Bye bye, a true PPRO roast. Get a load od the schmuck in the pool at Vegas, LOL: "Worth the Price? With a modest business, PurchasePro has built a large market value
interactive.wsj.com (Barron's)
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
post-Labor 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 canceled 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 a 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.
The more common practice is to wait until products or services are sold to the
end user before recognizing revenues. "There are issues about control and the
business process and who is minding the store when it comes to general
accounting practices," says a New York hedge-fund manager who was long
the stock in the past as a momentum play, but no longer holds a position.
In his call to Barron's, Johnson said that the CFO post is the only one he's
filled with employees age 50 or older, something that helped satisfy investment
bankers. One, Richard St. Peter -- whose eight-year stint as former CFO of
Petco Animal Supplies ended in 1998, after a series of earnings shortfalls --
lasted less than a year. Johnson, who noted St. Peter "did real, real well in
one year," leaving with 50,000 vested PurchasePro stock options, says that
the former CFO was "old school" in his approach and didn't have confidence
in PurchasePro's business model.
St. Peter wouldn't comment.
One thing St. Peter had going for him is residency in Las Vegas, where
PurchasePro is based. Much of its business is tied to that city's hospitality
industry, and MGM Mirage has been one of its biggest supporters. Steven
Wynn, Mirage's chairman until its takeover by Kirk Kerkorian's MGM
Grand, provided early support; indeed, Wynn is understood to have lent
Johnson money to pay off notes due to those who helped get PurchasePro off
the ground.
A host of Johnson's associates have Wynn connections. MGM Mirage
Chairman J. Terrence Lanni, for example, is a former PurchasePro director.
Wynn also urged local suppliers to sign on with PurchasePro.
Among other Las Vegas types with stakes in PurchasePro are Maurice
Gallagher, a communications entrepreneur and ValuJet Airlines cofounder and
former PurchasePro director, and Robert Priddy, also a founder of ValuJet
and a principal of RMC Capital, an investment company he formed in 1998
and through which he has made numerous Internet investments. Both have
been sellers of PurchasePro recently.
For PurchasePro to thrive, not only does it have to bring on more partners to
deliver more members for its licenses and services but it needs to show a level
of transaction volume that will give members a reason to stay with the service.
In the third quarter, $8.4 million of transactions were conducted on the
PurchasePro system, according to information the company provided to
investors. With PurchasePro extracting a 1% fee, that amounts to $84,000.
Peanuts. Of the $8.4 million, Hilton accounted for $2 million. Moreover,
PurchasePro is struggling to retain the partners that are vital to bringing in new
customers.
Last week, its subscription agreement with Office Depot ran out (the same
day its expanded agreement with AOL was announced). The agreement
won't be renewed, according to Eileen Dunn, Office Depot's investor relations
director. That's a blow. The pact with Office Depot, which included warrants
to issue 750,000 shares of PurchasePro at $8 a share, was struck under
Office Depot's former management team, including CEO David Fuente, who
had also served on PurchasePro's board. Fuente quietly exited the board in
December; PurchasePro announced only that it had named R. Todd Bradley,
executive vice president of global operations for Gateway, its newest partner,
to the board. Fuente couldn't be reached for comment.
Shawn McGhee, who headed Office Depot's North American operations and
its e-commerce initiatives, joined PurchasePro in the fall, as chief operating
officer. PurchasePro maintains that Office Depot was behind the ballooning of
accounts receivable in the third quarter as CEO Johnson cut the struggling
retailer some slack as its business sagged. Now, too, PurchasePro is telling
investors that its marketing agreement with Sprint will soon end.
Many of PurchasePro's business partnerships are based only on a handshake.
In the world of B2B, such partnerships are often dubbed "Barney
agreements" because they generally amount to businesses proclaiming "I love
you, you love me" and not much more.
One deal that is far firmer is with AOL. PurchasePro is on the hook for at
least $70 million to that company under a marketing and revenue-sharing
pact. AOL provides marketing and technological support. AOL also received
warrants to buy four million PurchasePro shares, which vest at different
intervals and are exercisable at strike prices that have been reset so they
remain in the money. The value of the warrants is recorded as paid-in capital.
Other PurchasePro relationships appear to have altered radically from the
time they were announced.
In December 1999, Advanstar, a publisher of trade magazines and producer
of trade shows, agreed to have PurchasePro create a B2B system linking
Advanstar customers and creating Web communities and exchanges.
PurchasePro was to receive $5 million for building the system and $1.6 million
a year for maintaining it. The two were also supposed to share revenues from
transactions and advertising. But by the following spring, the companies had
gone their separate ways, according to James Alic, vice chairman of
Advanstar and chairman of Advanstar.com.
And an agreement announced with VerticalNet in November 1999, in which
PurchasePro said that VerticalNet had "licensed the full suite of
PurchasePro.com's e-commerce tools" "never materialized into anything,"
according to a spokeswoman.
As for PurchasePro's claim -- made on a number of occasions -- of providing
a liquid marketplace of "more than 30,000 businesses," it may be a bit of a
stretch. After talking with some of the small to mid-size firms that are
mainstays of its strategy, there's little evidence that being part of an online mart
generates enough efficiencies or profits to make them stick with it.
M&M Office Supplies of Las Vegas, which has less than $1 million in annual
sales, is one of those businesses. Owner Mary McDowell sought to end her
contract with PurchasePro four months ago. But she was told she could stay
on the network free of charge and would be assessed a charge only if she
benefited from any transactions on the system. McDowell says she's gotten
little business through the system. "For smaller companies," she asserts,
"personal relationships are more important" than the Internet. And, she adds:
"Most of the smaller businesses [she's spoken with] have found the same
problems."
Comments Joyce Holtz, owner of the Beveled Edge Frame Shop, a custom
picture-framing store in Las Vegas: "I was doing a lot of work and not getting
a lot out of" PurchasePro's network. She had expected to win more
commercial accounts through the system. "Networking brings in a lot more
business," she asserts. Nonetheless, she intends to continue to pay $40 a
month to PurchasePro to maintain her Website.
One of PurchasePro's original customers, the Greater Phoenix Chamber of
Commerce, might not renew its annual contract, according to Stuart Banks,
the organization's senior vice president. Banks says concerns about the
long-term viability of dot-com businesses in general, and PurchasePro's
inability or unwillingness to share information about how much business its
members generate on the system in particular, are causing the chamber to
rethink its ties to the B2B company. At least 100 of the chamber's members
are participants in the system. Another issue for the Arizona organization:
PurchasePro's technology was incompatible with most of its members'
computer systems and the chamber was forced to provide upgrades. It turned
to International Business Machines for solutions because PurchasePro doesn't
resell its technology. Another cause of the Chamber's reassessment of its ties
to PurchasePro is the falling price of setting up a business Website directly. "If
you can do it better yourself, you'll do it yourself," says Banks.
Besides the phone calls from CEO Johnson last fall, PurchasePro officials
haven't been eager to discuss the company's prospects with Barron's. In
postponing a rescheduling of the canceled December interview with Barron's,
PurchasePro cited the "quiet period" designated by securities laws preceding
the release of financial results. Since then, company officials have made
presentations at a Morgan Stanley conference in Arizona, have courted
investors in Zurich, entertained securities analysts at a SuperBowl party in Las
Vegas and just last week made the rounds on Wall Street, touting their
prospects to money managers. |
