FRAMINGHAM (05/03/2000) - After falling short of Wall Street's financial expectations for a second consecutive quarter, online music retailer CDNow Inc. yesterday announced plans to cut its annual operating expenses by $12 million and said it expects to find a buyer before the end of June.
As part of yesterday's announcement, CDNow reported a $37.8 million first-quarter loss. And the Fort Washington, Pennsylvania-based company warned that both its revenue and its rate of adding new customers are likely to drop in the second and third quarters because of the planned spending cuts.
The red ink continued to flow in the first quarter, even though CDNow said it added 440,000 new customers during the three-month period. The company estimated that it won't begin to turn an operating profit until the fourth quarter of 2002, depending on the specifics of its expected sale to a new owner.
The struggling online retailer has enlisted Allen & Co., a New York-based investment firm, to help it find a buyer, after a proposed merger with Columbia House Co. fell through in March. A CDNow spokeswoman said the company has been approached by two-dozen potential buyers and remains "completely confident that (a sale) will happen."
CDNow reported that its revenue for the first quarter rose 99 percent from the same period a year ago, reaching $43.6 million.
Rob Martin, an analyst at Freidman, Billings, Ramsey & Co. in Arlington, Virginia, said he has dropped coverage of CDNow's stock in anticipation of the company's sale. The company's future now hinges on whomever it finds as a buyer, he said.
"CDNow has done a great (marketing) job," Miller said. "They're a top-five brand (on the Internet). The question now is whether they can make money selling CDs after putting up the cash to build that brand name."
The CDNow spokeswoman said the $12 million operating cut is primarily in marketing expenses related to attracting more consumers to the company's Web site. "We have no plans to lay anybody off," she said.
As a result of a decrease in advertising, the company said, it expects to lose as much or slightly more this quarter than it did from January to March.