More Bad News for Internet Consulting Firms

Technology consultant C-quential, the latest victim of negative investor sentiment toward the Internet consulting sector and technology stocks, said late Wednesday that it postponed its initial public offering.

Pricing earlier in the week didn't bode well for the spinoff of consulting firm Arthur D. Little. Originally set to price its 7.25 million shares in the $13 to $15 range, the company finally settled for a decrease to the $7 to $9 range on Tuesday, only to delay the issue the next day.

The Cambridge, Mass.-based company is only the latest to disappear from the IPO calendar. "General market conditions are the primary reason," said Melanie Hase, an analyst with Renaissance Capital, which runs the IPO Plus Aftermarket Fund.

However, weakness in the sector is certainly also a factor. IPOs of Internet consultants have performed an excellent vanishing act themselves in the past few months, helped along by a raft of pre-announcements of projected losses and revenue shortfalls by the group's public companies, including Viant (VIAN) and iXL Enterprises (IIXL).

Woeful third-quarter numbers posted -- without any warning -- by MarchFIRST (MRCH) (formed earlier in the year by the merger of Whittman-Hart and USWeb/CKS) on Tuesday didn't help matters. Meanwhile, Scient (SCNT), Viant and Proxicom (PXCM) all issued cautious remarks about the fourth quarter.

Sentiment likely won't change until "a handful of companies emerge as the service providers of choice," said Matthew Litfin, an analyst with William Blair & Co. "Already, we can see the beginnings of differentiation in the most recently reported third quarter."

Despite the shaky outlook for the fourth quarter and beginning of 2001, Litfin singles out Scient, Diamond Technology Partners (DTPI), Sapient (SAPE) and Proxicom as companies that all reported strong third-quarter numbers. Scient and Proxicom both posted triple-digit year-over-year revenue growth of 231% and 155%, respectively, while Diamond posted 97% growth. Litfin rates Scient a strong buy, Diamond a buy and has no rating on Proxicom. (His firm hasn't performed recent underwriting for the three companies.)

He predicts that investors will become more positive on the sector once they "recognize this stratification," but he believes that won't happen unless companies are able to record at least another quarter of solid growth.

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