No New Economy CFO is going to tell you that profits don’t matter. You might hear that market share, revenues, or brand awareness matters more. Or that the first priority is to fine-tune the business model for scalability and leverage. Or that the company could turn profitable in the current quarter, if it wanted to, but that doing so would be a big mistake.
“Being profitable now would not only be shortsighted, it would be suicide,” exclaims Russ Surmanek, CFO of Net Objects Inc., an E-business software and services provider in Redwood City, California, with revenues of $10.2 million and a net loss of $4.3 million in its most recent quarter. “Our largest spend is research and development, and we could save a lot of money there if we told everyone to go home. Advertising and promotions could also be cut, but we wouldn’t have any leads.”
But Surmanek, like other New Economy CFOs, realizes that today, profits matter more than ever. The recent cooling off of the market for technology stocks, coupled with the well-publicized troubles of such E-tailers as CDnow and Peapod, has made investors impatient with quarterly losses. “There was a period where you were expected to stake out a position in the marketplace and capture market share before you turned on the profit engine,” says Geoffrey Moore, a consultant and author of Living on the Fault Line, a new book on managing for shareholder value in the Internet Age. “That period is over.”
The Red And The Black
Profitability among New Economy companies is not as foreign a concept as many may think. Major players like America Online Inc. and Yahoo Inc. have been making money for years, and Ebay Inc. was that rare Internet company that was in the black when it went public. In all, 15 of the 40 public companies on Internet audience- measurement firm Media Metrix’s top 50 digital media and Web properties are profitable, according to Business 2.0 magazine.
As for CFOs at red-inked companies, they insist that the notion of building a profitable business has never been far from their thoughts. For example, the day after VerticalNet Inc.’s initial public offering in February 1999, CFO Gene Godick was on the phone with consultants about installing a budgeting and planning system. And in April 1999, its first month as a public company, Priceline .com Inc. vowed that it would show steady progress toward profitability every quarter. “We recognized that Internet companies would, sooner or later, have to demonstrate that they had a business model that could be profitable,” says founding CFO Paul Francis.
It remains to be seen how tolerant skittish investors will be of ongoing losses and what signs they will be looking for to measure progress. Will ramping up revenues still be enough? Merrill Lynch analyst Henry Blodget calls revenue multiples “a fine shorthand valuation technique,” but Blodget is looking to future earnings when he predicts that 75 percent of the 400 or so Internet companies will disappear (through consolidation or failure) before ever making a dime.