NetTrends: Internet Ad Firm Upbeat on Industry

by Jan 24, 2002, 12:00 AM

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It has been one of the bigger surprises of the latest earnings reporting season: DoubleClick Inc., whose struggling Internet advertising business had become a symbol of the dot-com bust, last week reported an operating profit and raised its earnings outlook for the year ahead.

The troubles of the online ad industry have been so prolonged that a number of industry analysts had stopped following companies like DoubleClick.

But those who still do track it were way off with their assessment of the company's performance at the close of last year. Contrary to their expectations of a five cent per share operating loss, the company produced an operating profit of $1.66 million, or a penny a share.

"People had given it up for dead, and then it showed that it had a heartbeat," explained Lanny Baker, an Internet media analyst with Salomon Smith Barney.

Now that DoubleClick is showing signs of life, it has set off a debate over whether the industry really is beginning to recover, or if its quarterly numbers shined only through smoke and mirrors.

True, DoubleClick only reported an operating profit, and on its bottom line, after including a host of unusual charges, it lost a hefty $64 million.

STANDING TALL IN THE RUINS

On the other hand, Wall Street still judges companies largely on the basis of their operating income, and even on that basis, a number of companies did not make money.

"Who do you know who made more money this fourth quarter than they did a year ago?" Kevin Ryan, DoubleClick's Chief Executive, said in a recent interview when his words took on the tone of a victory speech. "Yahoo didn't and Cisco didn't and Sun didn't. If DoubleClick can make money now, why did Sun not make money?"

But not everybody thinks DoubleClick should get all the credit for turning things around. (In the year-ago fourth quarter, DoubleClick had reported a much slimmer operating profit of $216,000 and a steeper net loss of $104.8 million).

As the largest and one of the few surviving companies selling online advertising, DoubleClick was the default beneficiary of the collapse of so many of its onetime rivals. To its credit, it has also maintained a healthy balance sheet with a large cash balance which also contributed to the operating profit in the latest quarter by generating interest. And, it has been shrewd about cutting costs.

As much as these factors helped shore up DoubleClick in the fourth quarter, analysts warn that they are also short-term perks that do not guarantee the company's success over time.

"It had a pretty good quarter," said Safa Rashtchy, an analyst with U.S. Bancorp Piper Jaffray. "But the company does not have a lot of products or services in growing demand. Its media business (selling online advertising) will probably continue to decline. The selling of online ads is being done by smaller companies. It is essentially a shrinking market."

To that Ryan offers two responses. First he is not ready to give up on the online advertising business. And second, he is prepared with a worst case scenario strategy.

BETTER TECHNOLOGY NEEDED

"There is no question in my mind that the share of dollars going to the Internet is growing," he said. "Marketing departments are saying that online business grew a lot in the quarter and nothing else did. We need to be focusing more on that."

What many investors and critics have focused on instead, is the company's dismal performance in prior quarters, which made an improvement in the fourth quarter almost a no-brainer. But Ryan insists there were several areas that showed a strong bounce. "On the European side of the business, revenues grew 50 percent from the third quarter," he said.

Yet not even the head of an Internet advertising business is willing to stake his future on strong online ad sales along. Ryan confesses the business today is much different than what DoubleClick had once set out to become, and now includes a wide assortment of technology solutions and analytics products that cater to both online and offline marketers by offering them tools to fine-tune their marketing.

One of those products, the just-launched ChannelView for instance, is an analytics software that helps major companies track the response to their promotions online and off. Such technology products already contribute the biggest portion to DoubleClick's total revenues.

But Ryan believes they still have a lot of room to grow. While technology today offers some good ways ways to track consumer responses, it has not perfected the practice. DoubleClick recently discontinued one of its technology products that let marketers target ads based on online surfing patterns. Contrary to what many people suspected, the service was dropped not because of privacy concerns but simply because it was not all that popular.

"We can tell how many people saw and ad and where they saw it, but we could do a much better job still of linking online advertising to sales in stores.

"We've done a lot of great work but more needs to be done. "We define ourselves as a marketing infrastructure company," said Ryan. "It has been a long time since we have focused just on the online market."

- Reuters

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