Editor's note: The previous version of this story incorrectly stated that PlanetOut did not offer full refunds for its customers on the cancelled cruise. In fact, every passenger was offered a full refund. The error has been corrected.
While taking a riverboat cruise is supposed to be a relaxing way to see the sights, it's become more of a gamble for management at PlanetOut (Nasdaq: LGBT ) , a tiny company serving the lesbian, gay, bisexual, and transgender community.
Earlier this year, PlanetOut acquired RSVP, a travel and entertainment marketing service for gays and lesbians that competes against companies such as Atlantis Events, said to be the largest all-gay tour operator. RSVP and PlanetOut develop travel itineraries at resorts and cruise lines through contracts with third parties and then add entertainment amenities to the program.
Cruising toward higher costs
PlanetOut scheduled four riverboat cruises in August and September, but because its European riverboat operator, Austrian River Cruises, became embroiled in some legal matters, it couldn't meet its contractual obligations to run the riverboats. RSVP instead changed the itinerary to a bus tour of Prague and Budapest. Not exactly an elegant alternative to sailing down the Danube, is it? It ended up costing RSVP and PlanetOut significantly more money because they priced it at the lowest cost of the cancelled riverboat cruise.
Equally worrisome is slower revenue growth from the advertising business. In the second quarter, advertising became the biggest money maker for PlanetOut. It accounted for 45% of all revenues, and it's been growing exceptionally fast: 185% this year compared to last, and 50% over the year before that. But coupled with declining ad sales from The Advocate, the third quarter is apparently shaping up to be a bust, which is both troublesome and perplexing. The Advocate and Out are the two largest-circulation gay magazines in the United States. Why they should be experiencing suddenly declining growth rates is not known.
As a result, the leading gay-and-lesbian media/entertainment Web portal is dramatically scaling back revenue projections. Third-quarter revenue is now expected to come in 14% below previous estimates, or in the range of $15 million to $16 million, while EBITDA guidance has been cut in half, at best, to come in between breakeven and $1 million. Previously, the company had said it planned to make between $2 million and $2.5 million.
A storm on the horizon?
It does appear to be a worsening situation. For example, a basic calculation of free cash flow is operating cash flow minus capital expenditures. Over the past 12 months, PlanetOut's free cash flow has deteriorated to a $3 million loss, much worse than the $300,000 loss reported in the prior 12-month period. In the year before that, free cash flow had been a positive $1 million. It seems that PlanetOut is hemorrhaging cash the faster it tries to grow.
When the company went public in 2004, it raised about $40 million, which it has since been using to make acquisitions. Cash on its balance sheet is down to about $4.9 million, though long-term debt is a manageable $4.7 million. Having made numerous acquisitions, PlanetOut has become the premier venue for the LGBT community. However, News Corp.'s (NYSE: NWS ) purchase of the MySpace community and Yahoo!'s (Nasdaq: YHOO ) personal ads provide better-financed and better-known alternatives to PlanetOut that will prove challenging to the startup company. Yes, PlanetOut is catering to a niche market, but its competitors -- including Match.com and eHarmony -- also make room for the LGBT community.
The riverboat gamble seems like a bet that didn't pay off this time, though it can't really said to be at fault here. It was smart not to cancel the tour and to make other arrangements, since many people had undoubtedly planned for a long time to take the tour.
A risky play
While the company says it is reorganizing its operations to be better able to project its performance, the stock remains well off its 52-week highs of more than $10 a share. Unfortunately, this seems like something the portal does on a regular basis. In 1997, it bought out Sequoia Capital and booted its CEO. In 2001, it reduced staff to focus on aggregating content, premium services, and e-commerce. The latest reorganization entails consolidating its media and advertising services and cutting its workforce by 5%.
Some investors may balk at buying a company that serves the LGBT community, just as they might hesitate to buy adult-nightclub operator Rick's Cabaret (Nasdaq: RICK ) or Playboy (NYSE: PLA ) . But simply because the stock is down, that does not make it a buy recommendation. For PlanetOut, some wrinkles remain to be worked out of the business plan, and that makes this a risky play for more than the community it serves.
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