Expectations High for GeoCities, CitySearch IPOs

By KAREN KAPLAN

Aug. 5, 1998 12 AM PT

TIMES STAFF WRITER

The Tech Coast will be hosting a coming out party of sorts next week, when two of its marquee Internet companies--GeoCities and CitySearch--offer their shares to the public for the first time.

The pair of initial public offerings is expected to grab the attention of Wall Street and venture capitalists, who have long been accused of overlooking high-tech companies here in favor of their counterparts in the flashier Silicon Valley.

“There is a feeder mentality, and success breeds success,” said Cliff Numark, program director for the Los Angeles Regional Technology Alliance. “The significance of these IPOs is that the L.A. area is finally getting the credit it deserves for having hard-core technology companies.”

Both Santa Monica-based GeoCities and Pasadena-based CitySearch are poised to cash in on their efforts to create a sense of community on the vast computer network. GeoCities provides free Web sites for roughly 2 million “homesteaders,” then arranges them into “neighborhoods” based on themes such as sports, arts and family. CitySearch (which counts Los Angeles Times parent Times Mirror Co. among its investors) builds local guides for cities including Los Angeles, San Francisco and New York.

By focusing on what’s on a Web site instead of the hardware or software that is used to build it, both companies are making the most of their Southern California location, said Bill Manassero, executive director of the Software Council of Southern California.

“They’re both content companies, and this is Hollywood,” he said. “That certainly helps leverage these companies.”

Shares of both companies are expected to rise significantly in their first days of trading on the Nasdaq market, which coincidentally are scheduled for the same week. Some analysts are even comparing GeoCities to Broadcast.com, the Dallas-based Internet firm whose stock jumped a record 248% in its first day of trading last month.

“I wouldn’t be surprised if it has a similar performance,” said Tom Taulli, a market analyst who focuses on high-tech companies for IPO Monitor in Calabasas.

However, Taulli cautioned that if the stock market--which lost 3.4% of its value Tuesday--continues to decline during the next week, both companies might end up delaying their public offerings.

Among thousands of Internet start-ups, 3-year-old GeoCities has a unique business model. Instead of paying for the content it needs to attract visitors, the company gets it from so-called homesteaders who build Web pages for free on the GeoCities site.

GeoCities then charges companies to advertise on its members’ pages (although members can keep their sites ad-free if they pay GeoCities a few dollars a month). The company also collects transaction fees from some partners who sell their wares on GeoCities sites.

The GeoCities community has emerged as one of the most popular places on the Internet and regularly ranks among the top 10 most-visited Web sites. According to a recent report by Internet traffic counter ReleventKnowledge, about 14 million individuals rack up more than 850 million page views on the GeoCities site each month. Those are the kinds of numbers that convince advertisers to spend money on the Internet.

“The fact that homesteaders set up their own home pages within GeoCities engenders a high degree of loyalty,” said Ryan Jacob, portfolio manager of the Internet Fund, a mutual fund based on Long Island. “The challenge for them will be to leverage that traffic into more substantial revenue streams through signing more advertising and marketing agreements.”

Jacob, among others, is optimistic. Last year, GeoCities lost $8.9 million on revenue of $4.6 million, but the company is on track to more than double its revenue this year. Although GeoCities reported a total deficit of $15.7 million in a filing with the Securities and Exchange Commission, Jacob said he wouldn’t be surprised if the firm breaks even in the next 12 to 18 months.

GeoCities plans to offer 4.75 million shares to the public for $12 to $14 apiece. That would net the company between $57 million and $66.5 million to expand the business, which currently employs about 115. If the stock follows the lead of other recent Internet-related IPOs, GeoCities’ early investors--including tech firms Softbank Holdings, Intel and Yahoo--will be richly rewarded.

The outlook for CitySearch is somewhat less rosy, but analysts expect it to turn in a solid performance in its first day of trading. The company plans to sell 4 million shares in the $11-$13 range to raise between $44 million and $52 million.

Two-year-old CitySearch has launched a dozen Web sites--with five more in the works--in conjunction with newspapers including The Times, the Baltimore Sun, the Washington Post and the Dallas Morning News. The sites offer information on local events and attractions, including entertainment, sports, dining and shopping. CitySearch makes its money from advertising, especially from smaller local businesses and from online classified listings.

Sound like a good idea? It did to software behemoth Microsoft and online giant America Online, which both offer competing city guide services. Microsoft’s Sidewalk venture has 10 local Web sites, and AOL has launched more than 50 of its Digital City sites.

“It’s going to be a very, very competitive environment for them against two other companies that are going to spend heavily to promote what at first glance are very similar sites,” Jacob said.

But analyst Taulli noted that the competition proves CitySearch is operating in a vital market. He also praised CitySearch for getting newspaper partners to supply local content instead of trying to create it all from scratch.

Still, CitySearch, with 560 employees around the world, has spent plenty of its venture capital. The company lost $36.5 million in 1997 alone and has a total deficit of $58.7 million. Revenue, by comparison, is meager: $6.2 million for 1997, plus $3.1 million for the first three months of this year. In addition to Times Mirror, CitySearch counts Intel, Compaq Computer, AT&T; Ventures and HSN/Ticketmaster among its early investors.

In part, the success of GeoCities’ and CitySearch’s IPOs will depend on whether demand for Internet-related stocks remains strong. If Internet traffic stops growing at a record pace, or if a bellwether company like Yahoo were to come out with bad earnings, stock prices could easily fall throughout the sector, Taulli said.

In fact, several analysts said that although Internet stocks are overpriced, they expect investor demand to keep pushing prices even higher.

“The underwriters have some responsibility to shareholders to price these stocks on some sort of a model that is closer to making sense instead of pricing these to demand,” said David Menlow, president of IPO Financial Network in Springfield, N.J. The result, he said, is often a huge run-up on the first day of trading.

If the GeoCities and CitySearch public offerings do enjoy a healthy run-up, they might not be the only Southland companies to profit.

“People have a negative perception about technology in L.A.,” said Numark of the Los Angeles Regional Technology Alliance. “To the extent these are successful IPOs, it diminishes that perception.”

The halo effect would most likely benefit other Internet and multimedia firms on the Tech Coast, but other high-tech industries, such as biotechnology, could benefit as well, Numark said.

“Hopefully, this will help us gain some momentum,” said Rohit Shukla, director of the Alliance. “Hopefully, there will be renewed interest in overall venture activity down here.”

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GeoCities

* Business focus: Provides free Web sites for “homesteaders” and arranges them into theme-based “neighborhoods.”

* Location: Santa Monica

* Year founded: 1995

* 1997 revenue: $4.6 million

* 1997 income: --$8.9 million

* Expected offering price: $12 to $14 per share

* Number of employees: 114

* Management: David Bohnett, founder and chairman, Thomas R. Evans, chief executive

* Lead underwriters: Goldman Sachs, Donaldson Lufkin & Jenrette, Hambrecht & Quist

CitySearch