From: Adam Rifkin (adam@KnowNow.com)
Date: Sun Dec 17 2000 - 19:03:39 PST
My favorite recent quote on the investing environment: "It's not that
VCs are doing zero new investments, it's that they're doing far fewer
and with heavy due diligence," says Rob Ryan, former CEO of Ascend
Communications (bought by Lucent) and the founder of some 17 startups.
Found that one at:
Man, it's gonna be a cold winter:
Will consult for food
By Stephen Lucey
Redherring.com, December 11, 2000
B2C might mean "back to consulting" these days, but it doesn't mean back
to Internet consulting stocks. A quick look at this new breed of
consulting firm paints quite a grim picture -- fleeing customers,
slowing demand, weak earnings, and plummeting stock prices. The average
price drop for seven leading Internet consulting firms is 71.6 percent,
since October 1.
And you can now add a massive round of layoffs to the spate of bleak
news. Four Internet consultants announced job cuts last week: Lante
(Nasdaq: LNTE), Xpedior (Nasdaq: XPDR), Viant (Nasdaq: VIAN), and Scient
(Nasdaq: SCNT). And, as if this weren't bad enough, Scient lowered its
third-quarter earnings estimates as well.
But investors following the sector know that this is nothing new. Last
month, iXL Enterprises (Nasdaq: IIXL) said it planned to reduce its
workforce by 850 employees, or 35 percent. And Marchfirst (Nasdaq:
MRCH), which missed its earnings estimates last quarter by a stunning 19
cents without so much as the slightest warning to investors, followed
that doozy of a report by letting go 1,000 employees, or 10 percent of
Making matters worse for investors is the fact that the analysts who
follow these companies can't seem to figure out what to make of all the
bad news in the sector. You could make the argument that the news is
already priced into the stocks, and that it's a positive sign that these
firms are tightening their belts in order to conserve capital. In fact,
one analyst did just that -- and then changed his mind a day later.
Greg Gore, an analyst for WR Hambrecht & Company, issued a report last
Wednesday in which he reiterated his Buy rating on Scient, even though
he predicted that the company would likely issue an earnings
warning. But on Thursday, Mr. Gore downgraded the stock after seeing
just how bad the news was. What a difference a day makes.
While Mr. Gore admitted in an interview with us that he underestimated
how bad the earnings warning would be, he felt he was still correct in
two key areas crucial to any earnings announcement -- timing and
direction. But that's little consolation to investors who watched the
stock plunge 37 percent on Thursday.
Mr. Gore did raise an interesting point, though. Although he is not
saying that the company misled him or anyone else in recent conference
calls, he did admit that, due to the recent adoption of Regulation FD,
the Securities and Exchange Commission's new full-disclosure standards,
he no longer has the "fairly candid" conversations he used to with
executives from Scient and other companies he covers.
SO WHAT'S NEXT?
Since the analysts who follow these companies for a living aren't able
to accurately depict just how bad the consulting environment is right
now, we think it would be wise to avoid all of these consulting firms
for at least a couple more quarters, no matter how deceptively cheap
they may appear. Bill Loomis, an analyst at Legg Mason, agrees with
us. And Mr. Loomis has made some prescient calls in the last few
months. He warned investors of a slowdown in IT spending back in
September, and downgraded Scient as a result.
So now there are two really important questions for investors to
consider: When will demand for IT consulting pick up? And at what rate?
It appears the growth rates may never again be as robust for the
Internet consultants, primarily because the bursting of the dot-com
bubble has enabled the larger consulting firms to compete more
effectively against the upstarts.
According to David Grossman, an analyst for Thomas Weisel Partners, the
Internet consultants were able to win as much business as they did
because they promised something more-established companies, such as
Andersen Consulting, could not: speed. The larger firms generally took
on big projects that did not have especially short lead times.
But as more and more Internet businesses were established, the need for
speed was the No. 1 priority, and a new breed of firms emerged to
address it. Competing through their ability to offer faster and more
specialized IT solutions, they quickly won business from Internet
companies, and their stock prices soared along with those of many of
their customers. However, now that the economy is slowing, Mr. Grossman
says the big guys have been able to mobilize and catch up, namely
because they're better able to lower prices due to their economies of
This is not a pretty picture, but it doesn't mean the Internet
consulting firms are on their last legs. Some may get acquired by bigger
consulting companies. Even software and hardware makers with IT service
divisions, such as IBM (NYSE: IBM), are among the names discussed as
possible suitors. That wouldn't be too far-fetched. After all,
Hewlett-Packard was in discussions to purchase the consulting arm of
PricewaterhouseCoopers before HP's earnings warning put an end to that
deal. And the Internet consulting companies would cost a lot less.
But we don't think investors should buy these stocks in hopes of cashing
in on a merger. After all, cheaper doesn't always mean better.
Popmail (POPM) down 99.53% since 12/15/1999, from 71.25 to 0.12: http://www.stockmaster.com/exe/redherring/chart?Symbol=POPM
Webvan (WBVN) down 97.39% since 12/15/1999, from 22 to 0.47: http://www.stockmaster.com/exe/redherring/chart?Symbol=WBVN
I wonder if Vitria (VITR) feels silly doing two 2:1 splits this year: http://www.stockmaster.com/exe/redherring/chart?Symbol=VITR
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