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Mercator Dealt Another Blow
Mercator Software shares have plummeted recently. Now, news of revised earnings has sent the company lower. Nevertheless, the company remains on track to profitability and its revenue momentum continues. If the company has answered its credibility issues with changes at the top, these recent events will mean little to the long-term future of the company.
By
Mike Trigg (TMF Tonto)
August 22, 2000
Mercator Software (Nasdaq: MCTR) shareholders took a George Foreman-like uppercut yesterday when the company restated first- and second-quarter results. The integration software provider for e-businesses reported it had failed to properly record more than $2.4 million in expenses for the first half of the year. It meant more bad news from Mercator stockholders, who had to suffer through a damaging earnings warning in mid-July.
Q1, Q2 revisited
The company reported an increased second-quarter loss of $1.78 million, or $0.06 per share, to $17.8 million, or $0.61 per share. Profit (excluding amortization of goodwill and other intangibles) was reduced by $694,000 to $500,000.
First-quarter losses increased $1.62 million, or $0.06 per share, to $11.5 million, or $0.41 per share. Profit (excluding amortization of goodwill and other charges) decreased $823,000 and now stands at $987,000.
After posting second-quarter results last month below Wall Street estimates, the stock tumbled, and the revised earnings are a continuation of bad news. However, the new numbers shouldn't come as a complete shock. The company put a bug in the ear of investors last week when it delayed its second-quarter filing to the Securities and Exchange Commission. That sparked rumors about more bad news looming on the horizon.
Members of management get KO'd
In response to the accounting errors, Mercator's President and CEO Connie Galley came out firing yesterday, literally. In a Monday press release, she indicated that re-staffing the financial management team as well as implementing new controls and procedures would strengthen the company and eliminate such problems in the future.
When the smoke cleared, Chief Financial Officer Kevin McKay resigned, Vice President of Finance and former CFO Ira Gerard was terminated, and Mercator's controller was relieved of her duties.
Problems began for this group back in July when the company warned earnings would not meet expectations on a Friday evening after the close. One has to wonder why a company would do such a thing, but whatever the strategy was, it backfired. Investors sat on the news through the weekend, and the following Monday, they bailed. The stock got hammered and lost almost 60% of its value.
Now, the company is faced with additional public embarrassment after being forced to revise its recent earnings. Galley and Mercator's board had witnessed Mercator's transformation from a hot growth company to a sinking ship and needed to send a signal to investors that this won't be tolerated -- so who better to throw overboard than those responsible for financial oversight?
James Schadt was also named chairman. He has been a director of the company since 1998, formerly serving as chairman of the audit committee. I think it's safe to say the message has been sent.
Where to from here?
In an attempt to find a silver lining in the Mercator cloud, there are a few things worth pointing out.
The company is well-positioned in the e-commerce integration market, at least on the product side. The need for businesses to integrate their e-commerce operations continues to grow. Mercator's products are top-notch and attractive to businesses because they offer a full suite of solutions under a common umbrella.
Revenues are also something to consider. They will make or break the future of this young company and were unaffected by the changes. The company reported second-quarter revenues of $35.7 million, which was a 51% increase from the same period a year ago. Increased strength in the software integration e-commerce market and additional expenditures in Mercator's sales force leads me to believe that the company's revenue will continue growing at a high rate.
Mercator has been beaten down recently because of a few mistakes -- including this one, as the shares lost nearly 20% today -- but the company's fundamentals haven't changed much beyond that. In the end, Fools must ask if this earnings revision will have any bearing on the long-term success of the company. This Fool doesn't think so.
Your Turn:
Does any of this recent news really affect Mercator in the long-term? We bid you welcome to the Mercator discussion board to share your thoughts.
Related Link:
Mercator Gets Spanked, Fool News & Commentary, 7/17/00
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