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Freemarkets raises 1Q targets

    Freemarkets (Nasdaq: FMKT) topped consensus analyst estimates in the fourth quarter and boosted financial goals for the first quarter.

    After market close Monday, the operator of online business marketplaces reported a fourth quarter loss of $10.4 million, or 27 cents per share, excluding special charges. Analyst consensus predicted a loss of 31 cents per share on revenue of $31.2 million, according to earnings tracking firm First Call.

    Freemarkets now sees a first quarter loss of about 25 cents per share, CFO Joan Hooper said, during a conference call with analysts. First Call was predicting a loss of 29 cents per share for Freemarkets' March quarter.

    Revenue in the first quarter should be about $36 million, higher than analyst forecasts of $34 million, Hooper said.

    The company still expects to reach break-even in the first quarter of 2002.

    Shares of Freemarkets traded at 25.75 in afterhours activity on the Island electronic communications network, following the conference call. Freemarkets rose 1.5625 to 26.6875 in Monday's regular trading ahead of the report.

    Fourth quarter revenue increased 340 percent year-over-year and 30 percent sequentially to $34.5 million, 10.5 percent higher than First Call's forecast. Volume on the company's marketplaces rose 18 percent sequentially to $3.5 billion, on with 2,432 auctions conducted.

    Gross margins in the fourth quarter increased 50 percent, from 46 percent in the third quarter.

    "Overall, I thought the fourth quarter was good," said Michael Hughes, analyst with Raymond James & Associates. "The guidance was basically what I expected."

    As with other business-to-business commerce specialists that recently reported results, Freemarkets issued a growth forecast that wasn't as bullish as in previous quarters. But the company remains in solid shape, analysts said.

    "The fundamentals of their business are clearly very strong," said Scott Alaniz, analyst with Stephens Inc. "I think the stock has less downside risk over the next year, and analysts and portfolio managers are going to take that into consideration."

    First quarter gross margin should hit 52 percent, Hooper said. The company expects to reach its long-term goal of 55 to 60 percent gross margin by the second quarter of next year.

    Although auction volume grew, the dollar amount was less than predicted, Hooper said. Freemarkets executives characterized it as a by-product of success; when companies save more than they expected through Freemarkets, auction volumes drop, Hooper said. The "average savings rate" reported by Freemarkets customers was 18 percent in the fourth quarter, compared to 14 percent in the third. That reduced total bid amounts by about $200 million in the quarter, Hooper said.

    Auction volumes were also affected by a decrease in the length and size of contract bids in the automotive and manufacturing sectors, accompanied by an increase in business from the energy industry, which has shorter contracts.

    Those shifts -- auto and manufacturing made up 35 percent of Freemarkets' fourth quarter business, compared to 47 percent in the third -- lowered total auction volume by $400 million. "I don't think it's a big deal," Hughes said.

    Raymond James has a "market perform" rating -- the equivalent of a "hold" or "neutral" -- on Freemarkets, as the stock has risen in recent weeks leading up to the earnings report. "The stock needs to consolidate at current levels before moving higher," said Hughes, who views Freemarkets as a "very well-run company."

    Investors should appreciate Freemarkets' into non-manufacturing sectors, Alaniz said. "This is the first time they've talked about how well they're done in competitive bidding for services," he said.

    Including one-time acquisition charges and costs related to stock compensation, Freemarkets in the fourth quarter lost $44.6 million, or $1.17 per share.

    For the full year, Freemarkets lost $43.9 million, or $1.18 per share, excluding one-time costs. Including all items, Freemarkets in 2000 lost $156.4 million, or $4.21 per share, on revenue of $91.3 million.

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