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Publish date: Revisited

The B2B's momentum has stalled as some question how it will generate enough money to justify its share price.

Promise Keeping

Before declining 14% in the past two trading days,


was a walking advertisement for momentum. From Feb. 10 through Feb. 16, the stock rose over 60% to last Wednesday's close of 133 1/4.

I return to the story because this company -- which went public last September -- in many ways typifies the "new economy" phenomena -- for good and bad.

As a leading provider of business-to-business e-commerce "solutions," drinks from the Holy Grail of the Internet economy, and its stock price reflects the promise of B2B salvation. But cynics argue the stock's gains are blasphemous when compared to the reality of the company's current business (or even its future potential).

The stock's recent setback seems more a function of a "buy the rumor, sell the fact" trade rather than any fundamental development. In fact, the recent news from has been largely positive.

Last week, the company received new coverage from

Credit Suisse First Boston

, which initiated with a strong buy rating and a 12-month target of 205;

Robertson Stephens

, with a buy rating and a 300 target; and

Bear Stearns

, with a buy rating and a 275 target. Each of the firms has done

underwriting for

Also, the company's fourth-quarter financial results (released

TheStreet Recommends

Feb. 16) provided the kind of metrics investors and analysts demand of highfliers: Revenue rose 318% over fourth-quarter 1998, while gross profit margins increased to 90% from 83% the prior year.

That losses per share expanded to 24 cents (excluding charges) vs. 15 cents the prior year seemed all but an afterthought during the company's conference call last Wednesday. Instead, the focus was on the growth of's network to around 19,600 mainly small and midsize companies, which use the network to buy and sell a variety of goods and services.

Also, executives touted the perceived competitive advantages of its browser-based B2B solution vs. main rivals such as

Commerce One





, which develop proprietary software for which their customers pay large up-front fees. The software developers then book the revenue over a period of time.

First Boston analyst Christopher Vroom acknowledged that Commerce One (for one) is trying to move away from a strict license fee-based revenue model. But because's business is based on both subscription and transaction fees, "they are a true marketplace," he said. "In that respect, they are differentiated."

Subscriptions made up the bulk of's fourth-quarter revenue, with about 70% of the total. However, the company projects subscriptions and transaction fees will each be around 30% of total revenue in three to five years as more deals are done within its network. (The other 40% will come from licensing fees, advertising and a variety of other sources.) Essentially, the company aims to be the tollbooth collector of the information superhighway's B2B lanes.

Another feature of's conference call was that fourth-quarter results included very little (if any) revenue from separate alliances with

Office Depot

(ODP) - Get ODP Corporation Report






, a catalog publisher with over 3 million subscribers.

"To sustain huge percentage

revenue growth with not one dollar from these people gives you an idea of the momentum we are having

going into the first quarter and 2000," CEO Charles Johnson said during the conference call. Johnson did not return phone calls seeking additional comment today.

Looking ahead, rolled out 125 kiosks in Office Depot stores in late January and plans to be in 850 by the end of March. The intent is to provide heightened exposure to Office Depot's small and midsize business customer base, into which Johnson forecasts "deep penetration." will receive 75% of transaction revenue generated through the alliance, but the CEO did not specify when the revenue would emerge, nor forecast a level.

Still, Office Depot is a motivated partner: The retailer bought 500,000 shares at the time of's IPO and has warrants for an additional 750,000 shares (exercisable at 8) if it can meet certain performance benchmarks. Also, Office Depot Chairman David Fuente is on's board.

Sprint also has motivation: It owns warrants with a strike price of 95.79 to purchase 1.35 million shares and can receive an additional 1.35 million if it is able to help generate annualized net recurring revenue of over $40 million from the alliance. The B2B firm took a noncash $50.1 million charge in the fourth quarter related to the issuance of the Sprint warrants. Arguably, comes out $10 million in the hole even if the Sprint deal blooms in full.

Meanwhile, Steve Schlegel, director of corporate development at Sprint, was quick to note "we are not providing revenue to PurchasePro," and the $40 million is's own forecast.

And might need help from

Lawn Doctor

to see this deal blossom.

Supporters such as Vroom admit "it takes awhile to build up transaction revenue" from such alliances, and doesn't expect the Sprint deal to reach its full potential until the second quarter of 2001. However, Sprint's Schlelgel reports "they've got us on an aggressive timeline."

Essentially, the telecom giant has about a year to earn the extra warrants. This is "a short window," according to the Sprint executive.

Getting through that window is going to be even tougher because two Sprint executives that negotiated the deal with -- Dale Boeth and Jeff Anderson -- have recently left the firm to join (drum roll, please)

"We did lose a couple of quality people to, but we are still dedicated to offering this solution to our small and medium-sized business customer," Schlegel said.

Maybe so. But given the lofty expectations built into's stock price, a fair-minded investor should ask what happens to if the Sprint or the Office Depot or some other deal doesn't come to fruition. Or, for that matter, what changes to the competitive landscape -- such as

SBC Communications'


$3.9 billion

acquisition of

Sterling Software

(SE) - Get Sea Ltd. (Singapore) Report

-- mean for the company.'s "valuation today represents the magnitude of the opportunity,

and we think it's quite considerable," Vroom said.

But remember, one man's "magnitude of opportunity" is another man's "priced for perfection," especially when you recall that 3.2 million shares are due to come out of lockup in mid-March, 1.7 million in April, 735,000 in May and 14.2 million in June.

One financial analyst, who has no position in but calls it "very shortable," questioned how "is going to generate the kind of money they'll need to justify the share price."

Finally, while currently boasts a market cap of around $3.5 billion (with a "B"), bullish analysts are looking for revenue approaching $70 million (with an "M") in 2001 and don't even consider profitability until 2002.

In comparison, Office Depot has a market cap of just under $4 billion after generating revenue of nearly $9 billion (with a "B") last year and earnings per share of 86 cents in calendar 1999.

Let's say for the sake of saying it that the "new paradigm" is for real and those figures are justified. How then, to explain why Office Depot isn't getting more "credit" for its stake?

As originally published, this story contained an error. Please see

Corrections and Clarifications.

Aaron L. Task writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at

As originally published, this story contained an error. Please see our

Corrections and Clarifications for details.