The Day Ahead: Engage knocking at death's door

Engage looks like going the way of the dodo
Written by Larry Barrett, Contributor

Commentary: Engage's disastrous first-quarter results are just the latest of symptom of a ferocious disease that's methodically destroying the company from the inside out. Put away the defibrillators. This one's already dead.

This company has extinction written all over it.

Sales are down 38 percent from the prior quarter (and this was supposed to be one of its strongest quarters). Management upheaval abounds.

Its sugar daddy, CMGI, is fighting for its own survival. It's burning cash at an alarming rate. And the prospects of an improved Internet advertising market—at least for the next three or four quarters—are as likely as a timely resolution of our presidential election.

It's one thing to miss analysts’ estimates in a quarter. Or even two quarters. It's another to miss your own watered down estimates just a month after issuing a profit warning.

Engage’s latest masterpiece was a first-quarter loss of $48.7m, or 26 cents a share, on sales of $41m.

First Call consensus expected the online advertising and marketing services provider to lose 23 cents a share in the quarter.

That estimate was obviously too optimistic considering the company warned that it would post a loss of 25 cents a share back in November.

It's good to see these analysts are right on top of the companies they follow.

Company officials said it missed its own loss estimate primarily because some of its customers were unable to pay their bills this quarter.

By the way, the stock’s trading under $2 a share after storming up to a 52-week high of $94.50 way back during the insanity of early March.

Footnote: Believe it or not, Engage's market capitalisation briefly eclipsed that of Omnicom Group, a pillar of the advertising industry that earned $86m in its latest quarter. Analysts lost faith long ago

"It's already a disaster," said Chris Hansen, an analyst at Banc of America Securities. "It's teetering on the edge of bankruptcy."

Hanson, who initiated coverage of the stock in August with a "neutral" rating, said it would be disingenuous to blame the dearth of online advertising dollars for Engage’s demise.

"The majority of Engage's problems are internal," he said. "They bought too many second and third-tier advertising firms and could never integrate them cohesively."

Well, Engage made a half-assed attempt to right its ship this quarter when it consolidated five of its business divisions and lopped off 13 percent of its bloated headcount.

But it's clear this efforts will prove to be far too little, far too late.

"Their current situation isn’t good," said David Doft, an analyst at ING Barings. "But they've got to reconfigure their business model into something that's viable in the short run. That's exactly the opposite of what it and most Internet companies have been trying to do in the past few years."

As of the end of October, Engage desperately clung to $107.9m in cash, cash equivalents and short-term securities. We can't be entirely sure that money hasn’t evaporated already.

In a moment of refreshing candor, Doft admitted that he wouldn't recommend the stock to anyone right now because "there are too many questions about this company both internally and with the industry as a whole."

DoubleClick confirmed those concerns Monday when it warned that its sales and earnings in the next two quarters will miss analysts' estimates.

Yahoo! could be the next big-name Internet media company to miss estimates as it struggles not only to attract established customers but to cut deals that actual have a profit in them.

"Clearly, we are very disappointed in the results for the first quarter," said chief executive Tony Nuzzo, who stepped into the fray in early November. "In order to improve the financial health of Engage in this tough market, significant changes will be made in the short term."

Unfortunately, Tony, it doesn't look like you’re going to get much of a chance to fix all that was broken before you got there.

Add Engage to the list of "promising" Internet companies that was long on vision but short on execution.

And now it's short of cash and hope.

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