The findings are in PwC’s Internet 150, a quarterly analysis of cash burn rates and share price performance of the top 150 publicly listed European internet companies, carried out by its Business Recovery Services in conjunction with e-business strategy consultants Fletcher Advisory.
According to PwC, 38% of companies in the index were profitable in the fourth quarter of last year, up from 28% in 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 €196 million was raised as a result of EU internet IPOs in the first quarter of 2001 compared to €900 million 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%.
The market polarisation which emerged towards the end of last year is becoming more marked. While the top 25% of companies by share price performance are, on average, more profitable, are growing their sales faster and are improving the effectiveness of their marketing spend, the bottom 25% of companies have seen little sales growth and increasing pressure on cash resources. 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.
According to PricewaterhouseCoopers, 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.
Commenting on the latest findings, Kevin Ellis, a partner at PricewaterhouseCoopers, said:
“Trading in a start-up industry is always tough and the dot.com market is no different. Dot.coms have been labouring under a desperate desire for first mover advantage coupled with huge growth expectations, which have made finding a business model that works a near impossible task. We’re now seeing those companies who have got it right emerging as the dominant forces in the market while the weaker ones fall by the wayside. We expect this polarisation to continue.
“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 €66 billion – equivalent to the entire capitalisation of the Lisbon stock exchange.”