The company also may have to stop counting revenue from its largest customer. After market close Monday, the operator of online business-to-business marketplaces reported a loss of 24 cents per share on revenue of $33 million in its fiscal first quarter ended March 31. Analyst consensus predicted a loss of 26 cents per share on first-quarter revenue of $36 million, according to earnings tracking firm First Call.
Also Monday, FreeMarkets said staff members of the U.S. Securities and Exchange Commission believe the company should not classify payments from its largest customer, Visteon, as revenue. Visteon generated $2.8 million of the $33 million reported as first-quarter revenue. The SEC staff contends that because FreeMarkets gave Visteon a warrant for 1.75 million shares of stock, Visteon is really paying FreeMarkets for the warrants, not products or services.
Shares of FreeMarkets traded at $9.98 in after-hours activity on the Island ECN, following the news. FreeMarkets fell $1.52 to $10.29 in Monday's regular trading ahead of the report.
First-quarter revenue increased 205 percent year over year, a bit less than the company hoped for. "While our revenues fell slightly short of our expectations due to longer sales cycles driven by a softening economy, we are very encouraged by the deals we signed late in the quarter," Chief Financial Officer Joan Hooper said.
FreeMarkets expects revenue to increase 10 percent to 15 percent sequentially in the second quarter, which translates into almost $38 million. First Call consensus was predicting revenue of $41 million for FreeMarkets' second quarter, which ends in June.
Revenue for the full year should be about $150 million, the company said. First Call was calling for 2001 revenue of $176 million.
Hooper said she was comfortable with First Call's current estimates calling for FreeMarket losses of 22 cents per share for the second quarter and 73 cents per share for the full year. The company still expects break-even results in the first quarter of 2002.
FreeMarkets said it has not decided if it will appeal the SEC staff's position. Company executives are talking to SEC staffers, but an appeal would delay the previously announced acquisition of e-commerce software maker Adexa--a deal FreeMarkets wants to close quickly.
If the company does not appeal, it will restate last year's results to exclude $8 million in Visteon revenue. FreeMarkets reported overall revenue of $91.3 million for 2000.
Losing the revenue reported from Visteon will not affect FreeMarkets' bottom-line goals, Hooper said during a conference call with analysts. "It really won't have anything to do with our break-even point or our cash flow," Hooper said.
Gross margins rose to 51 percent in the first quarter, from 41 percent in the year-ago period. FreeMarkets' gross margin will improve at least 0.5 percent to 1 percent each quarter this year, Hooper said.
The company expects to report an operating margin of 25 percent to 30 percent by the second half of 2003, Hooper said, adding it would require quarterly revenue of about $75 million to $80 million.