DoubleClick Drops Another Shoe

In a late-quarter earnings and revenue warning, DoubleClick's CFO said even the modest growth now projected for early 2001 will be an accomplishment, considering the frothy ad market earlier this year when business was "clearly driven by economic realities that don't exist today." Unfortunately, the company offered little insight into when the current reality might show some improvement.

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By Nico Detourn (TMF Nico)
December 12, 2000

When a company schedules a conference call to offer financial guidance for a quarter that's almost three-fourths over, it's a near certainty the news won't be great. When the call is held just days after it becomes known the company is laying off nearly 10% of its employees, it's especially foreboding. So it was with DoubleClick (Nasdaq: DCLK) yesterday when, for the second time in two months, the biggest online ad services firm guided expectations down for the current quarter and the first quarter of 2001.

In October, DoubleClick announced its first-ever profit for the third quarter and took the occasion to guide expectations down for Q4 and beyond. CFO Stephen Collins acknowledged in Monday's call that the company was "not conservative enough" given the "tough market" it's facing. The company's core media business in Q4 is expected to be down 9% to 12% from Q3, based on the pace of bookings as the holidays approach.

New estimates have fourth-quarter revenue coming in between $126 million and $129 million, about 8% to 10% less than the $140 million previously expected. Where revenues come up short, profits tend to follow, and Q4 earnings will be between breakeven and a loss of $0.03 per share, instead of the $0.02 per share indicated during October's Q3 conference call.

The company will also miss consensus estimates for the first quarter of 2001. Revenues are expected to be about $115 million, up a modest 5% over Q1 of this year. The loss for the Q1 will be between $0.05 and $0.07 per share, instead of the much slimmer $0.02 per share loss previously expected.

DoubleClick has approximately $900 million in cash, which gives it "no issues whatsoever relative to cash flow," Collins said. All the cash is held in investment-grade, fixed-income securities, and "we do not hold Internet stocks," Collins added, voluntarily responding to "a rumor that was going around."

Frothy ad market
Collins said that even the modest growth projected for Q1 would still be an accomplishment, considering the "frothy ad market" earlier this year, when venture capital was flowing into the Internet sector, and business was "clearly driven by economic realities that simply don't exist today."

DoubleClick will also write down goodwill of between $70 million and $85 million for acquisitions, and will take a $2.5 million charge for the layoffs announced last week. In addition, the company will write off $19 million it is owed by advertiser, a DoubleClick client that may be able to pay its bill. The company said this was a "unique transaction" and that it had no plans to repeat it with other clients.

That last item gets us to the heart of the matter: DoubleClick's warning is the latest sign of weakness in the online advertising market, and of the domino effect as dot-com failure begets dot-com failure, and a smaller client base produces weaker revenues. In addition, as DoubleClick and its competitors have said before, traditional advertisers are not moving online fast enough to offset dot-com attrition. The company said that while approximately 60% of its clients were dot-coms one year ago, that had fallen to 50% by the end of the last quarter. Currently, 48% are Internet companies, with the other 52% composed of "not-coms."

DoubleClick also said it had overestimated its ability to "up-sell" additional services to its customers. CFO Collins said this wasn't because of client dissatisfaction with either DoubleClick or the medium, but because advertisers are "keeping their powder dry" in a difficult economic environment. Clients are not canceling services because "the stuff doesn't work," he said. "I believe it was, and is, a mistake to come to the conclusion that online advertising doesn't work -- it does.'' That doesn't, however, tell us when the market will turn around.

Canary in the coal mine
DoubleClick says it expects to be out of the red for the second quarter and to post a profit for FY 2001. Nevertheless, a cautionary tone was heard throughout the conference call, which was held in part to "put a little more meat" on earlier gloomy predictions. The beginning of the year will continue to be weak and a rapid recovery is not expected. Visibility remains low, with "no upside surprises" on the horizon.

CFO Collins said it was not surprising that the industry was hit hard and early as the economy slowed. "Online advertising in the spring of 2000 proved to be the canary in the coal mine, that was an early indicator of economic slowdown and softness in the advertising market." What weary investors are looking for now are signs of life in old Tweety Bird, maybe a chirp or two, rather than the gasping for air we've heard all year.