Analyst reports: Art Technology criticized over collections

Several Wall Street analysts lambaste the seller of Internet advertising software after its 10k filing reveals concerns about the collection of its accounts.

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Several Wall Street analysts criticized Art Technology Group on Wednesday after the company's 10k filing revealed that it sold $9.6 million in account receivables to a bank, an indication that it was worried about the collection of its accounts.

The Internet advertising software seller's stock nose-dived in response, falling $9.94, or 17.97 percent, to $45.38 in midday trading. The decline extended a sharp drop Tuesday, when the stock fell 20 percent following the release of the filing.

In selling receivables to a bank, Cambridge, Mass.-based Art Technology took a reduced portion of the money owed to it in exchange for the bank taking on collection responsibilities. The receivables were sold without recourse, meaning Art Technology would not be responsible even if some of the debtor companies turned out to be deadbeats.

While at least one analyst touted the move as a smart way to ensure payment--with a slight dip in revenue--other analysts noted the practice raised questions about the credibility of Art Technology's customers.

Salomon Smith Barney analyst Heather Bellini raised this question in her research note.

"We believe that the sale of the receivables was likely due to ATG's exposure to dot-com companies. In fact, 19 percent of its total revenues, or $8.8 million, in the quarter came from dot-coms, while the company factored $9.6 million," Bellini wrote. "The company claimed that it had enforced stringent payment requirements on all of its dot-coms, yet it is doubtful that it would have sold these receivables if no problems existed."

Other analysts wrote that the company should had have been more up-front about the issue. Thomas Weisel Partners analyst Tim Klassell wrote in his note that it was "disappointing" to find out the news through a 10k filing. "This event was not mentioned by the company in its third-quarter press release, nor was it mentioned on the third-quarter conference call earnings," he wrote.

Klassell downgraded Art Technology to a "buy" from a "strong buy," pointing out that the company "did not have the staff to focus on ramped receivables and factored some despite a healthy cash balance."

Not all analysts were as punishing. In a report titled "Much Ado About Nothing," UBS Warburg analyst Ken Carey raised his rating on Art Technology to a "strong buy" from "buy." Carey said he spoke with Art Technology's management and was assured that the customers in question were "high-quality" companies, but notoriously "slow payers."

"ATG runs a very lean organization and does not have the capacity to do collection in-house; the factoring option was the most cost-effective approach, and we concur with the company's thinking about how to keep costs down and reduce the risk of collections," Carey wrote. "We believe the details of this factoring make sense and were misunderstood by the market."

On Oct. 26, Art Technology Group reported a better-than-expected third-quarter profit. The company said it earned $5 million, or 7 cents per share, beating the consensus estimate of 5 cents per share.