Critical Path Gets Another CFO from PricewaterhouseCoopers

Why it hired its third CFO in the past year.
Joseph RadiganDecember 11, 2000

At a time when tech stocks across the board are 50% or more off their highs, a company that is on its third CFO in a year might be considered a candidate for the endangered species list. But in the case of Critical Path, Wall Street analysts are giving the company a passing grade.

The three-year-old San Francisco software firm develops Internet messaging systems sold in conjunction with systems from telecom firms like Verizon, WorldCom and Sprint.

Last week it announced it had hired Lawrence Reinhold as its CFO. Reinhold, a 20-year veteran of PricewaterhouseCoopers, succeeds Mark Rubash, who had also been a partner with the accounting firm before joining Critical Path in January.

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Reinhold will spend the next week wrapping up his duties at PwC, which is also the software firm’s auditor. He’s expected to join Critical Path later in the month.

Back in January, Rubash succeeded Dave Thatcher, who was promoted to president. Thatcher had joined the firm as CFO while it was still private.

Rumors of an illness in Rubash’s family had been circulating for some weeks, and he had taken a leave of absence in November. But when Rubash’s departure was announced in conjunction with Reinhold’s hiring, the company did not offer any details as to the nature of the illness.

The news about Reinhold’s hiring was announced after the market closed on Wednesday, and Critical Path’s shares opened sharply lower on Thursday. But on Friday, the stock was up a solid $4.13 to $31.06.

Still, the stock price has a long way to go before it approaches the 52-week high of $119.50 it hit back in March. But back then, the tech sector and all stocks with even a hint of the Internet were blistering hot. Since then, tech shares have been deader than a doornail, and the sell-side analysts who follow the company are drumming up support for it in part by stressing the large share of its revenue it garners from Fortune 500 firms and not dot-coms.

“People had been concerned that Rubash’s departure might signal something,” says Bert Hochfeld, a Josephthal & Co. analyst. “There had been a lot of stories going around, but since they got a partner from the same place Rubash came from, I think it would be reasonable to believe that Rubash was, if not instrumental in bringing Reinhold on board, then at least a part of the job search.”

“I think it will be a pretty smooth transition overall,” says Larry Berlin, an analyst with First Analysis Corp. “Rubash did a pretty good job of putting systems in place, both with people and financial reporting.”

Reinhold says he and Rubash have known each other for years and worked together in Price’s Silicon Valley office in the mid-1990s.

The Street is also optimistic about the company’s ability to turn cash flow positive in 2001.

“Fundamentally, everything is very, very good there,” says Dan Renouard, an analyst with Robert W. Baird. “There’s been no deterioration in the fundamentals, and they’re in a very dynamic and fast-growing sector.”

Certainly the trend was positive in the company’s latest quarterly earnings release. For the third quarter, the company reported a gross profit of $20.2 million on sales of $45 million compared to negative gross income of $2.6 million on sales of $4.9 million in the same quarter a year earlier. Amortization costs and other charges caused the company to show a net loss of $128.8 million in the most recent quarter, but management has reaffirmed its forecasts that it will turn cash flow positive by the first quarter of 2001.

But the company has also made at least five acquisitions this year, which partly explains the heavy one-time write-offs. For example, in August, the company announced it was buying privately held PeerLogic for 6.4 million shares of common stock. In July, it took a 15% stake in MindSurf, a start-up specializing in using mobile computing for education and training.

In mid-June, Critical Path bought Netmosphere for $40 million in stock.

Despite the acquisition charges, the firm has what appears to be a rock-solid balance sheet. As of Sept. 30, it had $243 million in cash and equivalents on its balance sheet. Research and development costs were only $7.6 million in the third quarter, so there seems to be little need for it to revisit the capital markets any time soon.

In March, the company sold $300 million of subordinated debt with a yield of 5.75 percent in a private placement. The notes mature in April 2005. It did its last stock offering in June, 1999, three months after it went public.

Reinhold says he can’t comment on any prospective acquisitions the company might make, but he also notes that with the deals it has already done this year, the company has rounded out its product line and probably won’t need to revisit the M&A arena in the near future.

“My expectation is that like all technology companies, there’s always a constant stream of deals that are out there,” he says. “But we don’t need to do more deals.”