Technology

Internet: Name Your Own Severance Package

Last week's abrupt resignation of Priceline.com's Heidi Miller caps one of the most spectacular job changes among CFOs.
Joseph RadiganNovember 7, 2000

So what’s next for Heidi Miller? The high- profile chief financial officer for Priceline.com abruptly resigned her post last Thursday when the company announced its results for the third quarter.

An assistant who answered Miller’s phone on Friday morning said she was not in the office, and a company spokesman would not answer any questions about Miller.

Priceline’s new chief financial officer is Robert Mylod, who had been the company’s senior vice president of finance. He, too, was unavailable Friday.

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The shake-up at Priceline, which coincided with the layoff of 87 employees, brings an unwelcome end to a story that began with one of the more high-profile CFO job changes in recent memory. Miller had been chief financial officer at Citigroup until February, when she was lured away to Priceline in what appeared at the time to be yet another coup by a dot com upstart in poaching a veteran executive from an established company.

But back then, Priceline’s stock was trading for $51.88. Thursday, the shares closed at $6.84 and then fell another $1.64 in after hours trading once the news of Miller’s departure and the layoffs were released following the 4 p.m. close of trading. The stock continued to trade lower once the markets opened on Friday, losing $2.31 to $4.53.

Unfortunately, Priceline had plenty of bad news mixed in with its quarterly results. The company also announced that fourth quarter revenue would decline from the third quarter, and the company’s progress toward profitability has now been thrown off schedule.

That said, the company did report solid year- over-year revenue growth. Its top line in the third quarter more than doubled to $341 million from $152 million in the third quarter of 1999. The company’s bottom line almost progressed to break-even, showing a loss of $2 million, or $0.01 per share, compared to a loss of $12 million, or $0.08 per share, in the year-ago period. But a one-time charge of $189 million related to the closure of the company’s grocery and gasoline business, Priceline WebHouse Club, and other charges related to preferred stock dividends, stock warrants and payroll taxes on stock options deepened the loss to $191 million.

Unfortunately for Priceline, almost being profitable didn’t count for much. Timothy Fogarty, an analyst with Thomas Weisel Partners in San Francisco, said the Street had been expecting a profit until the company issued an earnings warning a few weeks back.

In addition, while the company’s year-over- year top line growth has been strong, its sequential revenue growth this year has been lackluster. Second quarter revenue grew to $352 million from $314 million in the first quarter, but the third quarter sales figure was almost 3% lower than the second quarter sales total.

Now, given the company’s revised outlook for the next quarter, it is headed for two consecutive quarters of shrinking revenue. This is not what the dot com revolution was supposed to be all about.

For Miller, too, the move to a high-flying Internet start-up clearly failed to meet her expectations. Friday The Wall Street Journal, quoted her as saying she joined Priceline because she “thought this would be a meaningful opportunity to grow an organization, but circumstances do change. I was disappointed.”

When Miller was hired, Priceline loaned her $3 million at an interest rate of 6.56%, according to company’s March 27 proxy statement. Given Priceline’s stock performance and her resignation, it’s highly unlikely that Miller will make any money off of exercised stock options. But according to the proxy, Miller would be obligated to use 25% of her option income in excess of $6.6 million to pay down the loan.

The proxy statement also says that the loan “will be forgiven by the company in the event of certain changes in control, death, disability, termination without cause or termination for good reason.” The Priceline spokesman refused to answer questions about the loan or Miller’s compensation.

In addition, the proxy statement only discusses Miller’s loan. It doesn’t address her salary or option package.

Miller’s predecessor as Priceline CFO, Paul Francis, moved over to the sister company, WebHouse Club when Miller was hired. But Priceline announced in September that it was shutting down WebHouse, and while the affiliate is winding down its operations, a spokesman there said he was not aware of Francis’s plans. The spokesman also said that Francis was unavailable for comment.

According to the March 27 proxy, Francis was paid $225,000 in salary during 1999, and as of Dec. 31, 1999, he had options on one million shares, 750,000 of which were exercisable. No mention is made of Mylod’s compensation.

If Miller’s future is uncertain, things are no more settled for Priceline itself.

“Heidi is obviously extremely well respected, and her departure is a blow,” says Fogarty of Thomas Weisel Partners. But he also cautioned investors not to lose sight of the continued presence of other senior executives such as chairman Richard Braddock, who had been the No. 2 executive at Citicorp in the early 1990s, and chief executive Dan Schulman.

Fogarty is also encouraged in that he knows Miller’s successor, Robert Mylod and that Mylod is well versed in the company’s operations.

That said, Fogarty also acknowledges that Priceline needs to rethink its compensation program; given its weak stock, its options are under water.

With so much uncertainty surrounding the company’s business and the Street’s ability to accurately forecast its future operations, Fogarty is not ready to recommend the shares. Still, he said, “The company is aimed toward keeping gross margins positive in the 10% to 12 % range, so they can actually make any adjustments” if consumers continue drive ticket prices down.

But the conference call with analysts at least included enough profitable signals to convince Fogarty that “These guys are trying to build a profitable business.”

He also said the company is well capitalized. As of Sept. 30, Priceline had $104 million on its balance sheet.

But Priceline’s current trials underscore the overall gloom that plagues the business-to- consumer B2C e-commerce sector, says Alan Loewenstein, the co-portfolio manager for the John Hancock Technology Fund. Moreover, with the pervasive weakness across the B2C sector, these companies are going to have a harder time recruiting senior managers to team up with the high-tech entrepreneurs who founded these companies.

It could be the beginning of a vicious cycle; the harder it is for the dot coms to recruit senior financial executives, the harder it will be for them to sell their story to Wall Street.

Not too long ago, you could have argued that Priceline’s “name your own price” motif could work for raising capital. Not any more.