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CHANNELDEX : Yielding returns in the Net game

CHANNELDEX : Yielding returns in the Net game

LookSmart Ltd (LOK 5.7¢)

Global leader in Web directories LookSmart recently announced financial results for the second quarter ending June 30, 2001. The company reported $18.9 million in revenues, which, compared to the same period last year, represents a reduction of $8.4 million.

Excluding e-commerce from total revenues, Q2 2001 results of $18.4 million were also down compared to $20.4 million in the first quarter of 2001. Listings now represent LookSmart's largest revenue stream, growing 26 per cent to $8.1 million from $6.4 million in the first quarter of 2001. The number of listings grew nearly 60 per cent sequentially to 136,683 URLs.

Cash operating losses (operating profit excluding the effects of non-cash compensation and intangible amortisation charges) for the second quarter of 2001 were $3.6 million, 68 per cent narrower than a loss of $11.1 million (including one-time restructuring charges) in the first quarter of 2001, and a 57 per cent improvement on $8.4 million in the same quarter a year ago. Cash operating earnings per share for Q2 2001 (excluding the effects of non-cash compensation and intangible amortisation charges) were $0.04, exceeding First Call consensus estimates of $0.06.

Cash used was $5.9 million during the second quarter of 2001, compared to $8.8 million in Q1 2001. LookSmart had a balance of $84.1 million in restricted and unrestricted cash at the end of the second quarter of 2001. LookSmart's US operations reached an important milestone in the second quarter by contributing positive cash flow, excluding one-time charges related to the first quarter of 2001.

LookSmart is executing a three-part plan for the year: to cut costs, to launch LookListings, and to increase distribution volume (the number of search queries per day that use the LookSmart database). With lower and more stable fixed costs, LookSmart expects growth and profitability to be achieved by increasing the number of search queries that use the LookSmart database.

Davnet Ltd (DVT 6.1¢)

Davnet shares were voluntarily suspended in early August, pending a company announcement regarding its refinancing negotiations and the expected operations review. Davnet has advised each of its operating subsidiaries in Canada, Hong Kong and Singapore that it will not provide them with further funding at this stage and cannot say if and when this situation will change.

The Davnet Group's operations elsewhere will be reviewed in light of the outcome of discussions with financiers.

In May, Davnet reported its core Australian operations had turned EBITDA positive in April 2001, and were expected to remain so for the remainder of FY2001/02. Davnet has secured funding for its current business model via a private placement, an equity-linked working capital facility and a converting note facility through BNP Paribas Equities Australia. The management team continues to focus on managing cash expenditures in line with available reserves. Davnet had previously stated that the total cash-burn rate remains on track to support its nine-city organic growth business model. A 23.9 per cent increase in penetration rates resulted in a 100 per cent increase in year-on-year revenues during FY2001. On the cost side, a sustained focus on reducing operational expenses resulted in the group cutting operating costs by 18 per cent. Meeting Capex requirements continues to represent the largest obstacle for Davnet.

Melbourne IT (MLB $0.38)

Melbourne IT, a global supplier of domain names and related services, reported revenue of $24.8 million ($43.3 million for FY2000) and a net profit after tax of $1.648 million ($1.48 million for FY2000) for the six months to June 30, 2001. Earnings before interest and tax of $2.05 million ($1.53 million for FY2000) exceeded the company's amended forecast, made at its AGM in May, by $500,000.

The company now believes it has "turned the corner". A total of $933,000 positive operating cash flow was recorded for the first half of 2001. On the market for generic top-level domains (gTLDs), the company stated that although the market and volumes had stabilised, it remained fiercely competitive and difficult to forecast. Melbourne IT said the underlying registrar business is strong. Melbourne IT's market share for new gTLDs is now approximately 8 per cent, up from 6.7 per cent in Q1 2001, and 4 per cent in Q4 2000.

For the quarter, Melbourne IT achieved 260,700 gTLD registrations (including 37,000 renewals) - a 9.5 per cent increase compared to the previous quarter when it reported 237,900 new registrations. In the domestic market, Melbourne IT had 31,400 com.au registrations and renewals for the June quarter. This represents a 10 per cent increase over the previous quarter, where the total number or renewals and registrations was of 28,500.

World.Net Services (WNS $0.32)

World.Net Services is a developer and provider of e-business and Internet-based solutions for the corporate and government sectors. The company's strategy revolves around developing generic applications for the B2B (business-to-business) and B2C (business-to-consumer) markets.

World.Net Services has just reported positive net-operating cash flows for the latest quarter and closed the quarter with cash reserves in excess of $2.7 million. The company achieved a 94 per cent increase in operating revenue for the first half of 2001 at $1.2 million. Expenditure increased 47 per cent, EBITDA was $148,000 and a loss of $83,000 was reported for the same period.

WNS's current focus is the development and marketing of several software products and systems: Travel.World.Net, Rosta2000, Goose and Oyster. Travel.World.Net is an Internet-based reservation system for the travel and tourism industry operates in both the B2B and B2C market spaces and creates reservations in real-time. WNS is currently developing the next generation of the system, known as Project Matrix. Rosta 2000 is a staff-scheduling system that utilises Internet technologies and an integrated award interpreter to produce rosters that can be reviewed and actioned via the Internet.

Goose is a suite of open-architecture software development tools for business. Oyster is a 128-bit encryption system for securing electronic transactions. In addition to its product development and marketing operations, WNS offers consulting and for business services integration, secure Internet hosting and site management, as well as Web design and development.

Investika Ltd (IVK $0.12)

Investika's principal activities relate to technology and Internet investments. Its core investment, Kidz.net, is an Internet service for children, teachers and families. Kidz.net is especially designed for children and families. Instead of being a filter, actively selects sites on the Internet to include in its database.

Kidz.net contains more than 500,000 sites and is growing at a rate of about 1000 handpicked sites every 24 hours, the company claims. These sites are about education, sport, games and entertainment of interest to young people. Kidz.net's motto is "Just the good stuff" and all sites and links have been verified to ensure their suitability for children. Once inside Kidz.net's environment, users cannot get out onto the World Wide Web without a password. Kidz.net has offices in Australia, the US and Europe.

Investika has an agreement with Telstra to provide Kidz.net as a value-added product to Telstra Big Pond Home customers, plus an agreement with Impaq Australia, a market leader in education service provision, to deliver the Kidz.net product to Impaq's customers. Investika also has an alliance with 3Com to provide network infrastructure and support to all schools Australia-wide.

Other Investika investments include:

- Quiktrak Networks (13.03 per cent) is a niche communications network service provider that uses direct sequence spread spectrum radio technology to deliver a range of vehicle monitoring, security, fleet management, and secure data transfer applications.

- Zylotech Ltd (7.2 per cent) develop Eyelink videoconferencing and Filmlink video streaming technologies. These technologies allow video and film to be digitised, compressed, stored and transmitted over the Internet and other networks.

QPSX Ltd (QPX $0.50)

QPSX is the holding company for a number of companies specialising in the development and global commercialisation of telecommunications technologies. It holds patents for technologies that form an integral part of high-speed data transfer protocols used by telecommunications carriers.

QPSX Communications Pty Ltd is the owner of the company's core patents, notably its segmentation and reassembly (SAR) technology that is a core component of the asynchronous transfer mode (ATM) protocol for high-speed, reliable data transfer. ATM is in turn part of the asymmetrical digital subscriber line (ADSL) protocol. ADSL provides high-speed data transfer and Internet access via copper phone lines. The SAR technology is protected by QPSX's existing patents in Germany, the UK, Canada, Australia and the US. QPSX intends to undertake a program of non-exclusive licensing of the SAR patent in the ATM and ADSL industries. QPSX has licensing agreements in place with Siemens, Alcatel and a number of Australian universities and government institutions. It also owns the exclusive worldwide licensing rights for patents covering network congestion buffering technology and technology relating to information storage and retrieval.

QPSX's forecast profit before tax is $445,000 ($269,000 after tax) for the financial year ending June 30, 2001. This compares with the profit before tax of $8000 (after-tax loss of $32,000) forecast in the company's prospectus, dated November 13, 2000. The increased profitability is partly attributable to higher royalty income and reduced overheads. Cash balances ($4.1 million) and receivables net of payables ($0.5 million) are forecast at $4.6 million. This compares with $3.1 million that was forecast at the time the prospectus projections were prepared.


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