The New Year started off with a bang all right. It was the sound of Netscape stock getting smashed to smithereens by news that the original Internet company's mega-growth has slowed to a fraction of its previous pace, and that the browser-maker will report its first quarterly loss.
Blaming competition with Microsoft and, to a lesser extent, Lotus, Netscape admitted that it simply didn't bring in the bucks it expected from its messaging products - not to mention from a browser business where its market share continues to fall. The company will report a quarterly loss of between US$85 million and $89 million, including one-time charges of $52 million for acquisitions and $35 million for restructuring, which will begin immediately.
There were no specifics about who will be laid off or which facilities will be closed, although the company pledged that the restructuring would lead to a quick turnaround. "We are obviously working hard," said Netscape's chief financial officer, Peter Currie. "We're fully engaged in restructuring, refocusing," he added during a conference call, without providing any further details.
But refocusing will not necessarily bring salvation. Just last spring the company made a public splash about refocusing the core of its business from the retail, standalone browser toward the enterprise market - as analysts sang the company's praises. In July, Morgan Stanley's key Internet prognosticator, Mary Meeker, forecast 60 percent annual growth - down from 80 percent the previous year. But today's figures - with annual revenues of some $125 million to $130 million - trim that figure down to somewhere between 9 and 13 percent.
Meeker was one of the sharp-tongued analysts who took the company to task for its wildly wrong sales estimates in this morning's conference call. Executive vice president of sales marketing Mike Homer tried to cast some blame on the difficulties faced by the Netscape's sales force when it had to integrate into its portfolio products the company acquired when it bought the e-commerce application-maker Actra and application server software-maker Kiva. But Meeker pressed Homer for a better explanation.
"Microsoft and Lotus have caught onto the fact that we're doing well there and they've come in," snapped up business, and driven down the price, Homer finally admitted. He said that some of Netscape's expected messaging deals were preempted by the competition, and while others went through, they did so at lower prices than originally projected.
Homer also pointed a finger at Microsoft's Internet Explorer giveaway as one of the factors in Netscape's poor results. The standalone browser accounted for only 13 percent of the last quarter's revenues, as opposed to 18 percent in the previous quarter, which Homer treated as something akin to highway robbery. "While our products are doing extremely well in the marketplace and we're fighting the market-share battle effectively, the revenue is being diminished because of price pressure from Microsoft's free browser," Homer said.
However, given Netscape's self-proclaimed desire earlier this year to move beyond the browser - and into the server-side of enterprise sales - it's hard to believe anyone in Mountain View was counting on client sales to flush out the company check book.
Meeker wasn't available to comment later in the day, but Morgan Stanley downgraded the stock. So did most brokerages, contributing to an ugly free fall that sliced $4.75, or 20 percent, off Netscape's share price, leaving it at $18.625 in afternoon trading. Over 12 million shares traded hands, making it the second-most active issue on US markets and one of the biggest percentage losers on Nasdaq. Earlier in the day, the stock traded at an all-time low of $17.75.
Greg Vogel, an analyst at Montgomery Securities in San Francisco, compared Netscape with some of the tech sector's other market darlings that failed to live up to their promise, like Novell, which invented networking, then fell flat, or Apple, which created the multimedia market and then let the Wintel crowd run roughshod on it.
"Netscape discovered an exciting market. It wasn't complicated technology, but it was revolutionary," Vogel explained the early popularity of the browser. But, the lack of technical complication made it too easy for others, like Microsoft, to make their own, he said, and now they give it away free.
Citing difficulties selling email servers in a mature market, messaging technology in a crowded market, and Web servers through the long decision-making time frame most companies take for complicated purchases, Vogel sees some relatively tough times ahead for the Net company that wants out of the browser business. "They'll have to find a niche," he said. "They're a company without a lot of resources."
Despite today's woeful news, Netscape execs were already predicting a return to profitability in 1998. In the meantime, the company will have to live with its first operational loss since it went public in August 1995.
