B2B Bear Blues

FreeMarkets, like Commerce One, has good news, but not higher stock value

Monday, B2B marketplace FreeMarkets reported positive results for the fourth quarter ended Dec. 31, 2000. Revenues for the fourth quarter increased to $34.5 million, up 340 percent over the fourth quarter of 1999 and 30 percent over the quarter ended Sept. 30, 2000. Market volumes grew to $3.5 billion, an increase of 153 percent over the fourth quarter of 1999 and 18 percent sequentially. Gross margins increased to 50 percent, compared to 39 percent in the fourth quarter of 1999 and 46 percent in the quarter ended Sept. 30, 2000. Net loss for the fourth quarter, excluding stock-based expense and non-cash acquisition-related costs, was $10.4 million, or $0.27 per diluted share, beating the First Call estimate by $0.04 per share, and bettering the $0.41 per diluted share loss reported for the fourth quarter of 1999.

Revenues for the year ended Dec. 31, 2000 were $91.3 million, compared to $20.9 million in 1999, an increase of 337 percent. Market volumes grew to $9.9 billion, an increase of 264 percent over the $2.7 billion reported in 1999. Gross margins increased to 46 percent in 2000 from 42 percent in the prior year.

Demand for e-sourcing solutions that deliver large and immediate returns on investment is extremely strong, and FreeMarkets is uniquely positioned to capitalize on this market opportunity, said Glen Meakem, chairman and CEO of FreeMarkets. Our portfolio of e-sourcing solutions provides professional buyers with the technology, information and services they need to make better business decisions. These solutions have delivered tremendous results to buyers around the globe  more than $2.7 billion in savings to date.

Good news from FreeMarkets includes the fact that, for the quarter, 2,432 auctions were conducted for $3.5 billion worth of goods and services. This represents an increase in market volume of 153 percent over the fourth quarter of 1999, and 18 percent over the previous quarter. FreeMarkets has conducted over 9,200 online auctions for over $14 billion worth of goods and services in more than 165 different supply verticals and generated over $2.7 billion in potential savings for its customers to date.

In the fourth quarter, the company announced new agreements with companies as varied as CLP Power Hong Kong Limited and H.J. Heinz Co., and extended long-term agreements with the Commonwealth of Pennsylvania, Emerson Electric, United Technologies Corp. and Allegheny Technologies. In a major development, FreeMarkets also signed a letter of intent to form a Japanese joint venture with Mitsubishi Corp., one of the largest general trading companies in Japan. The joint venture, which will be majority-owned by FreeMarkets and operate from its office in Tokyo, will deliver the FreeMarkets B2B Global Marketplace to the Japanese market. Mitsubishi will invest significant capital in the joint venture and receive a significant equity stake.

So there's good news all around, and, in a time of huge layoffs (10,000 at Lucent alone), surely that's good for the company's market cap, right? After all, last week Commerce One posted losses of five cents a share versus estimates of seven cents, and its stock closed up 29.25 percent for the day. But FreeMarkets' loss beat estimates by four cents a share, and it closed down 20.8 percent for the day. Why the difference?

John Wojtkiewicz, associate analyst, B2B Commerce and Applications at research and advisory firm The Yankee Group, believes the answer lies in Commerce One's breadth of offerings. He explains, I think it's important to remember that FreeMarkets is, for all intents and purposes, offering auction services. So an enterprise that's using FreeMarkets, they're working with suppliers that they won't have traditional relationships with. They're unsolicited relationships. It's an auction set-up.

Wojtkiewicz goes on to explain, If you look at it from C1's perspective, they're doing a whole lot more. They're offering a procurement solution, they're helping their large-enterprise customers to plug into their suppliers, so they're streamlining the procurement process&. There's definitely some value to be found in the auction site model, but it's only one possible part of saving costs in procurement.