Homestore has new management, and with a change of command there emerges the possibility of creating a viable business. But success is hardly assured: A look at the company's numbers shows that steep obstacles remain.

The key issue is money. In the first nine months of 2001 the firm reported quarterly losses of $67.1 million, $72.1 million, and $106.6 million -- a total of $245.8 million. That's an average loss of $27.3 million per month, a level which cannot be eternally sustained.

Whether the numbers above are correct or not is uncertain. Initial findings from the Audit Committee of the firm's Board of Directors say Homestore "overstated" online advertising revenues by $54 million to $95 million -- and that's just for the first nine months in 2001. The Audit Committee is also looking into the books for the year 2000 and warns that "additional restatements, if required, could have a further material adverse impact on the company's reported financial results."

"The magnitude of this overstatement is quite staggering," says Morningstar.com. "Based on the company's current estimates, between 45% to 80% of total ad revenues for the past three reported quarters should not have been recorded as sales."

Wall Street

Homestore has traded stock for goods and services since its inception, a smart way to preserve cash when you don't have dollars.

AOL, as one example, received $20 million in cash and almost 3.9 million shares in exchange for the right to access AOL's millions of members. This deal, said Homestore, was "valued in excess of $200 million" -- but 90 percent of this "value" was in stock, not cash.

The ability to go back to Wall Street for additional cash or to trade stock for goods and services is finished for the foreseeable future. Revenue overstatements, looming audit results, pending class action suits, the recent stock suspension, and a general disfavor with dot-coms all weigh against Homestore.

However, other companies have emerged from tough situations and succeeded. Think of a very much smaller AOL which in 1996 wrote off $385 million in deferred subscriber acquisition costs in a single quarter.

Alas, not every company is an AOL.

Webmergers.com says "at least 537 Internet companies shut down or declared bankruptcy in 2001." If Homestore cannot stem losses or raise additional capital, then how long can the company remain viable? If it is not viable, what happens to Realtor.com, the NAR site operated by Homestore?

The Next Six Months

If Homestore is to survive it must move quickly to end massive cash losses. Given that additional stock sales won't happen anytime soon and that the potential for private investment is limited, what is to be done?

Homestore and its network of sites cannot exist without substantial traffic. Traffic is a necessity not only for Realtor.com, but also for Springstreet.com, Homebuilder.com, and other sites owned or operated by Homestore.

If you're Homestore, you have to get people to your sites, otherwise your sites can't work. Thus the first issue is to assure that traffic continues. Even better, attract more traffic than in the past.

This means the current dispute with AOL must end. It has been announced that Homestore and AOL will arbitrate a dispute regarding their partnership, but why wait? There is now new management at Homestore and the opportunity to tell AOL, "we're not the people who got us into this mess, why don't we sit down and work this out?" Given that AOL is forecasting limited revenue and ad growth this year, it might welcome the opportunity to renegotiate.

And since traffic is important, why stop with AOL?

Microsoft's HomeAdvisor and MSN draw enormous volumes of traffic, so why not deal with them? How about a trade, traffic for the right to sell software? That's Microsoft's core business.

And then there is Yahoo! and other major portals. No one has more listings than Realtor.com and access to those listings has value.

Once traffic flows have been assured, the next step is to look at Homestore assets and ask the magic question: What can the company sell? This has to happen for two reasons: First, the company needs capital. Second, cutting back will allow the company to focus on its core operations.

An Opening

Homestore's new CEO, W. Michael Long, has made a point of saying that the company must be able to demonstrate that it offers a superior "value proposition." In essence, Homestore must deliver leads. Once brokers and salespeople associate Homestore with leads, it then becomes possible to justify costs and attract additional subscribers.

According to NAR's 2001 member profile study, 37 percent of all buyers go online, but only 3 percent of all Realtors get 50 percent or more of their business online. Alternatively 29 percent get nothing and 49 percent get less than 10 percent of their income from the Internet.

The bottom line: The Internet has real estate traffic but a huge proportion of realty pros have been unable to capture such business.

This is an opportunity for Homestore. Show brokers how to prosper online. Make it happen with links and leads. And do it quickly -- before the vault is empty.

An End To Hubris

Wendy's Dave Thomas just died. The public image of the hamburger king was that of an approachable guy who talked comfortably with customers and employees. You could split an order of fries with Dave and be totally at ease.

In a similar way, Homestore needs a friendly face. Homestore's newly-minted executive team ought to pick up the phone and speak each day with at least one of those top 3 percent Internet users. What are these people doing that allows them to succeed? What can Homestore learn from them? How would they make Homestore better?

And what about a live conference, each day, Monday through Thursday, for an hour or so at a regular time? Here's a chance for top management to answer questions, hear compliments and complaints, and service consumers -- those real estate professionals who buy the company's goods and services.

While trading in company shares has re-started and a new management team is now in place, by no means is Homestore secure. This remains a company with huge problems, and the real estate community has a right to remain doubtful and dubious until concrete, visible and effective changes are made.

For more articles by Peter G. Miller, please press here.

Published: January 10, 2002

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