The eagerly awaited first full-year SmartForce results as an Internet-based learning company will be published on Thursday. They will show it has surpassed its targets, with the company on the threshold of making profits. Looking at the performance of the share price one would be forgiven for thinking something was askew.

But the share price movements reflect the malaise enveloping IT companies trading on Nasdaq. After reaching $55 last October, the shares dropped all the way to $25 3/4 this month before recovering to $34 3/8 on Friday. Against that background, the directors were fortunate in selling some of their shares last October at prices between $48 and $53 which is not too far from their peak of $60 reached last March.

But on the trading front, the omens for the company are brighter, provided it is not knocked off keel by the slowdown in the US economy. A year ago US brokers were anticipating a move into positive earnings by the second quarter of 2001. Now an average of these brokers reviews indicates positive earnings (pre-goodwill) by the first quarter.

The latest results, for the third quarter to September 30th 2000, showed revenues at $45.6 million, or 25 per cent higher than the second quarter, and exceeded analysts' expectations. The net loss for the quarter, excluding amortisation of intangible assets, was $3 million, or 33 per cent better than estimates. Significantly, it reported a contract backlog of $290 million. This was a record and represented a 13 per cent increase on the level three months earlier.

One of its goals was to build what it called a "critical mass" of registered subscribers to its e-Learning. It reached this - over 1 million subscribers - in the third quarter, well ahead of its end of 2000 or early 2001 target. Importantly, it has over 2,500 corporate clients, including Intel, General Electric and Citigroup. It also does business through partners such as Deloitte & Touche, Dell and Provant. This business is reckoned to account for some 10 per cent of group revenue but this could grow in the years ahead. But what about the group's future? Thursday's figures should show a rise in revenue from $45.6 million in the third quarter of 2000 to about $55 million in the fourth quarter. The operating loss should be almost halved from $6.8 million. And the loss per share (pre-goodwill) should be reduced from 6 cents to near breakeven. Credit Suisse reckons revenue for the whole of 2000 will be $164 million and will rise to $263 million in 2001. An eps of 26 cents - the same as the average US broker estimate - is forecast for 2001, rising to 65 cents in 2002. Looking much further ahead, Credit Suisse reckons revenue in 2011 will be $1.6 billion and earnings before interest tax and depreciation will be $355 million. All very heady stuff, so how can SmartForce be valued? Regrettably, most analysts are valuing the company, like a whole host of other IT companies, on the basis of a revenue multiple. This is a dangerous practice as all IT companies will have to generate profits in time; otherwise they will just disappear. Others value the companies on the DCF (discounted cash flow) basis. As this takes in a number of variables, such as growth, expenditure, working capital and interest rates, it has more validity, but the more traditional prospective p/e is safer. Credit Suisse's DCF-based share price target of $50 implies a 2001 revenue multiple of 9.3. Using prospective p/e basis, the multiple at a price of $32 is an enormous 145, implying very substantial growth in the future. Looking at the projections it will be a while before brokers start using the p/e ratios as a selling tool.

Clearly, SmartForce has displayed strong, focused management in transforming the company from a CD-based learning group into an Internet-based company. In just nine months, over 80 per cent of its business is now reckoned to be on the new base. It has plenty of challenges ahead in what is a highly fragmented and competitive market. There is also the prospect of a cutback in corporate expenditure on eLearning as the US economy slows. These pressure will be reflected in a continuing volatile share market.

Last week, the share price plunged from $34 to $25 3/4 before finishing at $34 3/8. That put the spread (from the low to the high) at 34 per cent. A decidedly dealing share but timing is of the essence!