FMKT ($18-$13)EPS -9.. Beats by 6 cents..raises guidance..but investors concerned that FMKT attracted only one new customer last quarter.
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Gauging FreeMarkets' Market
By Rex Moore
Poor FreeMarkets (Nasdaq: FMKT - news). It delivered a third-quarter earnings report exceeding all expectations, including its own. But when the dust settled yesterday, investors had knocked the share price down about 25% on fears that FreeMarkets' market is not all it was cracked up to be.
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FreeMarkets creates business-to-business auctions, helping companies purchase industrial parts, raw materials, and other goods and services. If a client needs ball bearings, for example, FreeMarkets accepts bids from suppliers around the world in a real-time auction. Its goal is to make money by helping buyers save money, and in its latest annual report FreeMarkets estimated that it saved customers some $2.7 billion last year alone. Its revenue comes from service agreements with its clients, which typically include fixed monthly fees and incentive payments based on customer savings.
The company's third-quarter net loss of $0.04 per share -- excluding non-cash expenses and goodwill charges -- topped the consensus estimate. Revenues grew 53% year-over-year, and gross margins improved for the seventh consecutive quarter, rising to 55%. In addition, FreeMarkets announced it would achieve profitability during the current fourth quarter, a quarter ahead of schedule. It expects to earn $0.15 to $0.20 per share in 2002, on revenue growth of about 30%.
Despite all that, FreeMarkets added only one new customer in the third quarter, compared to 12 in the previous three months. That prompted investors to worry that Freemarkets' segment of the B2B market may not have strong growth potential. Despite a customer stable that includes the likes of Alcoa (NYSE: AA - news), American Airlines (NYSE: AMR - news), Raytheon (NYSE: RTN - news), and Schering-Plough (NYSE: SGP - news), there are concerns that FreeMarkets is having trouble attracting more.
Yesterday's sell-off may have been an overreaction, however. The company is in good financial shape with $90 million in cash and equivalents, while it burned just over $100,000 last quarter. That bodes well: Many technology-based companies who said their money-saving products and services would help them stay strong in an economic slowdown have been proven wrong, and not all will survive. FreeMarkets should, and if it actually does what it says it does -- save money for its customers, at a fair price -- then it shouldn't have problems adding new clients over time.
Philip Fisher lays out 15 questions, or points in his classic book, Common Stocks and Uncommon Profits. Point four asks: Does the company have an above-average sales organization? Even great products or services rarely sell themselves. Perhaps FreeMarkets, soon to be a profitable company with a good business model and improving metrics, needs to concentrate on improving its pitch.
Rex Moore finally read The Hobbit: "So snow comes after fire and even dragons have their ending." His holdings, and the Fool's disclosure policy, are not as good a read as Tolkien, but are interesting nonetheless.
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