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News > Technology
Net consultant firms skid
September 1, 2000: 3:39 p.m. ET

Internet services companies fall after downgrade of Viant, sector
By Michele Masterson
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NEW YORK (CNNfn) - The Internet shakeout reached full throttle Friday, as the Web services sector bore the brunt of a serious pullback in spending related to the Net.

Joining its brethren in Net advertising, the latest dot.com debacle set off a strong reaction among the thinning ranks of Internet investors after Internet consultants Viant Corp.  (VIAN: Research, Estimates) issued a statement conceding an anticipated third-quarter earnings shortfall that the Street had been whispering about recently.

The New York-based firm, which counts heavyweights such as American Express (AXP: Research, Estimates), Compaq (CPQ: Research, Estimates), Sears (S: Research, Estimates), and Sony (SNE: Research, Estimates) in its 250-plus client roster, announced the expected loss late Thursday, blaming a "shifting marketing environment."

That shift is big enough to cause the company to expect a revenue decline of 12 to 15 percent below the $38.5 million in revenue it turned in during its second quarter 2000, falling somewhere between $32.7 and $33.9 million, which is up from year-ago third-quarter revenue of $18.8 million.

"With the perceived threat from dot-com companies reduced, many global 2000 companies have slowed down their e-business initiatives and have taken the opportunity to step back and revisit their strategies," Bob Gett, Viant's president and chief executive officer said in a statement.

Analysts pummel Viant


As a result of its disclosure, shares of Viant (VIAN: Research, Estimates) fell to a 52-week low of $8.38 a share in Friday afternoon trading, staggering down $5.50, a plunge of nearly 40 percent. The company, which has a market capitalization of $401.60 million, was well off its high of $63.56 a share.

graphicWall Street analysts helped grease the skid, slamming the company for not responding to rumors sooner and cited the general uncertainty within the Internet service provider arena.

Lehman Brothers cut its rating on Viant to "neutral" from "buy," and sliced its price target in half to $15; it also cut its 2000 earnings estimate to 14 cents a share from 37 cents, cut its 2001 earnings estimate to 12 cents from 44 cents and said it expects the stock to settle at about $9 to $10 per share.

Analysts at CSFB cut its 2000 revenue estimate to $136.1 million from $161.6 million and its earnings estimate to 12 cents a share from 32 cents. Its 2001 revenue estimate was cut to $175 million from $244 million and earnings to 23 cents a share from 45 cents.

CSFB said that while its estimate revisions might be overly conservative, they

are appropriate, given the lack of management guidance.

Additional downgrades for Viant were issued by CIBC World Markets, Goldman Sachs, which cut it to "market performer" and dropped it from its recommended list; ING Barings, which slashed Viant to "buy" from "strong buy," and SG Cowen, which cut the company to "neutral" from a "buy" rating.

Merrill Lynch analyst Stephen McClellan also cut his near-term rating on Viant to "neutral" from "accumulate" and long-term rating to "accumulate" from "buy." 

Viant spurs downgrade for entire services sector


Merrill's McClellan called Viant's comments concerning the industry "disturbing" and said he believes "there will be considerable uncertainty clouding the Internet professional services group for a while...Viant is the first one to announce...but we would not be surprised to see other similar situations."

graphicThat domino effect hit Viant's competitors in Friday trading, who also went for a ride along the downward spiral. Shares in nearly every Web services firm were hit in Friday trading, based on Viant's scary outlook, which also prompted a DLJ analyst to downgrade the entire sector to "market performance" from "outperform."

Eric Ross and Adam Liebhoff made the sector slash in light of Viant's comments "to reflect the valuation of the group and its increasing risk profile as the sector navigates a transition in demand."

"At this point, the group of about 20 Internet consulting stocks has declined by an average of 64 percent during 2000, versus a 3 percent gain in the Nasdaq over the same time frame," the analysts said in a research note.

"While we believe the correction is near its bottom, we also believe that it will be unlikely to see any significant multiple expansion or upward estimate revisions over the next one to two quarters, given the current transition in demand, general seasonality of the business and the maturing of the sector's growth profile," the analysts said.

As a result Ross and Liebhoff set new target prices for the following Internet services firms: Diamond Technology Partners (DTPI: Research, Estimates), whose shares fell $6.06 to $57.75, a loss of 9.5 percent; Scient  (SCNT: Research, Estimates), which also reaped several of its own downgrades from other analysts, fell $4.95, or 18 percent, to $22.13; marchFIRST (MRCH: Research, Estimates), off $1.19, or 6 percent, to $18.19; iXL Enterprises (IIXL: Research, Estimates), off $1.63, or 17 percent, to $7.94; Breakaway Solutions (BWAY: Research, Estimates), down $1.94, or 13 percent, to $12.94; Xpedior   (XPDR: Research, Estimates), down 75 cents to $10, a 7 percent dip and  Organic (OGNC: Research, Estimates), off 50 cents or 7 percent, to $6.69. 

"The Web-presence frenzy that drove many of the global 2000 projects during the past year has subsided," points out Merrill's McClellan. "Venture capital firms have become much more selective in their funding practices. Large companies are now taking a more deliberate approach to implementing Web strategies."

The Web, it is a-changing


Analysts don't think this shift spells the end for the e-business services sector, but firms need to adjust and roll accordingly with the pullback in the rush to the Web and its associated spending.

"While the hyper-growth phase may be over, we don't believe there has been a bursting of a demand 'bubble' like that of Y2K," said DLJ. However, the game is changing and consultants need to adjust."

The DLJ analysts believe the current shakeout exposes serious differences among the Internet consultant firms, "revealing business model deficiencies and execution mistakes that were otherwise masked by the robust demand backdrop."

To survive and thrive, Net services companies may need to consolidate into large, established organizations and target mass markets instead of the niche markets of the past.

"Companies must increase their emphasis on external sales and marketing to win business in this more competitive environment, " said Merrill's McClellan.

Echo the analysts at DLJ: "We believe this transition is well under way, evidenced by increasing average project sizes."

 "As business continues to shift away from dot-com clients, consultants are being forced to realign their sales and marketing efforts and build stronger pipelines of business from enterprise customers with more sophisticated buying habits and hence, longer sales cycles."

In spite of its sector downgrade, DLJ is still long-term bullish on the sector and cited companies in the field it said are best positioned, which include Diamond, Scient, marchFIRST and iXL.

"We don't believe the business or the investment opportunity presented by Internet consulting firms is even close to finished," the analysts said. "In our view, there is no finite end-point to the networked computing demand driven by the adoption of Internet technologies. Rather it is evolutionary and in our opinion, solid and intact." Back to top

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.