Online Advertising Brightens Outlook for Web Companies

July 31, 2000 -- Maybe the Internet advertising picture isn’t so bleak after all.

Funding among the once-lush Internet content companies has dried up, thanks to months of stock-market swooning and the recent failure of some high-profile online companies.

And the current earnings season has sparked worries that companies depending on Internet advertising could suffer earnings shortfalls that would drive another Net stock rout.

But big players such as Yahoo! and DoubleClick have posted rock-solid numbers, and even second-tier names such as About.com are spreading good cheer with their results. So perhaps the tide is turning for some of these beaten-down names.

Earning Their Ads

About.com’s CEO Scott Kurnit certainly thinks so. He told investors listening to its second-quarter earnings in late July that About.com expects to report an operating profit by the first quarter next year, thanks to greater revenue from increased advertising spending on the Internet portal site.

That means the company has cut its profitability forecast by a quarter. “Companies that don’t make money are not real businesses, and I’m really excited about becoming one at last,” said Kurnit.

In its most recent earnings report, About.com lost 33 cents a share in the quarter, excluding some noncash charges. That’s narrower than the 39-cent loss forecast quoted by First Call/Thomson Financial. About’s net loss narrowed to $18.9 million, or $1.06 a share. The bullish news helped the company’s stock jump 16 percent in one day.

“The numbers are very good,” says Jeffrey Fieler, a consumer Internet analyst at Bear Stearns in New York. “I believe that the business model to become cash flow positive will work.”

Seeking Targeted Audiences

About.com’s content-specific Web sites offer a wide selection of targeted audiences — an attractive prospect for advertisers, according to Bear Stearns’ Fieler.

“The Internet advertising market is becoming more competitive, so if an advertiser knows the demographic they are getting, it resonates with them and it means that they can get higher conversion rates,” he says. “Advertisers will pay a higher price to be a part of that.”

About.com also said the number of advertisers on its network of 700 content-specific Web sites (covering anything from botany to waste management) increased to more than 1,800 from 620, thanks to the launch of Sprinks.

Sprinks is a pay-per-click advertising service that enables online advertisers to bid for ad space. It has attracted more than 1,000 advertisers since its launch six weeks ago, the company said.

Offline Players Helping Out

Another group of advertisers that is taking Internet advertising more seriously is traditional bricks-and-mortar companies, like consumer products companies Coca Cola and Procter & Gamble, says Fieler.

Web companies that can show they have a compelling offer for these companies will benefit from the migration of offline advertisers to the Internet, he says.

“When a company like Procter & Gamble, with an annual advertising budget of $4 billion, says they are going online it shows the value of online advertising,” says Fieler. “It says this is a good marketplace for these companies to spent their money.”

A major television advertiser for decades, Procter & Gamble has reportedly said that it wants to focus more on reaching specific consumer groups by marketing through direct mail, the Internet and other alternatives.

Indeed, Internet-only companies are making the most of the opportunity of receiving increased advertising revenue from offline advertisers.

For instance, America Online in a late July earnings call reported that revenue from advertising, commerce and other sources had improved 95 percent to $609 million in the latest quarter, making for a total of nearly $2 billion for the full year. The company said it had focused on gathering advertising revenue from large established companies like Citigroup, Blockbuster, and the NBA, instead of small dot-coms.

In a recent research note, analyst Michael Graham at Roberston Stephens wrote that About.com receives just over 50 percent of its revenues from dot-coms, and that it has shifted its focus to established companies with greater financial stability.

Revenue growth from advertising is traditionally slow during the summer, he added, noting that it would be wrong to interpret the slowdown as industry weakness.