CMGI's Great Quarter Tarnished By Loss of H-P Business

CMGI INC. (CMGI-NASDAQ) Earnings Highlights: For the second quarter, CMGI reported net income of $35.9 million or $0.07 diluted earnings per share.  CMGI currently expects revenues of approximately $1.10 billion in fiscal 2007. With respect to gross margin percentage, while the Company does not expect second half gross margin levels to approximate the levels achieved in the second quarter, the Company does expect full year gross margin percentage to show improvement over the prior year.

Net revenue increased 1.9% from prior year to $324.8 million; Gross margins improved to 12.5% compared with 9.5% in the prior year period; Operating income improved to $11.3 million or 3.5% of revenue from an operating loss of $1.7 million in the prior year; Non-GAAP operating income more than doubled, to $19.5 million from $8.8 million in the second quarter of the prior year; Net income increased to $35.9 million compared to a net loss of $6.3 million in the same period last year; Cash, cash equivalents and marketable securities at January 31, 2007 increased to $275.0 million from $163.0 million at January 31, 2006.

CMGI also continued to invest in its strategic initiatives which are focused on penetrating new target vertical markets including Communications, Storage and Consumer Electronics, expanding service offerings, deploying a new Enterprise Resource Planning (ERP) technology platform and implementing a shared services model, which includes consolidating IT and finance infrastructures. These investments totaled approximately $3.1 million during the quarter, of which approximately $2.1 million was recorded as an operating expense in the period.

Joseph C. Lawler, CEO, COMMENTS: “We have been making meaningful progress across our business and are beginning to see improved results from our efforts.  Our increase in revenue was achieved despite a $20.9 million decline in revenue related to a previously announced program change for a single client.”

Here is the one eyesore: The Company was recently informed that a business unit of Hewlett Packard intends to migrate away from ModusLink Corporation a program which accounts for approximately $100.0 million of annual revenue. The operating income associated with this program is estimated at less than $3.0 million per year. The Company expects volumes associated with this program to decline late in the third quarter and does not expect the loss of this program to have a significant impact on results for this year.
Last week we had asked if the company has transformed itself.  Shares gapped up immediately following the positive earnings, but shares are back to flat in after-hours trading.  With the loss of the H-P business, it wouldn’t be surprising at all if the comnpany gives back some of its recent gains.  The naysayers will say that H-P is just the start, and the bulls will say it doesn’t matter and look ahead to the revenue guidance and financials.  The company did show a good quarter, but losing H-P as a client is probably going to bring more bears than bulls in the immediate future.

Jon C. Ogg
February 26, 2007

Jon Ogg can be reached at; he does not own securities in the companies he covers.