DoubleClick, Take Two

The online ad leader got hammered last year, but it's branching into new businesses and headed for profits

It has been more than two years in the making, but DoubleClick Inc. (DCLK ) finally seems poised to take advantage of one of the Internet's early promises: targeted marketing made possible by reams of information about customers' shopping habits. In 1999, DoubleClick paid $1 billion in stock for direct-market researcher Abacus Direct Inc., which gathers information about the buying habits of consumers from catalog sales and then sells it to retailers. DoubleClick hoped to merge Abacus' database of billions of consumer catalog transactions with its own data about shoppers' online behavior. But privacy advocates protested that would reveal too much about individual consumers, and DoubleClick was prevented from taking full advantage of Abacus.

Until now. On Jan. 22, DoubleClick rolled out a new service called ChannelView, which helps retailers with online sales and catalog or store sales know how individual customers shop. With this information, retailers can target promotions to particular shoppers, find out whether the promotions are working, and quickly make adjustments. Consumers get to choose whether they participate or not, alleviating privacy concerns. "This is about taking advantage of what the Internet is good for," says Jupiter Media Metrix analyst Marissa Gluck.

DoubleClick's new service couldn't have come at a better time for the company. Of all of the black eyes suffered by dot-coms, none has been worse than that of the online ad industry. After a blowout $8.2 billion year in 2000, sales of Net ads plummeted 22%--to an estimated $6.4 billion--last year, according to Merrill Lynch Inc. DoubleClick, the online advertising leader, took a licking with the rest. On Jan. 15, it reported that fourth-quarter revenue fell 27%, to $96 million, and it suffered a $64 million loss.

"A HUGE BENEFICIARY."

 Rather than become just another Internet hard luck story, the online ad pioneer is trying to prove that operating in a terrible market can actually be a good thing. The company is de-emphasizing its business of selling advertising space for Web sites. At the same time, it's investing in other ad-related businesses, serving up ads for Web sites from its own computers, technology for analyzing customer data, and market research. "Unless you see online advertising as dead, you really need to look at DoubleClick as a huge beneficiary of the shakeout on a long-term basis," says analyst Scott Kessler of Standard & Poor's.

In fact, most analysts expect online advertising to rebound, boosting all of DoubleClick's businesses. Merrill Lynch expects online ad sales to grow to $7.3 billion this year, and bounce up to $9.1 billion in 2003.

Already, the five-year-old company is clobbering the rest of the industry it helped create. With 5,000 customers, DoubleClick is more than twice as big as its closest rival, 24/7 Real Media. Meanwhile, others are dropping by the wayside: MatchLogic Inc., once DoubleClick's primary competition, went out of business in mid-September. And rival Netcentives Inc. (NCNQE ) went belly-up on Oct. 9.

BUY, BUY, BUY.

  What keeps DoubleClick on top of the heap is cash. As a result of well-timed public offerings in 1998 and 2000, it has more than $750 million. With a burn rate of $10 million per quarter, the reserve should tide it over until it becomes profitable, which analysts expect by the third quarter of this year. And the cash allows DoubleClick to buy up the competition like distressed merchandise at a going-out-of-business sale. "We are looking to acquire anything that is a direct competitor," says DoubleClick CEO Kevin P. Ryan.

DoubleClick has acquired six companies or product lines in the past year. On Oct. 2, it bought a unit from former rival L90 Inc. that creates ads for Web sites and tracks the response to them. And on Jan. 18, it purchased e-mail marketing outfit McAuliffe Message Media. Ryan expects several more acquisitions in the coming year.

At the same time, DoubleClick's ad-sales business is shrinking. The problem is that smaller Web sites are going out of business, and large Web sites increasingly handle their own ad sales, so there's a shrinking role for an intermediary between Web sites and advertisers. The company still handles ad sales for 715 Web sites, including Nasdaq.com. But the business is struggling. Fourth-quarter revenues for the unit were $27 million, down from $60 million a year ago, and more than 90% of the company's operating losses come from this business. DoubleClick says it's open to the possibility of exiting ad sales altogether if a buyer can be found--something analysts say is unlikely.

DOWN BEFORE UP.

  Even if DoubleClick doesn't shed the ad-sales business, a fundamental shift is under way. In 2001, 50% of the company's revenues came from technology products and services, 32% came from ad sales, and 18% from market research. In 2002, the company expects technology to grow to 62% and ad sales to shrink to 16%, with the balance coming from market research. To boost its technology, the company has brought on a new chief technologist. Formerly CIO at Ameritrade (AMTD ), Mok Choe's mission is to develop new services for analyzing customer behavior.

It will take several quarters for the business remix to show results. Revenues will decline--from $406 million in 2001 to $369 million this year--before starting to grow again in 2003, say analysts. DoubleClick's stock is trading at about $11 per share, up from a low of $4.40 in October, because analysts are forecasting improved financial performance. Goldman, Sachs & Co. forecasts a $5.36 million profit this year.

Expect DoubleClick's buying spree to go on until most of the valuable technology assets of the remaining online advertising companies are under its roof. Then, if the online ad market turns around, it will be ready for a second growth spurt. If this all works out as planned, the company's biggest problem might turn out to be an enviable one: dealing with the loneliness of being by itself on top of a still-emerging industry.

Corrections and Clarifications "DoubleClick Take Two" (e.biz, Feb. 18) should have said that DoubleClick's ChannelView service helps a merchant to analyze its own customer data for its own use, but does not offer customers an opportunity to choose whether or not they participate. In any event, the information is not shared with other retailers.

By Jeanette Brown

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