Net services shares fall on shakeout concerns

The failures and mergers that are eliminating numerous dot-coms are starting to affect Scient and other companies that provide services to the industry.

2 min read
The failures and mergers that are eliminating numerous dot-coms are starting to affect the companies that provide services to the industry.

Shares of San-Francisco-based Scient dropped 20 percent today after Banc of America Securities downgraded the stock because of concerns that the bankruptcy of two of the company's customers might crimp its bottom line.

Analyst James Janesky cut the Scient shares from "buy" to a "market performer" rating following the recent bankruptcy filings of Verde Media and Inacom. Both companies owe Scient money for Internet consulting services.

Scient shares fell $9.63 to close at $37.44 on volume of 3.9 million shares, more than four times the stock's average daily volume.

Other consulting companies also took a hit today. Viant fell $6.19, or almost 21 percent, to $23.81; Sapient fell $5.38, or 5 percent, to $95.63; and MarchFirst fell $2.25, or nearly 11 percent, to $18.69.

"That's why the stock is down today; it's now becoming an industry concern," said Steve McClellan, an analyst at Merrill Lynch. "If two bankruptcies are announced this week, how many will there be in six months?"

Analysts expect Verde Media will probably pay Scient in full but believe Inacom may not be as generous. Janesky wrote in his report that Scient collected $350,000 of the $2 million worth of services it billed Inacom. The company will take a charge for the current first quarter, which ends in June, to reflect some of the uncollected fees.

While expressing concern Special report: End of the Beginningabout Scient, McClellan, Janesky and Chase H&Q analyst Dirk Godsey--who also issued a report today--did not adjust their revenue estimates for the current quarter. The analysts expect the company to generate revenue of $79.1 million to $80.6 million, compared with $16.4 million for the year-ago quarter.

The analysts also estimate the company will post earnings of 5 cents a share, which matches the consensus of 19 analysts surveyed by First Call. Scient lost 6 cents per share in the year-ago quarter.

Janesky says that "riskier dot-coms" owe Scient about $8.4 million, or 15 percent of the total $56 million the company has billed clients so far.

Despite the possibility of additional dot-com failures, McClellan remained optimistic. A shakeout will have a "moderating effect on (Scient's) earnings?Earnings growth might not be as high as expected, but it will still be impressive."