The findings come from "PricewaterhouseCoopers Internet 150", a quarterly analysis of cash burn rates (the length of time a company can survive before needing additional cash to stay alive) and share price performance of the top 150 publicly listed European internet companies, done in conjunction with e-business strategy consultants, Fletcher Advisory.
The 150 companies in the study underperformed the FTSE 100, NASDAQ and TechMARK. The fourth quarter saw business to business (B2B) stocks in particular lose ground, losing 51% of their value over the quarter compared to a 38% drop in the value of business to consumer (B2C) stocks.
According to PwC, the overall slump masks increasing polarisation between the best and worst performing internet companies in Europe. While the worst performers shed well over 75% of their value, the best performing companies nearly tripled their value. Germany’s stronghold on the sector was eroded over the third quarter, with German companies accounting for 35% of the index by value compared to 45% previously.
The research and analysis revealed a slight deterioration in the burn rates of European internet companies during the third quarter of last year (most recently available financial reports), driven by depleted cash holdings and increased spending. Among the key findings:
According to PwC, internet companies failed to build on the second quarter trend for improving burn rates, choosing instead to continue with high marketing spend in a bid to position themselves as attractive candidates for M&A (merger and acquisition) activity.
Commenting on the findings, Kevin Ellis, a partner in PwC Business Recovery Services, said:
“Given some of the high profile dot.com insolvencies last year, we might have expected some belt-tightening from companies in the sector. Instead, the typical internet company increased spending on marketing and overheads by 11% in the third quarter, bringing the total spend to more than 150% of gross profits.”
Despite burn rates remaining fairly static during the third quarter, the report notes that more prudent management by a number of companies have enabled them to distinguish themselves from the rest of the sector and go some way to regain the confidence of investors. The most profitable European internet companies outperformed the 150 companies in the study, characterised by a more attractive ratio of marketing and overhead costs to sales. Companies within the top quartile of the index spent 64p for every £1 of revenue they made, compared to the £1.25 spent for every £1 of revenue by companies in the bottom quartile.
Kevin Ellis said:
“Profitable dot.coms are exercising greater discrimination over their spend, moving away from expensive advertising to more targeted marketing activity – something the advertising industry may feel the effect of during 2001.”
”Market sentiment is now strongly biased towards profitable dot.coms, which marks a turnaround from the first half of last year when the focus was on long-term value. We expect polarisation between the best and worst performers to continue during the fourth quarter and into 2001, leading to further consolidation in the sector. We may also see a flow of new e-business propositions from bricks and mortar companies due to the negative market sentiment towards – and lack of funding for – dot.com start-ups.”
Stephen Adler, a director at Fletcher Advisory, commented:
“We expect to see internet businesses coming to terms with conventional business realities. Consequently the weaker companies are likely to be shown the back door by investors, leaving the market clearer for the well-managed businesses to set themselves up for the long term.”
A copy of the report, PricewaterhouseCoopers Internet 150, is available. Registration is required.