Sands Brothers Covers VERT
By: Sands Brothers
12/21/00 8:17:00 AM
Source: Sands Brothers
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Company Description: VerticalNet provides end-to-end E-commerce solutions targeted at distinct business segments through three strategic business units: VerticalNet Markets, VerticalNet Exchange and VerticalNet solutions. VerticalNet International leverages the company’s three strategic business units to create global Internet B2B marketplaces, offering products and services internationally and partnering with companies that have strong local presence and domain expertise. VerticalNet’s mission is to build and manage dynamic, industry-focused Internet communities with online information resources, communication vehicles and E-commerce channels for industrial, professional and technology based businesses. VerticalNet was founded in 1995 and went public via an IPO in February 1999. The company’s headquarters are located in Horsham, PA.
Quote Snapshot
VERT 5.66 0.34
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Investment Conclusion
We are downgrading our recommendation on VerticalNet from a Strong Buy to a Buy. On December 19, 2000, VerticalNet agreed to sell NECX, a global trading exchange for electronic and computer components to Converge (formerly eHITEX), a technology marketplace backed by technology companies such as HP, Compaq, NEC, Gateway, and Hitachi. The sale of NECX raises numerous questions as to the direction of VerticalNet’s business model and financial operations. The highlights of this announcement include the following:
-For the sale of NECX, VerticalNet will receive a 19.9% equity stake in Converge, as well as $60 million in cash. At the present time, no estimates have been given as to the valuation of Converge.
-In a separate announcement, Converge has signed a three-year contract to license $107.5 million in software from VerticalNet Solutions, a business unit of VerticalNet. Initially, Converge had selected Commerce One as its E-procurement technology vendor.
-At the present time, no actual guidance has been given as to how the transaction will be accounted for, future profitability measures, or to the valuation of Converge. We believe guidance will be given during the January conference call.
-Since its acquisition, NECX has accounted for over 50% of total VerticalNet revenues. We question whether the revenues lost from the sale of NECX will be made up through the value of the equity in Converge and future software license revenues from this deal.
VERT Sells NECX
On December 19, 2000, VerticalNet announced that they will be selling NECX, a global trading exchange for electronic and computer components to Converge (formerly eHITEX), a technology marketplace backed by technology companies such as HP, Compaq, NEC, Gateway, and Hitachi. In turn, VerticalNet will receive a 19.9% equity stake in Converge, as well as $60 million in cash. In a separate announcement, Converge has signed a three-year contract to license $107.5 million in software from VerticalNet Solutions, a business unit of VerticalNet. The VerticalNet software package replaces Commerce One, who, back in September, had been selected to provide auction technology to Converge. The NECX/Converge deal is expected to close during Q1’01.
Where does this leave VERT?
The selection of VerticalNet Solutions as the E-procurement platform for Converge is a positive announcement. VerticalNet was able to step in and steal business away from Commerce One in what was CMRC’s first mega exchange customer loss. We believe this deal puts VerticalNet Solutions on the map as a viable player in the highly competitive mega exchange technology provider sector. However, this deal raises numerous questions as to the future direction of VerticalNet’s business model and operations.
This sudden announcement leaves us questioning VerticalNet’s financial status. NECX represented approximately 53% of 3Q00 revenues and our current estimates had forecasted NECX to account for $160 million in total revenues for FY01. At this time, VerticalNet has not provided future financial guidance for life after NECX. We believe Management will issue guidance during the 4Q00 conference call, which should be held during the third week in January.
Management has emphasized that they would rather trade NECX’s volatile and unpredictable revenue stream for potentially more consistent revenues provided from licensing software to mega exchanges such as Converge. However, at this time there is no way to value whether these revenues will offset lost revenues from NECX.
Furthermore, though management claims that the ownership stake in Converge will place VerticalNet at the center of a high profile industry consortium, no present valuation can be attached to Converge. Therefore, no assumptions can be made as to the value of VerticaINet’s equity stake in Converge.
Management has now changed the structure of VerticalNet twice since Joseph Galli came on board as CEO. During the VERT/NECX/Converge conference call, management explained how VerticalNet would no longer run electronic exchanges and this essentially leaves VerticalNet Exchange as a business unit with no business.
Conclusion
VerticalNet’s stock has taken a significant hit since our now infamous November 7, 2000 election day, losing approximately 80% of its value. In addition, the stock has fallen precipitously from March 10, 2000, when the stock closed at a 52-week high of $136 19/32. We believe the $107.5 million software-licensing contract with Converge is a positive for VerticalNet but we are still left with a lot of unanswered questions. We believe VerticalNet stock will face near term volatility until VERT gives future guidance as to its new profitability timetable and financial outlook. At present, we are not changing our income statement model for 4Q00 or FY01 but we will likely alter our model after VerticalNet reports its 4Q00 financial results and sheds some more insight on VerticalNet’s new direction.
We believe VerticalNet was able to sign the deal with Converge based on a special/unique opportunity based on a swapping of revenue for equity arrangement revolving around NECX. We would consider revisiting our opinion on VerticalNet if the company can continue to win E-procurement business versus the “blue chip” B2B E-commerce companies such as Ariba and Commerce One but in the mean time we are taking a wait and see approach. Direct materials procurement is highly complex and specialized and a new segment of the market for VerticalNet.
Presently, VerticalNet trades at only 1.1x our current FY01 revenue forecast of $435.0 million. If the stock were to appreciate just 1x this forecast, this would imply 107% improvement to $11 per share. While our FY01 revenue forecast is likely subject to revisions, we nonetheless believe that the stock offers an attractive value at its current price.
We are downgrading our recommendation from a Strong Buy to a Buy |
