H&Q Conference: USWeb/CKS' Long Slog Back

Shareholder concern has driven the stock down 41% since late March. But the company is vowing to fight its way back into portfolios.
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SAN FRANCISCO --

USWeb/CKS'

(USWB)

new CEO, Robert Shaw, concedes that his firm is in an "ugly period."

Perhaps that explains part of the stock's recent unsightly performance, down 41% from its record high of 47 reached late last month. In stark contrast to the bulk of Internet stocks, USWeb/CKS has lagged behind broad stock-market measures. Since the beginning of the year, USWeb/CKS is up 6.4%, while the

S&P 500

is up 10.6% and

TheStreet.com Internet Sector

index is up 75.7%.

"We've got a lot of work to do," explained the gray-haired and goateed Shaw, 51, during a recent interview at the company's headquarters in Santa Clara, Calif.

He's got that right. In addition to merging with the CKS Group, a marketing company with digital savvy, USWeb has been on an acquisition binge, gobbling up 41 companies in the last three-and-a-half years. The idea was to create the world's largest professional services firm for the Internet, a consulting firm that helps

Fortune 500

companies conceive, develop and execute e-commerce strategies.

But while the company's healthy appetite has helped it grow rapidly, the acquisitions have led to corporate indigestion. "People are concerned about the integration with CKS," says Cameron Steele, an associate analyst with

Dain Rauscher Wessels

. "It's a challenge to meld those two cultures successfully."

Surprisingly, Shaw says USWeb/CKS is not satiated. The company, he says, is looking to make three to 10 more acquisitions by the end of the year that will deepen USWeb/CKS' expertise in back-end software systems, and help it build a presence in more domestic and foreign markets. "As the year progresses we'll move into the Asia-Pacific markets," Shaw told investors at the

Hambrecht & Quist Technology Conference

Tuesday. "We've got to get to a $1 billion run rate as quickly as possible." For the latest first quarter ended March 31, the company reported revenue of $84.1 million.

To meld all these disparate units into one integrated company, Shaw says USWeb is in the midst of a six-month restructuring plan. Mostly that means building a back-office infrastructure, closing redundant offices, and retraining and reassigning workers to avoid layoffs.

This transition is so important to the company that it's formulated a dorky phrase for a three-step plan: "forming, norming and storming." Shaw says USWeb/CKS is moving from the forming to the norming stage now. He predicts it'll be storming by the end of the summer.

Beyond the integration challenge, analysts say that USWeb/CKS pales next to its Internet brethren for a few simple reasons. First, the services business isn't as sexy as consumer-oriented businesses such as

Yahoo!'s

(YHOO)

or

eBay's

(EBAY) - Get Report

.

Second, service businesses are labor intensive and tend to have thinner margins. USWeb/CKS currently has 2,250 employees; it plans to employ 3,200 by year's end.

Third, investors have felt that USWeb/CKS suffers from a lack of experienced management. That one of the company's founders, Joe Firmage, dedicated his life to the pursuit of extraterrestrial intelligence didn't help matters much. Since the entrance of the seasoned Shaw, who previously managed

Oracle's

(ORCL) - Get Report

Worldwide Consulting Services Group, those concerns have been allayed.

"In the last couple of months they've really turned a corner," says

Monument Internet Fund

portfolio manager Alex Cheung, who keeps tabs on the company by interviewing customers. "Most of their projects are in the pilot stage, but if they can get that work done right they can move forward and generate new business."

And there's no lack of competition. USWeb/CKS has got competitors nipping at its heels, torso and head: computer hardware and service vendors such as

IBM

(IBM) - Get Report

and

Compaq

(CPQ)

; advertising and media agencies such as

Foote Cone & Belding

and

Ogilvy & Mather

; other pure-play Internet service firms like

iXL

and

Organic Online

; large consulting firms such as

Andersen Consulting

and

Cambridge Technology Partners

(CATP)

; telecom giants such as

AT&T

(T) - Get Report

and

MCI-Worldcom

(WCOM)

; and software vendors such as

Microsoft

(MSFT) - Get Report

and Shaw's old stomping ground, Oracle.

USWeb/CKS has its share of advantages. Its early entry helped it stake out a leading position in the professional services market. It has beaten Wall Street's earnings estimates four out of the last five quarters. And it continues to evolve, looking for new revenue streams and better sources of profit. The recently launched e-services business, for instance, represents an attempt to improve operating margins by developing a subscription-based model for clients.

"We're taking the intellectual property from professional services, commoditizing it and making it available to a larger consumer market," explains Bob Wise, the company's chief operating officer for e-services. "The nice thing about e-services is that you have a predictable revenue line."

During Tuesday morning's presentation, Shaw also hinted at a promising if fuzzy new product. He said USWeb/CKS is getting ready to unwrap a "corporate portal" that helps "empower knowledge workers in every industry."

In the meantime, analysts will be gauging progress on the company's makeover, tracking revenue growth and average revenue per worker. Between the third quarter in 1998 and the first quarter in 1999, for example, revenue per employee increased from $139,000 to $148,000. "I think June is an inflection point," says Danny Rimer, an analyst with

Hambrecht & Quist

, which has done underwriting for USWeb/CKS. "If they come out with good numbers, investors will be significantly rewarded."