PurchasePro struggles to regain trust

5 min read

In the last 24 hours, PurchasePro may have lost a lot of credibility--not to mention market capitalization--on Wall Street, analysts said.

After Wednesday's abrupt profit warning and delay in giving its earnings report, the business-to-business software company reported a loss on Thursday. Excluding charges, the company lost $1.4 million, or 2 cents a share, on revenue of $29.8 million, down from revenue of $33.6 million in the fourth quarter. The numbers were far below First Call's consensus for earnings of 8 cents a share and revenue of $41 million.

Including charges, the company lost $18.1 million, or 26 cents a share in the first quarter, which ended March 31.

Shares were down 23 cents to $3.82 Thursday. PurchasePro stock had already fallen $2.22 to $4, or 32 percent, Wednesday after the company issued its last-minute profit warning.

Analysts said the company's dribs and drabs of bad news has diminished its credibility. The first sign something was wrong came from a terse warning Wednesday morning that the company's first quarter would miss estimates due to "deferred recognition of certain license revenue." Then, the company suddenly delayed its earnings report, which had been scheduled for Wednesday night.

On Thursday morning, PurchasePro laid its disappointing numbers on the table. On a conference call, the company said it couldn't give an outlook for upcoming quarters because it had to sort out accounting problems.

The earnings report and events leading up to it overshadowed positive news for the company--the long-awaited appointment of a new chief financial officer. After market close Tuesday, the company hired Richard Clemmer, former CFO of Quantum, to assume the same position at PurchasePro.

CEO Charles "Junior" Johnson admitted the circumstances were unusual. "We do believe you deserve a clear, concise explanation of what happened and why," he said on Thursday's conference call. Officials then detailed a host of problems with recognizing revenue from its online marketplaces--Web sites where businesses buy and sell to other businesses. PurchasePro said it wouldn't comment beyond what officials said on the conference call.

"The management team is going to have to do a lot to win back credibility from the Street," said SG Cowen analyst Pawan Malhotra, who downgraded the stock to "neutral" from "strong buy" Thursday morning. Aside from its accounting problems, the company will also have to do something to diversify revenue--two-thirds of which came from AOL Time Warner (NYSE: AOL) in the quarter, Malhotra said.

Credit Suisse First Boston Ian Toll also downgraded the stock to "hold" from "buy." He said it could take two to three quarters for the company to rebuild its credibility.

"We question why (PurchasePro) waited nearly a month after the close of the quarter to disclose this, especially given recent indications from the firm that it would make its numbers," said David Garrity, an analyst at Dresdner Kleinwort Wasserstein, who cut PurchasePro to "hold" from "buy" before the company released its earnings numbers.

Acting CFO James Clough blamed the complex and time-consuming nature of revenue-recognition procedures as well as "emerging accounting procedures" for the fact that it took the company until Tuesday night to figure out that it should defer some of the revenue from its myriad AOL Time Warner-related contracts.

Accounting mayhem
The curt announcements Wednesday--two press releases totaling three paragraphs--left Wall Street analysts confused. They were no more enlightened following the company's earnings release and conference call Thursday.

Lehman Brothers analyst Patrick Walravens simply laughed when asked to summarize the company's accounting problems.

The main issue appears to be that the company has bundled revenue from software sales with revenue from the delivery of advertising impressions on the AOL network. That's a big problem since software revenue can be recognized in advance, while advertising revenue has to be recognized over the length of the contract.

"Because the two were bundled, (PurchasePro) will now have to recognize the whole thing over the length of the contract," Walravens said. PurchasePro managers indicated on the conference call that the company would recognize $4.1 million in deferred revenue over the next three quarters.

Another issue was that the company had insufficient facts to determine whether one of its customers was creditworthy. Though it did finally obtain the needed information to book the $3.7 million in revenue from this unnamed customer, it was too late to count it toward the first quarter. The money will be recorded as deferred revenue in the second quarter.

"These are individuals who haven't sold software before, they don't understand a lot of issues relating to software accounting," said Malhotra.

Can a new CFO prevent old mistakes?
This isn't the first time PurchasePro has made mistakes with Wall Street. And many of its past problems have been blamed on CEO Johnson's management team--which was said to be more of an old boys' club than a team of experienced professionals.

In February, Barron's magazine trashed the stock and accused the company of lacking a CFO. Though the company had an acting CFO, James P. Clough, it had been public about its search for a more experienced candidate. PurchasePro countered by topping estimates for its fourth quarter and followed up by boosting its first-quarter outlook and expanding a partnership with AOL Time Warner. Though investors were appeased, concern about the company's lack of a star CFO continued.

"Clemmer's experience as CFO of a multibillion-dollar technology company will be invaluable for PurchasePro," Walravens wrote in his research note that came out just before the company's warning.

Its difficult to tell at this point whether the accounting problems can be cleared up right away, or if they will drag on to dent the company's fiscal year. Hopefully, with a new CFO, the company will be able to resolve them, Malhotra said.

Toll wrote: "Poor internal financial controls and management may be allayed by the appointment yesterday of Richard Clemmer as CFO. However, even should the underlying business prove sound, it should take 2-3 quarters at a minimum to rebuild credibility with the street. During that period we believe that the stock remains stuck in single digits."

In the meantime, it'll be baptism by fire for Clemmer. The company said it would hold off on its outlook until Clemmer gets rolling.

"I don't blame the new CFO for wanting to take some time with this," Walravens said.

ZDII's Larry Dignan contributed to this story.