01:39pm EDT 11-Apr-00 Robertson Stephens VERT: Q1:00 Preview - Comfortable with Estimates (Page 1 of 2)
Key Points:
** We are comfortable with our Q1:00 estimates of total revenues of $16.7
million and operating EPS of ($0.27), which reflects the 2-for-1 stock split
effective April 3, 2000. Our estimates include the first full quarter of
NECX results as well as higher operating expenses for the Real World and
Microsoft deals. The company plans to report the week of April 24.
** We are adjusting our C2000 and C2001 estimates to reflect the Real World
Electronics acquisition, which closed on April 3, 2000. VerticalNet paid $10
million in cash and approximately $38 million in stock, and assumed $21
million in debt. We expect Real World to add net revenues of $14.3 million
in C2000 ($133 million in gross revenues) and $36.0 million in C2001 ($180
million in gross revenues). We believe the acquisition will be accretive to
C2001 and the company will still achieve profitability in Q3:01.
** We believe the recent acquisitions of two land-based electronics players,
the acquisitions of Isadra and Tradeum, and the Microsoft partnership
represent a changing strategy and business model for VerticalNet -- and the
potential acceleration of the company's transition from a media model to a
commerce player. Although it is still very early, we believe VerticalNet has
solid momentum and a strong presence in the electronics vertical, and
represents a diversified play on the B2B space.
Q1:00 (ENDING MARCH) PREVIEW
We are comfortable with our Q1:00 estimates of total revenues of $16.7 million
and operating EPS of ($0.27), which reflects the 2-for-1 stock split effective
April 3, 2000. Our estimates include the first full quarter of NECX results
(projected to contribute $8.1 million in net revenues) as well as higher
operating expenses for the Real World and Microsoft deals.
Over the last several quarters, VerticalNet's strategy and financial model have
evolved dramatically -- where the company has completed a number of significant
acquisitions, including two technology plays (Isadra and Tradeum) and two land-
based electronics brokers (NECX and Real World Electronics). In addition,
VerticalNet signed a major deal with Microsoft -- growing storefronts from
2,900 in Q4:99 to more than 80,000 over the next three years. Thus, VerticalNet
has changed the model substantially on two fronts:
** Escalated the media model -- from adding a few hundred new storefronts per
quarter to signing major deals to accelerate both its advertising and
strategic partnership initiatives. If VerticalNet continues to sign deals of
a similar magnitude, we believe there could be much greater upside to
advertising revenues while the sales model changes profoundly.
** Expanded the eCommerce strategy -- buying legacy businesses in a select
group of large, highly attractive industry verticals and moving them online
using its proprietary technology. We believe this strategy is much broader
in scope than the revenue sharing agreements VerticalNet has signed with
other B2B marketplaces, such as the PaperExchange.com deal. In addition to
having greater control over its marketplaces, VerticalNet is betting that it
is faster and more effective to move offline businesses to the Internet by
leveraging its technology than to build liquidity one buyer or one supplier
at a time.
With the NECX and Real World acquisitions and the Microsoft deal, we have
raised our C2000 revenue estimates from $47 million to $131 million and C2001
revenues from $95 million to $266 million. Sales from NECX and Real World are
projected to account for 34% of C2000 revenues, the majority of which will be
offline as VerticalNet migrates these legacy businesses to the Web beginning in
Q3:00. As a result, we believe the metrics we focused on in the past (number of
vertical sites and storefronts, and advertising and eCommerce revenues as a
percentage of the total mix) are less relevant to the story moving forward.
We believe these moves are indicative of VerticalNet's bigger vision moving
forward -- becoming a major player in eCommerce by focusing on the most
attractive vertical industry opportunities, regardless of whether they are in
the portfolio of 55 today. Longer term, we believe VerticalNet will build B2B
marketplaces in 5-15 verticals in a hybrid model that is likely to combine its
technology platform with the domain expertise, liquidity, and distribution
capabilities of offline partners.
IMPACT OF REAL WORLD ELECTRONICS ACQUISITION
On April 3, 2000, VerticalNet completed the purchase acquisition of Real World
Electronics for approximately $69 million ($10 million in cash, $38 million in
stock, and the assumption of $21 in debt). Founded in 1981, Real World is an
offline electronics broker and distributor focused on spot and open market
services as well as predictive end-of-life inventory management and custom
purchasing programs for the electronics industry. In addition to enabling
Original Equipment Manufacturers (OEMs), Contract Equipment Manufacturers
(CEMs), telecommunications manufacturers and systems integrators to buy and
sell CPUs, memory chips, semiconductors, passives, and storage devices, Real
World provides inventory management software to help reduce inventory-related
inefficiencies.
Given that it is a smaller competitor to NECX, we believe Real World expands
NECX's existing buyer and supplier network in the $60 billion open market
segment of the $150-200 billion electronics industry as evidenced by the
following:
Real World NECX
1999 Gross Transactions $170 million $348 million
1999 Net Revenues $19.5 million $37.5 million
# Trading Partners 8,500 18,000
Offices Worldwide Boston, Korea and Japan Boston, Ireland, Sweden,
Singapore
# Employees 60 160+
Source: Company reports.
VerticalNet is expected to integrate Real World's organization and services
into NECX's Global Electronics Exchange -- offering comprehensive sourcing,
procurement, and inventory management solutions in a real-time eCommerce
exchange for electronics components. VerticalNet is targeting a Q3:00 launch of
the electronics marketplace -- migrating about 10% the NECX and Real World
legacy businesses online by year-end.
In terms of the model, we expect Real World to add $14.3 million in net
revenues in C2000 ($133 million in gross transactions) and $36 million in C2001
($180 million in gross transactions). We expect the acquisition to be accretive
to earnings in C2001 and the company to break even in Q3:01. In its financial
statements, the company now combines NECX and Real World gross revenues and net
revenues (contributing to overall gross margin), and breaks out VerticalNet
advertising and eCommerce revenues.
STOCK PERFORMANCE
With the recent market sell-off over the past three weeks, the stock has
dropped 44% and is 60% off its 52-week high of $148. This compares to a 40%
drop for the B2B comp group and 9% for the NASDAQ. However, the stock is still
up more than 250% from its IPO in February 1999 -- reflecting the company's
first-mover advantage and enormous, untapped opportunity in the B2B space, in
our opinion. At $50, VerticalNet trades at 28x C2000 revenues and 14x C2001.
We believe the volatility in the stock reflects increasing concerns among
investors that B2B companies are at risk given the recent announcements from
industry players to build their own exchanges, the potentially restricted
public market financing environment, and uncertain interest rate movements over
the next year. In an unstable market, investors have become less willing to pay
for early stage B2B companies that aren't expected to demonstrate significant
eCommerce traction until the 2001-2002 timeframe, in our opinion.
Although we are profoundly bullish on the B2B space, and as large and as
durable as we believe these franchises could become, they will take a long time
to build -- where developing scalable infrastructure and marketplace liquidity
is analogous to developing the interstate highway system. For all the value we
believe these companies will provide, it is likely that it will take several
years to get there, given they must integrate hundreds of players and systems,
tie together multiple business processes, replicate both workflow and
collaboration online, and incorporate every piece of the transaction in order
to offer a seamless, end-to-end solution.
RATING: VerticalNet is rated Buy.
THE COMPANY: Founded in 1995 and based in Horsham, Pennsylvania, VerticalNet
is a Business-to-Business (B2B) eCommerce company that operates a portfolio of
highly focused, vertical trade communities on the Internet. Each site provides
content, communities and commerce, including product sales, auctions, industry
news, online forums, career centers, and other resources for industry
constituents. Each trading site has a similar infrastructure, architecture and
purpose, enabling VerticalNet to quickly replicate sites across new industries. |
