The Day Ahead: Prime time for PurchasePro.com

If PurchasePro's partnership with AOL delivers (and early results indicate it will), the company will be ready for prime time
Written by Larry Dignan, Contributor

PurchasePro.com has been toiling away in relative business-to-business obscurity while players such as Ariba, Commerce One and VerticalNet hog the spotlight.

But that situation may change in the next few quarters as the company rolls out a high-profile partnership with America Online and continues to deliver strong revenue growth. On August 16, PurchasePro announced its "soft launch" of AOL partnership. If the deal delivers (and early results indicate it will), PurchasePro should be ready for prime time.

PurchasePro, which jumped nearly 50 percent last week, still has a market capitalization well below its peers. Here's a recap of why shares aren't trading with the B2B crowd. We'll start with Charles Johnson Jr., Chairman of the company, who doesn't come from the usual CEO factory. Johnson has a southern drawl and a lot of flare. Although Johnson sports blonde hair and a tan, you wouldn't describe Johnson as your typical Internet CEO. Johnson isn't Harvard, but he is quite convincing.

PurchasePro, which is based in Las Vegas, also didn't have flashy IPO underwriters, which means there weren't big-time brokerages talking up the stock. Then toss in the fact that PurchasePro revenue base is relatively small -- it relies on transaction fees and network effects from small- to mid-size businesses -- and you can see why the spotlight hasn't hit PurchasePro.

Quietly, however, analysts such as Lehman Brothers' Patrick Walravens are starting to believe what PurchasePro is preaching. "We think PurchasePro has operated under the radar screen," said Walravens.

Johnson's view on the B2B sector is that there are a lot of software companies masquerading as exchange players. Put simply, there's a huge difference between deferred revenue and recurring revenue. PurchasePro, through partnerships with AOL, Office Depot and Sprint, is building a critical mass of exchanges, which will all be connected.

This "commerce community" will provide PurchasePro with a recurring revenue stream from transactions and hosting. Advertising revenue will be gravy. Contrast that plan with Commerce One, which takes a large upfront payment like a software vendor and builds exchanges, most of which won't be connected to each other.

Sounds interesting huh? The biggest problem with PurchasePro's model has been it is more theory than reality. The next three quarters will tell the tale.

The company's second quarter results gave an indicator of where things are headed. In the second quarter, PurchasePro reported a loss of 22 cents a share on sales of $9.5m (£654m), up 109 percent sequentially. Walravens is projecting sales of $14.3m in the third quarter, and Johnson said he's more than comfortable with that target. PurchasePro is expected to break even in the second quarter of 2001.

We recently spoke with Johnson about where the company's headed. Here's what he had to say:

On the AOL partnership: The soft launch is underway and PurchasePro will roll out new features over the next two quarters. From the start, Johnson expects PurchasePro gain 4 million impressions from small business users. "This opportunity is so much larger than anyone expected," said Johnson. "It'll give us a lot of traction.

Johnson added that AOL is also using PurchasePro internally. PurchasePro will also add AOL's ease of use and features such as instant messaging. The roll-out will occur in phases with a fully integrated product completed early in the first quarter.

On the PurchasePro model: Johnson said in the next few quarter, B2B watchers will begin to differentiate by revenue growth and the type of revenue generated. PurchasePro is linking up with companies that will use its software to not only buy and sell goods, but become a source of future participants. If PurchasePro succeeds, its revenue model will be hard to duplicate.

"There's a significant difference between recurring revenue and deferred revenue," said Johnson. "In the first quarter, our product will have the ability to reach a critical mass of users and exchanges that will be linked exchange to exchange.

"It'll all be flushed out soon -- the companies that make the most money wins the game."

Johnson added that he was "patiently impatient" with Wall Street's reaction to the company's story. PurchasePro realizes what it has, but investors are just starting to come around, he said.

On the future of B2B: Johnson was upbeat about the future for the industry, but did note that software vendors posing as B2B companies could be hurt. He said Ariba will emerge as one of the clear winners.

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