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After a Day's Delay, PurchasePro Posts Loss

Joe Bousquin

Nothing good came to anyone who waited for PurchasePro.com's (PPRO) first-quarter results.

After preannouncing on the day of its scheduled earnings release Wednesday, and then postponing its results and conference call until this morning, PurchasePro badly missed the consensus estimate. The company posted a loss of 2 cents per share, compared with analysts' expectations for a profit, on revenue reduced to $29.8 million because of accounting concerns.

Analysts expected the company would earn 8 cents a share on revenue of $41 million, according to Thomson Financial/First Call.

On its conference call with financial analysts, the company said it saw a total of about $43 million in "contract activity" but that its auditors wouldn't let it recognize all that revenue due to accounting rules.

Jim Clough, the company's interim CFO, said that $4.1 million of the company's deals this quarter fell into the deferred revenue category, while the company didn't recognize another $3.7 million because "we had insufficient facts to determine whether the customer was creditworthy." In all, Clough said about $10 million of the company's potential revenue this quarter was affected by recognition issues.

Accounts receivable, or the money owed to the company by its customers but not yet collected, shot up to $44 million from $23 million in the fourth quarter of 2000. Days sales outstanding, or the length of time it takes to collect that money, jumped to 134 days. PurchasePro said the spike resulted from several large deals that closed toward the end of the quarter, and that it had already collected $23 million of its accounts receivable so far in April.

The delayed quarterly report and loss come after PurchasePro reiterated its guidance in March, promising Wall Street that it would make its numbers despite the rough economy.

George Santana, an analyst at Wedbush Morgan Securities who rates PurchasePro a sell, found little to be happy about in the report.

"In 2001, you probably shouldn't be selling to or banking a large percentage of your revenue to customers with credit concerns," Santana said. "A lot of analysts had taken comfort that the economy had not significantly impacted their business because they adamantly reiterated their guidance in March, and then here the company is with this mayhem and the delay in releasing their results. Then they miss their numbers, and there's no guidance going forward." (Santana's firm hasn't done underwriting for PurchasePro.com.)

Patrick Walravens, an analyst at Lehman Brothers who had a buy rating on the stock at publication, said the company's fiasco over reporting its numbers is disappointing, because he does get positive feedback from the firm's customers.

"I'll tell you, the thing that's so frustrating about this company is that when you talk to their customers and partners, you still get very positive feedback," Walravens says. "And yet they continue to find ways to disappoint people on the Street." (His firm hasn't done underwriting for the company.)

Charles Johnson, Jr., the company's CEO, told investors to expect similar "business activity" and gross revenue in the company's second quarter, and that PurchasePro would give further guidance in coming weeks. Currently, consensus revenue estimates for the second quarter stand at $47.4 million. Analysts expect 11 cents per share in earnings, according to Thomson Financial/First Call.

The company also said it was doing away with its controversial practice of issuing warrants to business partners.

"That was an early stage strategy," said Johnson. "We will not issue any new warrants, and now warrants will be repriced."

In November, PurchasePro repriced to a penny per share 3 million warrants that it had granted to AOL Time Warner(AOL). While the company won't grant any new warrants, Wedbush Morgan's Santana pointed out that AOL gets warrants it was already promised over time, as it helps sell PurchasePro's marketplaces. The company said that nearly two-thirds of its revenue during the first quarter came through its partnership with AOL.

How quickly AOL can exercise its warrants, however, is based on how much revenue it generates for PurchasePro - the more revenue it refers to the company, the faster its warrants are rewarded. Santana estimated that at its current rate, AOL could earn all of its promised warrants by this June.

"AOL is getting the warrants and exercising them immediately," Santana says. "If you go through and exercise all the warrants by June, what's the incentive for AOL to keep pushing PurchasePro's marketplaces after that?"

The issues were taking a toll on PurchasePro's stock. After losing 35% Wednesday, it was off $1.27, or 31.4%, to $2.78 in recent trading.

The company also introduced its new CFO, former Quantum (DSS) executive Richard Clemmer, on its conference call. He will succeed Clough, who will remain at the company.