Homestore profits not on the horizon

August 4, 2004

Realtor group will decide model changes

By Jessica Swesey
Inman News

Homestore likely will not achieve profitability this year, as some observers previously anticipated. The company narrowed its second-quarter loss to $4.3 million, or 3 cents a share, from $91.7 million, or 78 cents a share a year ago.

The second-quarter loss compares with a loss of $5.1 million, or 4 cents a share in the first quarter this year. Although Homestore today reported its second year-over-year quarterly increase in revenue, CEO Mike Long said the company doesn't expect profits this year.

"It is unlikely that we will be able to reach that goal," Long said in an investor conference call this afternoon.

Homestore's goal of profitability has been set back by litigation expenses as well as expenses related to it's compliance with Sarbanes Oxley.

Homestore provides marketing exposure and technology products to the real estate industry. The company also operates, the official Web site of the National Association of Realtors.

Investors again questioned whether the company's current business model should be altered as a way to speed up the prospect of profitability. The licensing agreement Homestore has with the National Association of Realtors prohibits referral fees, but NAR leadership is considering modifying the agreement. Referral fees are viewed as one strategy for helping to make Homestore profitable.

Long said Homestore engages in "frequent discussions" with NAR.

"I've been encouraged by these discussions and if the market demand for new and enhanced marketing products is there, I'm quite confident the NAR will do what's right for it's members," he said.

Homestore's revenue for the second quarter was $56.8 million, up from $53.9 million last year and $56.1 million the previous quarter this year. The year-over-year increase was due to a $2.1 million surge in revenue from Homestore's media services segment and a $1 million increase in its print segment. Revenue in the software segment declined by $200,000.

Homestore had $35.2 million in cash and short-term investments available to fund operations as of June 30. The cash balance reflects the impact of a $3 million payment made in April related to the settlement of a class-action shareholder lawsuit.

Second-quarter earnings results included $2.2 million in settlement charges relating to two legacy lawsuit matters.

In May, a federal judge approved a settlement agreement between Homestore and The California State Teachers' Retirement System related to the consolidated shareholder class action lawsuit. In June, an unnamed "objector" to the settlement filed and appeal. Homestore expects the settlement will be upheld, but the courts have not confirmed.

As part of the settlement, Homestore agreed to pay $13 million in cash and issue 20 million new shares of common stock valued at $50.6 million. Homestore placed the first $10 million in escrow last October, and in April, placed the final $3 million in escrow.

In May, Homestore issued 20 million shares of common stock. After completion of the appeals process, the court will distribute the shares to the class.

Homestore shares (Nasdaq: HOMS) closed at $3.40 a share today, down 2.9 percent from Monday's closing price of $3.50.

Copyright: Inman News Features

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