City Search

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By SARA FISHER

Staff Reporter

CitySearch Inc. has never posted a profit, has no proven revenue model and has liabilities exceeding assets by a whopping $58.7 million.

But that hasn’t stopped it from filing documents with the Securities and Exchange Commission for an initial public offering.

In most industries, investors would stay far away from such a proposition. But this is the Internet, and standard Wall Street rules do not apply.

The Pasadena-based company, which produces online arts-and-entertainment guides for major cities across the United States, is jumping into the heated Internet IPO scene that already has attracted such high-profile local companies as Santa Monica-based GeoCities.

Despite the phalanx of negative numbers marching across CitySearch’s prospectus, industry watchers expect its public offering to go fairly well.

“Think of Internet IPOs as a horse race,” said Bill Bass, an analyst for Cambridge, Mass.-based Forrester Research Inc. “Right now, everyone is backing what they hope will be the next Yahoo! Some are going to win and walk away with money. Everyone else is going to lose their shirt.”

CitySearch which was created in Bill Gross’ Idealab!, an incubator for Internet companies intends to sell $50 million worth of stock. NationsBanc Montgomery Securities LLC is the lead underwriter, along with Robertson Stephens and Donaldson Lufkin & Jenrette Securities Corp. Due to an SEC-enforced quiet period, executives from CitySearch and the underwriting companies could not comment.

CitySearch’s main source of income derives from selling advertising space on its Web sites. As its sites attract more traffic, the company has been raising its rates. CitySearch operates guides in Austin, Texas; Los Angeles; Raleigh/Durham, N.C.; Nashville, Tenn.; New York City; the Bay Area; Washington, D.C.; Toronto; and Melbourne and Sydney, Australia.

It has plans to continue rolling out sites in other cities.

In some cities, CitySearch partners with major local newspapers to help bankroll the city guide, in return providing banner advertising to the newspaper. The company has agreements with such papers as the Los Angeles Times, the Washington Post and the Baltimore Sun.

Despite its rapid growth, the 2-year-old company has steadily lost money. According to the prospectus, CitySearch lost $13.9 million in 1996 and $36.5 million (on revenues of $6.18 million) in 1997. The company also said it had an accumulated a deficit (liabilities exceeding assets) of $58.7 million.

This year, the red ink is still flowing although no longer at gusher speed. In the first quarter of 1998, CitySearch posted a net loss of $8 million on revenues of $3.1 million, compared with a loss of $9.1 million on just $470,000 in revenues in the like period in 1997. Still, the IPO prospectus points out the company expects to post “negative cash flow from operations for the foreseeable future.”

“The fact that CitySearch has no proven revenue stream is very worrisome,” said Ken Fleming, the technology research analyst at IPO authority Renaissance Capital Corp. “However, few if any of these tech companies filing for IPOs are in the black. The environment for Internet companies is so favorable right now that we’re seeing an oversupply of Internet IPOs. Things do change, however, and public interest can go bad.”

Jill Frankle, an analyst with Internet Data Corp., doesn’t believe that the gold rush of public interest in Internet IPOs is likely to wane.

“I don’t see that hype dying down anytime soon,” she said. “More importantly for CitySearch, market demand is out there for these kinds of online city guides. On the other hand, most of these companies in that (city guide) market are not going to survive in the long run.”

Analysts unanimously agreed that CitySearch is well known and well favored in the industry. Co-founder and CEO Charles Conn has a solid reputation as an Internet entrepreneur.

However, the company also faces fierce competition from some extremely heavy hitters. America Online Inc. runs its Digital City, Microsoft Corp. has created a city guide network called Sidewalks and Yahoo! Inc. has developed city-specific guides. Sunnyvale-based Zip2 Inc. has an almost identical model to CitySearch, having partnered with over 160 newspapers.

Zip2 and CitySearch had intended to merge earlier this year. But in mid-May, the companies announced that those plans had been called off due to differences in their “technologies, product strategies and business models,” according to a Zip2 press release. Company executives refused to comment about the derailed merger.

“It was damaging to (CitySearch) that the merger with Zip2 didn’t happen,” Bass said. “The two companies effectively split up their major paper partnerships and split their market. They’re now battling it out pretty violently.”

According to Frankle, the deep pockets of America Online and Microsoft also will put CitySearch at a disadvantage in the market.

Another concern that jeopardizes CitySearch’s prospects is advertiser discontent about the number of customers coming from their online presence. In other words, while more people are browsing CitySearch’s site, they aren’t necessarily clicking on the advertisers’ banners.

“I’m hearing that businesses are uniformly disappointed with the level of traffic (CitySearch) is redirecting to them,” Bass said.

Advertisers contacted in the Los Angeles area would not comment.

The bottom line for CitySearch is that although its financial data may not draw satisfied nods, the enormous market optimism about Internet offerings may very well drive its IPO to a successful opening.

“We’re discussing a relatively new industry here, and normal market rules don’t necessarily govern it,” Renaissance’s Fleming said. “We are seeing another boom in tech stocks like we saw in 1995. But we may be rushing toward a swing in sentiment, leaving these Internet IPOs high and dry. A lot can change in the two or three months between filing with the SEC and actually holding the public offering.”

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