Art Technology Group: E-commerce Icarus spreads its wings again
As Internet mania soared in the late 1990s, so did the stocks of companies that promised to turn brick and mortar stores into online e-tailers. None of them saw the ground until they hit it in the dot-com crash.
Art Technology Group, Inc. (Nasdaq: ARTG), a Cambridge, Mass., seller of e-commerce software, is one company that imitated Icarus, the mythological figure who soared high before plunging back to earth after heat from the sun melted his wings, and the result was not pretty. Founded in 1991, the company went public in July 1999 at $6 per share and peaked at $125 a year later after splitting 2:1 in March. Then the meltdown began, and revenue dropped from $63 million in the fourth quarter of 2000 to a low of about $14 million in the second quarter of 2002. By that time the stock was trading for less than $1.
Art Technology Group, commonly referred to as ARTG, is still alive, although the stock is hovering much closer to the ground these days having closed Thursday at $4.17. Still, that’s nearly double the price it commanded a year ago. Several Wall Street analysts believe the company has successfully restructured and is ready to make smaller yet impressive gains over the next few years.
ARTG has a strong lineup of software and services to create everything from online shopping carts, customer service systems and marketing programs to systems that understand natural language queries and collect data about individual buying and site surfing patterns. Its big advantage is its ability to tailor searches and other features to individuals based on their past actions.
“ARTG has one of the most, if not the most, robust e-commerce solutions around,” says Paul Kaump at Northland Securities.
ARTG also has 50 channel partners to help sell the programs and boasts huge customers such as Walgreen Co. (NYSE: WAG), Nike (NYSE: NKE), The Nieman Marcus Group, MTV Networks and Martha Stewart Living Omnimedia, Inc. (NYSE: MSO). Its chief rival is IBM Corp. (NYSE: IBM).
While its turnaround is the result of years of hard work by new management that took over in 2002, the stock caught its tailwind when the company bought eStara for $42 million in 2006. eStara focuses on turning site visitors into buyers with a hosted service that helps identify visitors who may be hesitating or having trouble finding what they want, and putting them in touch with customer service or sales personnel through click-to-chat (text messaging) and click-to-call (phone) services. The big competitor in this space is LivePerson, Inc. (Nasdaq: LPSN), which is so far experiencing faster growth on a higher revenue base.
ARTG soared above analyst expectations in the third quarter of 2007, with revenues up 64% to $35.9 million (versus analyst projections of about $33 million) and non-GAAP net income of $2.6 million, or $0.02 per share, meeting or bettering Wall Street projections. On a GAAP basis the company lost $800,000, or $0.01 per share, due to stock grants and amortization of acquired intangibles.
ARTG reached a 52-week high of $4.84 in December 2007 before correcting. “The stock may have been getting a little ahead of itself,” says Kaump, whose price target is $5. Its 52-week low was $1.98, established in February 2007. Its market cap is now about $512 million.
Putting a valuation on ARTG is complicated. The company is trying to shift from licensing software to offering an ongoing service hosted on its own site. That can smooth wildly fluctuating quarterly earnings that turn on how many million dollar license deals are signed with large clients, but also creates a transition period when revenue reporting is delayed, because the new model records revenues spread out over the life of the contract instead of up front.
For that reason, Northland’s Kaump values ARTG on a cash flow basis, setting a 22 times multiple on his expected $29 million cash flow from operations in 2008.
Still, not everyone believes ARTG is ready to sprout new wings and soar. Nathan Schneiderman at Roth Capital believes that eStara revenues are masking still-lagging and volatile sales from the ARTG products. “They made a pretty good acquisition with eStara, which has driven a lot of that growth,” he says. “I don’t see any convincing evidence that the company’s core business is taking off yet.”
While license revenues soared 65% year-to-year, to $7.9 million in the third quarter of 2007, for example, they had dropped 29% year-to-year, to $6.5 million in the second quarter.
There has also been legal turbulence in the company’s flight path. Last summer ARTG fell out of compliance with profitability covenants on a $20 million line of credit. The lender, Silicon Valley Bank, issued a waiver from the covenant. And a 2006 Sarbanes-Oxley audit found ARTG to have “inadequate and insufficient controls” over its financial reporting. Analyst Kaump blames the loss on the company’s changing revenue recognition model, and notes that it is now hiring more accountants and improving its policies and procedures.
Still, Kaump interviewed several of ARTG’s channel partners recently and found that the sales and marketing pipeline was “far more robust than last year’s.” Indeed, on Jan. 8, the company increased its 2007 forecast to $136 to $137 million, from previous guidance of $130 to $133 million, raised its expectations of cash flow from operations to $25.5 to $26.6 million, from previous guidance of $24 million to $25 million, and narrowed its projected GAAP loss to $5 million to $6 million from its previous $5 million to $7 million. In a new report, Kaump points to “a prosperous 1H08.”
As a result, ARTG could prove to be not a modern Icarus, but a latter day Phoenix that will fully test its wings over the next couple years. And that makes a much prettier picture.
About the Author
Richard L. Brandt is a journalist and author with more than 20 years' experience covering science, technology and business.
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