Engage's Dismal 1Q May Signal the End

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Analysts used words such as "abysmal" and "bleak" to characterize Engage Inc.'s fiscal 2001 first-quarter financial performance and gave advice they hardly ever give investors: Avoid the company's stock.


Engage, an ad network based in New York, said in a conference call with analysts and the media this week that its loss for the first quarter, which ended Oct. 31, would be larger than it previously had warned. The company in late November said its first-quarter earnings per share would come in at a loss of 25 cents. However, it reported Tuesday a loss of 26 cents per share on revenue of $41 million. The loss was 3 cents below analysts' estimates.


The company said its worse-than-expected performance was due to "additional bad debt expense recorded in the quarter" resulting from many dot-com customers turning in similar dismal financial performances.


Factoring in restructuring costs and other expenses such as acquisitions, Engage's first-quarter loss was $173.8 million, or a loss of 92 cents per share. In the same quarter a year earlier, the company posted a loss of $17.8 million, or a loss of 17 cents per share.


Even more troubling to analysts was the company's cash burn rate. The company said it had $107.9 million in cash at the end of October and $101 million at the end of November. But even with a $50 million commitment from parent CMGI Inc., analysts do not think Engage can sustain that rate of spending and remain solvent.


"While Engage continues to believe it has adequate cash to achieve profitability, given the severe deterioration in fundamentals we remain thoroughly unconvinced and continue to recommend investors avoid the stock until signs of a turnaround are clearly evident," said Christopher Hansen, an analyst at Banc of America Montgomery Securities.


Still, the company believes it can attain profitability sometime in 2001.


"This business will be profitable," said Tony Nuzzo, Engage's new president/CEO. "We have enough cash to get us through the break-even point." He would not say when that would be, however.


Nuzzo took the helm of the company in mid-November after a restructuring and vows to continue the company's overhaul.


"I am not satisfied with the current results," he said. "We have a lot of work to do. We are taking a hard look at the organization."


In an effort to reach profitability, Engage will eliminate a number of positions and will consolidate its three ad serving platforms into one, Nuzzo said. He would not provide any more details on the restructuring.


"Clearly, changes have to be made," Nuzzo said. "But it requires a few more weeks to complete."


Another troubling aspect of Engage's business, analysts said, is the decline in gross margins in each of its lines of business.


In the first quarter of fiscal 2001, Engage reported that revenues from its Media business declined to $21.3 million, from $31.2 million in the fourth quarter of fiscal 2000, with gross margins down to 9 percent from 15 percent. Media Management revenues fell to $6.3 million from $8.3 million, and gross margins there fell to 23 percent from 40 percent. First-quarter revenues from Software and Consulting were $13.4 million, down from $27.2 million in the fourth quarter, with gross margins declining to 26 percent from 47 percent.


"Given the abysmal financial performance and bleak outlook, we believe the company continues to face very significant challenges in regard to the health of its underlying acquired businesses and its attempts to integrate them into a cohesive offering," Hansen said. He added that he "continues to question [Engage's] ability to operate as a going concern" in its present form.
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