The continuing division of the consumer online space into two divisions, where eyeballs and ad dollars increasingly flow to upper-tier portals, is being reflected in the ad services sector, where the early attainment of scale is expected to become self-reinforcing. Engage comes up behind DoubleClick, the undisputed leader in this space. But even DoubleClick is feeling the pinch of the slowdown in online advertising.
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Engage also announced yesterday that it would layoff 175 employees, or 13% of its workforce, as part of a reorganization plan to cut costs and streamline operations. After a related first-quarter charge of $3.5 million to $4 million, the company expects its action to save about $21 million a year. In the plan, Engage's five operating divisions will be consolidated down to two, Engage Media and Engage Software, enabling a sharper focus on interactive marketing, the company said.
"Engage has acted quickly to conform to the new realities of the global Internet economy, which requires all Internet companies to show a solid plan and progression toward profitability." With that, Engage CEO Paul Schaut, addressed the well-reported slowdown in online advertising, as well as the new, no-nonsense approach to profits recently in vogue among Netcos of all stripes.
The company said the reorganization will help it reach cash profitability by next April, three quarters earlier than expected. Engage is a majority-owned subsidiary of Internet conglomerate CMGI (Nasdaq: CMGI), which itself announced a sweeping, profits-inspired reorganization earlier this month.
Also helping Engage paint a picture of a healthy Internet company was a reduction in operating cash burn to $29 million from approximately $49 million in the previous quarter. Cash and cash equivalents amounted to $136 million at quarter's end. "Our cash and securities balance combined with the cost savings resulting from the restructuring announced today should support Engage until estimated cash earnings profitability," Schaut reassured.
But while conforming to "new realities," Engage is still battling them. The number of customers for its user profiling technology, the company's core product, which lets advertisers track and target messages to users, dropped to 20 from 42 between the third and fourth quarters as dot-coms stopped buying ad space. As a result, media revenues fell some 28% for the quarter, to $31 million, despite an increase in total revenues. However, the company indicated expectations that the slack will be taken up as traditional, off-line advertisers launch online campaigns.
Shades of optimistic gray
The continuing division of the consumer online space into two divisions, where eyeballs and ad dollars increasingly flow to upper-tier sites like Yahoo! (Nasdaq: YHOO) and America Online (NYSE: AOL) is being reflected in the ad services sector. Early attainment of scale is expected to become self-reinforcing. Engage, supported by its CMGI family connections, comes up behind DoubleClick (Nasdaq: DCLK.), the undisputed leader in this space. But even DoubleClick is feeling the pinch, having acknowledged the slowdown in online ad action will effect its third quarter earnings and touch its fourth quarter results as well.
As with Engage, DoubleClick CEO Kevin Ryan paints a picture in shades of optimistic gray. "More and more people are going on the Internet and more and more are buying on the Internet, and more traditional advertisers are coming on board and selling goods," Ryan told Reuters earlier this month. "But there is no question that there was a bulge of accelerated spending from dot-coms that has absolutely slowed down because there is less money available for that group."
"More conservative"
But other, smaller firms in the online ad services game have been communicating with darker Crayolas. On Tuesday of this week, MediaPlex (Nasdaq: MPLX) warned that third quarter revenues would fall below analyst expectations as its clients take "a more conservative approach to allocating advertising expenditures to this quarter." However, the company indicated the quarter's cash earnings per share would be in line with estimates.
Earlier this month, Avenue A (Nasdaq: AVEA) also warned that revenues were revving down relative to expectations and would be considerably less than consensus Q3 estimates. "Our dot-com clients become more conservative with their marketing budgets as these companies seek to conserve cash," the company's president and CEO, Brian McAndrews, said in announcing the shortfall. The company is looking forward to a better fourth quarter when holiday ad budgets, and the seasonal increase in online usage, will help warm its revenue streams.
Looking out even further and picking up the same as DoubleClick's Ryan, McAndrews said that in a growing market, "Internet advertising is ultimately expected to deliver customers at a reasonable cost." The trick, of course, is to hang on long enough, and strong enough, for those expectations to be met.
Your Turn:
What will the long-term impact be of the current slowdown in online advertising? Will Engage's restructuring help ensure that it is one of the long-term players? Share your thoughts on the company's discussion board.
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