Ventro's Numbers Just Don't Add Up

Don't be fooled by the $25.2 million in "total" revenue that B2B electronic marketplace Ventro (VNTR) reported for the second quarter on Thursday. While the headline number seems impressive, it doesn't compare to the revenue reported by sector leaders Ariba (ARBA), Commerce One(CMRC) and PurchasePro.com (PPRO).

While the company's 74-cent per-share loss was six cents better than the 80-cent consensus loss forecast by First Call/Thomson Financial, it missed on the crucial transaction fees analysts were eyeing. That performance calls into question how quickly B2B transactions, hailed as the frictionless way to do business just months ago, will grow at the thousands of marketplaces cropping up in industries from construction to cattle.

"The company clearly has stumbled pretty badly," says Ian Toll, an analyst with Credit Suisse First Boston." The market is likely to see this as a major setback."

Toll, whose company hasn't done underwriting for Ventro, was preparing to downgrade the company from buy to market perform. He wasn't alone; two other analysts contacted by TSC were getting ready to cut Ventro as well.

In after-hours trading, the stock fell 2 3/8, or 12%, to 18.

Ventro's $25.2 million total revenue figure is tied to the value of goods that passed through the exchange. The amount the Mountain View, Calif.-based company actually pocketed in the form of net revenue: $1.8 million. No wonder the 500-person company managed to lose $33.1 million for the quarter.

Ventro's problems underscore slowing growth of transaction volume over the company's network. The firm's $29.1 million in transactions this quarter was 9% higher than the previous quarter. That fell short of the $30 million mark analysts had expected and well below the $35 million they had hoped for.

Ventro President and CEO David Perry concedes the figure fell below expectations, but claims the industry is healthy.

"We would have expected [transaction volume] to be north of $30 million and the fact that it wasn't could be construed as disappointing," Perry said in an interview after the company's conference call. But he said robust results at other B2B companies bode well for his own.

Ariba recently reported revenue of $80 million; Commerce One, $62 million; and PurchasePro.com, $9.5 million.

Ventro's $1.8 million in net revenue, by comparison, included $1.2 million in transaction fees and $600,000 from services. Because analysts were expecting $1.7 million from transactional fees alone, the company actually missed transaction estimates by $500,000, or about 30%.

"They hit the bottom line overall, which is what's most important, but they didn't do it in the way we expected, and it makes it look like the [exchange] portion of business is starting to flatten out," says Jon Ekoniak, an analyst at U.S. Bancorp Piper Jaffray. "I see it like going to the prom with your sister. The great part is that you got to go to the prom. The bad part is that you went with your sister."

Ekoniak has placed his buy rating on the stock under review. His firm has not done underwriting for the company.

Ventro's Perry, however, sees the breakdown as a bullish development for the company, which started trading a year ago.

"The fact that our lower transactional revenues were offset by a service revenue stream that people didn't expect us to have should be seen as a positive," Perry said. "Analysts ought to take another look -- we're finding more and more ways to make money."

Perhaps. But regardless of the diversity of Ventro's revenue streams, $1.8 million still ain't a lot of money in the B2B world.

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