PurchasePro Inks a Deal With Hilton but Still Gets No Respect - TheStreet

PurchasePro.com

(PPRO)

can't get no respect.

It's not that the Las Vegas-based business-to-business exchange-builder is an also-ran in the B2B space. It's just that, well, if the company sold footwear, it would be the discount shoe rack at

J.C. Penney

(JCP) - Get Report

, and not the thick-carpeted footwear department at

Nordstrom

(JWN) - Get Report

.

But one thing B2B investors might want to think about is that J.C. Penney sells a hell of a lot of shoes. PurchasePro, for its part, has been selling a hell of a lot of exchanges.

The company had set up 155 private-label marketplaces for its customers, through the end of the first quarter, and analysts say it will add six to eight more this quarter. One of those will be for

Hilton Hotels

(HLT) - Get Report

, a deal that gave PurchasePro's stock an 8.4% pop when it was announced June 1. In fact, over the last week, the stock has surged 35%, along with other B2B names. And analysts say more deals of that scale should be forthcoming in the next three weeks.

In addition to those private marketplaces, which essentially allow firms to set up their own online exchanges with existing suppliers and customers, PurchasePro also runs a network of suppliers and buyers. It says it has over 21,000 businesses on that network. And while not all of those companies are actual PurchasePro subscribers, they do provide the much-coveted liquidity that B2B exchanges lust after.

By comparison,

Ariba

(ARBA)

has 90 exchanges, though it also counts 10 industry consortia among its customers, and has 172 customers on its procurement network.

Commerce One

(CMRC)

has 135 customers.

Why then, does PurchasePro have a market cap of just $1 billion, even after gaining 35% over the past week? Commerce One's market cap, on a good day, is closer to $10 billion, while Ariba is within shouting distance of a $20 billion market cap.

Analysts say it might be the company PurchasePro keeps. For instance, Commerce One can boast some high-class customers, including

General Motors

(GM) - Get Report

,

Compaq

(CPQ)

and

Warner-Lambert

(WLA)

being on its client list. Ariba counts

Cisco

(CSCO) - Get Report

,

FedEx

(FDX) - Get Report

and

Dell

(DELL) - Get Report

. While Hilton and

Office Depot

(ODP) - Get Report

are two scores PurchasePro has made, more representative of its customers are the likes of

Nevada Power Company

or the

Circus Circus

hotel chain.

"PurchasePro is targeting a lower-tiered customer," says Timothy Getz, an analyst with

Prudential Volpe Securities

. "They're not issuing press releases with General Motors in them. Hilton is the exception to that." (He rates the stock a strong buy and his firm recently performed underwriting for PurchasePro.)

Maybe those customers are the reason PurchasePro hasn't been investors' favorite date to the B2B prom.

"It's true, PurchasePro hasn't generated the following that some of the other names in the group have," adds Ian Toll, an analyst at

Credit Suisse First Boston

. "We think that's likely to change as the company proves its model." (He also rates the stock a strong buy and his firm provided underwriting services to the company as well.)

Still, sometimes a lot of little fish can make for better feeding than landing a couple of trophy bass. That, at least, partly explains Hilton's thinking.

"The primary reasons for us going with PurchasePro were that they understood our industry better than a lot of the technology companies, and they had the greatest number of suppliers on their platform. That's critical. People underestimate what it takes to adopt suppliers on a network," says Tony Nieves, senior vice president of purchasing at Hilton.

He said when Hilton started looking into e-procurement, the company identified 114 key suppliers that it would need on any network it endorsed. PurchasePro had 89 of those suppliers already signed up when Hilton came knocking.

Another reason was PurchasePro's technology. While Ariba and Commerce One sell software to big companies to enable their systems to work smoothly with those of their buyers and suppliers, PurchasePro's platform lives on the Web. With 1,800 hotels in operation, Hilton needed a simple way to get them all connected. Nieves, who said he also considered Commerce One's technology, said PurchasePro was the best solution for the hotel company.

More deals like Hilton may be in the works. While analysts wouldn't name names, they've been hinting that PurchasePro has a lot of irons in the fire right now. In a research report on June 7, CSFB's Toll wrote that he expects "significant new customer wins on a par with the recent announcement of Hilton Hotels in the next three weeks."

That said, there are some damn good reasons why PurchasePro doesn't carry the cache of Commerce One and Ariba. One is revenue. During the first quarter, Ariba recorded revenue of $40 million, while Commerce One raked in $35 million. PurchasePro, by comparison, had just $4.5 million in revenue during the first period.

That lower amount in sales is related to PurchasePro's business model. While Ariba and Commerce One get millions of dollars for selling software to their customers, PurchasePro charges most of its users just $75 a month to access its network. While it can boast profit margins of more than 90% through that business model and does get revenue through hosting and transaction fees, the amount of cash generated is significantly less.

It's a point that rubs Charles Johnson Jr., PurchasePro's chief executive, a little raw. From his perspective, with the simplicity of his company's setup, the long-term advantages of an investment in his company are clear.

"I've fought every person along the way from the investment-banking community on that point," says Johnson, who helped fund the start-up of PurchasePro himself without initial seed capital for venture capitalists. "They all want these big gross revenue numbers. But with our lower cost basis and ease of use, over the long term, there's nothing better than what we've got."

Toll at CSFB says the little revenue that PurchasePro does have is likely to keep coming.

"The difference, though, is that this is a recurring revenue model," Toll says. "It's going to leverage nicely to critical mass with subscription and transaction fees that build over time. That's different than a software licensing model, which eventually expires."

Other concerns, when it comes to PurchasePro, are the fact that it's still losing a lot more money that it's taking in: $8.3 million in the first quarter on its $4.5 million in revenue. And the company, which started out supplying things to the Las Vegas hotel industry, is still heavily concentrated in that sector. Commerce One and Ariba have sold their products across much more diverse industries, from aerospace to life sciences to computers.

Still, with its small-guy philosophy, PurchasePro may be set to grow. And who knows? Someday it might even get some respect.