Angst and optimism in the e-commmerce industry

Weekly Corporate Growth Report, Mar 25, 2002 by Dolbeck, Andrew

The e-commerce, information retrieval services and Internet industry includes companies that provide information, goods, or services online, as well as companies that provide networking and other support services for companies that do so. This industry relies heavily on retail and corporate spending. Unfortunately, in the current economy, low consumer confidence has impacted retail spending, and cost-cutting measures have decreased corporate spending.

e-Commerce

Companies that support e-Commerce are feeling the pinch from the tight-fisted corporate spending environment. Prospective clients are simply not willing to invest large amounts on networking services and software to support their e-commerce projects. Several firms in this industry segment have announced that average selling prices have been down.

December's numbers look better than those of the previous quarter, but this may be deceptive. In the wake of the terrorist events of September 11, business activity slowed substantially in the United States for a period of a few weeks. Much of this deferred business may be showing up in the current quarter, artificially inflating December's results. Online stock trading firms were especially impacted, as trade activity resumed slowly and cautiously after September It.

The e-Commerce industry is not showing signs of insider confidence. There is little insider buying, and insider selling has increased. Revenue projections for the upcoming quarter have also been modest.

Information Retrieval Services

As a result of both the economic downturn and the September 11 attacks, consumer confidence is fairly low. The lower consumer confidence level has adversely impacted retail companies, which are a substantial chunk of the Information Services industry's client base. Revenue growth in this industry has been modest at best through the end of 2001.

There is cause for hope, however. The economy has begun to benefit from a number of factors, including interest-rate cuts, a rebuilding of inventories, and, most importantly for the Info Services industry, recent monthly retail sales have been on the rise. Improving market conditions for retail sales are expected to have a positive impact on the Info Services industry.

Internet

The economic downturn has also impacted the Internet industry. Web advertising has significantly decreased, undercutting a major source of profit for the companies in the industry.

Companies in this industry are fighting back in a number of ways. Many companies are starting to charge fees for services that were formerly provided for free, such as online greeting cards. Monthly subscription charges for services are also increasing. Reducing headcount is another method of controlling costs. AOL and Yahoo! are both reducing their workforce by 10 percent.

The Internet industry has also relied on aggressive accounting measures to propup its bottom line results, but the increasingly skeptical investors of the postEnron world aren't buying it anymore. Amazon.com made headlines by finally turning a profit in the fourth quarter of 2002. But it was a pro forma net profit, which excludes amortization of goodwill and certain other nonrecurring investment expenses.

M&A Activity

While there was a fair amount of merger and acquisition activity in the e-commerce, information retrieval services and Internet industry in 2001, the level of activity was considerably higher in the year 2000. Not only were there three times as many deals in this industry in 2000, but the companies also sold for much higher prices relative to revenue. In 2000, companies sold for an average of 6.9 to 9.2 times revenue, de pending on the industry segment. In 2001, the average was only 1.3 to 1.9 times revenue.

Conclusion

The e-commerce, information retrieval services and Internet industry relies on retail and corporate consumers who have been spending less due to the downturn in the economy. As the economy improves, these companies are expected to benefit from an increase in spending. M&A activity, however, will probably not return to the inflated levels that were seen before the dot-com bubble burst.

Source: Value-Line, Done Deals, Hoover's

By Andrew Dolbeck Editor