Cdnow Eyes Future Efficiencies

NEW YORK-CDnow Inc., which posted a net loss of $19.1 million, or 96 cents per share, on sales of $22.8 million in its first quarter ending March 31, expects to realize savings of $20 million-$25 million in operating efficiencies this year, thanks to the completion of the integration of N2K, which it acquired on March 17, into its operations.
The loss included $1.4 million in amortization and write-offs due to costs incurred in the merger. On an earnings before interest, taxes, depreciation, and amortization basis, the company posted a loss of $23.1 million.
For the period, the company posted a 128% increase in sales over 1998's first-quarter revenue. Only two weeks of sales from N2K are included in the company's results. If the results of the two companies for the entire first quarter are combined, CDnow posted a loss of $38.2 million on sales of $36.3 million.
Despite the continued losses, gross profit improved dramatically to 21.3% from 14.6% in the same period last year.
Jon Diamond, chairman of the company, says reasons for the gross profit improvement include a decrease in the use of free shipments as a promotional item, a change in product-pricing strategies, and supply-side savings.
Jason Olim, president/CEO, says he believes an increase in cooperative advertising funds and advertising revenues from the company's content sites will contribute further to the gross profit situation. Already, advertising revenues from content sites make up 5% of revenues.
Moreover, he says, he expects the company to realize greater savings as it more efficiently uses suppliers in product fulfillment.
At the end of the quarter, the company had about $62 million in cash, which would be reduced by $24 million as the company fulfills accrued merger costs and other accrued expenses.
But Diamond says the company shouldn't have a cash problem this year, thanks to a reduction in cash burn as the company realizes cash savings from the operating efficiencies created by the merger.
Also, the company anticipates further improvements in gross profit due to increases in advertising revenue.
Olim adds, "There are a number of options available for raising cash," should it be needed.
Asked if those options included press reports that Time Warner and other majors have had talks about buying the company, Olim declines to comment.