‘Mayhem’ at PurchasePro pushes stock even lower

Kevin Ferguson

Thursday, April 26, 2001 | 11:07 a.m.

In what an analyst called "mayhem," the Las Vegas technology company PurchasePro finally announced its quarterly financial performance this morning after two events disturbing to investors Wednesday.

In an unprecedented or at least very unusual move, PurchasePro announced Wednesday morning -- just a few hours before its earnings were to be released -- that its first-quarter results would fall short of analyst expectations.

Then, like throwing gasoline on a fire, PurchasePro on Wednesday afternoon said it was delaying issuance of the numbers and a conference call discussing the results until this morning.

Investors found little to cheer about when the numbers were finally issued today. PurchasePro reported a loss of $18.1 million or 26 cents per share for the first quarter ended March 31.

That compared to a loss of $15.7 million, or 27 cents per share, in the same quarter in 2000.

Analysts expected a profit of 8 cents per share -- the average of 10 analyst predictions gathered by Thomson Financial/First Call.

"I think there is still a lot of information that remains undisclosed," said George Santana of Wedbush Morgan Securities, the analyst who described PurchasePro's actions of Wednesday as "mayhem."

PurchasePro shares slid 11 percent to $3.59 in late-morning trading today. That followed Wednesday's 35 percent decline in the stock price to $4.05.

Excluding non-cash charges of $16.7 million for strategic marketing expenses, amorization of equity-based compensation and goodwill, PurchasePro reported a cash operating loss of $1.4 million, or 2 cents per share.

Some analysts questioned Wednesday afternoon why the company didn't disclose in the first week in April about a shortfall in earnings. That's when most companies facing such shortfalls warned investors that they would miss expectations.

James Clough, a PurchasePro senior executive vice president, said the extra time was needed to calculate and assess a number of transactions that came in just before the quarter ended.

PurchasePro develops marketplaces for businesses to buy and sell products on the Internet. Part of its revenue comes from fees generated on each transaction conducted on its networks. The company also charges a licensing fee for customers to use its software.

Many of the transactions toward the end of the quarter, largely related to a partnership with AOL Time Warner, involved a revenue-sharing contract. Some of those transactions had to be reviewed and confirmed by third parties, Clough said.

As a result, about $10 million worth of transactions could not be confirmed until after the quarter closed, Clough said.

"Our revenue-recognition decisions require us to grapple with merging accounting standards," Clough said. "Late Tuesday night we jointly concluded (with outside auditors) that some of the revenue should be deferred (to the next quarter)."

This morning, analyst Pawan Malhatra of S.G. Cowen downgraded the stock from a"strong buy" rating to a "hold."

"The delays that they had raise more questions than they had answers for," added David Garrity, an analyst for Dresdner Kleinwort Wasserstein.

Garrity downgraded PurchasePro's shares Wednesday from "buy" to "hold" after the company delayed its earnings report.

"(The delays) point to the fact that the new (staff) members they are bringing on from more established companies are needed."

The company announced Tuesday that board member Richard Clemmer, formerly chief financial officer of Quantum, would fill that position for PurchasePro, ending a months-long search that had raised questions among investors and analysts about the company's accounting practices.

PurchasePro's revenues for the first quarter totaled $29.8 million, compared with $4.6 million posted in last year's first quarter. During last year's fourth quarter, the company reported $33.6 million in revenues.

During the recently ended quarter, PurchasePro and AOL announced details of their partnership to co-develop the Netscape Netbusiness Marketplace that aim to converge the two companies business clients. These customers would pay a subscription-fee to use the Web-based marketplaces. Revenues are split 50-50 between the two companies.

"While we recognize that our results are below expectations, we achieved a number of milestones in the quarter that are broadening our reach," Chairman and Chief Executive Charles Johnson, Jr. said.

"Our focus continues to be on driving transactions, revenues and growth to further our position as a leading business-to-business e-commerce company," Johnson added.

Some of customers from the Netscape Netbusiness Marketplace have been added for free during a promotional period. Johnson said the company doesn't expect to convert them to paid subscription members until the fourth quarter.

Clough said about 66 percent of the company's revenue during the first quarter was generated through the AOL partnership. He noted that $9 million came from subscription fees, $3.7 million came from integrated services and $7.1 million came from licensing software fees.

Two of those licenses, accounting for $4.1 million, failed to be calculated in time to count for the first quarter revenues, Clough said, noting that revenue would be deferred to next quarter's earnings.

One analyst remains in a wait-and-see mode on the benefits of the AOL-PurchasePro partnership.

"Our question isn't so much what (the AOL deal) will do to the top of the line, but what it will do for their bottom-line. If you make a $100 and pay $100 in taxes, what good is it?" Garrity said.