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Can software sales save VerticalNet?

As the business-to-business company comes off a topsy-turvy year, analysts wonder whether its new software division will move fast enough to offset sluggish sales.

As business-to-business company VerticalNet comes off a topsy-turvy year, analysts are trying to figure out whether it can get its new software division up and running fast enough to offset sluggish marketplace sales.

VerticalNet, based in Horsham, Pa., is a company in transition. The company, which provides online marketplaces and software to industrial customers, started as a content company. It bulked up by acquiring an electronics component exchange, which it unloaded after just a few months. The company is now focused on software sales, a move that pits it against the likes of Ariba and Commerce One.

Excluding the results from its recently sold NECX electronics component exchange, VerticalNet posted a loss for its fourth quarter, ended Dec. 31, of $28.5 million, or 32 cents per share, on sales of $40.7 million. That compares with a loss of $10.3 million, or 14 cents per share, on sales of $7.8 million in the year-ago quarter. The results didn't correspond to First Call estimates, which had factored in results from NECX.

The company cited the NECX sale as a reason that it couldn't offer more valid comparisons with Wall Street's figures for the fourth quarter. Investors weren't pleased as shares dipped about 16 percent in early trading Thursday, down 56 cents to $2.97.

While the loss widened from the year-ago quarter, it was still an improvement from the third quarter, when the company lost 35 cents per share.

Analysts said that VerticalNet's comeback--if there is one--will take a few quarters. For now, analysts will settle for some quiet. In January, CEO Joe Galli, who was brought in with much fanfare from Amazon.com, left after just five months on the job to go to consumer products company Newell Rubbermaid. Less than two weeks later, the company announced a round of layoffs, cutting loose 150 workers, or about 8 percent of its staff.

VerticalNet was riding high with the rest of the business-to-business stocks when its shares hit an all-time high of $138.88 in March of last year. But investors soured on that market, and the stock began to plunge, hitting the single digits on worries about the company's business model.

Losses ahead
The company said it expects to lose between $28.5 million and $31.5 million in the first quarter, or 29 cents to 32 cents per share. For the year, VerticalNet expects to lose between $60 million and $70 million, although it predicts positive cash earnings in the fourth quarter of 2001.

Despite the losses, there were a few bright spots. The company did see a boost in software sales--up from $900,000 in the third quarter to $6.1 million in the fourth quarter.

The bulk of that business came from Converge, the company that acquired VerticalNet's NECX business in December. Through Dec. 31, VerticalNet's software division signed contracts with 10 customers with contract values worth about $125 million, $118 million of which were signed in the fourth quarter. It had a backlog of $114 million, including the Converge contracts, as of Dec. 31. The Converge contracts, which amount to $108 million, will be recognized over 36 months.

Analysts, however, questioned whether VerticalNet could expand its software customer base.

"Though there is no better way to start a software company than with a $108 (million) contract, Vert faces an uphill battle in establishing itself as a marketplace application provider," Pawan Malhotra, an analyst with SG Cowen Securities, said in a research note.

Analysts said VerticalNet will have a tough time competing with entrenched rivals such as Ariba and Commerce One. "We wonder if the company will gain traction," in an application market dominated by Commerce One, SAP, Ariba, i2 Technologies and Manugistics, Malhotra said.

Advertising woes
VerticalNet will have to get traction for its software business quickly. That's because the company's markets division, which relies on advertising and on building "store fronts" for industrial customers, is in trouble, according to analysts. The company's markets division reported fourth-quarter revenue of $34.6 million, a meager $1.1 million increase from the third quarter. The company cited "lower-than-anticipated advertising sales as customers continue to evaluate the effects of the economic and market conditions on their operations."

"We were disappointed by the trends in the advertising and e-commerce revenues, and we will closely monitor these revenue streams going forward to ensure that the drop-off was truly related to economic cyclicality, vs. fundamental problems with the business model," said Prudential Securities analyst Tim Getz.

Getz maintained his "hold" rating on the stock, dropped 2001 revenue estimates to $220 million from $288 million, and cut 2001 earnings per share estimates from a profit of 12 cents a share to a loss of 68 cents a share. Getz also lowered his price target for the stock to $4 from $7.

Lehman analyst Patrick Walravens also sounded warnings about advertising revenue.

"VerticalNet attributed weakness in enablement and e-commerce to the poor market conditions. We consider the lack of usage is mainly due to the storefronts' poor performance. As a result of storefronts not performing well, current subscribers are expected not to renew," Walravens said.