L90 struggles to rise above charred Internet advertising industry

Anyone who saw AOL Time Warner Inc.’s earnings last week and the market’s brutal response knows that Internet advertising is in a Rip Van Winkle slumber.

The downturn, which started nearly a year ago, has driven hundreds of ad-dependent Web sites out of business, and altered the strategy of countless others.

One victim has been L90 Inc., the Santa Monica Internet marketing firm, whose stock has gone south since debuting on Nasdaq at $24 a share in February 2000. Recently, L90 shares were trading for $1.10 each, less than half the $2.69 in cash the company held at the end of June.

That gives L90 a market capitalization, or overall company value, of only $27.4 million, even though it has some $66 million in the bank. Translation: Investors think L90’s business is worthless.

Is the market right?

Chief Executive John Bohan doesn’t think so. “I believe that the insanity of the market caps (of Internet companies) in the good times is equal to the insanity of the bad times today,” he said.

Sale sets off howls

There is no question that L90’s plans have been pared back by the downturn. It recently capitulated on one front, selling its ad-serving technology to DoubleClick Inc., the market heavyweight that’s been leading a consolidation in the Internet advertising space. (Ad servers deliver banner ads, manage inventory and report on the traffic that has taken place.)

The sale set off howls from at least one investor group, Irvine-based Amara Group, which issued an “open letter” to express its dissatisfaction with the sale. Amara claims that L90 sold its core technology well below its intrinsic value, and that DoubleClick now has access to L90’s customer base. It’s calling for a turnaround pro to be brought in to save the company.

Bohan said he’s had no contact with Amara, and calls to the firm weren’t returned.

Bohan declined to comment on the sale price a source placed it below $5 million and said he’s satisfied DoubleClick will honor an agreement not to poach L90 customers. He said he would answer additional questions about the sale when the company releases its third-quarter earnings on Oct. 25.

But he made the case that by zigging where DoubleClick zags, L90 is positioning itself to prosper when the rebound comes. And he believes a rebound will come.

“The Internet gets 1.5 to 2 percent of all advertising dollars, but it accounts for 12 to 15 percent of all media time spent,” Bohan said. “That 12 to 15 percent is expected to grow to 20 or 30 percent, and eventually the advertising dollars will catch up.”

Where DoubleClick has staked its claim on technology, with purchases of several smaller competitors in addition to the L90 deal, it is cutting back on its media business the very area where L90 stakes its claim.

“DoubleClick certainly has a significant market share on the ad serving technology end of the business, but on the media end of the business, L90 is No. 1,” Bohan said.

Bohan has a valid point, even if he overstates it. Essentially, this is L90’s advertising network, which brings together inventory from many sites for a single advertising purchase. L90’s approach has been to apply traditional marketing efforts to the Internet space, much like an off-line ad agency would.

Claim is overstated

“L90 has always excelled at being beyond the banner,” said John Corcoran, an analyst with CIBC World Markets. “They bring a lot of understanding about how you use ads to get people to do what you want them to do.”

(Corcoran rates L90 a hold. His firm was a co-manager on L90’s initial public offering, but Corcoran was covering a different industry.)

But the claim to being No. 1 in media is overstated. When asked how he defined No. 1, Bohan said it was in number of employees not a very potent yardstick. In terms of revenue, DoubleClick dominates, with $22.2 million in global media revenue in the third quarter, compared with expected revenue of $14.5 million for L90 overall. (DoubleClick’s overall revenues totaled $92.7 million.)

In the third quarter of 2000, L90 reported a loss of $5.3 million, or 23 cents a share, on revenues of $14.7 million.

With the sale to DoubleClick, L90 loses just under 10 percent of its revenue base, but more than $5 million in quarterly losses, Bohan said. “It brings us pretty close to break-even. Not too many companies are that close to breakeven and have $60 million in the bank.”

Since the sale to DoubleClick, other competitors are making pitches to L90 customers. DoubleClick’s prices are more expensive than L90’s, said Chris Falk, a spokesman for Thruport Technologies, one of those competitors.

Although L90 has agreed to use DoubleClick’s DART service for its own customers, it will also allow them to use other back-end providers, Bohan said. He said customers are happy that the company will now be focusing on media and direct marketing, not ad serving.

“We have, we believe, the top name in the industry to represent beyond-the-banner solutions,” he said.