Wall Street might have loved them last year, but you won’t find a lot of dot-coms on the Business Journal’s list of L.A.’s most profitable public companies.
In fact, as one might expect, most of the county’s Internet firms are found near the bottom of the list, posting negative return on equity. And experts say that isn’t likely to change this year in fact, the next six to 12 months will likely bring a major shakeout in the online world, especially for business-to-consumer e-commerce sites.
“Only the strongest are going to last past the end of the year,” said Jon Funk, general partner at venture capital firm Media Technology Ventures.
Though investors were largely forgiving of big losses by Internet companies last year, heavy fluctuations in technology stocks over the past month have signaled that Wall Street is losing patience. Nonetheless, executives at local dot-coms while conceding that profits aren’t in the immediate picture say smart investors understand that it pays to wait.
L.A.’s least profitable
Not a single L.A. County-based public Internet company posted a profit last year. The best-performing local dot-com in terms of ROE was GenesisIntermedia.com Inc., a Van Nuys-based company offering multimedia marketing services through mall-based kiosks and DVDs. It posted a negative return on equity of 11.5 percent.
In second place was postage e-tailer Stamps.com Inc., with a negative ROE of 14.1 percent. Ticketmaster Online-CitySearch Inc. ranked third, with a negative ROE of 15.5 percent.
L.A.’s two worst-performing dot-coms were public information search engine US Search.com Inc. and e-business services provider NetGateway Inc., with ROEs of negative 135.3 percent and negative 2,273.4 percent, respectively.
Profitability projections were not available for Long Beach-based NetGateway. The company, which provides hardware and software that facilitates e-commerce and other applications, undertook significant expenditures last year to buy or license hardware and technology. NetGateway is also in the expensive process of acquiring another company, so profitability is unlikely anytime soon.
GenesisIntermedia.com made significant expenditures in 1999 to expand its Centerlinq Network of informational kiosks in shopping malls, and plans to enter 40 additional malls this year.
“We’re focusing on infrastructure,” said Robert Bleckman, director of investor relations for GenesisIntermedia.com. “This is a good, long-term play. If you’re looking for a short-term pop, we’re not it.”
As for profitability, Bleckman said: “It’s not going to be this year. As far as next year, it depends on how things pan out.”
Compared to other dot-coms, the company’s stock has been fairly stable of late, hovering in the mid-teens, but way off from its high of $35 in February.
Aiming for a million
Meanwhile, Stamps.com plans to spend heavily for the next six to 18 months to attract new customers for its postage and shipping services. The company currently boasts more than 200,000 customers, but wants to reach a goal of 1 million in order to dominate competitors E-Stamp and Pitney Bowes Inc.
“Our profitability will not take place until the mid-2002 time period,” said John LaValle, chief financial officer at Stamps.com. “You cannot get profitable until you get to over a million or more customers.”
Ticketmaster Online-CitySearch officials say the company will reach profitability in late 2001, a benchmark the company has been predicting since the merger of Ticketmaster Online and CitySearch in September 1998.
Though Wall Street seems to be getting impatient, venture capitalists remain confident that investors will come around and once again embrace companies with no immediate prospects for profits.
“You can’t look at Internet companies like you look at a Fortune 500 company,” said Frank Creer, managing director of Zone Ventures. “The structure of Internet companies is completely different the capital structure, the balance sheets, it’s all completely different. It’s a whole new paradigm.”
The negative return on equity posted by dot-coms is a result of the old adage about spending money to make money, venture capitalists say. A company might have to hire twice as many people as expected, spend significant funds on state-of-the-art hardware and software, and even unexpectedly move into a large office to accommodate a growing staff. As a result, the initial expenditures can easily outpace the amount of money a company brings in during its first few years.
“They’re creating a loss, accounting-wise, even though it could be very beneficial,” said Todd Springer, managing director at venture capital fund Trident Ventures Inc. “If you’re growing from 50 to 100 percent a year, you simply need to take a few investment risks to have that kind of growth.”
As for when the survivors are going to start turning those reinvestments into profits and a positive ROE, that’s for individual companies to say. According to industry experts and companies, the surviving dot-coms will begin to show profits in 2001.
