FreeMarkets Faces Tough Crowd After Ventro's Flop
On Monday,
FreeMarkets
( FMKT) has the enviable -- or perhaps regrettable -- position of following
Ventro
(VNTR) - Get Venator Materials PLC Report
in the business-to-business earnings line-up.
Thursday night, Ventro tripped over its number and ended up landing on its face for the quarter. (
TSC
wrote about Ventro's results on Thursday.) That inspired analysts up and down Wall Street to downgrade the stock Friday morning, and the entire B2B sector headed south for the day. (The tech-heavy
Nasdaq Composite Index
also was off.) Given the emerging nature of B2B, Ventro's setback is likely to still be on investors' minds Monday morning.
And that means analysts and shareholders will be particularly focused on FreeMarkets' transaction volume, the main place Ventro stumbled. (Transaction volume is simply the amount of goods sold through FreeMarkets' auctions.) Analysts are expecting the online industrial auctioneer to report auction volume of between $1.4 billion and $1.7 billion for the quarter. They're hoping that translates into net revenue of $13.2 million to $14.2 million.
The consensus estimate of 15 analysts surveyed by
First Call/Thomson Financial
is for FreeMarkets to post a loss of 41 cents a share. But as with the B2B companies that have already reported, the bottom line won't be the most important thing.
"One of the key metrics there will be the total amount of auctions hosted by the company in the quarter," says Jamie Friedman, an analyst at
TheStreet Recommends
Goldman Sachs
who rates FreeMarkets a trading buy. (His firm was the lead underwriter on FreeMarkets' IPO in December.)
Because the companies have different business models, Friedman was leery of using Ventro's disappointing transaction volume as an indicator of how FreeMarkets might fare with its own numbers. Rightly or wrongly, however, investors likely will make the comparison.
"People do look at those volume numbers," says Edward McCabe, the B2B analyst at
Merrill Lynch
who rates FreeMarkets accumulate. (His firm hasn't done underwriting for the company.) McCabe says net revenue numbers should be in the bag, because FreeMarkets recognizes revenue over the life of a contract, which means that deals signed in the past are still contributing revenue. "It can still be lumpy, but they have a pretty good bead on it."
Since July 12, when
Ariba
( ARBA) reported a blow-out quarter that sent B2B stocks on a tear, FreeMarkets has risen 14% -- considerably less than other stocks like
Commerce One
( CMRC) or
PurchasePro.com
(PPRO)
. That's because investors aren't sure where FreeMarkets will land once mega-industrial exchanges -- like the ones Commerce One is building -- get up and running.
"There's a concern that their customers might join consortiums and then compete against them," says Tim Getz, an analyst with
Prudential Securities
who rates the stock accumulate. (His firm hasn't done underwriting for the company.) "But what we've seen so far is that large buying customers and large suppliers are doing both, because the consortiums have been slow to execute." Consortiums involve corporate partners banding together in a group to buy supplies.
That tendency to funnel business to FreeMarkets, which has auction centers up and running in its hometown of Pittsburgh and in Brussels overseas, has made it one of the top business-to-business transactors, period. After the second-quarter numbers are in, for example, Getz expects FreeMarkets will have run a total of $7 billion in auctions since 1995.
Since there's been a relative weight on the stock, FreeMarkets could rally if it significantly beats its numbers. Analysts are optimistic that the company will hand in a strong quarter. That said,
VerticalNet
( VERT), which reports Wednesday, is
really
supposed to blow numbers away, so investors may stick B2B cash there instead.
Goldman's Friedman, though, thinks FreeMarkets should at least start getting credit for the business it has already put through its system, regardless of the outlook for where corporations will do business in the future.
"A lot of the calls I get on FreeMarkets are bearish," Friedman says. "But sometimes, you don't want to sing with the choir, because the reality is this company has been executing. Maybe it's time to give these guys some credit regardless of the strategic issues going forward."
On Monday, investors will be able to vote with their shares whether it's time for that.
