December 13, 2000 12:50 PM PST
Analyst reports: Brokers cast off Razorfish
It was the largest percentage loser on the Nasdaq in after-hours trading Tuesday night, the result of a warning by the New York-based company that it would not meet its quarterly financial expectations.
Razorfish announced Tuesday night that it expects to post a pro forma net loss of 17 cents to 22 cents a share, excluding certain charges. Wall Street had been expecting the company to post a per-share profit of 2 cents a share, the consensus estimate of 12 analysts surveyed by First Call/Thomson Financial.
On Wednesday, company executives woke to an avalanche of downgrades and a bottom-feeder stock price. The stock hit a new 52-week low in midday trading Wednesday, bottoming out at $1.81. That's down 41 percent since the close of regular trading on Tuesday and represents a 96 percent slide since the beginning of the year.
The company attributed the shortfall to "macroeconomic trends" that have caused a slowdown in technology spending. Razorfish also said that consulting projects have become larger and more complex, which has stretched sales cycles and crimped cash flow.
"The market for our services has changed dramatically, and we underestimated the magnitude of this shift," CEO Jeff Dachis said in a statement released after the markets closed. "As a result, we overestimated the visibility of our pipeline and our performance expectations."
But that explanation didn't placate analysts, who slammed the company in morning research notes. Most troubling, analysts said, was the company's unwillingness to lay off workers in wake of diminishing profits. Razorfish said it would not reduce the size of its staff--a cost-cutting tactic that several rival Internet consulting companies have used in recent weeks.
Internet consulting company Viant axed nearly 20 percent of its work force on Thursday and closed its Dallas office to reduce costs. Also last week, competing e-consulting company Scient laid off about 460 employees, eliminating a quarter of its staff.
"Despite a worsening macroeconomic environment, lengthening sales cycles and increasing competition, Razorfish has no intention of significantly cutting back headcount," wrote Robertson Stephens analysts Steven Birer, Joseph Vafi, Greg Zwakman and Douglas MacBean.
"The company is of the belief that in the long run its competitive strength would be compromised if it reduced headcount," they wrote. "In an environment where projects are getting bigger, Razorfish feels that it is imperative to retain a delivery channel that can deliver multiple large projects simultaneously."
Other analysts were troubled by the company's inability to provide accurate financial guidance for the upcoming calendar year. J.P. Morgan reduced its rating on Razorfish to "long-term buy," while Deutsche Banc Alex Brown and Robertson Stephens cut their ratings to "market perform." SG Cowen and Southwest Securities downgraded Razorfish to "neutral," while ING Barings downgraded it to "hold."
Lehman Brothers kept its "outperform" rating but halved its 12-month target price to $5 per share. In a research report titled, "The Fish is in Choppy Waters," analyst Karl Keirstead doubted whether the company could record profits in early 2001 and speculated that the company would have to lay off workers.
"Given the severity of the miss and the lack of any fourth-quarter 2000 or 2001 guidance, visibility appears extremely limited," Keirstead wrote. "In our view, demand is unlikely to recover in (the first quarter of 2001) and further headcount cuts are likely in order to achieve profitability."