The worldwide economic slowdown has wiped out signs of recovery in Europe`s beleaguered Internet sector, with up to 30% of dot-coms at risk of running out of cash and potentially facing consolidation unless a significant turnaround in trading conditions occurs.
However, while prospects look bleak for large parts of the sector, the top performing 25% of European Internet companies held their own between January and September 2001, outperforming the FTSE 100 and losing only a fraction of their value over the period.
These are the latest findings from the PricewaterhouseCoopers Internet 150, a rolling quarterly analysis of cash burn rates and share price performance of the top 150 publicly listed European internet companies, compiled by PricewaterhouseCoopers Business Recovery Services in conjunction with e-business strategy consultants, Fletcher Advisory.
The proportion of profitable companies in the Internet 150 fell to 24% in the first half of this year, down from 38% at the end of 2000. Average burn rates deteriorated to 11 months in the second quarter of 2001, down from 17 months at the turn of the year. PricewaterhouseCoopers` latest analysis, which covers a full year of dot-com performance, shows that the market capitalisation of the Internet 150 decreased by nearly 75% over the 12 months from 30 June 2000 to 30 June 2001 from Euro200 billion (lb126 billion) to Euro54 billion (lb32 billion).
The slowdown has seen sales growth among B2B companies remain stagnant for the fourth quarter in a row at a company average lb6.1 million, as business investment, especially in new technology, is put on hold. Mirroring what`s been happening on the high street, however, sales among B2C companies have continued to grow throughout the year, reaching a company average lb8.6 million in the second quarter of 2001 compared to lb3.7 million in the same period a year ago.
While this rate of growth slowed during the second quarter this year, it still outpaced the rate of Internet penetration in the home, indicating that consumer spending on the Net continues to rise.
Commenting on the findings, Kevin Ellis, partner at PricewaterhouseCoopers Business Recovery Services, said: "A year ago, the new economy operated under new rules, with the promise of growth taking precedence over profit. Today, Internet companies are clearly bound by the same rules as the old economy, where profitability is king. We still await the consolidation among the pure-play internet businesses which is almost certain to occur.
"The main beneficiaries of the internet going forward will be hybrid businesses - old economy companies with an online channel to market. The online divisions of these businesses already represent 75% of the total European Internet industry and, on average, expect to take half the time estimated by the pure-plays to become profitable. The pure-play survivors are looking increasingly like traditional businesses, with more conservative growth ambitions, reduced spending levels and increased profitability."
The situation in SA somewhat mirrors the findings in Europe. Doug Franke, director for e-business services in SA states: "South African pure-play dot-coms have been battling since day one due to our limited local market, but there have been some interesting success stories such as MoneyWeb and XSINet. These companies have managed to leverage the realities of the South African marketplace and generate more revenues than expenses - something very near and dear to those looking for long-term sustainability.
"We also see pure-play participants such as Attix5, who will soon be generating huge revenue growth which will propel them to profitability. When Kevin talks about the main European beneficiaries being hybrid old economy companies, we see a few local shining examples of this such as AquaOnline and Mweb`s CommerceZone. Again, these companies have grasped the need to generate real revenues and will lead their competitors in the next few quarters. AquaOnline`s business model is one that more South African companies should take note of as they successfully utilise local staff to service overseas clients - generating hard currency.
"One of SA`s competitive advantages is our relatively inexpensive highly trained labour force (at least in the IT industry), and, with the exchange rates weakening against the pound and dollar, there should be increasing opportunities for companies to provide services to overseas companies willing to outsource activities such as call centre support, data cleansing, security monitoring, and certain CRM functions. We see a bright future for those well positioned."
Toby Jennings, a director at Fletcher Advisory, commented: "Pure play internet companies have suffered the double hit of investor disillusionment combined with a wider economic downturn. In the absence of external funding, these companies are having to revise their business models in the race for profitability."
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1. A copy of the report, PricewaterhouseCoopers Internet 150, is available at www.pwcglobal.com/brs_internet_150.
2. The top 150 publicly listed European Internet companies are defined as those headquartered in Europe, listed on a European exchange and for whom at least 50% of revenue is dependent on the Internet; it excludes companies whose business model is to invest in other companies.
3. Burn Rate is calculated as: (Cash Operating Expenses - Gross Profit) divided by cash on hand and at bank. Cash Operating Expenses exclude exceptional items, non-cash expenditure and capital expenditure and are forecast to grow at European internet growth rates. NB: A company whose gross profit exceeds cash operating expenses will have no Burn Rate.
4. PricewaterhouseCoopers Business Recovery Services helps rapidly to rebuild and recover value trapped in under-performing and troubled businesses. The specialist expertise available to corporates and lender institutions includes: business regeneration and turnaround, advice to banks and other lenders, investigations, and insolvency services. The world`s largest dedicated business recovery practice, it has over 2 000 professional staff globally assisting troubled companies and, in the UK, includes some of the country`s leading insolvency practitioners and CEO-level turnaround managers.
5. PricewaterhouseCoopers (www.pwcglobal.com), is the world`s largest professional services organisation. Drawing on the knowledge and skills of 150,000 people in 150 countries, we help our clients solve complex business problems and measurably enhance their ability to build value, manage risk and improve performance. PricewaterhouseCoopers refers to the member firms of the worldwide PricewaterhouseCoopers organisation.
6. Fletcher Advisory Ltd. (www.fletcheradvisory.com) is a specialist consultancy helping senior management build and implement strategies for the Internet and new media. It is an affiliate of Forrester Research Inc, the Internet information business. For more information, contact Stephen Adler or Toby Jennings on: 020 7436 4217
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