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Homestore Inspection - Company Business and Marketing

Industry Standard, The, June 4, 2001 by Cory Johnson

Analyze its stock deals and Homestore.com's dramatic success doesn't look so good anymore.

Stuart Wolff, the lanky, bookish, 36-year-old CEO of Homestore.com, has a folksy shtick about the nature of his company. "The process of finding and buying a home is so complex, I've thought to myself, 'You have to have a Ph.D. to understand this process,'" Wolff says, trying to keep a straight face before delivering the punch line. "And I have a Ph.D.!"

But these days, some on Wall Street are saying you need a Ph.D. to understand Homestore's accounting-- and even that might not help.

Homestore is a survivor (and has been widely lauded as such by this magazine and Business Week, among others). In a year when other dot-coms were folding left and right, the Southern California-based Homestore has carved out a powerful brand in online realty -- so powerful it's being investigated by the Justice Department. Revenues are booming: $105.5 million in the last quarter alone, a 173.3 percent increase over the same period last year. Shares of Homestore are up 64.2 percent this year; the S&P 500, by comparison, is down 2.5 percent.

But that stellar success has come at great cost -- a cost not always reflected in Homestore's pro-forma earnings results. Homestore has been bold in its use of unregistered stock to pay for operating expenses. The company has doled out more than 6 million shares to marketing partners and real estate brokerages. "Most technology companies report pro-forma results," says Homestore Chief Operating Officer John Giesecke. "These were not just stock-for-revenues deals. We are creating partnerships here."

Typical of these is Homestore's recent deal with Bank of America. On April 10, the two companies announced a million marketing and Web-services agreement" that would allow Homestore access to B of A's 3.2 million online bankers. Analysts and investors figured that meant some $10.5 million in revenues to Homestore, and the stock surged 22.8 percent in a day. But in the company's quarterly report on May 15, Homestore reported giving Bank of America $13.4 million worth of stock for the deal. The company has signed similar stock deals with Broker Gold, Budget Truck, GMAC, Norwest and a host of multiple real-estate listing services.

Like a guest on the Jerry Springer Show, Homestore hasn't been bashful; the company plainly reveals its unregistered shares in public filings, warts and all. But it's taken the unusual result of eliminating these stock-related payments from its pro-forma results. Excluding all the stock deals, it looks like Homestore.com has big profits on little expenses. But by reworking Homestore's accounting to include stock-related costs, Merrill Lynch analyst Henry Blodget finds the company faces another $15.6 million in expenses in the most recent quarter. Adding that in, Homestore's stock trades at 114 times Blodget's 2002 earnings estimates.

Worse, Homestore's "partners" aren't always taking much risk on Homestore shares. America Online, for example, took $20 million and 3.9 million shares of stock to sign a massive marketing deal. But AOL also extracted a guarantee from Homestore that the stock will get to $68.50 by the third, fourth and fifth year of the agreement. If it doesn't, Homestore has agreed to pay AOL the difference. From AOL's perspective, it's a no-lose arrangement; if the stock goes to $100, AOL wins; if the stock goes to $10, AOL still gets a cash or stock payment of $68.50 a share.

The crowd on Wall Street is looking on with disgust, and piling on short-selling of Homestore shares, in a bet that the stock will fall. Short interest in Homestore is now at an all-time high.

Meanwhile, insiders at Homestore are selling stock. This year alone, Wolff and a family trust he controls have cashed in $178.4 million in Homestore shares. It doesn't take a Ph.D. to see that it all adds up to a risky future for Homestore.

                              Taking Stock
                    To secure a $10.5 million deal,
                    Homestore.com quietly gave Bank
                    of America 600,000 shares worth
                             $13.4 million.
Revenues          $10.5
Cost of Revenues  $13.4
SOURCES: PR NEWSWIRE, SECURITIES AND EXCHANGE COMMISSION
Note: Table made from bar graph

Homestore Inspection - Company Business and Marketing

Industry Standard, The, June 4, 2001 by Cory Johnson

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