Analyst reports: Wall Street shuns Scient, other e-consultants

The e-consulting niche slips further from Wall Street's good graces, a day after one of the sector's best-known players announces massive layoffs and lowered earnings expectations.

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The e-consulting niche slipped further from Wall Street's good graces Thursday, a day after one of the sector's best-known players announced massive layoffs and lowered earnings expectations.

Scient laid off about 460 employees Wednesday as part of a plan to lower costs, eliminating roughly a quarter of the company's staff.

Led by ex-IBM consulting veteran Bob Howe, Scient also lowered its earnings and revenue expectations for the third quarter. Executives blamed a broader economic slowdown that has forced dot-com companies to shrink consulting budgets.

The company now estimates its third-quarter revenue will be $80 million, with professional services margins about 50 percent. Prior analyst projections were about $112 million in revenue.

Scient is projecting a pro forma operating loss of about $13 million, or 16 cents a share, before one-time restructuring charges of between $40 million and $45 million. It now employs about 1,400 people, including 325 billable staffers and 135 managers--a relatively bare-bones operation that some speculate will induce heavy turnover and stress for those who remain.

The warning sent Scient's stock plunging by nearly 50 percent to a 52-week low on Thursday, bottoming out at $2.28 per share before a modest rally inched the stock price up to $2.81. The stock, which soared to $133.75 in March, has lost 97 percent of its value since the beginning of the year. (Click here for current stock price.)

The shortfall and layoffs are the latest in a string of casualties in the e-consulting sector, which Wall Street has hammered for several months.

Five e-consulting companies announced sweeping restructurings and layoffs in response to the Wall Street crunch in the past several days. Four of the companies--iXL, Lante, MarchFirst and Xpedior--issued financial warnings before the end of the third calendar quarter.

When Scient issued its warning on Wednesday, analysts rushed to bash what was largely perceived as the e-consulting leader, predicting a Darwinian shakeout in the overcrowded sector.

"This week's turbulence on the supply side of the e-consulting space has been harrowing," wrote Natalie Walrond of Pacific Growth Equities. "The e-consulting space is highly fragmented, and the players mired in their own mediocrity will be 'consolidated' to oblivion. The industry is shaking out the excess players to a more rational, competitive landscape."

Pacific Growth does not officially rate Scient or several other large e-consulting companies, but Walrond did not mention Scient in her short list of preferred e-consulting companies. She is betting that the shakeout's survivors will be DiamondCluster International and Proxicom.

Merrill Lynch analysts Stephen McClellan and Thomas Diffely dubbed Scient an "e-business victim" and downgraded the company from "accumulate" to "neutral."

"There is considerable upheaval, transition, enterprise stretch-outs and intensified competition in this specialized sector," the Merrill Lynch analysts wrote in a research note issued Thursday titled "Clouded Prospects."

Of Scient specifically, they wrote: "The next six months may be difficult?We expect personnel turnover to rise and some management departures."

UBS Warburg analyst Adam Frisch slashed his revenue and earnings-per-share estimates for the current quarter, which ends later this month, to $80 million and a loss of 9 cents per share from a previously bullish $112 million and profit of 8 cents per share. Despite the stock's relatively low valuation, Frisch remained skeptical about Scient, calling it a "long-term 'show me' story."

"We do not think the next few quarters will produce operating and financial metrics that reflect a turnaround," Frisch wrote in a research note issued Thursday morning. "But at these levels, long-term deep-value investors might have an interest."

Other analysts were also pessimistic about Scient's prospects. Analysts at Chase Hambrecht & Quist and First Union Securities cut their ratings on Scient's stock to "market perform" from "buy." Morgan Stanley Dean Witter downgraded the stock to "neutral" from "outperform."

Deutsche Banc Alex Brown cut Scient to "buy" from "strong buy," and Prudential Securities downgraded the stock to "accumulate" from "strong buy." Meanwhile, Credit Suisse First Boston analyst David Sturtz reiterated his "hold" rating on the company's stock.

But Wall Street's take on Scient was not entirely gloom and doom, and many analysts noted that large corporations are still eager to spend money on e-consulting services. According to Forrester Research, each of the world's 2,500 largest companies budgeted about $4.3 million on average for Web consulting services in 2000--and they expect that amount to roughly double by 2002.

In a research note issued Wednesday night by analyst Greg Gore of San Francisco-based investment bank WR Hambrecht, Gore maintained his "buy" rating.

Gore said the job cuts and restructuring could help Scient "return to business rather than obsess about the stock price and react to a radically changed environment."