Few dot-coms aren't bleeding cash to death

Diamonds may be forever, but not dot-coms. Most of the flashy ones are already gone, with a few exceptions, one being Blue Nile, the fast-growing Internet diamond merchant.

"We've had operating profits for the last three quarters," said Mark Vadon, chief executive of the privately held Seattle start-up. Blue Nile is projecting online sales of more than $70 million this year, up from nearly $50 million last year, partly because its lack of physical stores allows it to price engagement rings 20 to 40 percent below most jewelry stores.

"This is one of the few retailing categories where the online model turns out to be superior to the offline model," Vadon said.

Another exception is eUniverse, a Los Angeles firm producing lowbrow Web sites and e-mail newsletters with names like BigFatBaby.com. GossipFlash.com, a site it created with the National Enquirer, featured a story this week about Hollywood hunks acting kinky at nudie bars.

EUniverse is trying to morph from a marketing to a "content" company. It has persuaded 325,000 people to cough up credit card numbers and pay subscription fees averaging $6 a month. EUniverse said half its $11.4 million in second-quarter revenue came from advertising and half from premium services, yielding net profit of $2.5 million.

Alas, the two are among an increasingly rare breed called Internet moneymakers. A review of second-quarter financials for dozens of publicly traded dot-coms -- pure-play Internet content and e-commerce companies, most of them small -- showed most are losing gobs of dough.

Many Internet executives have been telling analysts that the fourth quarter or early next year is when they hope to report their first operating, or "pro forma," profits, an accounting trick that excludes a variety of costs not directly related to how the core business is functioning, such as acquisition costs.

Grim description

Unfortunately, much of their optimism is based on the assumption the economy will rebound this year, which looks iffy.

In the latest round of conference calls, executives grimly described how the falloff in tech spending by corporate America and the meltdown of giant telecommunications providers are still sending ripples through the Internet industry. E-tailers got clobbered first when the investment bubble burst in 2000.

Next, Web content companies felt the squeeze as online advertising growth stalled early last year.

And for the past six months, Web service and software providers have been taking their turns at getting whacked.

One of the few Internet retailing successes, GSI Commerce, saw its market valuation plummet 29 percent one day last week after telling analysts in a conference call that sales would be lower than expected for the third quarter. GSI, which recently bought Internet jeweler Ashford.com and runs e-commerce operations for many other retailers, had already reported slowing growth for the second quarter.

Another key e-commerce player that got dinged was Digital River, which runs online stores for 32,000 companies, H&R Block and Staples among them, and Major League Baseball. It also supervises inventory and product shipping for many of its customers.

Digital River's stock traded around $20 in February, but it dropped to less than $5 after first-quarter revenue growth came in lower than forecasted. Its shares now trade at $7 or so. While sales are still growing -- up nearly 50 percent in the second quarter compared with a year earlier -- its single-digit stock price is troubling for a company that single-handedly runs a fat chunk of the Internet's Main Street.

E-commerce here to stay

CEO Joel Ronning doesn't sound worried. "We've been cash-flow positive for three quarters," he says. "E-commerce, at the end of the day, is not going away. What companies are doing is not stopping their initiatives but trying to scale them back and reduce costs. We tell companies we will cut their costs 50 to 70 percent over running the store on their own.''

As more companies outsource their Web stores, Ronning projects that Digital River will manage more than half a billion dollars in merchandise sales online for clients this year. The company charges commissions and is projecting total revenue for the year of $75 million or more.

Other big e-commerce software providers have been sinking on Wall Street. BroadVision, which sells Web software to businesses, lost nearly twice as much as the $29 million of revenue it raked in during the second quarter, and its market valuation has sunk lower than its cash kitty.

Even one of the few successes -- FreeMarkets, which runs Web exchanges to help companies purchase supplies -- saw its shares drop sharply last week after predicting slower growth for the rest of this year. The Pittsburgh company collected $47 million in revenue for the second quarter and predicts it will show an operating profit for the full year.

In worse shape is the large Web publishing vendor Vignette Corp. After its second-quarter revenue fell 57 percent, Vignette announced a staff reduction of 20 percent. The company lost $20 million on $36 million in sales, and its share price has sunk by more than half in recent months.

Close to breaking even

While Vignette's woes are due to failures and retrenchment in the Internet's once-booming publishing industry, not all Web publishers are calling it quits.

IVillage.com, an online community for women, reported this week that second-quarter revenue was up 41 percent, to $16 million, and its net loss had narrowed to $3.6 million, less than a fifth of what it lost in last year's quarter.

A few privately held Internet publishers say they're close to breaking even. PlanetOut Partners, which runs the gay Web sites Gay.com and PlanetOut.com, says it had an operating profit in June and July after slashing staff by nearly half during the past year and moving aggressively into premium content.

"We almost doubled revenue in the first half of this year over first half last year," CEO Lowell Selvin said. "And our expenses for the first half this year are down almost 40 percent for the same period in 2001."