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Low earnings for MarchFirst drags stock down

The Internet consulting company reports third-quarter earnings that fall far below analysts' expectations, sending its stock down more than 50 percent.

Internet consulting company MarchFirst reported third-quarter earnings Tuesday that fell far below analysts' expectations, sending the company's stock price down more than 50 percent.
MarchFirst
Stock price from October 1999 to present.  
 Source: Prophet Finance

The Chicago-based company, created from the merger between Whittman-Hart and USWeb/CKS, said supplemental net income, excluding charges, came in at $2 million, or 1 cent per share, which is significantly lower than analysts' estimates.

Analysts polled by First Call/Thomson Financial expected MarchFirst to earn 20 cents a share for the quarter, which ended Sept. 30.

In the year-ago period, MarchFirst posted supplemental net income of $9.9 million, or 16 cents per share. The supplemental data includes factors such as amortization, intangible assets and onetime merger costs.

Third-quarter revenue increased 24 percent to $369.4 million from $297.2 million in the same period last year, but the figures came in below market projections of $408.1 million.

The disappointing results sent MarchFirst shares tumbling. Shortly after the opening bell, shares plunged $6.19 a share, or 52 percent, to $5.63. By the end of the day, shares had sunk $6.94, or nearly 60 percent, to $4.88 per share.

In research notes, Salomon Smith Barney analyst Christopher Paul lowered his price target for MarchFirst to $11 per share from $35 and said he expects the shares to come under pressure.

"Our estimates are under review pending the (third-quarter) conference call later this morning," he wrote, adding that he expects to reduce growth-rate guidance. The news set off a rash of stock downgrades from several investment firms. Analysts at Salomon Smith Barney cut their rating on the company?s stock to "neutral" from "outperform." The stock was downgraded to near-term and long-term "neutral" from near-term and long-term "buy" at Merrill Lynch. Robert W. Baird analysts clipped their rating to "market underperform" from "market outperform."

MarchFirst executives said in the conference call that charges in the quarter included a one-time integration and advertising branding charge of roughly $64 million. They also said the company lost $10 million in revenue in the quarter from the closing of two offices that were not profitable, one in Peoria, Ill., and the other in Manchester, England. Third-quarter revenue declined less than 3 percent sequentially.

Peter Murphy, MarchFirst?s chief financial officer, said the company had believed a certain number of contracts in the quarter would offset the decline. Instead, the company decided to take a "very conservative" approach and not recognize some revenue from projects until the fourth quarter, he said.

The company said it signed 150 new clients in the third quarter alone.

"We expect revenue to be relatively constant in the fourth quarter and (in 2001's) first quarter," Murphy said. "In the longer term, we?re comfortable for revenue growth in the 20 percent range."

The chief executive of MarchFirst, Robert Bernard, said that the environment in which his company operates has been "challenging" over the past few months, listing factors including a downturn in the market, changing e-commerce priorities and the weakness of the euro.

The company highlighted positive developments during the quarter, including large client wins, such as Sun Microsystems and Teradyne and said that it will remain focused on forging and maintaining long-term client relationships and helping its clients expand into fast-growth markets such as broadband and wireless.

The company?s quarterly results are indicative of the recent troubles among many Internet consulting firms that were once highfliers. MarchFirst helps businesses with Web development and Internet strategies. In addition, it competes in the application service provider (ASP) market, renting software applications to business customers for a monthly fee and managing and maintaining those applications.

Companies in the sector are trudging through a changing market landscape, going from serving dot-com clients to landing lengthier, more lucrative consulting engagements with Fortune 500 clients. In recent weeks, a list of Net consultants including Organic, Razorfish and Viant issued earnings warnings that sent their stock, and that of others in the market, tumbling.

"Clearly (MarchFirst) seems to have been impacted by the downturn in spending from dot-com clients and the lower sense of urgency among brick-and-mortar corporations as well," said Robert St. Jean, an analyst at investment bank J.P. Morgan.

Although MarchFirst indicated it has completed integrating the two companies from which it was born, St. Jean said that the merger was a large one and that it "takes a while for operations of the business to settle down."