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Start-up profits wow Wall Street

Internet services firms storm Wall Street with stellar fiscal quarter results, buoyed by strong demand for e-commerce work untouched by Year 2000 concerns.

    Internet services firms stormed Wall Street with stellar fiscal quarter results this week, buoyed by strong demand for e-commerce work that has been untouched by Year 2000 concerns.

    Shares of Boston-based Viant today jumped as high as 52 percent after the company surprised Wall Street analysts by posting a $1.6 million profit more than a year ahead of analysts' expectations. The company's shares closed today at 89.25, up 18.75 percent.

    Results are indicative of an industry that is exploding as customers book these builders of e-commerce sites solid for months to come. And as industry giants such as IBM and German software giant SAP lament a lockdown in corporate spending because of the Year 2000 changeover fears, e-commerce projects appear to be the exception to the wallet-shelving rule for the Fortune 1000. These services companies are also free of the worries that plague Internet companies such as Amazon.com and CDNow.com, which are forced to shell out thousands of marketing dollars to fend off increasing competition in their low-margin businesses.

    "The revenue is coming in so fast [for Internet services firms] that these guys can't spend that kind of money to offset it," said Wayne Segal, a financial analyst at Credit Suisse First Boston, which helped take Viant public earlier this year. "But to see them turn a profit in Q3 of this year was well ahead of expectations," he added.

    Analysts say these companies--including Scient, iXL, AppNet, Proxicom, and Razorfish--are particularly appealing now to investors because their short-term profits appear to be spared from the impact of millennium woes. They provide services that range from planning a Web site to designing, building, and integrating it with a company's existing financial and legacy computer systems.

    For the quarter, Viant's revenues climbed 254 percent to $18.8 million from $5.3 million in the year-ago period, and 71 percent sequentially from $11 million in the second quarter of 1999.

    Earlier this week, Razorfish and Proxicom both posted stronger-than-expected quarterly results. Web design consultancy Razorfish's quarterly revenues rose 380 percent to $19.1 million from $4 million a year ago.

    Reston, Virginia-based Proxicom reported third-quarter revenues of $23.6 million, an 87 percent increase from $12.6 million in the same period a year earlier. Both companies have already turned profits.

    E-services firm AppNet, a current Wall Street darling that does everything from building Web storefronts to connecting mainframes to the Net, is expected to report results next week. The company's shares closed today at 56.69, up 13.69 percent.

    Many of these Internet services firms that have gone public over the past six months are changing the face of the services market by focusing mainly on Web projects for profits. As older, established companies struggle to reinvent their offerings for the Internet, these newer companies are recruiting heavily to meet demand for their services, which is growing at a much faster pace than traditional services firms, such as EDS, Computer Sciences, and others, said Dirk Godsky, a financial analyst at Hambrecht & Quist.

    "The key for any professional services company is the ability to hire, recruit, and retain key professionals," said Godsky. "There's a lot of key professionals throughout the economy that are looking to join these kinds of firms."

    On average, Web services firms have a lower employee turnover rate of about 15 percent, compared to about a 25 percent rate for larger, traditional services firms, analysts said. San Francisco-based Scient, which earlier this week said revenues doubled for the quarter, reported a low employee turnover rate of 3 percent for the period. Scient closed today at 105.12, up 5.62 percent.

    "These companies are adding people at tremendous rates," said David Mahoney, a financial analyst at Soundview Technology Group. "I'm not saying it's easy by any stretch, but the companies with a good recruiting engine will be the most successful." His list included Scient, USWeb/CKS, Razorfish, Viant, and Proxicom.

    "The speed these guys are growing is causing a huge upside in revenues," said CS First Boston's Segal.