Fool.com: Egghead.com Beating a Path to Profitability (Breakfast News) November 23, 1999

BREAKFAST WITH THE FOOL

Tuesday, November 23, 1999

"Investing is most intelligent when it is most businesslike."
-- Warren Buffett

Egghead.com Beating a Path to Profitability

By Brian Graney (TMF Panic)

Newly formed online retailer Egghead.com (Nasdaq: EGGS) wasted no time giving investors guidance about where its business is going, releasing last night its expectations for the next two quarters and fiscal years. The company, which was created through the just-completed merger of Onsale and the original Egghead.com, forecasted Q4 revenues between $135 million and $140 million, roughly equal to the combined $137 million in revenues booked by the two firms in their most recent quarters. The company is being conservative, which seems to be a smart move considering it will likely take time for online shoppers to adjust to Egghead.com's new unified website.

Further out, the company is expecting 10% to 12% sequential revenue growth in Q1 of next year, contributing to overall year-over-year revenue growth of 45% to 50% in 2000. In 2001, the revenue growth rate is seen slowing to 35% to 40%. But even if the company is only able to hit the lower end of its projections, Egghead.com would be on track for hitting the $1 billion revenue mark in 2001. Profitability is expected to follow in 2002, as gross margins ramp up from 3% - 5% in Q4 of this year to 6% - 8% in 2000 and 8% - 10% in 2001.

While it may be surprising to some investors to hear an Internet retailer talk about expanding margins and profitability, Egghead.com doesn't have much of a choice except to steer its business in this direction. Unlike rival Amazon.com (Nasdaq: AMZN), Egghead.com lacks the brand name cache that translates into greater financing flexibility in the New Frontier of Internet financing.

With $906 million in cash and marketable securities on its balance sheet at the end of September, Amazon has the ability, if it so chooses, to sustain continued losses in order to keep investing in new business areas that offer the opportunity for large future returns off a relatively minimal investment base. With $105 million in cash (and another $20 million in short-term investments listed on Onsale's most recent balance sheet), the new Egghead.com will need more money to keep its expansion plans and, consequently, its growth going. The company is hoping that by projecting profits in the not-too-distant future, potential investors will warm up to the new Egghead.com's prospects and back a planned shelf registration of $100 million in equity securities to provide additional financing.

News to Go

Chipmakers and semiconductor capital equipment firms may get a boost today as the Semiconductor Equipment and Materials International trade group reported a North American semiconductor equipment book-to-bill ratio of 1.09 for October, meaning $109 in new orders were received for every $100 worth of product shipped during the month. The reading is slightly above September's book-to-bill ratio of 1.08 and is the highest level for October since a figure of 1.07 was recorded in 1995.

A study to be released today will suggest that women taking Merck's (NYSE: MRK) osteoporosis treatment Fosamax may be able to take a higher dose of the drug once a week with the same effectiveness as the current once-a-day dosing regime, The Wall Street Journal reported this morning. If the FDA approves a once-a-week version, Merck would likely see a boost in Fosamax sales.

The board of drug developer Warner-Lambert (NYSE: WLA) is expected to discuss a possible lawsuit against Pfizer (NYSE: PFE) in a meeting today as a means of scuttling its joint-marketing agreement for the cholesterol-fighting drug Lipitor, according to reports. Such a move might prompt Pfizer to drop its hostile $75 billion bid for Warner-Lambert and clear the way for Warner-Lambert to complete its planned $68 billion merger with American Home Products (NYSE: AHP).

Business-to-business e-commerce holding company Internet Capital Group (Nasdaq: ICGE) set a 2-for-1 stock split last night and announced that it will sell 6 million split-adjusted shares in a public offering along with $250 million of convertible subordinated notes.

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