must read article from wsj
Dow Jones Newswires -- April 21, 1999
Cda's Net Darling Bid.Com Gets Dose Of Realism On Wall St.
By Scott Adams
TORONTO (Dow Jones)--Canadian online auction company Bid.Com International Inc. (BIDS) hopes to ride the wave of Wall Street's dot.com euphoria with its listing on the Nasdaq exchange.
But it has gotten off to an inauspicious start, as the company's shares have tumbled since the company started Nasdaq trading Tuesday.
The stock is down 3 3/16 to 9 5/8 Wednesday, after having lost 3 13/16 Tuesday.
As one of Canada's few pure-play Internet stocks, Bid.com has benefited from the Internet mania which has whipped investors into a frenzy reminiscent of the gold rush days. It has been one of the hottest stocks in Canada for the past six months, rising as high as 32.05 in Toronto on April 9, from a 52-week low of 0.56 last October.
Like many other Internet stocks, the company hasn't posted a profit yet. The company, which changed its name from Internet Liquidators International Inc. last year, buys products from manufacturers and distributors and resells them through online auctions on its Web site. It competes with U.S. companies such as UBid Inc. (UBID) and Onsale Inc. (ONSL).
In an effort to boost market share, Bid.Com last year sold many of its goods below cost, meaning it sold the products at less than what it paid for them. Other comparable U.S. Internet auction companies sometimes sell goods below cost, but not as frequently as Bid.Com.
Bid.Com wants to be "cash flow positive in 1999" and that means it will wind down this discount practice, president Jeff Lymburner told Dow Jones. The company hopes to do this while increasing revenue to about C$50 million in 1999, Lymburner said, adding that the company has numerous plans to diversify its revenue.
Last year, the company's main goal was to increase traffic to its Web site "and certain expenditures made sense," Lymburner said. "We think we've reached the critical mass where we don't have to make some of those same expenditures (as last year) so I think that we will see a very measurable move towards improved margins (this year)."
In 1998, Bid.Com had revenue of US$13.1 million, or C$20.1 million, up 600% from the prior year. The company incurred direct expenses of C$19.4 million, for a gross profit of C$728,000. But that gross profit excludes some expenses.
By definition, gross profit is net sales less the cost of goods sold; it's also called gross margin. However, Bid.Com has an atypical way of accounting for some of its losses and expenses. The company's financial reports show that it places the loss for goods sold below cost under its advertising and promotion expenses category. According to Bid.Com's 1998 financial report, it cost the company C$3.52 million to sell goods at below cost last year. This figure is included in advertising and promotion expenses of C$12.6 million.
If Bid.Com had included the losses on those goods sold under its gross margin heading, gross profit would have been negative by about C$2.8 million in 1998.
In comparison, competitors Onsale and UBid include in their gross margin those goods that they sell at below costs. In 1998, uBid had revenue of US$48.2 million and a positive gross margin of US$4 million. Onsale reported gross merchandise sales of US$234.4 million and a gross profit of US$22 million in 1998.
Bid.Com's Lymburner said the company's accounting has been approved the company's auditors Deloitte & Touche LLP and it complies with U.S. and Canadian generally accepted accounting principles. The company's 1998 financial results were filed with the SEC as of April 15 prior to its listing on Tuesday.
Robert Willens, a well-respected tax and accounting analyst with Lehman Brothers, said he can see the theory behind Bid.Com's accounting and that he doesn't believe it is "erroneous." A Nasdaq spokesman said foreign-listed companies must comply with U.S. GAAP before listing on the exchange.
Stock Ran Up Prior To Nasdaq Listing
Duncan Stewart, a portfolio manager for the Canadian Navigator Technology Fund, said the stock has fallen in the past two days because it should never have reached as high as C$32.50 earlier this month, which gave it a market capitalization of more than C$1.5 billion. The stock ran up prior to its Nasdaq listing on the hope that U.S. investors would bid it up even higher, but just because a Canadian stock lists on the Nasdaq, that doesn't mean it will go higher, he said.
He said some investors have also been incorrectly comparing Bid.Com's revenue to eBay Inc.'s (EBAY) revenue. Bid.Com's 1998 revenue of US$13.1 million includes the value of all the goods it sold, or gross merchandise sales. In 1998, eBay had revenue of US$47.4 million, which is the figure that some investors were comparing Bid.Com's revenue with. But eBay's gross merchandise sales were worth US$745.4 million in 1998, or 57 times greater than Bid.Com's sales. eBay differs from Bid.Com in that it doesn't buy the merchandise, it only collects the commissions for providing an auction site for buyers and sellers. It reports its commissions as its revenue.
As of the close of Tuesday, eBay had a market capitalization of US$19.6 billion, about 30 times the size of Bid.Com's market cap of about US$650 million at the close Tuesday.
In addition, although Bid.Com reported less in gross merchandise sales than Onsale and uBid in 1998, its market capitalization was higher as of the close of Tuesday, even after falling significantly in recent days. As of the close Tuesday, Onsale had a market capitalization of US$469 million, while uBid had a market capitalization of US$404 million.
Bid.Com has also found it difficult to attract a loyal institutional following in Canada. Only two research analysts have reports out on the company, its underwriter Yorkton Securities Inc. and Taurus Capital Markets Ltd., which put a "sell" rating on the stock last November.
Ian Ainsworth, portfolio manager of the Altamira e-business Fund, isn't a shareholder. "We've looked at the company and we chose to go with models that are more viable," he said, declining to elaborate.
However, the company has attracted a loyal following among retail investors, as apparent on Internet chat lines. It has also been promoted on an Internet site called Bidding On Bay Street. Earlier this month, Bid.Com was added to the Toronto Stock Exchange 300 composite index, drawing buying from index funds.
Bid.com also has aggressive diversification plans. President Lymburner said the company will be updating its Internet auction site in about a week, specifically its "Dutch Auction" service. Whereas most auctions have rising prices, Dutch Auctions have declining prices. This new Dutch Auction service will have audio and video features, which Lymburner said will be unique to Internet auctions.
Bid.Com received a patent last month for its Dutch Auctions "process," which it hopes to license to other parties. Lymburner declined to say how much revenue the company believes it can derive from these licenses, but he said there should be revenue from that this year.
Bid.Com hopes also to license its auction technology to other parties, such as newspapers. Bid.Com also has begun to see revenue from advertising on its auction Web site, though Lymburner couldn't provide any specific figures. It also is launching business-to-business auction services.
-By Scott Adams; 416-943-7804; scott.adams@dowjones.ca
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