Inktomi Sales Out of Sight (News) October 22, 1999

Inktomi Sales Out of Sight

By Richard McCaffery (TMF Gibson)
October 22, 1999

Internet search engine software company Inktomi (Nasdaq: INKT) reported a net loss of $4.9 million, or $0.09 per share, compared to a loss of $0.18 per share a year ago for its fiscal fourth quarter. The results, which beat analysts' estimates by a penny per share, were driven by growth of new customers, expanding relationships with existing customers, and entry into new markets.

For the fiscal year, the San Jose, California company reported a net loss of $0.48 per share compared to $0.63 per share a year ago. Analysts had expected a loss of $0.46 per share, according to IBES International.

For the quarter, the number of search engine queries the company handled jumped 20% to 2.9 billion, up from 2.4 billion in the third quarter and 1.35 billion a year ago. Sales grew 217% to $26.2 million, up from $8.3 million a year ago, as sales of the company's search engine and Traffic Server networking product were especially robust. Sequentially, sales grew 34%.

Momentum sure isn't a problem for Inktomi. The company's customer list reads like a who's who of fast-moving companies: AOL (NYSE: AOL), Cisco (Nasdaq: CSCO), Intel (Nasdaq: INTC), Microsoft (Nasdaq: MSFT), Sun Microsystems (Nasdaq: SUNW). In the latest quarter, the company expanded its relationships with AOL, Excite@Home (Nasdaq: ATHM), and Microsoft.

But the stock sunk 15% to $104 1/16 this morning when Merrill Lynch (NYSE: MER) Internet analyst Henry Blodget downgraded the stock to 'neutral' from 'accumulate.' Blodget expects the company to report much wider than expected losses next year as it increases spending to spur growth. A company official said the losses are in line with expectations, and noted that it has actually reduced net losses for the last six quarters.

This kind of volatility shouldn't surprise Inktomi investors. For the year, the stock (adjusted for a split) has ranged from a low of $37 15/16 to a high of $159 1/8, with plenty of hills and valleys in between.

There's nothing wrong with a young company spending money to spur growth. After all, first movers have to quickly grab market and set up barriers to competition to stake a claim. Profitability, they argue, should be put on the backburner to stave off rivals from climbing faster. (Nasdaq: AMZN), the biggest name in e-commmerce, has used this strategy well to firmly establish its position as the Web's leading retailer.

At the same time, the growth has to be carefully managed, and Inktomi's latest income statement and balance sheet raises a question. Accounts receivable -- money the company is owed by customers -- grew 352% over the last year, compared to sales of 217%. Ideally, receivables would grow at the same rate or slower than sales. Receivables now stand at $23 million, however, and relative to total sales this number is not at all out of whack.

The question is whether the increase represents a growing trend. An Inktomi official said this isn't the case. The company said receivables stood at 79 days for the quarter, which is toward the high end of its normal range as a result of rapid growth, particularly overseas. Since the numbers are still relatively small, the company said, a few slow accounts can widely skew the picture.

Fair enough. Investors should keep an eye on this trend, however, as it's a key measure of operational discipline.

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