Dominant Role in Gay Media Isn’t Paying Yet for PlanetOut

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PlanetOut Inc. practically invented the gay media market.


The company’s two biggest properties The Advocate and Out magazines, both based in Los Angeles pioneered public recognition of gay identity, both as a pop culture phenomenon and as a segment for brand advertisers.


But for investors, that success hasn’t translated to the bottom line. Last week, the company warned that revenue would be below expectations. In the last year, PlanetOut’s revenues have nearly doubled to $68.6 million while its shares have lost about two-thirds of their value, dropping from $9.34 in April 2006 to close at $3.05 on April 25 as the red ink has swelled.


Behind those numbers is an acquisition strategy gone awry. More importantly for investors, the process of turning acquisitions into profit centers will absorb the company’s resources for some time into the future. Jordan Rohan, an analyst at RBC Capital Markets, put it bluntly in a Feb. 16 report when he said technology and marketing costs “should keep PlanetOut cash flow negative for the foreseeable future. We continue to remain on the sidelines, as we believe 2007 to be a year of transition that should leave PlanetOut in a stronger financial and strategic position in 2008.”


Rohan maintained his “sector perform” rating with a 12-month target price of $4. And among five analysts who cover PlanetOut, four have neutral or hold recommendations and one advocates buying the stock. The highest target price is set at $6 per share.


“Without question, our business model is in transition as we make important investments in improving the quality of our products and the way in which we monetize them,” concurred Chief Executive Officer Karen Magee in her latest quarterly earnings announcement. The company did not respond to repeated requests for an interview with executives.


PlanetOut went public in October 2004 as a San Francisco-based operator of gay Web sites. Its symbol on Nasdaq, LGBT, stands for lesbian, gay, bisexual and transgender the media segments that it dominates.


Its Web sites include Gay.com, PlanetOut.com and Kleptomaniac.com. They provide news, chat rooms and personal ads. At the time, the sites had about 158,000 paid subscribers.


In November 2005, PlanetOut acquired L.A.-based LPI Media, owner of the Advocate, Out and HIV Plus magazines, for $31.1 million. A few months later, PlanetOut bought RSVP, an established gay travel agency specializing in cruises, for $6.5 million.


But turning a profit from these properties incurred costs. In April 2006, the company filed papers with the Securities and Exchange Commission to sell an additional $75 million in stock thus diluting existing shareholders’ stake and also allow certain large stockholders to sell another $15 million. In response, the stock drifted downward.


Founder Lowell Selvin stepped down as chief executive in July 2006 for medical reasons. But the biggest shock came in September, when the company announced lower revenues due to slow advertising sales and the cancellation of a cruise when the line’s European operator went bankrupt.



Investors spooked

In a report on the company, William Morrison of JMP Research wrote: “There is an old saying in politics when you’re explaining, you’re losing. Unfortunately, PlanetOut is going to have to do a bunch of explaining about this announcement.”


Morrison singled out two issues: First, the company had no insurance to cover the cruise operator’s bankruptcy, and second, previous guidance had never mentioned the advertising slowdown. The lack of predictability and transparency spooked investors, and the share price fell 27 percent in one day.


Meanwhile, the company switched its online business model from subscriptions to advertising. It also opened a new service for local advertisers and localized versions of the Gay.com site in French, German, Italian, Portuguese and Spanish to go after international customers.


“Listings from gay-friendly merchants and service providers in major metropolitan markets is a significant opportunity now controlled by a small number of urban weekly publishers,” wrote Richard Ingrassia of Roth Capital Partners in a report on March 2. “We believe a certain amount of growth will be driven by the natural migration of print classified and yellow pages advertising to the Internet.”


PlanetOut’s latest quarterly announcement on Feb. 15 revealed that earnings before interest, taxes, depreciation and amortization fell 38 percent compared to a year earlier. In a conference call following the announcement, Magee cited “shortfalls in ad page volumes” at the Advocate, a decline in premium online subscriptions, and the need to discount the price of cruise cabins in order to meet occupancy goals.

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