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StockTalk:
TMF Interview With Lycos President and CEO Bob Davis
With Yi-Hsin Chang (TMF Puck)
and Brian Graney (TMF Panic)

July 29, 1998

Our guest today joins us from Waltham, Mass. He is Bob Davis, president and CEO of Internet navigation and portal company Lycos Inc. (Nasdaq: LCOS). The name of the company comes from "Lycosidae," the Latin name for the wolf spider family, which chases its prey.

TMF: Mr. Davis, thank you for joining us today.

Davis: My pleasure.

TMF: Speaking of the origins of your name and spiders, you recently received a patent covering your "spider" search technology. Do you plan to go after companies that may be using the same technology?

Davis: Going after companies is probably a little strong for me. What we plan on doing is certainly protecting our intellectual property. We have the whole matter off with patent counsel right now, and we're reviewing our options. But I think from a realistic standpoint, we're probably still a few months away from any course of action. What we're most focused on right now is not so much patent and much more in continuing to grow Lycos as a brand and destination on the Web.

TMF: And how do you plan to do that and compete better with your competitors, such as Yahoo! (Nasdaq: YHOO), Excite (Nasdaq: XCIT), and Infoseek (Nasdaq: SEEK)?

Davis: When we talk about competing better, really what we focus ourselves on and I think what we've really done a great job in cornering the market on is the concept of community. Now, there's an awful lot of overlap between the Internet portals. The rule of portal doesn't work for me because portal implies entry or exit way. To us it's a lot more than that. In any case, we've really wrapped ourselves around community with the acquisition of Tripod back in February. Lycos is now in the enviable position to say that we own two top 10 websites.

What we've been able to do effectively is wrap in not just home page publishing but personal publishing in many, many different levels in both Lycos and Tripod sites. We think we've done that quite well while most of our competitors have sat on the sidelines. Beyond that, we do what you've seen with virtually all of our competitors, the traditional things. We've worked very hard at building brand in a variety of fashions. We use both online and offline media in our brand, continue to build a product in a variety of different fashions. But community is the ground that we staked thus far as really our own.

"Lycos is now in the enviable position to say that we own two top 10 websites."
TMF: Last week, Yahoo! CEO Tim Koogle told us he believes that there is enough advertising and e-commerce to support three to five global branded networks. Do you agree, and do you think Lycos will be one of those?

Davis: To me, there's no doubt that Lycos will be one of those. I think that's probably on the money. I don't know if I'd say three to five. I might have been inclined to say four to six. In any case, I would agree in terms of base concept. I think Lycos is clearly one of those today and will continue to be one as we start to look forward. If I said two top 10 websites, that's a pretty powerful position.

Many often look at Lycos and see Lycos.com the entity and Tripod.com the entity, and forget the power of what is today the Lycos network, the combined site which has a cumulative reach in the U.S. alone of about 25%. Further than that, we have just an exceptional position internationally and what I would argue is stronger than any competitor. If we talk about global brands, this is the worldwide marketplace where we have had just exceptional success.

TMF: With the global brand name, how do you plan on leveraging it and promoting it to grow Lycos?

Davis: There's a variety of different things. One, we've entered into a variety of effective joint ventures around the world. For instance, we have a joint venture with Europe's largest media company and the third largest media company in the world, Bertelsmann, that happens to also own 50% of AOL in Europe. We've set up Lycos services in a lot of European countries. Now, this isn't just "search the Web." This is a complete context, complete culture -- local content and a local hub being set up throughout Europe. We did the same thing with Sumitomo and IIJ in Japan. Sumitomo is the world's eighth largest company and IIJ is Japan's largest ISP. We have set up Lycos services in Japan, and we did the same thing with LG Electronics in Korea.

So, one component of what we're doing is incredibly strong and incredibly powerful local partners that will help us build the service to attract content partners and build a brand. Beyond there, in the United States what we continue to do is, I guess I'll call it Branding 101, in a variety of fashions -- not only continuing to build a stronger product but continuing to promote and market ourselves by using a variety of different media. We use television. We use radio. We use print. We use the Web. We use NASCAR, for that matter. We've been particularly successful with NASCAR, we have a driver that's running at the top of the standings and doing quite well and giving us an awful lot of television coverage as a result.

TMF: What percentage of your revenues comes from Europe and Asia, and what are your plans for further expansion in those areas?

Davis: That's good news. None of it comes from Europe or Asia. It's a huge hidden jewel as it relates to Lycos and our income statements, especially at a time when European revenues are becoming substantial. We don't consolidate the revenues from our joint ventures, so you don't see that on our income statement as revenue. You also don't see that as a loss on our income statement in the early stages where we're building markets overseas.

That's a great story for investors of Lycos because when you first see it hit our statements is when in fact the joint ventures become profitable. It shows up as below-the-line earnings, purely accretive earnings per share. So when you start to look at comparables, when you compare Lycos revenue with competitors' revenue, we are far from an apples-to-apples comparison. You don't see our European revenues, which again are very significant. You don't see Japanese revenues showing up at any level. This hits bottom line, and it is very, very significant. There's a huge hidden asset of Lycos that most folks, frankly, just don't appreciate.

TMF: How big will that contribution be once they do become profitable?

Davis: It would be very substantial at any level. Let me look at international markets. The international markets in most other businesses represent somewhere around 40% to 50% of the company's gross revenues. I think it's not unlikely to expect maybe not quite that level, but the number's not far off from that. I would expect international revenues or international contributions to be in the 30% to 35% range in total. Again, this is why it's so powerful because right now we are clearly building European revenues.

"You don't see our European revenues, which again are very significant. You don't see Japanese revenues showing up at any level.... There's a huge hidden asset of Lycos that most folks, frankly, just don't appreciate."
For instance, we get more advertisers on Lycos Europe than does any competitor. We have more e-commerce agreements in Europe than does any competitor by a factor probably of two. Yet you don't see that as you look at our income statements or results we report each quarter. You won't see it until, in fact, when eventually it gets profitable. Further, another great value is this is not dilutive in the present term to shareholders because it's not our cash that's being used to build this business. The great component of the joint venture is that we have Bertelsmann and Sumitomo contributing essentially all of the start-up capital to these businesses. So we have powerful companies using their capital to build our brand.

TMF: With your emphasis on community, what is the model that Lycos is going to use to grow revenues in the future? Is it just adding more advertisers or creating more space for these advertisers?

Davis: It's a number of things. It's not really dissimilar to what we do at Tripod. Basically, it's advertising and commerce. We acquired a company in April by the name of WiseWire that you may be familiar with. For lack of a better description, it's an automated directory or an automated Yahoo! This is what the product builds except that I think it's a heck of a lot better in its structure and its format. We've taken the WiseWire tool set and applied it to categorizing all of the Tripod homepage members into a like-content area. That certainly works very well as it relates to targeted advertising.

Further, what community sites provide that you just don't find in traditional navigation centers is the ability to allow commerce partners to integrate their offerings into homepage builders. We have a very strong affiliate network within Tripod that signs up thousands of members per week to become affiliates of our commerce partners. For instance, CDnow (Nasdaq: CDNW) is our music partner, and as you build a homepage on Tripod, above and beyond being given 11 megabytes of disk space for free, you have essentially a menu where there's a homepage builder you can pick from that says, "I would like any of the following commerce partners to be on my homepage." Then, in turn, the homepage builder is given compensation for each sale that takes place on that day. It is just a fantastic model not only for the homepage builder because there's revenue where they wouldn't have expected it. It's a great model for registered commerce partners. You don't see that in the navigation center because you don't have this concept of people building things. So, it's working out very, very, very well.

Tripod has been unbelievably successful since the acquisition. The company has been the fastest growing amongst PC Meter's Media Metrix top 10 websites. We acquired the company in February. It's grown 65% in terms of reported Media Metrix reach since that time alone. We see new member registrations in the vicinity of about 10,000 per day, which is more than triple since the time we acquired the company. So it is really working on all cylinders right now.

TMF: Has Tripod.com helped to increase traffic to the Lycos site, or do they basically operate as separate entities?

Davis: It's a separate brand, not a separate entity. So it's run as a separate brand, not as a separate business. But in answering the question, yes, it has. Tripod has helped Lycos.com, and Lycos.com has helped Tripod. Basically, the two sites have fed each other very, very nicely. They are integrated -- Lycos drives homepage building with Tripod, and Tripod drives search and navigation to Lycos.

TMF: Is growth going to be fueled going forward with acquisitions as it has been in the past, or are you going to focus a little bit more on internal growth?

Davis: Acquisition is clearly a component of our strategy, and I think it's likely that you will see us continue to be reasonably aggressive on that front. Having said that, we are not looking by any means solely to acquisition strategy, which is very important to us as we continue to build the strong brands that we have and expand those. So, we'll find a dual-pronged approach.

"There's no metric that I can understand that would justify the premium that Yahoo! commands over Lycos' valuation."
TMF: In light of Disney's investment in Infoseek and NBC's investment in CNET's Snap!, are you working on a similar alliance with a major media company?

Davis: It's kind of funny. We've had an alliance with a major media company for a year and a half, and that's our joint venture with Bertelsmann. Bertelsmann is the third largest media company in the world. There's the 50-50 joint venture that we have. So, we have a very, very powerful media alliance. Secondly, we have working relationships with other media titans, for instance, Time Warner (NYSE: TWX) -- we have relationships with a number of their divisions -- Viacom (AMEX: VIA), same thing -- relationships with a number of their divisions. So we will continue to build and expand on those. I wouldn't preclude or include the concept of additional media relationships in the future.

TMF: More generally about the Internet and the industry in general, how long do you think it will be until you see computers in every house with computer prices falling as they are right now and how is that going to affect Lycos?

Davis: It's a great thing for Lycos, the concept of computers everywhere. But to me it doesn't necessarily imply it has to be computers. It's an access device of some type that presumably have some type of intelligence, but it's not computers as we know it today. It'll be hand-held devices, it'll be television sets, and it'll be computers -- network computers in every household. How far before I see that being truly ubiquitous? I think it's a good distance off, five, seven years before it is truly ubiquitous. Having said that, it doesn't happen overnight. Each and every year we make more progress on that front.

TMF: Lycos' stock price doesn't seem to have had as meteoric rise as Yahoo! Do you think the stock is undervalued, and will it be helped by the recently announced stock split?

Davis: Yes, I do think it's undervalued, and it's had a great rise, of course. One of the things that's interesting to note at Lycos is that we had a nice rise in calendar 1997 toward the end of the year. So when folks look at beginning of year to our present day, we get a little head start over the competition. Having said that, sure, I think it's undervalued by any measure. There's no metric that I can understand that would justify the premium that Yahoo! commands over Lycos' valuation. Certainly, it's not paid views, it's not revenue, it's not reach.

Having said that, I think that we are a greatly undervalued asset that presents an awful lot of upsides. Lycos right now has 12 companies on Wall Street that publish research about us. These are amongst the best firms on Wall Street -- Hambrecht & Quist, Merrill Lynch, Bear Stearns, and many, many others. What is unique about Lycos is that Wall Street is unanimous in the "buy" or "strong buy" equivalent rating that they have on the company. None of our competitors can make that claim. That's something we're pleased with.

We've now been a public company nine or 10 quarters. Something that we're also very pleased with and excited by: we have always overdelivered to date on analysts' expectations. We've always exceeded the most aggressive of analysts in the marketplace. We're very proud of that. We think we've delivered very, very nicely to the Street.

TMF: Mr. Davis, thank you for taking the time to speak with us today.

Davis: Certainly, my pleasure.

Related Links:

  • Lycos website
  • Tripod website
  • Lycos message board
  • StockTalk with Excite
  • StockTalk with Infoseek
  • StockTalk with Yahoo!

     

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