Just last week, Lante, Scient and Viant joined the list of companies that have issued earnings warnings or announced layoffs in recent months. "It's fire-fighting time for the whole industry," says Prakash Parthasarathy, analyst at Banc of America Securities. "A lot of these companies are now facing inflections in their business profile, in their clients and in the skills sets they need."
In response, Web integrators are scrambling to cut costs by slashing workforces, closing offices and, in some cases, narrowing their scope of services. Their ultimate goal is to survive long enough to generate positive cash flow.
Hey, Big Spender
Fiscal responsibility hasn't exactly been a strong point among many service providers. At least five companies--iGate, iXL Enterprises, Keane, US Interactive and Usinternetworking--burned through 40 percent of their "cash on hand" in the third quarter. Another four integrators - Breakaway Solutions, Interliant, MarchFirst and PSINet - burned through at least 25 percent of their cash by the end of Q2.
Now those companies and others are racing to cut costs to cover expenses. MarchFirst, for one, needs to line up $50 million to maintain operations through the end of this year and an additional $50 million to stay open for business through early 2001.
Rather than seek more money, other companies are starting to conserve their cash resources. "Everyone is looking to slow down their burn rate," says an investor-relations consultant who requested anonymity.
But having cash isn't enough, says Ravi Singh, CFO of consultancy SeraNova, which recently was acquired by Silverline Technologies. "Only if a company has good underlying business and is sufficiently funded will investors buy it," Singh says.
In some cases, Wall Street has decided companies don't meet that criteria. As a result, some integrators, including Cambridge Technology Partners, Lante, PSINet and US Interactive, are now trading below the cash value of their shares. Cysive, iXL Enterprises, MarchFirst, Tanning Technology and Viant are priced just higher than their cash value.
In other words, the stock market has turned so sour on these companies that it is according them little or no value beyond their cash holdings. "The market doesn't believe those companies have a viable business model," says Singh.
Adds Parthasarathy: "It could be the end of the day for them."
Change Of Heart
Gone are the momentum investors who bought these firms based on their continuing increasing revenues. And so far, value players, who seek bargains among knocked-down equities, aren't ready to step in for fear that the losses will continue.
Experts say investors won't back Web integrators until a few market leaders - say, DiamondCluster International (formerly Diamond Technology Partners), Sapient and Scient - post stable, sustainable numbers for two or three quarters.
But there's the rub. Just last week, Scient, Lante and Viant all announced warnings or layoffs.
"If we don't get our cost structure down, we can't play," concedes Robert Howe, CEO at Scient. During a conference call with analysts last week, Scient said it would slash one-quarter of its workforce and close its offices in Silicon Valley and Austin, Texas, to save about $60 million in the next year. It also warned of a $13 million expected loss for the current quarter, following three consecutive quarters of positive earnings. The news shocked the market.
Deutsche Banc Alex Brown quickly downgraded Scient and Sapient after Scient's earnings warning. Ironically, the investment house had reiterated a strong buy rating on both companies merely hours before Scient's warning.
And several analysts cut their rating on DiamondCluster International, the only consulting firm that had been considered a strong buy by most.
As for the other firms, "they need some time to heal," says Parthasarathy.
But time isn't something they have.