Business-to-business in spotlight: Vegas firm’s stock hurt on news of downgrade

Kevin Ferguson

Wednesday, April 4, 2001 | 10:56 a.m.

Internet business-to-business purchasing firm PurchasePro of Las Vegas and its national competitors Ariba and Commerce One are seeing their stock prices plunge this week on new worries about the entire technology sector.

Such Internet businesses, which rode the wave of New Economy optimism in 1999 and early 2000, continue to get hammered by disappointing earnings and stock downgrades by investment analysts.

These companies develop marketplaces for businesses to buy and sell large quantities of products on the Internet, which many saw as an intriguing business plan during the height of the recent stock market boom because it allowed businesses to streamline their purchasing process.

Credit Suisse First Boston analyst Ian Toll said PurchasePro had a solid first quarter this year, but expects the harsh business environment to continue -- hurting all companies in this business-to-business e-commerce sector.

As these developers of Internet marketplaces rely on other Internet businesses as clients -- at least in part -- it makes them vulnerable to the downturn in the technology sector and tech customers that are downsizing or closing.

That's part of the reason Toll downgraded PurchasePro's stock Tuesday.

"We identified one marketplace customer that was highlighted by (PurchasePro) as a competitive win on its (third quarter) conference call that was unable or unwilling to make the license fee payment and will not become a PurchasePro customer as a result," Toll's report states. "A slowing economy makes it morelikely that others may follow."

PurchasePro raised $489 million in its Sept. 14, 1999, public offering. Mountain View, Calif.-based Ariba and Commerce One of Pleasanton, Calif. had similar champaigne-popping introductions to the public market.

All three companies' stocks have sunk this week below half what they were originally offered at in 1999. PurchasePro closed Tuesday at $3.75, down $2.69. The stock was down another 59 cents today. The downward spiral effect followed Toll's report and another by analyst Tim Getz of Prudential Volpe Technology Group.

Ariba said Monday it plans to slash a third of its workforce -- 700 jobs. That announcement came during the release of its second quarter earnings report, ended March 31, which showed a loss before expenses of 20 cents per share.

The magnitude of Ariba's earning's report paints a picture of a very substantial slowdown in spending across all industries and geographies for both Internet marketplaces and purchasing applications, Toll's report states.

Ariba, which trades on the Nasdaq Stock Market, sunk $2.06 Tuesday, closing at $4.44. Commerce One also dropped $2.24, closing Tuesday at $5.61.

This shaky environment doesn't bode well for PurchasePro, Toll's report states.

His firm believes PurchasePro's first quarter earnings came in solid and the company should meet or beat his firm's earnings estimate of $6.2 million or 8 cents per share when PurchasePro reports its earnings in three weeks.

"However, we believe the tougher environment puts the aggressive second half earnings ramp reflected in company guidance and our prior model at risk," Toll said.

PurchasePro said Tuesday it is expanding its client-base to Africa and the Middle East, forming a joint alliance between global investment firm the Carlyle Group and Koc Group, an industrial conglomerate headquartered in Istanbul, Turkey. The partners are creating a marketplace called MENAN, the Middle East and North Africa Marketplace.

PurchasePro's aligning with AOL to co-develop the Netscape Netbusiness Marketplace could also help the Las Vegas-based business grow its revenue stream, analyst say.

The new marketplace links PurchasePro's 140,000 business clients with AOL's 28 million Internet users. They continue to add new clients. Tuesday the companies announced agreements with Information Markets Corp., InsureZone and Chinatdotcom Corp.

"However, few if any of these business users are currently paying a subscription fee," Toll's report states. "(PurchasePro) and AOL's strategy is to drive usage and adoption on a trial basis before attempting to convert these small businesses to paying customers."

"It's too early to make a judgement here, but the tough overall business climate will not help," Toll said.