Update: CMGI Loses $963.2M for Quarter, Folds AdForce

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One day after Internet incubator CMGI Inc. reported a net loss of $963.2 million for the third quarter, it shut ad-serving firm AdForce.

CMGI had spent three months unsuccessfully shopping around AdForce, Cupertino, CA, which employed about 250 people.

With the demise of AdForce on June 13, CMGI will focus on Engage Inc. and e-mail services provider yesmail.com, its remaining online ad-service properties. However, CMGI has indicated it will de-emphasize its ad-serving business in favor of more profitable areas of the market.

CMGI might abandon online advertising altogether, said Safa Raschty, an analyst at U.S. Bancorp Piper Jaffray.

"The overall ad market remains very difficult, and the company [CMGI] indicated that they will continue to de-emphasize the ad-supported models," he said in a recent report. "We expect the company may shift from advertising all together and focus on Engage as a marketing software solution or as part of CMGion."

CMGion is a company that CMGI is creating. It will focus on developing a network-based platform for enhancing the performance of Internet applications and content delivery. The company is not yet open for business.

CMGI has been hemorrhaging money since it began in the late 1980s, and many of its Internet-related properties have gone out of business.

Its $963.2 million loss, or $2.80 per share, reported June 12 compares with a net loss a year earlier of $428 million, or $1.53 per share. CMGI's third-quarter revenue, however, rose to $301 million, from $233 million a year earlier.

CMGI, Andover, MA, said revenue from its Interactive Marketing division, which includes Engage and yesmail, declined to $30.2 million in the third quarter, from $64.7 million in the same quarter in 2000. The division's third-quarter operating loss was $102.7 million. The slowdown in online ad spending was blamed for the division's performance.

The company warned that its fourth quarter might look worse. CMGI forecast fourth-quarter revenue of $280 million to $290 million. Fourth-quarter revenue from its Interactive Marketing division is forecast between $22 million and $24 million.

But analysts say there is good news, as CMGI reduced its cash burn - the amount of money spent each quarter - to $155 million in the third quarter, from $240 million in the second.

Though Engage has had a rough ride itself, the tide seems to be turning. The company reduced its net loss in the third fiscal quarter to $76.6 million, or 39 cents per share, compared with a loss of $196.5 million, or $1.14 per share, a year earlier, the company said last week.

Company executives said in a conference call with analysts that its restructuring is beginning to pay off. Engage reported a net loss of $695.5 million, or $3.53 per share, for its fiscal second quarter.

The executives also said Engage's third-quarter revenue fell to $25.5 million, from $58.7 million a year ago and $28.1 million in the second quarter. The decline resulted from the sale of its Internet Profiles Corp. analytical unit. Engage said in March that it would sell I/PRO to technology firm TopicalNet for an undisclosed amount.

But while Engage's financial fortunes may be improving, the legal climate may be changing for the worse. CMGI said there are growing privacy concerns about the use of cookies, which may limit Engage's ability to develop user profiles. Cookies are small text files placed on a user's hard drive that help ad-serving companies track a person's movements on the Internet.

In its latest quarterly filing with the Securities and Exchange Commission, CMGI noted that Engage makes extensive use of cookies.

"Engage's technology currently uses cookies to collect information about an Internet user's movement through the Engage Media Network," the filing noted. "The effectiveness of Engage's technology could be limited by any reduction or limitation in the use of cookies. If the use or effectiveness of cookies is limited, Engage would likely have to switch to other technology that would allow it to gather demographic and behavioral information. This could require significant re-engineering time and resources, might not be completed in time to avoid negative consequences to CMGI's business, financial condition or results of operations, and might not be possible at all."

DoubleClick Inc., Engage's competitor in the ad-serving market, is embroiled in privacy litigation over its use of cookies. The class-action lawsuit may go to trial in January, if not settled beforehand.


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