Lycos drops on Netscape fears

Shares of Lycos Inc. were down $3 per share, or 7 percent, to $36.94 on Monday in reaction to Netscape Communications Corp.'s preannouncement of weaker earnings as well as news that Softbank Holdings Inc. would invest $51 million in GeoCities Inc. and claim a larger chunk of stock in competing Yahoo! Inc.

While analysts were quick to cite the Netscape earnings warning as a significant harbinger for the entire Internet sector, they also said Lycos' recent gains indicate Monday's sell-off is also fueled by profit taking as shares in the Internet search firm improved by more than $7 per share in December.

"I think a big part of it is they've had such a good run in the past month and you've got some profit taking going on," said Sherri Wolf, an analyst at Adams Harkness & Hill. "Also, there's a bit of sympathy because Netscape's numbers are going to be off."

Netscape Communications Corp. shares fell, $4.81 per share, or 21 percent, to $18.56 after the Internet software company said it would miss fourth quarter earnings with a loss of up to $0.92 a share, or $89 million. Wall Street had expected $0.14 a share gain for the quarter.

Netscape blamed its heated competition with Microsoft for some of its problems, and hinted that it may give away its browser software to match Microsoft's marketing tactics.

From an investing perspective, whenever a major Internet player such as Netscape sneezes, the rest of the industry tends to catch a cold. But a closer examination of Netscape's expected revenue figures hint that Monday's sell-off of Lycos shares may be a bit premature.

"These Internet search engine companies aren't as closely aligned with Netscape as some investors might think," Wolf said. "Sure, Netscape is going to see some softness in its enterprise markets, but not in its advertising revenue. Companies like Yahoo!, Excite and Lycos are continuing to attract higher numbers of viewers each month."

The third significant piece of news affecting Lycos comes from Softbank Holdings Inc., which will use $25 million to fund GeoCities expansion and another $26 million to purchase GeoCities' stock from existing shareholders. Yahoo! will issue $5 million in new stock to GeoCities, meaning that as Yahoo!'s largest shareholder, Softbank will own 30 percent of the navigation service following the new stock issue.

Softbank Holdings is the holding company for all of Softbank Corp.'s operations in the U.S., including Inter@ctive Investor publisher Ziff-Davis Inc.

Analysts said the GeoCities deal will have little impact on Lycos' role as the search engine for GeoCities.

"They have provided the search engine for GeoCities and they will continue to provide it," said Derrick Brown, an analyst Volpe Brown Whelan & Co. "Nothing changes. We still have a very positive view of this stock."

First Call consensus expects Lycos to return a profit of 1 cent per share in its second quarter, up considerably from the 15-cent-per-share loss in the year-ago quarter. Last quarter, Lycos posted a profit of $107,000, or 1 cents per share, on sales of $9.3 million.