Layoffs Pending at Engage

Engage Inc., the CMGI-owned online advertising firm, released weak quarterly financial results Tuesday, and its new CEO warned that it would have to “create a simpler, more efficient company” to survive the downturn in ad revenues.

Before amortization, stock compensation and other costs, Engage lost $48.7 million in the three months ending in October, or 26 cents per share. That outpaced losses anticipated by analysts, who according to First Call/Thomson Financial had predicted a 23 cent-per-share loss. In the fourth quarter the company lost $23.9 million, or 14 cents per share.

Anthony Nuzzo, the CEO who on Nov. 20 replaced the resigning Paul Schaut, made it clear that he would restructure Engage and fire employees in an effort to make the Andover, Mass., business break even by next fall.

“Clearly changes have to be made,” Nuzzo said in a conference call with investors. “I can’t predict what the organization will look like or when this market will return to health. But right-sizing and headcount reductions will be part (of the reorganization). We intend to emerge as a simpler, more efficient company. This business will be profitable.”

Nuzzo, who has undertaken a complete organizational review since being hired three weeks ago by a board chaired by CMGI chairman David Wetherell, said the review would take “a few more weeks” to complete.

At that point, Nuzzo said, the company would announce a reorganization, including layoffs, and lay out a “firm timeline” for corporate profitability.

In September, Engage fired 175 employees. It has about 1,175 on staff today.

In a statement, Engage said it would aim to break even on a cash earnings basis (excluding amortization of goodwill, stock compensation and other costs) by the end of fiscal 2001. The company had $107.9 million in cash and short-term securities at the end of October.

Including amortization, stock and other costs — including bad debt associated with customers who because of a weak market couldn’t pay promised revenues — Engage said it lost $173.8 million in the first quarter, or 92 cents a share. In the fourth quarter it lost $112.3 million, or 64 cents a share.

Revenues for Engage’s 2001 first quarter totatled $41 million, more than double last year’s first quarter but down 38 percent from the 2000 fourth quarter. The company attributed the decline to the weak online ad market, as well as a big fourth-quarter customer deal that wasn’t repeated in the first quarter.

Gross profit for the first quarter was $10.5 million, a 66 percent decrease over gross profit of $31 million in the fourth quarter of fiscal 2000. The figure was up almost three times gross profit of $3.8 million in the year-ago quarter.

Nuzzo, 49, a 25-year managing and marketing veteran, has been CEO of Marsh & McLenna’s startup Internet bank and before that helped lead a turnaround of Fidelity Investments.

Nuzzo told analysts he was “thrilled” about Engage’s software and consulting division, saying it had “exactly the kind of products I’d want to buy if I were a traditional marketer.” In the first quarter that division accounted for one third of revenues but more than half the company’s gross margin.

In response to a question the CEO said “that excitement could well translate to increased emphasis on” the software division, implying the company might turn away from its media business.

The media division accounted for more than half of first quarter revenues but just 9 percent of the gross margin.

Gavin McCormick is managing editor at boston.internet.com.

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