Terra Lycos’ Rating Next on Goldman’s Chopping Block

Goldman, Sachs & Co.’s Internet New Media sector analysts struck again Tuesday, downgrading Terra Lycos on concerns about the current online ad softness combined with internal issues.

On Tuesday morning, analysts Anthony Noto and Joshua Fagen cut the portal’s rating to a Market Perform, from Market Outperform.

Two weeks earlier, the analysts had downgraded Yahoo from Recommended List to Market Outperform and predicted single-digit growth for the online ad market in 2001. Now, in a research note, they said that Terra Lycos suffers from the same challenges of keeping revenue up in a tight market for ad dollars.

Additionally, while Noto and Fagan wrote that the U.S. online advertising market “shows no signs of recovery” — suffering from both a worsening economic environment and secular issues due to the limited appeal of banners and buttons — Terra Lycos faces added exposure because of its sizable global operations.

The company’s Terra Networks portal operation — which focuses on Spanish and Portuguese markets — faces difficulties in the European and Latin American ad markets, which Noto and Fagan said are not fareing much better than the U.S. Consequently, they wrote that they do not expect substantial growth in those markets during the year.

In addition to macroeconomic and industry-specific problems, Goldman also said the company faces internal obstacles — Lycos’ merger with Terra Networks in 2000 combined “large and culturally diverse companies that we believe are further complicated by the recent changes in management.”

Those changes include the resignation of chief executive Bob Davis and chief operating officer Abel Linares.

“While we do not doubt the leadership of [new CEO] Joaquim Agut in managing the company through the executional challenges that lay ahead, we have decided to take a ‘wait-and-see approach’ toward the successful integration of the company given the additional challenges presented by the global online advertising market,” Fagan and Noto wrote.

As a result of their concerns, Noto and Fagan lowered their 2001 revenue estimates to $630.6 million, and their earnings projections to a loss of $254.6 million, or $0.45 per share. Previously, Goldman estimated Terra Lycos would post a loss of $213.5 million (or $0.38 per share) on $725.5 million in revenue.

Goldman also lowered its first-quarter estimates to a loss of $85.2 million ($0.15 per share) on revenue of $149.5 million, down from a loss of $73.1 million ($0.13 per share) on $174.0 million in revenue.

Additionally, Goldman cut its 2002 estimates, predicting a loss of $21 million or $0.04 per share, on $761.3 million — down from earnings of $22.5 million, or $0.04 per share, on $990.9 million.

“While we continue to believe that the company should be able to leverage duplicative operational processes to scale combined costs going forward, we do not believe … pending further evidence, that the company will be able to adequately scale costs in the nearer term in the face of softer-than-expected top-line growth,” Noto and Fagan wrote.

Shares of TRLY were trading down 1.74 percent, at $10.56 on the news.

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