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FreeMarkets surges on 2Q, CEO bullish

Shares of FreeMarkets (Nasdaq: FMKT) surged Tuesday after the company delivered strong second quarter sales and received upgrades from analysts. CEO Glen T. Meakem was bullish on the company's prospects.

In early trading, FreeMarkets was up 11 percent, or 6 to 59. Merrill Lynch upgraded the stock to a "near-term buy" from "near-term accumulate." Credit Suisse First Boston analyst Chris Vroom on Tuesday reiterated a "buy" rating and gave the stock a $85 to $90 price target. FreeMarkets is the latest B2B player to report strong results -- Ariba (Nasdaq: ARBA), (Nasdaq: PPRO) and Commerce One (Nasdaq: CMRC) delivered strong growth. VerticalNet (Nasdaq: VERT) is also expected to report an upside surprise this week.

After market close Monday, the online business-to-business marketplace operator reported a second quarter net loss of $12.8 million, or 34 cents per share, excluding special charges. First Call's survey of 15 analysts predicted a loss of 41 cents per share for the quarter ended June 30.

Second quarter revenue of $19.4 million represented a 363 percent improvement year-over-year and 80 percent gain from the first quarter. Volume on the company's marketplace rose 62 percent sequentially to $2.19 billion.

Sixty-four buyers used the FreeMarkets service in the second quarter, compared to 13 a year earlier. Global suppliers on the marketplace increased by more than 1,500, to a total of more than 5,600.

In an interview with ZDII, Meakem said the company hit an "inflection point" with its latest quarter. Here's what Meakem had to say:

On future revenue growth: Meakem said the company told analysts to bump up their revenue targets by about 30 percent. The company's second quarter revenue total topped "whisper" estimates by about $3 million. "We have demonstrated this is a large business," he said. Vroom raised his revenue expectations to $80 million from $63 million and to $150.9 million from $123.6 million for 2000 and 2001, respectively.

"That's double what we started the year at," said Meakem, referring to the revenue targets for 2000.

On the perception that FreeMarkets is a second-tier B2B player: The FreeMarkets chief acknowledged that the company often plays second fiddle to Commerce One, Ariba and VerticalNet, but said the company is clearly a top player. "We had $2.2 billion in transactions, which is by far bigger than any B2B site," he said.

Meakem added that Ariba, Commerce One and VerticalNet have been public more than a year, which boosted their brand recognition. FreeMarkets went public in December 1999. "We're less known," he said.

On licensing its technology: Commerce One and Ariba have basic software licensing business models -- until they can start collecting transaction fees. The knock against FreeMarkets is that it relies purely on transaction fees. Analysts said that FreeMarkets must diversify by licensing technology.

Meakem said the company intends to license its software in the future. Meakem added that the company does provide its technology to Honeywell's as a cobrand. "We are a full-service marketplace, but will offer self service," he said.

On the industry consortium threat: Not a day goes by where Oracle (Nasdaq: ORCL), Commerce One or Ariba announce a big contract to power exchanges by industry titans. Meakem said FreeMarkets will become a player in these consortiums in the future.

FreeMarkets offers direct sourcing for raw materials, a market that's a little to advanced for the consortiums at this stage, he said. "We view consortiums as a huge opportunity," said Meakem. "Once they get organized and start doing more complex transactions, we'll be there."
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