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VerticalNet Guarantees Cash Positive Fourth Quarter - Brief Article

Despite the fact that VerticalNet has posted tremendous losses in its past few quarters and that the company has undergone major restructuring in the past year, president and chief executive officer Mike Hagan insists VerticalNet will be cash flow positive by the fourth quarter of 2001.

Hagan made the announcement during the company's first quarter earnings conference call last week. VerticalNet posted a net loss of $90.4 million for the period, ended March 31, on revenue of $36.7 million. The company will also cut 25% of its work force in an effort to reduce operating expenses.

But the extent of VerticalNet's losses is deceiving because the company is just completing its efforts to restructure its operations and focus on its role as an e-commerce enabler for suppliers.

VerticalNet spent its first five years building online vertical marketplaces that offered news content, community and e-commerce. Company executives had envisioned the company generating the bulk of its revenues off transactions at its communities. But traffic at the marketplaces never materialized as company executives had envisioned.

The obvious question was why? What VerticalNet found was, suppliers faced too many technological obstacles. It simply wasn't cost-effective for small to medium-sized suppliers to begin selling their inventory online, Nate Lentz, senior vice president of strategy, told EIR.

Seeing an obvious gap in the market, VerticalNet realized it could use the technologies it had developed to build its vertical communities to build e-commerce platforms and solutions for suppliers that couldn't afford to do it themselves.

"The real benefits are to be derived not from transactions being conducted, but from making the business processes more effective," Hagan said. "While the game may have changed, the significant potential is just now being realized."

With this in mind, VerticalNet hired former Amazon.com executive Joe Galli to direct the company in its new role (EIR, July 28, 2000). That move would throw the company into more turmoil. Galli began by splitting the company into three business units, then, less than six months after joining the company, he left (EIR, Jan. 12, 2000). The sudden exit of Galli raised an alarm amongst VerticalNet analysts and many of its shareholders.

In need of a jump-start to begin its new role as an e-enabler, VerticalNet sold off its largest unit, electronics exchange NECX.com, to Converge, a new consortia-owned online exchange for the electronics industry, for a 20% ownership in Converge and a role as the exchange's technology provider (EIR, Jan. 5, 2001). With the sale, VerticalNet announced that it would no longer be an operator of online marketplaces.

The sudden change in strategy resulted in an even more pronounced loss of shareholder faith. The company's stock, once trading at over $150 a share, sank to less than $2 a share. What VerticalNet was doing, however, really wasn't that different from what it had been doing all long, Lentz said.

"Our business model started out as an advertising model through storefronts at our 59 portals," Lentz said. "At the time, we were little more than a site that offered advertising for suppliers. What we are providing now is much more hosted solutions, which is based off the technologies we have been developing all along."

Since shifting its business model, VerticalNet has slowly been able to pick up the pieces. VerticalNet has put together deals with numerous new customers, including American Business Credit and Price Waterhouse Coopers. The company also now has backing from Microsoft, which it announced last week would support the development and marketing of VerticalNet's e-enablement products and services.

"Since the Converge contract, we have really been able to build out and gain credibility for our enterprise solutions," Lentz said.

Is Profitability This Year Possible?

VerticalNet may feel secure that its new strategy will work, by the question still remains as to whether or not VerticalNet will be able to reach cash profitability after posting a staggering $193 million loss in 2000.

Analysts seem to agree that VerticalNet will at least come very close to profitability by the end of the quarter, but they are by no means guaranteeing profitability.

In a report following the company's first quarter conference call, analysts with Merrill Lynch forecasted that VerticalNet would reach profitability by the fourth quarter of 2001 based on the company's strategy shift into its new role as a software provider and its work force reduction plans, but added that "confidence in its forecast is limited."

Thomson Financial's First Call, meanwhile, was less generous. Based on a survey of 19 brokers, the firm expects VerticalNet to post a loss of 4 cents per share for the fourth quarter.

VerticalNet may insist that its announcement to move into the supplier e-enablement market is a natural progression for the company, but analysts that follow the company aren't buying it.

Merrill Lynch reduced VerticalNet's 2001 revenue projections for the company from $226 million to $152 million as a result of the company's strategy change. And by no means is VerticalNet's move into the software space guaranteed to be successful.

"VerticalNet will be trying to develop new products and sell into a competitive space where competition is only accelerated by sapped software demand due to the economy," the report said.

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