Netscape, once the standard-bearer of the Internet revolution and Wall Street's darling, fell down to earth on Tuesday when it announced severe losses and stagnating sales.
Netscape reported a staggering net loss of $88.3 million on revenue of $125.3 million for its 4th quarter of 1997, compared to a net profit of $8.2 million on sales of $115.2 million for the same period in 1996.
The loss includes a restructuring charge of $23.0 million and $56.3 million in non-recurring charges related to acquisitions of Actra Business Systems and Kiva Software. Excluding these charges, the company lost 20.8 million in the quarter.
On January 5th, Netscape had warned about losses, but analysts were still surprised by the definitive numbers. For the first time in the company's history, revenues declined quarter on quarter, falling from $150.1 million in the third quarter to $125.3 million.
While total revenue shows a 9 per cent growth compared with the year-ago quarter, revenue from software sales declined from $96.1 million to $85.7 million, while services revenue doubled to $39.6 million compared with the year-ago quarter.
In a teleconference after the earnings announcement, Netscape executives were economical with details about the exact origin of the shortfall, refusing to break out the results in much detail. Chief administrative officer Peter Currie blamed the decline of stand-alone browser sales, as well as longer sales cycles involved in enterprise sales.
Currie said stand-alone browser sales accounted for only 10 per cent of revenue in Q4. Last week, Netscape decided to give away its browser for free and to publish the source code of the next version of the browser on the Internet, a decision that was welcomed by analysts who hoped it might invigorate server sales.
The company offered little insight into the measures Netscape intends to take to return to healthy growth. Jim Barksdale, president and CEO, did suggest that the company intends to increase revenue from the Netscape Website.
However, analysts have indicated that Web publishing is a highly competitive, low-margin business. Recent market data suggests that Netscape's Web site, while still very popular, has actually lost market share in recent months.
Revenue from the Web site dropped from $27 million in the third quarter to $21 million in the fourth quarter, Peter Currie admitted.
Peter Currie said the $23.0 million restructuring charge does not cover all of the staff reductions, with an additional $12 million charge expected in the first quarter of 1998. Earlier, the company had said that up to 400 jobs would be lost, from a total of 3,200 worldwide.
The restructuring will not be across the board. Telemarketing will be outsourced, but there will be additional staff hired in direct sales, technical support and consulting, Peter Currie said.
Marc Andreessen, Executive Vice President products, confirmed that Netscape is cutting some of its product development. The most notable cut is the surprise decision to halt the development of Netscape's Java Virtual Machine, which means future versions of the Navigator browser will have to depend on JVM's from other vendors such as Sun or Microsoft.
Andreessen said Netscape is also dropping the project to develop a version of its next generation browser written entirely in Java, though he said the company will retain Javagator, a separate browser also written in Java.
For the year ended December 31, Netscape reported revenue growth of 54 per cent to $533.9 million and a net loss of $115.5 million, including $108.9 million for the purchase of in-process research and development and merger related charges, as well as $23 million in restructuring costs.
Without these non-recurring charges, Netscape's net income for the year was $4.7 million.
Analysts saw little to smile about in Netscape's earnings report. Jim Balderston, an analyst with Zona Research said that the glamorous time for Netscape is over.
"For a few years, they have been selling on a vision", he remarked. "Now, they need to get down to basics. Get away from the visionary, and get down to selling products."
Balderston said this is a general market trend: because the rate of innovation on the Internet has slowed down and businesses are more realistic about the technology, they are less inclined to buy into a vendor's vision. "People now know what they want. They know what is possible and what is impossible".
"They can't blame all this on Microsoft", Balderston concluded. "They are wrong about that. The problem is they are trying to sell into a highly competitive market with well-entrenched, well-funded competitors."
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