Many dotcom companies are showing signs of becoming profitable as the European internet market enters a new phase of maturity, according to a recent report.
PricewaterhouseCooper’s Business Recovery Services in conjunction with e-business strategy consultants, Fletcher Advisory found 38% of companies were profitable in the fourth quarter of last year, up from 28% on the previous quarter.
Average cash burn rates across the same period stabilised, showing only a one-month dip between the third and fourth quarters to 17 months.
This stabilisation occurred in spite of the availability of external funding all but drying up – a total of EUR196m was raised as a result of EU internet IPOs in the first quarter of 2001 compared to EUR900m in the previous quarter – indicating that companies are beginning to find ways to operate within the boundaries of their cash flow.
Similarly, for the first time since at least June 2000, sales growth among internet companies is running at an equivalent rate and in some cases higher than growth of spending on overheads.
In the third quarter of last year, spending growth outstripped sales growth by 11%; in the fourth quarter, this gap had narrowed to just 1%.
Overall, there are still some 18% of companies whose cash burn rates mean they have insufficient resources to last beyond 12 months without new funding or significant remedial action.
PwC believes that as the market matures, a combination of polarisation and consolidation will lead to a number of internet failures and the emergence of clear sector champions.
ISP companies are leading the market turnaround: 50% of ISPs are profitable compared to the market average of 38% and sales in the ISP sector increased by 29% between the third and fourth quarters of last year compared to an average increase of 7%.
Conversely, B2C companies look particularly vulnerable, with 19% of them now worth little more than the cash on their balance sheets.
Kevin Ellis, a PwC partner, said dotcoms, such as auction site QXL – driven by finance director Robert Dighero – were hampered by steep expectations.
He added: ‘Trading in a start-up industry is always tough. Dotcoms have been labouring under a desperate desire for first mover advantage and huge growth expectations, which have made finding a business model that works a near-impossible task. Companies who have got it right are now emerging as the dominant forces in the market while the weaker ones fall by the wayside. We expect this polarisation to continue.’
He added: ‘Investors should remember that internet companies are still growing 14 times faster than the European economy as a whole and, in an exceptionally short space of time, have created a combined market cap of EUR66bn – equivalent to the entire capitalisation of the Lisbon stock exchange.’
A copy of the report, PricewaterhouseCoopers Internet 150, is available at www.pwcglobal.com/brs_internet_150.
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