The Day Ahead: CMGI grasping at straws

CMGI is fighting through the bushes to get onto the road signposted 'Profitability', but does this road really go where it says it does?
Written by Larry Barrett, Contributor

Commentary: CMGI gave its bewildered investors a lot to chew on Monday when it told analysts that it was putting its online entertainment site and free Internet access business up for sale and predicted profitability by the end of fiscal 2001.

Folks, there's no plainer way to say it: it's not going to happen.

Despite CMGI's commitment to unloading money losers such as iCast and 1stUp.com and its alleged devotion to only the cream of the Internet crop, this company has issues that go far beyond the simple math.

It wasn't but 18 months ago that chief executive David Wetherell was on top of the Internet universe, complaining that USA Networks wasn't willing to pay enough to buy Lycos, one of its few shining stars.

But we all know how that worked out.

Now here sits CMGI, the first significant Internet incubator riding the wave of the dot-com propaganda that made guys like Jeff Bezos Time's Man of the Year, at $14.50 a share and deep into the preliminary stages of massive restructuring and strategic re-evaluation.

When you build a business that, with few exceptions, bases its very existence on the stock appreciation of iffy boarding on no-chance Internet companies, this is what happens.

It's no coincidence that the Nasdaq composite is now struggling below the 3,000-point threshold at the same time that most of the dot-com pretenders are trading below $5 a share.

Everyone wanted to suspend disbelief as Internet firms dropping $10m, $20m or $50m a quarter were watching their stocks quadruple or more in the span of a few months.

CMGI said Monday that it will try to sell iCast, the entertainment money drain, and 1stUp.com, a free Internet access business that frankly very people knew of or cared about.

Assuming it does get some kind of value for these pet projects, just as investors in Furniture.com and MotherNature.com had hoped, CMGI still has a long road to haul.

Wetherell said that four of its five business units will be profitable, on an Ebitda basis, by the end of fiscal 2001, which ends in July.

It also said its going to pare down its majority owned and operated companies to between five and ten companies by this same time.

What CMGI isn't talking about is the painful process it will have to endure to get to this "elite" list of investment opportunities.

Keep in mind that First Call consensus is expecting CMGI to lose $1.08 a share in the fourth quarter of fiscal 2001 and $5.44 a share in the fiscal year.

It's projecting year-over-year revenue growth of 80 percent to 90 percent in the fiscal year, bringing its total revenue to $1.65bn for the year.

Oh, by the way, CMGI said its board of directors approved a restructuring plan that going to cost between $8m to $10m in the first quarter of 2001 alone.

It gets worse.

It's predicting a loss of $75m to $80m in its second fiscal quarter.

Even if CMGI is lucky enough to survive its downsizing, pick five to ten sure-fire winners and reducing its operating costs, it's facing the same dynamics that have crippled "leaders" such as Amazon.com and Priceline.com.

It's just not happening.

Look at ICG, another incubator that's mired in red ink, laying off hundreds of employees and going through management upheaval.

Engage, another CMGI tentacle, provided even more bad news last week when it warned of a wider-than-expected loss in its first quarter and announced that its chief executive is jumping ship.

More disturbing, company officials said it expects the slowdown to continue for the next few quarters.

"We believe many of these conditions could persist into the next three quarters," said chief financial officer Bob Bartlett in a prepared release. "We believe we can achieve modest quarter over quarter growth throughout fiscal 2001, with total revenues anticipated to be in excess of $200m."

Everyone sees what's going on, but they're all holding on to hope, clinging to the promise of Internet riches while simultaneously watching all the telltale signs of collapse around them.

Maybe CMGI will get lucky and find the next Yahoo!.

But there's no next Yahoo! to find.

Larry Dignan's column will return on Wednesday.

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