FreeMarkets Still Paying the Price for Reducing Outlook - TheStreet

Updated from July 29

Shares of sourcing software maker and electronic auctioneer

FreeMarkets

(FMKT)

tumbled Tuesday amid a rash of downgrades after the company lowered full-year guidance a day earlier.

Shares of FreeMarkets dropped $2.73, or 29%, to $6.66 in recent trading. FreeMarkets was among the most actively traded U.S. losers, according to Instinet.

Goldman Sachs, Morgan Stanley, Wedbush Morgan Securities and U.S. Bancorp Piper Jaffray were among the investment banks to lower their ratings on FreeMarkets.

On Monday Pittsburgh-based FreeMarkets lowered its 2002 revenue guidance to between $180 million and $184 million -- 10% to 12% lower than its previous target of $205 million -- but reaffirmed its full-year pro forma earnings target of 25 cents a share.

Both targets are less than the $207.7 million in revenue and 27 cents inearnings expected by Wall Street analysts.

Analysts noted that the weak economy is leading customers to shift to FreeMarkets' cheaper self-service software from its full-service auction offering at a faster pace than expected, contributing to the lower revenue targets. The company's reduced guidance came despite a gain of six new customers in the second quarter.

FreeMarkets reported a GAAP loss of $87,000, or break-even on a per-share basis, in the second quarter, compared with a loss of$240.8 million, or $6.15 a share, in the same period a year earlier. Theprior year's second quarter included goodwill charges totaling $219.5million.

Excluding charges, FreeMarkets said it earned pro forma net income of$4.7 million, or 10 cents a share, compared to a loss of $6.6 million, or 17cents a share, a year earlier. That beat FreeMarket's earnings guidance ofbetween 5 cents and 7 cents a share in the second quarter.

In the first quarter, FreeMarkets reported a GAAP loss of $11.5 million,or 28 cents a share, and pro forma net income of $3.4 million, or 7 cents ashare

The company said revenue excluding fees characterized as payment forwarrant rose 20.2% to $44.6 million from $37.1 million a year earlier and3.2% from $43.2 million in the previous quarter. Including those fees,revenue totaled $47.4 million -- in line with the company's guidancereaffirmed at the end of June.

Wall Street's estimates called for FreeMarkets to earn 6 cents a shareon $47.7 million in the second quarter, according to Thomson Financial/FirstCall.

For the third quarter, FreeMarkets expects to report total revenue of$42 million to $44 million and earnings of between 2 cents and 4 cents ashare. Consensus estimates for the company's September quarter are $52.5million in total revenue and 6 cents per share in earnings.

For the fourth quarter, the company expects revenue to rise slightlysequentially to $45 million to $47 million and earnings to reach between 4cents and 6 cents a share. Wall Street analysts were forecastingfourth-quarter revenue at $61.6 million and earnings at 9 cents a share.

Until now, with year-over-year revenue growth, FreeMarkets has managed to rise above other battered business-to-business software companies such as

Ariba

(ARBA)

and

Commerce One

(CMRC)

.

The difference in the electronic auction field is that FreeMarketsoffers more services in addition to its auction software, analysts say.FreeMarkets helps customers refine the buying process, from helpingstructure requests for qualifications before auctions to supportingsuppliers in different languages during the auction itself.