BARRON'S: Worth The Price? With A Modest Business, PurchasePro Has Built A
Large Market Value
By Sandra Ward
Under white parasols and over good cigars, the talk in the boxes one
sun-drenched Saturday afternoon in October 1999 at Keeneland RaceTrack
turned from the day's card to a topic America seemingly couldn't get enough
of at the time: the Internet. Some of Lexington, Kentucky's movers and
shakers in the stands that day had more than a passing interest in at least
one online phenomenon. These were the lawyers, commercial real-estate
developers, auto dealers, even a jewelry chain-store magnate, who had
invested alongside a local boy whose small start-up Internet-based
business-to-business operation promised to revolutionize the way businesses
bought and sold goods.
A month earlier, these early investors, "friends and family" as they're
called when it comes time to see who gets an allotment of shares in an
initial public offering, had seen their fortunes swell when Charles "Junior"
Johnson's PurchasePro.com sold stock to the public. The price soared 116%
the first day of trading, to about 9 from 4 on a split-adjusted basis,
jump-starting the postLabor Day IPO market after a quiet summer.
PurchasePro, which provides a kind of high-tech Yellow Pages where buyers
and sellers find each other, would be one of the year's best-performing
initial offerings.
The stock climbed steadily through the fall and winter as word of a coming
partnership with America Online rushed through the community like a swollen,
rampaging river. Sure enough, a deal with AOL was announced on March 20 of
last year, six months after PurchasePro went public. That same day, the
stock reached its zenith, 82, adjusted for splits. Just about then, too,
lockups restricting stock sales by insiders and early investors expired. The
next day, the shares fell 20%, at the start of what would be a long, steady
slide in PurchasePro, as well as most things Internet-related. At the races
that spring, the talk turned back to horses.
Not quite a year since the pact with AOL (now AOL Time Warner) was
announced, PurchasePro shares change hands around 25. That's nearly 70% off
the high, but well above the May 30 low of 9.19. It's gained more than 50%
so far this year as Internet stocks enjoy a bounce after 2000's merciless
rout and as optimism spreads that PurchasePro will post big gains in revenue
when it reports fourth-quarter results. A big plus: Morgan Stanley's
influential B2B analyst, Chuck Phillips, initiated coverage January 17 with
an outperform rating and a target price of 30. The stock was at 16.63 at the
time.
Adding to the run-up, too, was the news that AOL would expand its marketing
efforts on behalf of PurchasePro through the many channels it now accesses
since its merger with Time Warner. No doubt, too, some short sellers may
have felt squeezed and covered positions.
PurchasePro officials abruptly cancelled a mid-December interview scheduled
with Barron's, preferring to postpone a meeting until the company reports
its fourth-quarter and yearend results Monday, February 12.
At its recent stock price, PurchasePro has a market value of about $2
billion. Not bad for a company whose revenues for the full year 2000 are
expected to come in at $61.7 million. That's based on an expected $30
million of revenues in the fourth quarter, up from $17 million in the third
quarter and $6 million in 1999. There have been no profits and cash flow has
been negative.
Anyone considering investing in PurchasePro has to consider the general
business climate for the online business-to-business universe, which is
undergoing a reassessment by the investment community as growth slows,
pricing pressures loom and a shakeout is all but certain.
Factors more specific to PurchasePro are definitely worth pondering, too.
Among them: its liberal accounting procedures and the lack of a chief
financial officer; its inexperienced management team full of buddies; its
inability to retain some high-profile partnerships, including those with
troubled retailer Office Depot and Sprint; and its heavy reliance on a
single source, Hilton Hotels, for transaction revenues. A big question
remains as to whether the small and mid-size companies PurchasePro is
targeting stand to reap the kind of benefits from B2B exchanges that will
induce them to stay on as subscribers.
Noteworthy, too: Top PurchasePro officials often make a point in
presentations to investors and to the media that they have not sold any of
their shares. What they don't disclose in their discussions, but have
acknowledged privately to investors, is they've borrowed against their
shares, the next best thing to selling shares since the stock is pledged as
collateral. Johnson, for one, secured a $100 million personal loan. Also
insider selling has picked up of late.
PurchasePro, like many of its B2B rivals, has rejiggered its business model
so that much of its revenues are based on collecting software-licensing,
Web-hosting and transaction fees, rather than on selling membership
subscriptions for its services. Competition is intensifying among the top
players, including Ariba, CommerceOne, PeopleSoft and SAP, as most of the
market for blue-chip clients -- Fortune 1000 companies -- has been taken.
And pricing pressures are rising.
These concerns came to the fore when Ariba reported disappointing fiscal
first-quarter results last month. Soon after, Commerce One announced strong
year-over-year revenue growth for its fourth quarter, but revealed that
direct license sales had risen just 9%, compared with 25% in the previous
quarter, and that it had become more reliant on joint sales with SAP. Ariba
and Commerce One are the No. 1 and No. 2 global players and the ones that
garner the most attention. These are the ones investors are consolidating
their bets on as the economy slips into uncertainty.
PurchasePro executives like to call their company a "little Ariba." Says CEO
Junior Johnson: "We're on the cutting edge of everything." Johnson (not to
be confused with the race-car driver of the same name) boasted in twangy
tones last fall in an unsolicited telephone call to Barron's. "We're on the
cutting edge of technology, the cutting edge of accounting."
Cutting edge? Maybe. In any event, PurchasePro has come a long way.
It had no venture-capital backing and no first-tier investment banker to
bring it public. Jefferies & Co. and its head, John Chiles, agreed to
underwrite the deal. But because Chiles was a PurchasePro director and had a
stake in the company, Prudential Securities was brought in as co-manager.
Two of the Prudential bankers that helped bring PurchasePro public hold
senior management positions at the company.
Johnson brags of having dreamed up the PurchasePro concept five years ago,
while standing on a street corner in Manhattan with then-girlfriend Gina
Tognoni, who plays Kelly Cramer on the soap opera One Life to Live. At the
time, as he tells it, he didn't even know how to use e-mail.
Before PurchasePro, Johnson ran some video stores and fitness clubs in the
Cincinnati area and managed his father's security business in Lexington.
Johnson was in Las Vegas with good chum Royce Pulliam, head of Global
Fitness Holdings, a Lexington-based Gold Gym's franchisee, when he first met
former Mirage Resorts chairman Steve Wynn, who proved instrumental in
helping PurchasePro take flight. Just last year, Executive Vice President
Robert "Geoff" Layne took a 20% stake in Pulliam's Global Fitness Holdings.
PurchasePro's president, Christopher Carton, doesn't have high-tech
background either; he used to manage country clubs. Johnson's cousin,
Bradley Redmon, a former operator of Blockbuster Video stores and a
Pretzelmaker franchisee, holds a contract to supply software to the company.
The makeup of the management team makes some investors wary. "This is an
industry with significant technical components," says a securities analyst
at a leading firm specializing in small-growth stocks, whom Johnson
approached hoping to gain wider Wall Street coverage of PurchasePro. "I
don't see any software management experience, and there's not a lot of
technical know-how."
More of a concern, there have been four chief financial officers in about as
many years, and the post is currently vacant. This is a big issue even for
bulls on the stock.
"They need a CFO," says Chris McHugh, of Turner Investment Partners, who
bought PurchasePro shares at the 16-17 level for his small-cap and B2B
funds.
Indeed, some accounting issues have cropped up. In the third quarter, the
company refiled its second-quarter results to reclassify $2.35 million of
revenues. Also in the third quarter, CEO Johnson signaled to the Street that
revenues would be in the $22 million range; the figure came in at $17
million and Johnson admitted to investors $5 million had not been sold
through yet to end users and he was advised to defer the revenue. In
addition, accounts receivables spiked up dramatically in the third quarter
-- to $22.6 million from $1.73 million -- and the provision for "doubtful"
(or uncollectable) accounts bulged by nearly $2 million, versus $351,000 a
year earlier. Days sales outstanding or DSOs, jumped to 123 days in the
third quarter. Company officials routinely characterize PurchasePro as
having turned cash flow-positive in the third quarter, but then explain this
is only possible if orders booked through resellers are accounted for
immediately.
(MORE) DOW JONES NEWS 02-03-01
02:26 AM
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