VerticalNet sinks on CEO departure

VerticalNet (Nasdaq: VERT) got a thumbs down from analysts Monday as it elected to replace departing CEO Joseph Galli with the company's co-founder and COO, Mike Hagan. Concerns that the company could miss estimates for the next quarter were also raised.

Shares were down 23 percent, or 1.25 to 4.06, ahead of Monday's opening bell.

Galli will become the President and CEO of Newell Rubbermaid, returning to his old economy roots just 5 months after joining VerticalNet from Amazon.com. Analysts took his departure as a vote of no-confidence in the company and cut their ratings on expectations that near term performance may suffer due to a weak fourth quarter and the deferment of cost cutting measures.

Exacerbation

"Galli`s departure exacerbates issues including unwinding the SierraCities deal," said Lehman Brothers analyst Patrick Walravens in a report.

Walravens reduced his rating to "outperform," and said he expects the stock to sink on the news of Galli's departure. He also said other challenges the company now faces could also become more difficult, including the renewal of storefronts beginning in April, the need to complete a software development project at Converge, and competition with Ariba (Nasdaq: ARBA) and Commerce One (Nasdaq: CMRC).

"Galli`s departure suggests to us that he was not confident in his ability to lead VerticalNet to overcome these challenges." Walravens added.

Part of Galli`s mandate at the company had been to improve profitability by pruning what was seen to be an overly ornate structure - the result of dozens of acquisitions. "We think these difficult decisions (i.e., layoffs) were deferred and are now likely to fall onto the shoulders of new CEO, Mike Hagan," Walravens said.

Wachovia Securities analyst Robert G. Fontana downgraded the stock to "neutral" from "buy," citing the same issues. He also noted that "financial questions still exist following the recent sale of (VerticalNet's) NECX division to the high-tech marketplace Converge.

The fourth quarter risks

Given the lack of visibility, most analysts said they will wait for the next quarter's results before revising estimates.

The company is expected to report about $44 million in revenue and 28 cents a share in losses results some time in January.

Walravens said he thinks the company could miss estimates and also see lower guidance for 2001 due to factors including the weak market for online advertising, the company's lower-than-expected number of current storefronts, and distractions like the divestiture of NECX and the acquisition of SierraCities.

The long view

"While the near-term looks bleak, new CEO Mike Hagan is not without key assets to work with," Walravens said. He also noted that VerticalNet has about $125 million in cash, a $108 million software contract with Converge and the Microsoft (Nasdaq: MSFT) contract which should net (it) about $87 million over its three year term.

Execution appears to be the central issue going forward.

"We believe its recent.. software contract with Converge validates its software offering, though execution in this area is now a question," said Fontana in a research note.

"Longer-term, Hagan should be able to leverage VERT`s key assets but, as always, it will come down to a question of execution," Walravens said.

An acquisition could also be in the works, according to Prudential Securities analyst Tim Getz, who downgraded the stock to "hold" from "accumulate and lowered his price target from $7 from $20.

Getz also noted that "trading at less than 2 (times) 2001 revenues, ... (VerticalNet) is increasingly looking like an acquisition target."