On Oct. 17

PurchasePro.com

(PPRO)

crushed analysts' expectations with its third-quarter results, as revenue soared 82% from the previous quarter and its loss per share was a dime less than expected. The company also says it didn't have to spend any cash in the quarter and would become profitable during the fourth quarter, three months earlier than anticipated.

Yet since reporting those results, shares of the Las Vegas-based business-to-business software company have fallen 33%.

PurchasePro's doubters say the decline has come because investors see disturbing issues in the company's third-quarter results. The issues involve a huge jump in the company's accounts receivable, a big drop in its recurring revenue, a $7 million expense the company didn't record and doubts about PurchasePro's claim that it didn't have to spend any cash during the quarter.

PurchasePro blames the stock's decline on the overall market and disputes critics' contentions about its recent results. "Business from a revenue perspective and from customer interest is white-hot right now," says Chris Benyo, PurchasePro's marketing chief.

PurchasePro's Decline
The stock has tumbled since the company's third-quarter results

While PurchasePro's revenue soared 82% on a sequential basis in the third quarter, the company's accounts receivable also jumped -- by a whopping 143% to $22.6 million.

Accounts receivable are funds owed to a company. When they rise, it means it's taking longer for a company to get paid for products it has already sold. In turn, that can indicate that a company is offering delayed payment terms as an incentive for customers to buy its product. Usually, a company will only do that if demand is slowing.

PurchasePro says the increase in accounts receivable was due to a raft of deals that closed toward the quarter's end, many through reseller agreements with top-tier partners like

America Online

(AOL)

and

Sun Microsystems

(SUNW) - Get Report

. Since many businesses bill on a 30-day cycle, that explanation for the rise in accounts receivable is plausible.

Selling for Less

But those deals might provide another window into potential demand issues at the company. While PurchasePro says it typically charges $250,000 for a marketplace license, its resellers sold 27 marketplaces for $5.3 million, or about $196,000 each. If demand for the company's products is "white-hot," as Benyo claims, it seems odd that it would be scrambling to close deals at the end of the quarter while charging less for its products.

When analysts asked about that pricing discrepancy on the company's conference call, Charles Johnson Jr., PurchasePro's CEO, offered a partial answer.

"Because

the resellers are doing mass distribution, they bought the license that has the minimum amount of users so they can distribute them rapidly," Johnson said. James Clough, the company's CFO, then added that the $250,000 price tag includes $30,000 in consulting fees, which weren't paid on these licenses. But neither addressed why the licenses went for less than $200,000 each.

Meanwhile, PurchasePro's recurring revenue fell. Recurring revenue, in the form of monthly charges to get onto PurchasePro's network of Internet marketplaces, is attractive because it keeps coming in long after a sale is made. Like the $20 a month AOL charges its millions of subscribers for Internet access, PurchasePro has long said this type of revenue is at the heart of its business model.

Falling Fees

But one type of recurring revenue, network-access fees, dropped 30% to $5.1 million in the third quarter from $7.2 million in the second quarter. The company says it had to go back and pull out $2.3 million it received in the second quarter from a deal with

AdvanceStar

. Benyo, the marketing chief, says the money "snuck in" to recurring revenue, but actually doesn't recur, forcing the change.

But even considering the reclassification, PurchasePro's network-access revenue grew only 6% from the second quarter.

"It shocks me that these guys in general are trying to focus on potential profitability and the core number goes down by 2 million bucks," says an analyst who asked to remain anonymous. (The analyst doesn't have a position in PurchasePro, but some of his clients are short the stock, meaning they profit if PurchasePro shares fall.)

A Smaller Percentage

In addition, network-access fees fell to 29% of quarterly revenue in the most recent quarter from 76% in the second quarter. Meanwhile, one-time licensing fees, as a percentage of revenue, climbed to 65% from 15%.

The company says the jump in licensing fees stems from its new strategy to sell more software licenses, though that figure will fall as those marketplaces generate recurring hosting and maintenance fees. (Hosting and maintenance fees are separate from network-access fees.) The company says each marketplace should generate recurring annual revenue equivalent to 50% of the original license price.

But concerns over PurchasePro's numbers don't end there. The company beat the third-quarter consensus estimate by a dime because it didn't record a sales and marketing payment that analysts were looking for.

Under a March agreement with AOL for technology development, PurchasePro has to pay $20 million over the next two years in equal quarterly installments. (In total, it has agreed to pay AOL $70 million through various deals.) But it only paid $1.1 million of the $7.1 million it was expected to pay during the third quarter, a result of a "timing issue," the company says. So it'll have to pay the remainder in the fourth quarter, which makes some analysts wary of whether the company can reach its profitability goal then.

"We are raising our estimates but are being more conservative than the company's target for profitability -- where PurchasePro indicated it is targeting profitability in the Q4," wrote Eric Upin, an analyst at

Robertson Stephens

who rates the stock a buy. (His firm hasn't done underwriting for the company.) "We are now forecasting that the company will cross over into profitability in Q1 of 2001."

On Track

PurchasePro's Benyo says the company is on track. "We've said we would be profitable in Q4, so that means we expect revenues to cover that initial AOL expense," he says.

At the same time, the analyst who asked to remain anonymous disputes the company's claim that it burned no cash and turned cash flow positive. He notes that PurchasePro's cash position dropped during the quarter to $101 million from $121 million in the second quarter.

Benyo says, "Cash on hand is a measure of cash, and investments that are equivalent to cash. So there were some things in the quarter that altered the cash balance, but on a cash-flow basis, if you look at the deferred revenue, our revenues and the money we spent, there was a zero burn rate. Basically, we took in as much cash as we spent."

The answer may come late this month with the filing of the company's 10-Q, the detailed account of its quarter, with the

Securities and Exchange Commission

, says Tim Getz, an analyst with

Prudential Securities

who rates the company a strong buy. (His firm underwrote PurchasePro's initial public offering.)

Among PurchasePro's doubters, it's sure to be a must-read.