VerticalNet Will Be The 'Consolidator' - Brief Article - Statistical Data Included

Despite burning $3 million a month, the company insists it will turn a profit next year--and acquire many of its current competitors.

* VerticalNet, the b-to-b e-commerce marketplace featuring 56 online trading communities, launched in 1995 with ambitious plans to change the medium through which corporate buyers and sellers do business. Five years later, however, the company is valued at more than $1.5 billion--but has yet to turn a profit. Revenues have grown to $27.5 million through the first quarter of 2000, but net losses increased to $53.5 million in 1999.

What's more, VerticalNet's stock, which went public in February 1999, has lost approximately 66 percent of its value over the past year. Trouble signs abound.

But while Wall Street may be losing confidence, some (very important) investors haven't. Microsoft is funding the creation of 80,000 more storefronts by guaranteeing revenue of about $200 million over the next three years.

Will VerticalNet survive? Mark Walsh, CEO of the Horsham, Pennsylvania- based company, recently sat down with FOLIO: to discuss the challenges he's facing.

Q: On your Web site, VerticalNet reported a cash loss of $12.2 million for the first quarter of 2000. How much cash are you burning, and when do you need to see a profit?

A: It's my sense, in looking at how analysts are looking at other Internet b-to-b companies, that we'll be the first profitable one. The cash bum is about $3 million a month at this point, but we do expect to turn profitable next year. As for cash in the bank, the company has never had more cash than it does now. We just received a $100 million investment from Microsoft, so we have more than $200 million in cash assets on the balance sheet. We could, if we chose to, become profitable without raising any more money. However, the use of cash is going to become more and more interesting. There are a lot of opportunities out there for purchasing companies whose market caps really took a whack in March and April.

Q: How do you handle the onslaught of old media--armed with established capital-- developing vertical online communities?

A: It's funny. The reason I'm here (in New York City) is that I was invited to be the luncheon speaker for a meeting of BPI and Bill Communications. I felt like I was being invited into the lion's den. I think trade publishing companies are fantastic companies--they're smart, profitable, they have unbelievable legacy relationships with their customers and their leaders, and they have tremendous brands. All that said, they have an unbelievable challenge. We say, if you're going to start a fresh brand, we're both starting from the same starting line. Your legacy of archived content, your legacy of eyeballs of readers that matter, your legacy of a relationship with advertisers--all fine. But VerticalNet has 200 salespeople calling the U.S. today, talking to many of those same advertisers and reaching out and getting those same buyers and suppliers to come to our site, where they see us as a brand that actually could do a transaction--not as just a media company. I think some of the trade pubs believe that the um brella of value of their book's brand is such that, when they come to the Web, all competitors will fall to their knees in dismay and leave the playing field--and they'll be the winner, much like they have the dominant magazine in the real world.

Q: VerticalNet's stock has plummeted from l48 3/8 to 50 3/4 [as of early May]. Do you feel Wall Street has lost confidence, and how pressing is the need to get the stock price back up?

A: I'd say no to both. We actually welcomed the huge diminution in market caps that happened in b-to-b stocks over March and most of April. I think it is forcing analysts, and in particular smaller shareholders, to actually study the business model at a lot of these companies, and how they book revenue. We think we will emerge smelling very, very good. If you look at some of the business models out there and some of the companies that were getting funding, they were going to launch one vertical market site or try to get one type of revenue stream. We believe that the market is starting to realize, through some of our market cap recovery versus some of our competition's, that it's difficult to succeed by being in just one marketplace. A portfolio play is far more defensible.

We don't think Wall Street has lost faith. We have about 21 analysts following us--all the major investment banks have analysts dedicated to us. They all have buy ratings or super buy ratings. They all think that VerticalNet is going to be one of the winning companies as this marketplace proceeds. As for getting the stock price back up--no, I'm not overly concerned, because all stock prices went down, relatively speaking.

Q: What is your game plan for the future?

A: I think we have a very good shot to be a nuts-to-bolts supplier, but the proof is in the pudding. You'll see us deploying more and more technology. In a year I think you'll see us very much intimately involved in the actual transaction side and providing service and platforms to companies, whereas in the past we've been more the provider of the audience.

Q: We understand you're expanding into European and Asian markets.

A: Forty percent of our traffic is non-U.S. We're already one of the poster children for the fact the World Wide Web has "World" in it. Businesses behave globally. If you're building a pollution control plant in China, for example, you are still going to buy a pump and valve from an American manufacturer, and vice versa. You'll see us launch VerticalNet UK live this quarter, then we'll go to France, Germany, Spain--and then VerticalNet Japan, probably by the end of the year or in early 2001.

Q: How has your revenue model changed after once being based on advertising?

A: This past quarter, about 45 percent of our revenue was advertising and storefront fees combined, 45 percent was the margins on transactions in our exchange platform, and 10 percent was the margins on transactions in our e-commerce centers, our auction sites and our marketplace sites where we sell book software and other materials specific to the industry. In a year or two, I think advertising will probably drop to be 25 percent, while 25 percent will be software sales and licenses and 50 percent will be margins made on transactions.

Q: In an earlier interview you said in five years there will be a number of trade publishing companies that won't be around. In light of your recent struggles, will VerticalNet be around?

A: What I meant by not being around is I think they'll consolidate. All industries consolidate. Look at Advanstar and Miller Freeman being up for sale. There will be a few larger companies as opposed to many today--just like all industries. I think VerticalNet will be the consolidator, not the "consolidatee." You'll see VerticalNet alive in five years, and we'll own many of the companies that are today thought of as our competition, because our model is much more robust.

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