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THE DAY AHEAD: VerticalNet charts e-commerce path

Tech Industry

VericalNet Inc. (Nasdaq: VERT) has become a rarity in the world of Internet IPOs -- it has maintained its first day gains and then some with a series of moves to bolster its market leading position.

But VerticalNet, which priced its initial public offering in February at $16, is far from sexy. The company operates business-to-business Web sites for industries focused on such mundane topics as wastewater, chemicals, oil and plastics.

Aside from first-mover status in its niche, VerticalNet has also been on a tear of late with a series of moves geared to rev up the company's e-commerce revenue.



VerticalNet: Can shares keep climbing?



As a result, investors have flocked to shares of the Horsham, PA-based company. VerticalNet shares are now trading at about 103, off its 52-week high of 149 set April 22, but still good enough to be one this year's best performers in the IPO aftermarket. VerticalNet (chart), up about 555 percent from February, only trails Priceline Inc. and Healtheon Inc. in terms of aftermarket performance, according to Renaissance Capital Corp., an IPO research firm.

On Thursday, VerticalNet got a boost after it announced that it bought three "communities of commerce and content" focused on the machine tools, electrical power, and oil and gas industries. The acquisition of the three sites -- TechSpex, ElectricNet and Oil-Link -- is part of VerticalNet's grand plan to grow through acquisitions. When the company went public it had 33 sites. Now VerticalNet has 43 sites and plans to hit 50 by the end of the year. VerticalNet also said the acquisitions will be accretive to earnings.

Two days before the latest VerticalNet acquisitions, the company announced its first global trade agreement with South African company Metropolis* Transactive Holdings. Under the three-year, multi-million dollar pact, Metropolis* will use VerticalNet's platform to build an African version of VerticalNet. VerticalNet will be compensated through up-front set-up fees and revenue sharing.

All that's impressive, but it's history. With any high-flying Internet stock, there's always the "What's next?" question.

ZDII spoke with Mike Hagan, co-founder and senior vice president of VerticalNet, on Thursday to get the skinny on what's on deck for VerticalNet.

On future e-commerce revenue: VerticalNet is still dependent on advertising for now. The company reported first quarter loss of $5.6 million, or 39 cents a share, on revenue of $1.9 million. But only 3 percent of those sales derived from e-commerce. In the current quarter, Hagan said the company is gradually increasing e-commerce revenue and seeing "encouraging metrics." In recent weeks, VerticalNet has launched industrial auctions in about 20 of its communities, mainly focused on scientific, chemical and oil niches.

Hagan added that the company is establishing a host of partnerships so distributors can move excess inventory through VerticalNet. The company plans to roll out a unified auction format across all verticals in a few weeks.

For 1999 and 2000, VerticalNet's goal is to have 10 percent of sales from e-commerce, but there could be upside to that goal. "I'd rather underpromise and overdeliver," said Hagan. A lot depends on VerticalNet's audience adopting e-commerce.

On enabling e-commerce: Hagan said recent moves to buy Isadra, Inc., an e-commerce software developer, and team up with TRADEX Technologies, another e-commerce player, are part of a plan to bring its customers into the world of e-commerce.

Hagan said VerticalNet realizes its target audience may be skittish of e-commerce so the company is working to bring its clients up to speed. "We're working with distributors and suppliers to help them sell online," said Hagan. "Right now we have to demonstrate traction and be ready for when suppliers are willing and able to sell."

On the competition: For now VerticalNet is alone. "There's no one out there that's institutionalized a multi-vertical format," said Hagan, who noted there are sites focused on some of VerticalNet's specific niches. However, those individual sites are being acquired. Traditional trade publishers have been too slow to be a threat. Will VerticalNet be a first-mover forever? Don't count on it. "There's a lot of venture capital out there chasing different models," he said. "With that access to capital there's bound to be competition. You have to be paranoid."

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