Freeserve posts £17.5m loss, shares drop

Freeserve's (quote: FRE) full-year results, announced Monday, delivered no big surprises -- certainly nothing earth-shaking enough to distract attention from the big news over the weekend, that merger talks with T-Online had fallen apart.

Against the background of a £17.5m loss, the Internet service provider's number of active users edged up from 1.82 million to 1.967 million, as of 24 June. Freeserve is the UK's largest ISP.

The company's shares fell steadily through the day, ending down nearly 17 percent, or 73.8, at 365p. The FTSE 100 rose 13 points to 6,405 while the techMark 100, measuring many Net startups, slid 26 points to 3,415.

Monthly page impressions actually dropped from 162 million in February to 151.5 million in May; the company chalked this up to "restricted availability of chat for a period of time in May following the site redesign". Presumably there's also a seasonal element to this as users enjoy the nice weather. That compares to 63.8 million the previous May.

Despite the lower page views, however, minutes of use were up from 2.2 billion in February to 2.5 billion in April, a crucial measure for indicating how likely users are to view advertising and use e-commerce services, and a metric in which Freeserve trails America Online.

Freeserve CEO John Pluthero said the results assure Freeserve's continuing dominance in the UK market. "These results demonstrate the growing strength of our financial performance, which is underpinned by the ever-increasing popularity of our portals."

Freeserve's revenues are divided between e-commerce and advertising, on the one hand, and connectivity charges on the other. The two remained fairly evenly split as e-commerce and ad revenues grew 20 percent compared to the previous quarter, with the number of advertisers nearly doubling from 121 to 232 quarter-to-quarter.

E-commerce and ad revenues are sustainable, whereas connectivity charges will be obsolete once flat-rate pricing becomes commonplace.

Overall turnover was up 41 percent from the previous quarter to £7.3m.

Freeserve announced it is setting up a health and well-being channel with pharmacy chain Superdrug and online health sites ThinkNatural and Planet Medica.

The company said it has completed the rollout of two unmetered access packages -- introduced in response to unmetered announcements from ISPs such as AltaVista and British Telecom's SurfTime. It is also planning a rollout of a "diverse range of content and services" based on broadband technology ADSL, due to arrive in Britain 1 September.

The results are overshadowed, however, by the collapse of talks between Dixons, Freeserve's parent, and T-Online, a massive German ISP owned by Deutsche Telekom.

The results, for the year ended April 29, were brought forward by a day to coincide with the announcement that Dixons -- whose shares also fell 8.5 percent -- had failed to secure a strategic investor for Freeserve.

Dixons (quote: DXNS) , which is thought to want to marry Freeserve to another big industry player to guarantee the young ISP's future, said it had held talks with "a number of parties, including T-Online, about a variety of potential transactions.

"Whilst certain discussions continue, Freeserve does not expect that this process will lead in the near future to a bid for the whole of Freeserve."

Freeserve has consolidated its dominance in Britain, where one in three dial-up Internet surfers uses its services, but most industry players are already looking ahead to the dawning era of always-on, high-capacity broadband access.

The most obvious partner, therefore, would be a distribution company which could provide a network to Freeserve's content and customers. Nasdaq-listed cable company NTL has been widely tipped as a company that could do that.

If not a network provider, another possible Internet partner that could help Freeserve gain scale in a consolidating European market could be Spanish ISP Terra Networks.

Dixons and T-Online could also resume talks at a later date, one industry source said on Sunday.

Reuters contributed to this report.

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