Yes, it can get worse. For at least three months now, there's been a general assumption that things had gotten as bad as they could get. It turns out those were the assumptions of people whose worldviews and life experiences didn't include visions of what "worse than bad" looks like.
Software maker Inktomi
(INKT:Nasdaq - news - boards), clearly as good a poster child as any for the high-multiple Internet-stock era, gave a vivid illustration late Monday of just how ugly the picture can get. Remember, there is no guarantee that the picture will be much prettier soon. Or ever.
You may recall all the bytes spilled
here
exactly a month ago suggesting that for a company publicly hitting the reset button, Inktomi might be a wee bit overvalued at $1.5 billion. The stock recently had closed at $11.44, down from its early 2000 high of $241.50. At the time, shares of Inktomi were worth nearly 300 times Wall Street's forecasts for calendar 2001 pro forma earnings (the kind that don't include non-cash and one-time expenses), and almost five times revenue forecasts.
Well, even the most optimistic tech-stock investor now understands that just because a stock is down 95%, it's not necessarily cheap. Shares of Inktomi, which makes software that helps Web site operators speed their delivery of data to viewers, fell to $6.22 Monday on no particular news. After telling investors Monday evening that revenues for the March quarter will be between $36 million and $38 million -- 43% less than previously expected -- the shares fell in after-hours trading to about $4.70. The damage was worse when the real trading began Tuesday. By midday, the shares had plunged 53% to $2.94. That's now far below Inktomi's split-adjusted IPO offering price of $4.50 in 1998.
Inktomi also said it will lose between 23 cents and 25 cents per share on a pro forma basis in the March quarter alone. Because that doesn't include one-time charges, presumably it also doesn't include the expenses of dismissing 250 employees, about 25% of Inktomi's workforce.
Despite the gloomy forecasts, Wall Street still hadn't given up on Inktomi before Monday. Before the 15-minute conference call Inktomi hosted after the markets closed (it's 15 minutes of shame?), analysts polled by Multex.com still expected 2001 revenues of $298.1 million. Taking an unscientific 43% whack out of the next three quarters of Inktomi's revenues would yield calendar 2001 sales of $170 million, down 37% over the previous calendar year. So now, at a market value of $391 million, Inktomi trades for a little more than two times forward sales. Merrill Lynch analyst Henry Blodget estimates that Inktomi has about $275 million in cash ($311 million at year-end minus this quarter's cash burn), so excluding its cash Inktomi now is trading for a discount to its forward sales. That's not surprising for a former growth company that's not growing anymore. Mature, profitable companies often trade for between one and two times trailing sales.
The news at Inktomi is so gloomy that the once hype-happy management team couldn't even be encouraged to be optimistic by its fans on Wall Street. Bear Stearns analyst Robert Fagin, who not so long ago saw a floor in Inktomi's shares somewhere above $17, asked if visibility might improve once Inktomi's software embedded into hardware sold by Compaq
(CPQ:NYSE - news - boards), Hewlett-Packard
(HWP:NYSE - news - boards) and 3Com
(COMS:Nasdaq - news - boards) began shipping. "On the visibility front, there just isn't any," responded Inktomi CEO David Peterschmidt. "It'll be three to four months of them having any product shipping before we have any visibility."
What's more, Inktomi declined to provide balance sheet information, guidance for the rest of the year or details on when its cost reductions will begin hitting the bottom line. Peterschmidt did note that days sales outstanding (a measure of how quickly customers are paying their bills) and deferred revenues (a measure of products sold but not yet recognized for accounting purposes) would be "negatively affected." But he said the company would have no details until it reports full results April 19. That's 12 days of painful pondering on those crucial balance sheet issues.
Peterschmidt said the economic climate had declined significantly since Inktomi first warned on Jan. 18 that the quarter would stink. He said there's a good chance the economic softness is extending to Asia as well. "This is the most severe quarter in technology I've ever seen," he said.
This clearly is a tough climate for every technology company. But there's one element still missing -- from the self-analysis of what's gone wrong -- from companies like Inktomi that are blaming problems on the economy. It's that even when the economy improves, it's an open-ended question if their businesses will return as well. Inktomi acknowledges that because there are no new Internet portals, it is reliant on growth at existing portals to sell software targeted at that market. Most of its business previously came from telecommunications carriers, a label not best repeated in polite company nowadays. One analyst, after ascertaining that Inktomi closed no big deals in the quarter, wondered if that meant some big deals could be in the offing later in the year. Replied Peterschmidt: "It's hard to even say that right now."
Peterschmidt concluded that "as long as the economic climate remains uncertain," it will be difficult for Inktomi to achieve operating profits. Remember, Inktomi bragged about its being profitable before the dot-com bubble burst, at least excluding special items. But a company that makes money in an upturn but loses gobs when the hype fades sounds worse than an industrial company in a down cycle. At least you know people will want steel and autos when the economy begins humming again.
See, hear more
Haven't gotten your fill of me from my written words? Fine. You can see me on television and hear me on the radio later today.
Tonight I'm hosting the recently re-designed Silicon Spin program on TechTV. Spin used to be a rambling roundtable discussion. Now it's going to be a lot like Nightline, with the host interviewing guests in points distant. Tonight's
show
, on the digital rights brouhaha that is the subject of Senate hearings today, will feature an interview with Stephan Jenkins, lead singer of rock group Third Eye Blind. The recording industry and a lobbyist for streaming video companies will round out the discussion. To find out if your cable operator or satellite provider carries TechTV, click
here
.
Finally, David Brancaccio, host of public radio's Peabody Award-winning program Marketplace (he bribes me to include the award-winning stuff), thought it might be time to say something optimistic about tech stocks on his program tonight. Unfortunately, he called me. Here's how you can figure out
where and when
to listen to Marketplace today.
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