As Year Wears On, Less and Less Green for NBCi's Peacock

Things are bad in the Internet advertising business, of course. But at NBC Internet (NBCI), they're worse than they look.

As NBCi, like other Internet companies, struggles to generate cash from its operations, an unsettling trend is occurring: A growing percentage of that revenue -- more than 36% in its latest quarter -- isn't cash at all. Rather, NBCi is taking much of this revenue in the form of advertising on other media or in other companies' stock. Not only that, but the value of that stock appears to have plummeted in the recent market downturn, thus looming as a future writedown for NBCi. Though it beat estimates in its latest fiscal quarter, its barter revenue doesn't paint as pretty a picture.

NBCi's stock, 39.2% of which is held by NBC and related companies, fell 19 cents Friday to close at $3.13, a new closing low. The stock's high was $106.13, on Jan. 27.

Trend Lines

Over the year's first three quarters, the first complete quarters of NBCi's existence, revenue edged up 4%, but the portion represented by barter transactions zoomed 53%. Revenue rose from $30.1 million in the first quarter to $31.3 million in the third quarter; barter revenue rose from $7.4 million to $11.3.

In the first two quarters, most of that barter revenue came from trades of media and advertising services for stock, and the balance from the exchange of advertising for advertising in other media. NBCi didn't break down different types of barter in its third-quarter financials.

NBCi's Barrage of Barter
Time Period	1Q 2000	2Q 2000	3Q 2000
Barter for Equity (in millions)	$6.9	$7.5	*
Barter for Advertising (in millions)	$0.5	$1.2	*
Total Barter Revenue (in millions)	$7.4	$8.7	$11.3
Percentage of revenue that's barter	24.6%	28.6%	36.1%
Source: NBCi financial statements * Not specified by NBCi

The drop in cash revenue tells a different story from the impression investors might have gotten from, say, the financial results for the third quarter, ended Sept. 30. After NBCi's quarterly release came out Oct. 26, the headlines were that NBCi reported a narrower-than-expected loss -- 88 cents a share instead of the First Call analysts' consensus of $1 -- and that it was changing estimates to reflect narrower losses than Wall Street was expecting for the fourth quarter and for 2001. (NBCi had guided 2000 estimates downward in June.) The day after the third quarter announcement, NBCi's stock rose 78 cents, or 16%, to $5.69.

The figures that NBCi and analysts are using to assess its performance are what is known as pro forma earnings -- a figure that excludes such noncash charges as acquisition-related amortization of good will and other intangible assets and amortization of deferred pay. The pro forma earnings, though, don't appear to exclude noncash revenue.

The Question of Balance

"I'm concerned about how much cash revenue they're generating for their advertising inventory," says Catherine Skelly, Internet analyst at Gruntal & Co. "You have to wonder what the true value of their advertising inventory is if they're not able to get cash for it." Skelly has a market perform rating on NBCi; Gruntal was an underwriter of NBCi's secondary stock offering earlier this year.

An NBCi spokesman says the company will be reducing its barter revenue. "We're not looking to grow equity barter deals as a percentage of revenue," he says. "As time goes on and our revenue grows, you can expect that revenue to come down over the longer term." The company declined to comment further.

NBCi told analysts in October that it expects 2001 revenue of $150 million, up from about $120 million in 2000.

To put that barter revenue in perspective, Walt Disney-Internet (DIG), another Internet operation affiliated with a broadcast network [Disney's (DIS) ABC], doesn't report any barter revenue, though it does report that 11% of Internet revenue for the fiscal year ended Sept. 30 were transactions with affiliates. NBCi, formed last November from the combination of Xoom.com, Snap and some NBC Internet properties, didn't recognize any barter revenue at its predecessor operations in the first nine months of last year.

Taking Stock

The quality of barter revenue aside, NBCi faces another issue: the value of the stock it took from other companies in exchange for its advertisements.

The company doesn't specify which companies' stock it has received, or whether that stock is publicly traded. Either way, NBCi's holdings are at risk, given current market conditions. In its third-quarter financial statements, NBCi lists, among its short-term investments, publicly traded securities bought for $64.2 million but carrying a current fair value of $30.9 million, translating into a net unrealized loss of $33.2 million. Separately, the company took a noncash charge of $2.5 million related to writing down privately held investments.

Companies that have announced major deals to advertise on NBCi over the past year -- not necessarily paying for the ads with equity -- include educational portal Embark, travel site Lowestfare.com and online consumer electronics dealer Roxy.com. As part of the Roxy.com deal, NBCi and home shopping company ValueVision International (VVTV) (owned in part by NBC) said they were taking stakes in Roxy.com. ValueVision has already written down its investment in Roxy.com; it's unknown if NBCi's $2.5 million private-investment writedown also relates to Roxy.com. NBCi announced in March that it was taking a stake in now-defunct free ISP Spinway.com; it's unclear whether, as part of the deal, NBCi booked any revenue from Spinway.

Skelly suggests that, like other companies such as ValueVision and Amazon.com (AMZN), NBCi may end up writing down the value of its stock holdings. "What's the chances that their Internet investments are worth more now than they were a year ago?" she asks.

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