Critical Path acquires profitable competitor, tops 3Q estimates

Critical Path (Nasdaq: CPTH), which reported a smaller than expected third quarter operating loss, said Thursday it would acquire profitable competitor ISOCOR (Nasdaq: ICOR) in a stock swap valued at $287 million.

Both Critical Path, a CMGI (Nasdaq: CMGI) @Ventures investment, and ISOCOR are business-to-business Internet messaging companies. Although ISOCOR has more revenue and a profit, Critical Path, which went public in March, has had a much better reception on Wall Street (chart). Critical Path's market cap of $1.9 billion dwarfs ISOCOR's $105 million. ISOCOR's regulatory filings date back to 1996.

Under the terms of the acquisition, ISOCOR shareholders will receive 0.4707 shares of Critical Path for each share they own. The deal is expected to close in the spring of 2000. ISOCOR chief Paul Gigg will become Critical Path's chief operating officer.

In a separate announcement, ISOCOR reported a surprise third quarter profit of $88,000, or a penny a share, on revenue of $9.4 million. The results walloped First Call consensus of a loss of 7 cents a share. The results were fueled by the company's latest Internet directory products. ISOCOR didn't plan on turning a profit until the fourth quarter.

In a statement, ISOCOR said it will accelerate revenue growth courtesy of a contract with Compaq Computer (NYSE: CPQ).

Critical Path, which offers its services to enterprise customers, Internet service providers and Web portals, said the acquisition of ISOCOR will expand its ability to target the corporate market. Two-thirds of ISOCOR's product revenue come from enterprises. ISOCOR counts AT&T, UUNet, British Telecom, New York Life, and Procter & Gamble among its largest customers.

Critical Path also reported a third quarter operating loss of $6.2 million, or 17 cents a share, beating First Call consensus by three cents. The loss was lower compared to the 65 cents a share and 21 cents a share reported a year ago and in the second quarter, respectively.

Revenue in the quarter was $4.9 million, up 145 percent from the second quarter tally of $2 million. Critical Path CEO Doug Hickey said the company had positive gross margins for the first time and is on " a clear path to profitability.''

During the quarter Critical Path inked contracts with 265 customers, including Exodus, Mitsui & Co. Ltd., Qwest, Cable and Wireless, and AltaVista to provide email and messaging services.

Critical Path had 6.7 million active mailboxes in the third quarter, bringing in revenue of 30 cents a month compared to 26 cents in the second quarter. Cost per mailbox fell to 28 cents in the third quarter compared to 41 cents in the second quarter.