VerticalNet Goes Horizontal

Shifts toward providing software for private marketplaces

Horsham, PA  April 30, 2001  Erstwhile B2B poster child VerticalNet announced last week that it was going horizontal, shifting its focus from operating public e-markets in disparate industries to providing software that will enable participants in those marketplaces to connect with each other in private marketplaces.

The company also announced continued losses (though smaller than expected), even as it unveiled a restructuring (read: layoffs) and a new partnership with Microsoft.

The shift in strategy takes the company away from a "closed demand model," whereby buyers enter VerticalNet marketplaces through its 59 vertical communities, to an "open demand model," under which VerticalNet will provide the software to link its supplier network to diverse sources of demand, including public and private marketplaces. VerticalNet will reportedly continue to operate its vertical marketplaces.

The company reported losses for the quarter of $28.2 million and followed with an announcement that it was laying off 25 percent of its workforce, or 270 people. In January VerticalNet had let go 150 employees, or about 8.3 percent of its workforce at the time.

Revenues for the quarter ending March 31 were $36.7 million, an increase of 185 percent over the $12.9 million reported for the same period of the prior year. The cash loss for the quarter of $28.2 million, or $0.30 per share, compared to $13.6 million, or $0.18 per share reported for the same quarter last year.

The company reported that it had $107.3 million in cash and marketable securities in the bank as of March 31, down from $145.2 million at the end of last year. The catch is that the $107.3 includes a $40 million cash injection from Microsoft as part of a new deal with the software behemoth. Despite this apparently substantial cash-burn rate, VerticalNet restated its intention to turn the corner and attain positive cash earnings by the fourth quarter of 2001.

"We have taken an aggressive approach to streamlining our cost structure this year," said Gene Godick, executive vice president and chief financial officer. "We continue to evaluate opportunities that will improve operating efficiencies and reduce costs and we believe that our liquidity position is sufficient to fund our business plan and reach positive cash earnings in the fourth quarter of 2001."

VerticalNet's president and CEO, Mike Hagan, marking his first 100 days in office last week, put the best face on the announcement: "We are pleased to have beaten projections for the quarter despite the current economic environment, and we have taken actions to aggressively reduce expenses to ensure that we meet our goal of attaining positive quarterly cash earnings this year."

Also last week, the company consolidated its two divisions into a single operating unit and unveiled additions to its senior management lineup, including: Pat Hume as chief marketing officer (moving over from president of VerticalNet Markets); David Kostman, chief operating officer (adding to his position as president of VerticalNet International, a post he will continue to hold); and Chris Larsen, executive vice president of global field operations (coming over from SAP America, where he was president).

In a sign of just how much things have changed in the B2B world since the days when profit was a four-letter word, Hagan said that the company's priorities henceforth would include developing products that meet its customers' needs, eliminating "activities that do not add direct value to our customers and other stakeholders" and getting into the black quickly.

In conjunction with its refined focus, VerticalNet announced a new strategic partnership with Microsoft. Under the terms of the new agreement, which replaces an online-storefront-distribution alliance launched in April 2000, Microsoft will provide $40 million to VerticalNet to create and market supplier enablement solutions and to promote Microsoft's technology platform as the supplier enablement backbone for small and medium-sized businesses. This $40 million payment replaces the net cash flows that VerticalNet expected to receive under the April 2000 storefront distribution arrangement.

Additionally, under the new partnership, both companies have agreed to enter into an additional agreement under which they will each spend $10 million to develop other products, services and marketing initiatives.

VerticalNet forecast revenues this year of 150 million to $160 million, with a full-year cash loss expected to be in the range of $53 to $58 million, or $0.56 to $0.60 per share. The company expects its most recent cost restructuring initiatives to generate savings of approximately $25 million to $27 million on an annualized basis and to result in a one-time charge of approximately $5 to $7 million, or $0.05 to $0.07 per share, in the second quarter of 2001.

The company reported that as of March 31 it had $39.1 million of long-term debt. Significant cash outflows during the first quarter included $18.1 million to increase the company's ownership stake in VerticalNet Europe and $33.1 million to fulfill obligations related to the sale of a business unit.

VerticalNet's stock, which traded at nearly $140 in early 2000, now hovers around $2.

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