 26.4 30.3 15%
[email protected] 16.6 27.7 67%

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 [email protected] (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

es,
reflected in the $24.2 million in Q2 revenue from e-commerce and
licensing, more than twice the amount from the year-ago period. But
that’s a revenue stream, not a vertical niche. Also, two-thirds of the
company’s revenue still comes from advertising, which is a function of
eyeballs and demographics. With second-tier traffic and a generic
audience (read: low ad rates), Lycos is facing a low ceiling on ad
revenue in the future.

Lycos shareholders last year spurned the USA Networks offer, complaining
that it undervalued the company. Now might be a good time for Lycos to
entertain another acquisition proposal, before its position as a top Web
destination is further eroded.


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