On the Record with Russell Horowitz

Quietly hovering below radar. That appears to be the never-ending story of Web network operator
Go2Net . Even with straight five quarters of profitability under its belt and a high profile minority investor in Paul Allen’s Vulcan Ventures, Wall Street appears to barely acknowledge its existence.

Go2Net CEO and chairman Russell Horowitz does a good job of hiding his frustration, but it must be bubbling under the surface nonetheless. After all, he has helped steer his company to consistent profitability, while improving operating margins and posting impressive sequential sales growth in the process. To top it all off, Go2Net appears primed for the long haul with a cash hoard now of over $240 million.

However, Go2Net’s valuation still pales in comparison to its more high profile rivals like
Lycos and
ExciteAtHome . Operating performance aside, Go2Net’s lack of widespread name recognition amongst investors, and unwillingness to pull the trigger on blockbuster acquisitions, has kept Go2Net’s future plans somewhat shrouded in mystery.

We recently caught up with Russ Horowitz to learn more about his long-term plans for Go2Net and his thoughts on Internet company valuations.

ISR: To start out, it would be easy for most people to describe your company as a portal or a network, but what do you really think of Go2Net as today?

Horowitz: Basically, what we are is a diversified Internet network leveraging our branded Web sites, tools and infrastructure services. What that translates to is the opportunity to have critical mass- in terms of our destination Web sites – and because the primary foundation of each of our sites is a proprietary technology – we take those tools and can license them to partners.

ISR: Right. Let’s use the example of Silicon Investor and Dogpile, which are both properties in your network. How do they really benefit from being a component of Go2Net?

Horowitz: There are a couple of elements. A number of our businesses I would characterize as ends in themselves and others are a means to an end. In many cases, they are both. For something like Dogpile, it is a tremendous property in its own right. It’s a destination site; it’s a leader in meta-search that is a highly profitable and rapidly growing property. By being part of Go2Net it gets the benefit of being part of a larger network and the sales and technology infrastructure that we have.

ISR: Okay, so they’re benefiting from the shared resources.

Horowitz: At the same time, when we’re looking at doing larger revenue related deals with partners, we can expose them through keywords on Dogpile or perhaps a targeted community like investors on Silicon Investor or businesses with Hypermart. So each one works in its own right, but we get greater leverage by having the diversified properties and being able to apply programs with partners to the network, but at the same time targeting these vertical communities.

ISR: Your acquisition strategy has been very different than the typical portals. Most of your deals have been rather small purchases and vertical focused in nature. Why?

Horowitz: We’ve been very disciplined in how we’ve built our business both internally and through acquisitions. The primary focus and fundamental element of our business model – and it’s what has led to high profitability – where we now have I believe the second highest operating margins in the industry next to Yahoo! – is that all of our businesses have the element of being built on a proprietary technology platform. Our view is this technology driven business model is the ultimate and that’s where the Internet offers unique opportunity.

ISR: So profits and the Web can mix?

Horowitz: We’ve always been a little bit baffled when people ta

lk about Internet companies and profitability like somehow that’s a foreign concept. We felt that there was a tremendousopportunity by building Internet only businesses to have probably the most highly profitable and efficient business model in any industry. Our focus has been – where you mentioned some others have made really high priced acquisitions – to hopefully have the vision to be ahead of the curve. That means acquiring Hypermart in August of 1998 before the industry really saw the opportunity in the small business market. When we make an announcement of an acquisition for $4 million dollars, a lot of people may assume that based on consideration, it’s not material. Hopefully, we were just ahead of the crowd.

ISR: Well, that brings up this point though. Your stock price has been virtually cut in half from its old 52-week high. You’re showing actual profits, but have still been punished. What gives?

Horowitz: Yes. If you look at the overall move in the industry, relative to most, we’ve done better. The fact is that I think people are still learning how to value Internet companies. For the longest time, the only place they could find apples to apples comparisons was by doing revenue multiples. We never believed it was just about consolidating and building revenue. It was only about building leveragable and profitable revenue. We never wanted to be an e-tailer and never will be.

IRS: I’m sure you’re relieved about that.

Horowitz: There aren’t many people that have quite adjusted yet to valuing Internet companies by traditional metrics such as price-to-earnings ratios or the multiples dictated by leadership based on market position, growth rates and ultimately the defensibility of the business model. If you look at us, we earned eighteen cents a share last quarter, which is well ahead of the estimate. If you annualize that out and look at the growth rates that we have, we have a fairly modest double digit P/E. I just don’t think people have taken the time to look at that.

Horowitz: Is P/E going to end up king? Will it serve as the real drivers of valuations for Internet companies long term?

Horowitz: It will be. The P/E will be the predominant valuation metric and the multiple will be a function of growth rate relative the competition and ultimate leverage and defensibility of the business model. We’ve always believed that and positioned ourselves to be benefactors of that since day one.

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