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The Day Ahead: Diversification pays off for Go2Net

An organic approach to growth and avoidance of too much reliance on advertising has served Go2Net well this quarter
Written by Larry Dignan, Contributor

Go2Net topped estimates yet again and hit a few milestones along the way -- it showed purely organic growth and got the majority of its revenue from non-advertising sources.

Both points are worth noting for the future.

After the closing bell Monday, the Web portal operator and provider of Internet technologies reported fiscal third quarter net income of $10.1m, or 22 cents per share, excluding amortisation. First Call's survey of seven analysts predicted a profit of 15 cents per share.

Sales surged to $23m, more than quadruple year-over-year and up 23 percent sequentially. Page views rose to 37.5 million in June, up 103 percent year-over-year. Analysts said the growth figure is a "clean number" because it was the first quarter in awhile where Go2Net hasn't completed an acquisition. Management figures Go2Net can post sustainable growth of 15 percent to 20 percent each quarter.

More importantly, the company derived 52 percent of its revenue from licensing technology, subscriptions and commerce fees. With a potential dot-com advertising slowdown on the horizon, Go2Net's diversified revenue base sticks out.

Go2Net is a portal hybrid that offers popular sites such as Silicon Investor, but also licenses out the technology that makes the sites tick. Go2Net also takes a slice of the transaction pie.

More than $310m in e-commerce took place on Go2Net's sites and services during the third quarter. The company's Authorise.Net payment processing service picked up 12,000 merchants during the period, bringing the total to more than 82,000.

In an interview with ZDII, chief executive Russell Horowitz said he expects "at least two-thirds" of the company's future sales to come from licensing and commerce.

That projection means Go2Net has a predictable revenue stream and can iron out advertising seasonality.

The focus on commerce and licensing doesn't mean Go2Net will write off advertising completely, but it will take a back seat. The company has garnered some top offline advertisers, but wasn't as effective with sales as it would have liked, said Horowitz.

Horowitz acknowledged that the "concerns about online advertising are well-founded", but said the top 20 Web properties won't have a problem. Go2Net's chief also noted that "less than five percent" of sales comes from "questionable dot-coms".

Although the current online advertising market is nice, Horowitz is clearly banking on broadband advertising in the future. He said that Go2net could eventually get a slice of TV advertising budgets through its partnership with Paul Allen's Vulcan Ventures' properties such as Charter Communications, a cable company.

By 2004, industry sources estimate that the number of Internet-enabled devices worldwide will increase ten-fold to more than two billion. Of these two billion devices, Go2Net reckons one third will be broadband-enabled, including PCs, TVs, and wireless.

Horowitz said the company's first broadband portal will roll out on TV boxes later this summer. Other applications will hit the market at the end of the year.

Go2Net's third quarter was notable because it didn't complete an acquisition, but the company's plan to acquire promising startups for new technologies isn't going away.

Officials said Go2Net simply didn't find any prospects worth buying. The company, however, has made a series of minority investments. Go2Net and Vulcan Ventures recently invested $20m in gaming site Sandbox.com.

Since many privately held firms aren't able to go public, Go2Net is more than happy to step in with some cash to gain access to new features. Go2Net ended the quarter with $275m in cash.

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