N2K Posts $59 Million Loss, Despite Surging Sales

N2K Inc. (Nasdaq:NTKI), the parent company of e-commerce site Music Boulevard, reported 1998 year-end financial results Wednesday. Though losses were substantial [approximately $17.7 million (US$) for the quarter and $59.5 million for the year], the announcement focused instead on record high sales — up 331% over last year’s fourth quarter — and a 60% increase in customers.

Industry View

Although this type of increase in revenues and customers is indeed good news, it still seems somewhat of an oddity that a company posting such losses would not even attempt to explain those losses when reporting the results.

Perhaps the positioning of N2K’s announcement reflects the forgiving attitude that investors currently have for e-commerce stocks.

Short-term losses are being accepted, even expected, while e-commerce businesses ramp up for a hopefully profitable future. As long as an online store, such as Amazon.com or MusicBlvd.com, can continue to attract new and repeat customers in growing numbers, it seems that profitability on each individual sale is secondary.

Online Customers Keep Coming

Jon Diamond, vice chairman and CEO of N2K Inc., recently described 1998 as “a landmark year for e-commerce, and in particular for music as an online category.”

As of December 31st, N2K’s Music Boulevard had approximately 720,000 customers who had ordered and received product, including 603,000 new customers.

275,000 were first time customers added in the fourth quarter. According to N2K’s calculations, this represents a customer acquisition ramp-up of over 60%.

N2K also seems to have achieved loyalty among its buyers, with approximately 51% of revenue in the fourth quarter coming from existing customers.

Mr. Diamond attributes the increase of new customers to the company’s partnership and marketing efforts with major portals and media companies, including AOL, Netscape, Excite, @Home, Infoseek, Disney.com, Microsoft, CBS Cable, and ABC.com. The growth he said was well above expectations, as they saw 1998 revenues increase over 400%.

Holiday sales from Music Boulevard’s co-branded store on America Online were a big help. Music and books were ranked #3 for holiday gifts during the Christmas season on AOL’s Shopping Channel. As the exclusive music retailer in America Online’s Music Space, on AOL International, and in the music areas of AOL.com, Music Boulevard had high visibility and easy access to AOL’s 15 million users.

Financial Results

Reported results for N2K’s fourth quarter and the year ended December 31, 1998, included these comparisons with last year:

Q4’98 net revenue:increased 331% ($17.19 vs $3.99 million in ’97)

Q4’98 net loss per share:increased ($1.59 vs $1.26 in ’97)

1998 net revenue:increased 419% ($42.08 vs $8.10 million in ’97)

1998 net loss per share:decreased ($5.64 vs $5.88 in ’97)

1998 net loss from continuing operations:increased ($59.57 million vs $19.98 in ’97)

1998 net loss from continuing operations:increased ($4.37 vs. $4.09 per share in ’97) The net loss from continuing operations excludes a $2.37 million charge related to N2K’s upcoming merger with fellow e-commerce promoter CDnow, Inc. (Nasdaq: CDNW). That merger is expected to be completed by March 31, 1999.

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