Net Perceptions, Inc. (NETP) Message Board

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Technology Stocks : Net Perceptions, Inc. (NETP)

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To: Raj Ramaswamy who wrote (2743)	8/18/2000 9:21:34 AM
From: rupert1	Read Replies (2) of 2908

Raj: In the first place the Form 10 tends to be boiler-plate. All companies use more or less the same format and use the same phrases. They all tend to be ultra-conservative. They give the company a wide margin of error. There are no brownie points for being realistic in the Form 10 but lots of litigation and SEC penalties if you err on the side of optimism. They all say they may never sell a single widget again and their costs may explode 1 million-fold. The only risk not listed is that the dinosaurs might return and trample all over their factory. Having said that, I complained in posts about 6 months ago at the wide divergence between the Form 10's statements of no profitability in 2000, 2001 (and they used to say 2002)and the analysts expectations, which at that time was profitability in 1Q 2002, subsequently brought forward to 4Q 2001 and now 3Q 2001. At that time I was "predicting" profitability first in 2Q 2001 and then 1Q 2001. It seemed to be verging on irresponsibility for NETP to present one picture of operating trends in quarterly and annual reports, and a radically different one in formal SEC filings. It was exacerbated by the CFO's statement that "we are comfortable with analysts expectations" and "...we have always exceeded analysts expectations". To the best of my knowledge, yesterday was the first time that NETP have stated unambiguously that profitability will be achieved in 2001. It was said by the COO. The CFO also talked about the drive to profitability and said he used operating margins as his guide. They have improved sequentially every quarter and last quarter improved 9%. (That is why the debate about the abandoned lease write-off is so important - without that charge the operating margins were even better than the official figures). So my prediction of a year ago that profit will be in 1Q 2001 is looking better. The analysts predict 3Q - but if you look at their predictions you will see that NETP will probably have needed to have gone into profit sometime in 2Q even if the net effect in 2Q is a small loss. Since analysts have been consistently too conservative, it is not a huge leap to suggest that they are wrong again. I have stuck on 1Q 2001 they have moved from 1Q 2002 to 3Q 2001. However, 2Q was lower revenues than many expected. It did not have a negative effect on the trend in operating profits but it did raise a note of caution. Also, if NETP does make an acquisition of a loss-making company then that might affect the date of profitability (and the prudence of the Form 10 would come into effect). On the other hand it is possible that some of the pipeline Knowledge Management revenues may come good in the 3Q and 4Q and they have high margins. Absent a dilutive acquisition, I would expect profitability in less than six months - 1Q 2001 - and if I am wrong it will be by only one quarter - 2Q 2001. Even if NETP achives profitability - it can still go back into loss if NETP were to make a big acquisition which was dilutive of earnings. With respect to increasing costs and use of cash. There will be an increase in the absolute dollar value of costs, but a decrease in their percentage of revenues. As the company grows it costs more to run but the cost decreases in proportion to the enlarged revenues. But the cash-burn rate is decreasing - not increasing. As NETP reduces its operating loss it needs to use less and less of the cash reserves: eventually it will be profitable at which point it will stop using its cash reserves, will pay all its bills from revenues and start saving some of its profits. Even after it is profitable it will still have over $100 million in cash. It never needed an SPO to get to profitability.

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