LNUX Update: Media Revenues: No Growth in Sight - Lowering Investment Rating to Neutral

11/10/2009

MDB issued a research update today on Geeknet, Inc. (LNUX) reiterating its NEUTRAL recommendation and $1.25 Price Target.

Geeknet, Inc. (formerly SourceForge, Inc.) reported third quarter financial results for fiscal 2009 with revenues of $10.8 million, significantly below our estimate of $12.7 million. Again the major short fall came in the media segment as revenues at $3.7 million were down 27% versus the year-ago quarter and 15% sequentially. Total quarterly revenues declined 6% year-over-year and 8.5% sequentially. E-commerce revenues rose nearly 11% compared to the 3rd quarter of 2008, but fell nearly 5% sequentially. Quarterly gross margins of 28.8% fell 1,040 bps compared to gross margins of 36.9% during the same period last year and 440 bps versus gross margins of 33.2% in Q2 of 2009. Operating expenses of $7.7 million increased 13.5% year-over-year and 21.7% sequentially. As a result the GAAP net loss for the quarter totaled $4.5 million or $0.08 compared to a net loss of $2.7 million or $0.04 per share in the year-ago quarter. Management provided 4th quarter guidance of $25.7 to $28.2 million in revenues and projected breakeven adjusted EBITDA. Other developments from the quarter and conference call include:

• the corporate name change to Geeknet, Inc. in line with a complete rebranding effort to boost the awareness within the advertising community;
• traditional display and ad network revenues falling 58% and 35% respectively year-over-year, while premium product revenues of $1.6 million increased 93% versus Q3 of 2008;
• flat sequential media unique visitors at 35 million along with a decline in RPM to $9.00 from $10.02 and a 6% drop in page views;
• shipments at ThinkGeek rose 24% year-over-year to 110,000; and
• a decline in total cash and investments at quarter’s end to $35.6 million.

Media revenues disappointed once again, but the e-commerce segment continues to show promising year-over-year growth. Taking into account company guidance and the soft economy, we are projecting continued stagnant media revenues for the remainder of calendar 2009. We are now anticipating revenues of roughly $27 million non-GAAP cash earnings of $0.00 per share in the December quarter. We continue to believe that management is moving to improve the company’s product platform, but this process is taking much longer than anticipated. As such we are lowering our investment rating to Neutral and lowering our price target to $1.25.

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