FreeMarkets dips as Commerce One jumps
It's a tale of two B2B stocks: Commerce One takes the high road, FreeMarkets takes the low.
While FreeMarkets was sent into a free fall Tuesday by its mixed first-quarter results, Commerce One bounded ahead on a deal with Microsoft.
Shares in FreeMarkets, which operates real-time business-to-business online auctions for companies buying chemicals, coal and products in more than 70 other categories, were down $1.38, or 13 percent, to $8.91.
Commerce One, which makes the software that connects global buyers with suppliers of business goods over the Internet, was up $1.41, or 16 percent, to $10.17.
FreeMarkets topped estimates by two pennies with a loss of 24 cents a share, but revenue was $33 million, $3 million shy of First Call consensus estimates. FreeMarkets also said it may have to stop counting revenue from its largest customer, Visteon because staff members from the Securities and Exchange Commission have suggested that Visteon is really paying FreeMarkets for warrants for 1.75 million shares of stock, not products or services.
Analysts said the biggest worries for FreeMarkets were that the company didn't add enough customers and that auction volume declined in the quarter.
FreeMarkets picked up 11 new customers in the quarter, less than the 16 it added in its fourth quarter. Auction volume came in at $2.6 billion, down 26 percent quarter over quarter and about $500 million short of what analysts were expecting.
Merrill Lynch analyst Edward McCabe slashed his estimates and cut his rating to "neutral" from "buy" based on light customer additions and auction volume. He had previously downgraded the stock from "strong buy" on the same concerns.
McCabe also noted that the company's acquisition of Adexa, which is slated to close by the end of the second quarter, could see problems due to the tough environment for enterprise software businesses.
Dain Rauscher Wessels analyst Kash Rangan also downgraded the stock to "neutral" from "buy" and cited the SEC review, as well as lower measurements on customer acquisition and auction volumes, as reasons for the cut.
"A revenue restatement and lower profitability is likely" as a result of a change in the company's recognition of revenue from Visteon, Rangan wrote.
U.S. Bancorp Piper Jaffray analyst Timothy Klein maintained his "buy" rating although concern about the company's revenue miss and lower customer numbers incited him to lower estimates.
Klein found positive signs in the company's tight expense controls and praised its ability to convert 17 pilot customers to long-term contracts.
Commerce One
Meanwhile, Commerce One took off on a deal with Microsoft.
Under the deal, Microsoft will loan Commerce One $25 million to help it develop a product that will allow businesses using Microsoft's software to more easily integrate with online exchanges powered by Commerce One.
In doing so, the companies intend to tackle one of the biggest obstacles for growth of B2B marketplaces: the lack of online suppliers.
The news was announced at the company's user conference in New Orleans Tuesday.
Analysts were perplexed over the stock's gains. Goldman Sachs analyst Thomas Berquist said that though the company's recent analyst meeting and the user conference were both upbeat, "the stock will ride the roller coaster of the market until there is enough data on the quarter of the economy."
CIBC Oppenheimer analyst Doug Augenthaler also cautioned that Commerce One's relationship with Covisint could be similar to FreeMarket's situation with Visteon.
"Earnings would be dramatically impacted should Commerce One be unable to recognize revenue from arrangement with Covisint, which has similar characteristics," Augenthaler said.