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AvantGo makes investors nervous and shares fall

Commentary: What did you guys say to scare investors?

AvantGo chief executive Richard Owen heard that question Tuesday following his company's first earnings report as a public company. Shares fell about ten percent following the company's earnings report.

The company reported a third quarter loss before charges of $10.9m, or 47 cents a share, on sales of $4.6m. The results were ahead of expectations, but AvantGo shares sold off before and after the earnings release. Just a month removed from its IPO, AvantGo sits below its offering price of $12.

Welcome to Wall Street. AvantGo, which provides wireless software, infrastructure and services to corporations, happened to tell analysts that losses would increase through 2001 as the company ramped up. To those few folks that bothered to read the regulatory filings, the losses weren't exactly a news flash. The analysts covering the company -- all IPO underwriters by the way -- had those losses in their models already. Some firms such as Merrill Lynch did bump up their 2001 loss estimates, but reiterated "buy" ratings.

"I would have thought what we reported was good news," said Owen, who noted that AvantGo intends to grow revenue 15 percent to 20 percent sequentially throughout 2001. "There wasn't any new news there."

When asked about momentum in the wireless space, Owen, who called the quiet period following the IPO a good time because he couldn't be blamed for stock gyrations, rattled off a host of customer wins. The problem? We were talking about his stock price, not customer wins.

And there's the disconnect -- the business doesn't always follow the stock. AvantGo went public just as wireless stocks fell out of favour. Just a few months earlier, AvantGo would have had a much larger market cap -- at least for a while.

"All a management team can do is execute and exceed expectations," said Owen. "If you run the business on what is fashionable, you'll go out of business. If we execute and repeat that for ten years the Street will respond."

John Connolly, chairman of Mainspring, reiterated Owen's response. Mainspring, an e-consulting firm, reported its first quarter as a public company and topped expectations. The company is still losing money, but revenue growth surged 11 percent sequentially to $11.1m.

Connolly's big challenge is separating Mainspring from the "i-builder" crowd, a sector that has been pummeled of late. Shares of iXL,Viant and Scient have all been battered. Mainspring has almost been halved from its July IPO price of $12.

Mainspring's story, which is now being told to press and analysts, hinges on distancing the company from the i-builder stocks. Mainspring provides strategy consulting and sees its competition as traditional firms such as Booz Allen & Hamilton.

In many cases, Mainspring provides the strategy once the sites are built. The company also focuses on large corporate clients. When Connolly was asked about momentum for his company's shares, he also rattled off a host of client wins.

Of course, we were talking about momentum in the stock, but, like Owen, Connolly will catch on.

Connolly said he thinks investors are buying into the Mainspring story. For starters, the company went public despite a crumbling consultant sector. "There was a lot of noise about end-to-end solutions, but companies want best of breed," he said. "We had something different."

But Mainspring shares won't move much until the consulting sector shakes out. Connolly said the theory of massive consultant consolidation is overblown. Many consultant companies will simply go out of business, he said. Mainspring doesn't plan on being one of the companies in the dead pool. With $73m in cash and an expected cash burn of $2m to $4m a quarter in 2001, the company has plenty of funds to be profitable in the first quarter of 2002.

Connolly's theory, and Owen's, is pretty clear -- execute, focus on your business and the stock gains will follow eventually. That's a good attitude to have considering you could go nuts following their companies' post-IPO gyrations.

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