Netscape loses its luster

Wall Street on Monday gave Netscape Communications Corp. a big kick in the derriere after the company announced it would report a loss of at least $113 million in its fourth quarter. The stock fell $4.81 per share -- or 21 percent -- to $18.56 with more than 13.8 million shares changing hands.

But the impetus behind the boot might well have more to do with the company's long-term outlook than a one-time, albeit ugly, quarterly loss.

There's a growing sentiment among institutional investors that Netscape might have bitten off far more than it could chew in its relatively short existence.

Given the company's relative lack of resources, more than a few Wall Street pundits are questioning the wisdom of Netscape wrestling with a predator such as Microsoft Corp. -- not only for market share in the browser and enterprise server markets, but also in the expensive and unpredictable world of litigation.

Strictly by the numbers, Monday's announcement of a quarterly loss in the neighborhood of 90 cents per share is disastrous. An $85 million earnings shortfall from slowing revenue growth and encroaching competition from the gang in Redmond was all the likes of Morgan Stanley, Dean Witter and Smith Barney needed to hear. They, along with Cowen & Co., downgraded the stock and slashed earnings expectations for the quarter and the year -- not with a knife, but a chain saw.

"The magnitude of this shortfall is so severe that it has fundamentally changed our view of the company going forward," said Mark Usem, an analyst at Smith Barney. "It's just ugly. When you have a change in earnings that dramatic, it's time to start thinking about the true potential of this company in its current market."

Those strong words cap a bad run for Netscape's stock. Since trading at $60 per share a year ago, the stock slid to $24 per share in April before making a game rally to $50 per share in July. Alas, investors wary of pricing pressure and Microsoft's prowess sent the stock into another free fall that reached a depressing crescendo Monday.

"It made a nice little run in the spring ahead of some of its new product releases," said Dan Kiel, an analyst at Robinson-Humphrey. "But then it lost all its momentum. It looks like a case of a small, young company trying to do too many things too soon."

While analysts were quick to applaud Netscape's intranet software and enterprise servers, they also question the company's aggressive acquisition strategy at a time when it should be circling the wagons for the more important battles.

"They're battling for design wins, upgrades on their technology, the Microsoft litigation, and an acquisition plan that swallows up companies at the rate of about two per quarter," Usem said. "They've really stretched themselves pretty thin. Now, it looks like a company that was once a monopoly and now is struggling because the rest of the world has caught on."

Company officials blamed Asian economic problems as one of the reasons earnings would be so woefully shy of expectations, as well as competition for the corporate software market from IBM. Microsoft's entry into Internet access further whittled away at earnings. These issues, coupled with the $52 million cost for the acquisitions of Actra Corp. and Kiva Software, left Netscape's earnings short.

With layoffs and site closings in the offing, chief executive Jim Barksdale said Netscape will try to right its ship by pushing into the uncharted seas of enterprise software.

"For Netscape, volatility is the only constant theme," Usem said. "They keep making all these major shifts and you wonder if they're sure what direction they're really heading in. They're still a technology leader, but that's not enough if you can't focus on your markets and execute."

First Call consensus originally expected Netscape to post a profit of 13 cents per share. Now, company officials said the loss, excluding restructuring and merger costs, will be in the range of 15 cents to 18 cents per share.