After the fall

Dot-coms are under scrutiny

Yes, the end of dot-com mania presents an undeniably attractive target for those of us who spent months chronicling a steady procession of 24 year-old netwunderkinds worth more on paper than the GNP of Guatemala. But poking fun at the dot-com shakeout has become something of a cliché: It’s too easy, it’s too tired, and it’s obscenely unimaginative.

More importantly, dot-coms haven’t disappeared, despite a few well-publicized casualties like Britain’s, which scared everyone to death — including itself — with its financial outlook. The majority of publicly-traded internet companies are still hanging on, struggling to execute refined or redefined business plans (tough to resist a crack about the business plans) and claw their way toward profitability, while at the same time working very hard to sell their stories.

Tough act

It’s safe to say these last few months haven’t been easy for dot-com investor relations. The first hint of the dark days to come surfaced in March, when a highly unflattering Barron’s cover story predicted that 59 dot-coms with dizzying valuations might run out of cash within a year. The ‘burn rate’ piece was followed by the spectacular technology sell-off in late April. Since then, dot-coms have had to deal with a lingering deterioration in investor sentiment stoked by an endless parade of negative media stories.

By the time Barron’s ran an updated study in late June, the dot-com stock euphoria seemed irrevocably extinguished. There are, of course, plenty of exceptions — the success stories turning profits, such as AOL, CNET Networks, eBay, and Yahoo. But for every success story there’s a, a South San Francisco-based company that has seen its stock drop 95 percent to roughly $1 a share.

Companies are simply no longer getting a free ride just because their names end with dot-com, and some have even dropped the suffix. That’s what Seattle-based Network Commerce did in May when it spurned its former moniker, (though its stock price remains 75 percent off its 52-week high).

As for IPOs, the market has cooled considerably for dot-coms, as many have opted to postpone offerings amid the slump. AltaVista, a unit of CMGI, has put off its IPO until the prospect of profitability seems more plausible; and AOL Latin America recently slashed its offering price in half to drum up interest.

A demanding audience

‘What led to the sell-off was the fact that these dot-coms had money thrown at them in the private market. Now they’re in the public market which is less forgiving,’ explains Greg Kyle, president of New York-based Pegasus Research International, the firm that conducted the burn rate studies for Barron’s.

As internet companies face the less forgiving public market, the focus has shifted from building a net presence at any cost, to cutting costs. Streamlining has become a mantra for nearly every dot-com, from the US to Europe to Asia. According to outplacement firm Challenger, Gray & Christmas, 60 net companies have laid off 5,400 workers since December. They include companies like Hong Kong’s In July, the high profile Asian start-up laid off 80 people, or 16 percent of its total staff, as it struggles to become more competitive.

To some, the situation surrounding net companies might seem an anomaly. Others argue that the internet is another new and emerging technology that has spawned businesses for which profits lie in the distant future; growth potential knows no bounds; exuberance is immeasurable; and anyone will pay anything for a piece of the action. ‘Dot-coms just happen to be the most visible example of this phenomenon, but they aren’t the first, and they certainly won’t be the last. We’ve seen this through a number of cycles, even in the 1980s and early 1990s with biotechs,’ notes Kyle.

Investors are clearly beginning to judge internet companies on more traditional measures as analysts become more specialized and the term internet analyst begins to sound like an anachronism. With this evolution, investors are scrutinizing internet companies, whether they’re B2B or B2C, with far more vigor than ever before.

‘I would say that rather than just talking about industry growth, what is important now is for companies to give me a better insight into their execution plans and how they differentiate themselves from their peers. I think execution is the most important aspect, and I want a better road map to profitability,’ says Guy Uding, head of ING Investment Management’s technology team in the Netherlands.

‘The situation is the same in Europe as it is in the US,’ says Stefan Zenker, investor relations manager at, a German online gaming company with a stock price roughly 63 percent off its 52-week high. ‘As in the US, several German financial newsletters and magazines published so called Todeslisten — lists of companies that would not survive the next twelve months.’ While Zenker, like many of his US counterparts, faults the cash burn rate studies for not taking into account future increases of EBITDA, he admits that the attention has refocused everyone. ‘It’s absolutely true: a few months ago, we never had to comment on these issues to such a degree.’

It’s the profits, stupid

Faced with the daunting task of selling their stories and stabilizing their stock prices, dot-coms are responding to the new dynamics of the marketplace. Some have succumbed to consolidation and allowed their companies to be gobbled up. Others have quietly brought in seasoned hands with old economy corporate experience to help reassure investors, improve disclosure, and retool business strategy.

‘Our founder, Darryl Peck, is very creative and a visionary, but he realized he had to bring in someone with reputation and experience to deliver shareholder value,’ explains Jim Gallagher, chief communications officer at, an online retailer in Kent, Connecticut. ‘So we’re no longer being run by our legendary founder, but by Bob Bowman, who was president and COO of ITT Corp. Since October 1999, when he came on board, we’ve been releasing more information about cash flow and cost-cutting initiatives, as well as our plans for future profitability,’ adds Gallagher, himself a veteran of ITT Corp and its acquirer, Starwood.

Kyle says many companies like are realizing that to survive, they have to provide better transparency and clearer metrics for investors to gauge performance. ‘We have noticed that during last quarter and this one, more companies are releasing their EBITDA and providing greater transparency on cash flow numbers. For the old earnings releases, companies simply released an earnings statement and a balance sheet and that was it. There wasn’t much focus on financial strength.’

But simply releasing clearer metrics is a daunting task for net companies, as many of them are still evolving. There are some old economy lessons to be learned, but there are differences too, such as putting a value on intangibles. Even regulators, such as the SEC and Fasb in the US, are struggling to set ground rules for accounting in the new economy.

Some companies, especially the more visible industry leaders, have worked to establish their own guidelines for others to follow. ‘At the time of Freeserve’s IPO in July 1999, it is probably true to say that a set of standard metrics didn’t exist,’ says Paul Barker, head of investor communications at the company. ‘Freeserve was the first major UK ISP/portal to come to market, so we set the precedent for many of the metrics that are in current use today. Now, one year after our IPO and at the end of our fourth quarter and first full year of trading as a publicly listed company, we have a firmly established set of metrics that analysts and investors look to when assessing our business.’

These include weekly and quarterly minutes of use (time spent online); gross sign-ups (active registered user base); and page impressions, a key portal measure used by the advertising community. These metrics, says Barker, drive the company’s main revenue streams of connectivity (the share of telephone call revenue received), advertising, and e-commerce.

‘There is a view that certain dot-coms owed more to sentiment than any rigorous analysis of their operating metrics,’ concedes Barker. ‘But that’s definitely not true of Freeserve. Whenever there’s been volatility in the capital markets we prefer that the financial community concentrate on our metrics and the e-commerce and advertising, content and strategic partnerships we are creating to enhance our consumer propositions,’ says Barker.

The Amazon story

But finding a metric that will not only satisfy everyone but that won’t be misinterpreted is a difficult task, and with so much attention on net companies, the stakes are incredibly high. A slight hiccup is enough to shave a billion off a company’s market cap. Perhaps no company knows this better than

‘In today’s climate — both in the market and in the financial press — I believe it’s very difficult to find any method that doesn’t get misconstrued or misreported,’ maintains Russell Grandinetti,’s treasurer. ‘And you have to recognize that when a company is as scrutinized as Amazon is, things are going to get misreported. So you want to find information that is useful to investors, and simple to understand,’ he says.

One of the pieces of information Amazon has been criticized for failing to provide is the number of customers the company does business with each quarter. In response, Grandinetti says the problem with giving out quarterly information is that Amazon’s business is extremely seasonal. Many investors (not to mention journalists) might misinterpret any changes between quarterly figures unless they had a thoroughgoing understanding of the context of that seasonality.

According to Grandinetti, this was the problem with the Barron’s burn rate study, which listed Amazon at Number 147; and with a now infamous June 23 research note by Lehman Brothers fixed-income analyst Ravi Suria. Suria’s note questioned Amazon’s ability to pay off its $2.1 bn in convertible debt. Both studies, Grandinetti notes, only looked at the most recent historical quarter.

Eric Von der Porten, manager of Leeward Investments, a hedge fund in San Carlos, California, agrees that misinterpretation is indeed a problem for companies such as Amazon. But Von der Porten, who was one of the early (and most vocal) critics of the company, doesn’t think this should stop the disclosure of quarterly figures. ‘In my view, their argument gives too little credit to analysts. Analysts know to compare March to March, rather than March to December.’

In Von der Porten’s view, Amazon needs to go further with its disclosure. ‘I’ve been pushing them to report how many customers they do business with each quarter. If you have that information, you can figure out the revenue an average customer brought in that quarter, and you can compare it to the same result a year ago. I don’t think a lot of variables are needed, but some of the ones they report are not the metrics that analysts would like to see.’

While some investors and analysts may want more, Grandinetti argues that such debate can have a very short-term focus. ‘The discussion of disclosure can become a flavor-of-the-month situation, and if that’s what you’re focused on, it would constantly shift your disclosure. We’re focusing on the next five years.’

As for being in the media spotlight for the last couple of months, Grandinetti is optimistic. ‘You have to take a deep breath and realize we’re fortunate to be a highly scrutinized company. We’ve benefited from the amount of attention that’s been paid our company, and part of the problem that comes with that is that people watch you closely. Jeff Bezos has always told employees, If our stock price goes up 10 percent, you’re not 10 percent smarter. Conversely, you’re not 10 percent dumber if it drops 10 percent. That sort of thinking keeps us focused on the longer term in the context of how we’re going to build a great long-term business.

The straight story

So how does a net company — which is roughly 75 percent off its 52-week high as of August — shore up investor confidence? By telling a straight story and ensuring all investors are provided with the information they need to make investment decisions, says’s Gallagher. ‘Investors have been asking tough questions. So we’ve been very specific in return. We not only tell them we’re going to get profitable, but we tell them when it will happen, which is in the fourth quarter of next year. We’re also telling them exactly how we’re going to get there. And we’re spending a lot of time separating ourselves from the pack.’

Another strategy has been to avoid the splashy, get-our-name-in-the-press-at-any-cost attitude that reached a crescendo when dot-coms could do no wrong. Gallagher, who oversees all communications for the whole company, and Janice Simoncelli, who manages its investor relations program, both say they focus on the ‘quality, not quantity’ of the company’s announcements. ‘We think investors have become almost hostile to companies issuing a release a day simply for the purpose of keeping their letterhead in the media’s hands. Our goal is to be selective in what we consider newsworthiness,’ says Gallagher.

So while the company isn’t flooding the market with releases, it’s opening its doors to virtually anyone with questions. That means e-mails from large and small investors, many less than pleased with a stock price limping along at about $4, not only get answered, but get answered the day their message is received. Taking part in this Herculean communications effort is CEO Bob Bowman who, according to Gallagher, talks to investors every day.

That sort of democratic openness is most shocking when you consider that the company not only opens its conference calls to anyone who wishes to participate in them, but it allows anyone who is participating to ask questions. ‘We don’t cut off questions during conference calls, and we don’t screen the calls,’ says Gallagher, who admits that they do get some ‘off the wall’ questions. ‘The reality is, the price of our stock isn’t driving our activities. Our stock price will follow our execution, and that’s what’s important.’


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