More dot-coms thriving after bust
By Matt Krantz
USA Today
Three years ago, it seemed that any business with a ".com" attached was a sure thing. Then came arguably the most vicious failure of any industry in American history.
Now, it appears some companies are making money on the Internet.
More than half the companies in the USA Today Internet 50 index made a profit in the just-completed quarter. And we're not talking pro forma earnings that let companies throw out a range of costs in an effort to buff up their bottom line. Of the 50 companies, 28 had real net income that met generally accepted accounting principles.
A year ago, only 18 of the Internet 50 turned profits, and many of the others looked sure to become Wall Street road kill. But some were able to break into the black.
"The Internet always offered big opportunities for growth," says James Oberweis, portfolio manager of Oberweis Micro-Cap. "But when you have a new industry, companies lose money at first, and only a few come out very successful and have nice profit."
It might not come as a surprise that bellwether dot-coms such as Amazon, Yahoo and eBay — all of which are relatively large and have access to resources — were able to thrive. So USA Today took a look at how three smaller companies fared.
United Online: A little more than a year ago, United Online looked like just another dot-bomb. The company, which sells deeply discounted dial-up Internet access through Juno and NetZero, lost $23.9 million in the September 2001 quarter and saw its stock price plunge to $1.84. Investors assumed the tiny Internet service provider couldn't compete with industry leader AOL.
But while investors were writing it off, the company was attacking its costs. Now, just 444 employees staff United Online's farm of servers and headquarters in Westlake Village, Calif., unlike the thousands who work at AOL. United hired out its customer service and billing services to low-cost third parties.
CEO Mark Goldston, who helped develop the Reebok Pump shoe in the 1980s, says United Online tries to be the Southwest Airlines of the Internet. The service is no-frills but it gets you there. United Online makes a profit selling Internet access at $9.95 a month, while AOL charges $23.90.
J2 Global Communications: In December 2000, things were looking dire for this Los Angeles-based company that allows customers to get faxes and e-mail over the Internet. Not only did the stock hit an all-time low of $1.13, but the company burned a third of its $35.8 million in cash during the year and was struggling to integrate the merger of eFax, its biggest rival.
Buying eFax eliminated a rival and picked up more paying subscribers for j2M. Profits followed. The company posted $5.3 million in net income in the fourth quarter, its fourth-straight profitable quarter. The stock is back up to $21.50.
"Once these guys got the quantities of customers they'd lacked, they showed they can make a lot of money," says Tom Barry, portfolio manager of the Bjurman Barry Micro-Cap fund.
LendingTree: Things were getting pretty scary for LendingTree investors at the end of 2000. Shares plunged to around $2, and the company, which lets consumers pick among competing loan offers, was burning cash fast. Fast-forward two years: The company just earned $5.6 million in the fourth quarter, its second-straight quarterly profit. The stock is up to $10.94.
The boom in home buying has been a lifesaver for LendingTree as it stoked demand for mortgages. As an exchange that connects consumers to lenders, the company also has low costs, says Allison Thacker, Internet analyst with RS Investments.
CEO Doug Lebda, 32, said the key to survival was focusing on the only thing that matters: profit.
