No Rediffs, Ands, or Buts

Business continues to deteriorate at India's Rediff.com (Nasdaq: REDF  ) . The fact that the new-media company stumbled again was in this morning's quarterly report. Revenue climbed 10% higher to $8.5 million, while Wall Street was hoping for a 17% advance on the top line.

Earnings clocked in at $0.03 a share. That is in line with analyst expectations, but well off last year's $0.05 a share showing. It's a carbon copy of the disappointing bottom-line results that Rediff spat out three months ago. It's a sum that becomes abysmal when you realize the profit is entirely the result of the $1.4 million in interest earned on its $60 million cash mattress. If it weren't for the company's cash-rich balance sheet, Rediff would have posted a loss.

You haven't even heard the worst of it. Rediff trades at a market premium because of its dot-com presence in the world's second most populous country. Unfortunately, its India Online revenue grew by a mere 8%. It is a 17% spurt in the company's yawn-inducing stateside publishing business that had catapulted growth into the double digits.

It's hard to find a silver lining here. The registered user base of 62.7 million is up a smart 24% from last year. The company's advertiser base has widened by 44%. Impressed? Don't be. The 8% growth in cyberspace sales indicates that its advertisers are spending substantially less on average. The same can be said for the value created per user.

The beauty of online businesses is that they are scalable. You're not seeing that here. Operating expenses climbed 25% higher during the period. In other words, operating margins contracted during the period.

Rediff is trying. It is expanding into vertical portals. It is following Yahoo!'s (Nasdaq: YHOO  ) lead into improving the algorithms of its ad network. However, it is apparently working as well for Rediff as it did for Yahoo! with its Panama rollout last year.

It's a shame because I really want to like the Rediff story. Even if the stock attention that India typically attracts is to its IT outsourcing specialists like Infosys (Nasdaq: INFY  ) and Wipro (NYSE: WIT  ) , the broadband migration is a great investing angle. Unfortunately, companies like Rediff and access provider Sify (Nasdaq: SIFY  ) are getting slammed.

Rediff and Sify are both trading for less than half of last year's highs. Sify has earned its failing grade by perpetually coming up short when it comes to meeting Wall Street's profit expectations. Rediff has failed simply because it has not lived up to the hype. If there is growth to be had in India's portals, it's just not going through Rediff.

Bulls will argue that Rediff has roughly $2 a share in cash, making it an intriguing value as it falls into the single digits. Until Rediff shows that it can earn more than just interest income, that cash mattress won't give much of a bounce.

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