From: Linda (firstname.lastname@example.org)
Date: Thu Jul 20 2000 - 02:39:27 PDT
Adam tells me that some here have an interest in CommerceOne. I follow
these stocks fairly closely since I have shares in Ariba. The
difference in business models is becoming more apparent, and for now the
Markets seem to be favoring Ariba.
Ariba Leading B2B Software Race by Taking Road More Traveled
By Joe Bousquin
7/12/00 1:32 PM ET
Maybe birds of a feather don't flock together.
When it comes to business-to-business e-commerce stocks, no two stocks
are more closely identified with each other -- or the sector as a whole
-- as Ariba (ARBA:Nasdaq - news) and Commerce One (CMRC:Nasdaq - news).
Both make exchange and procurement software that allows companies to
buy and sell materials over the Internet. Both are pioneers, and both
can brag about splashy deals and partnerships aimed at changing the way
the world does business.
So why did Ariba recently smash through the $20 billion market-cap level
while Commerce One sits well below $10 billion? Why has Ariba rebounded
70% since its recent low on April 17, while Commerce One has risen just
18% since then?
The easy answer: The companies aren't as similar as some people assume.
In fact, there are significant differences that any B2B investor needs
to consider. While both are still pounding the table about the promise
of B2B, they've taken different approaches to the sector. And those
differences may be apparent when the two companies report earnings.
Ariba is expected to announce earnings after the close on Wednesday, and
Commerce One is slated for next week.
"When Ariba and Commerce One first came [public], they were almost
exactly the same company," says Todd Weller, an analyst with Legg Mason
Wood Walker who has a buy rating on Commerce One but has no rating on
Ariba. (His firm has done no underwriting for either company.) "Now,
they've started to diverge."
Both companies, Weller says, began with a focus on procuring so-called
indirect goods, or things not used in the manufacturing process such as
paper, pens and office supplies.
But Commerce One soon began targeting the huge industry exchanges, like
the one being set up by Detroit's Big Three. Those exchanges want to
move manufacturing materials -- stuff like plastics, metals and machine
parts -- between different companies. The market for these materials is
huge, with estimates reaching into the trillions of dollars, but it also
represents an entirely new way of doing business.
"If both stories work out how the companies want them to, Commerce One
will be a bigger success," says Brian Salerno, co-manager of the Munder
Netnet fund, which is long Ariba but doesn't own Commerce One. "But for
that to be the case, something has to happen in business that's never
happened before. I think the likelihood of actually pulling it off would
have to favor Ariba."
Other factors have turned the tide against Commerce One as well. Soon
after the frenzy over B2B exchanges got under way at the beginning of
the year, questions started to emerge about how these "industry
consortiums" with the likes of General Motors (GM:NYSE - news), Ford
(F:NYSE - news) and DaimlerChrysler (DCX:NYSE - news) partnering, would
work together. Analysts also questioned whether they would be able to
charge transaction fees for the goods traded over them.
Then Washington started showing an interest in B2B exchanges. The
Federal Trade Commission held a two-day workshop in June to look at
antitrust issues that online B2B exchanges raise, and the specter of
government regulation further weighed on Commerce One's stock. (TSC
wrote about the workshop last month.)
Meanwhile, Ariba was plodding along to add extras and customers to its
indirect-goods procurement platform. While it hasn't shunned exchange
opportunities -- it recently landed a deal to help power Omnexus, a
marketplace for the plastics injection molding industry with the
backing of Dow Chemical (DOW:NYSE - news) and DuPont (DD:NYSE - news) --
it continued toconcentrate on indirect goods, and now boasts more than
170 customers on its procurement network.
All of this puts Ariba in the improbable position of exhibiting a more
traditional business model -- at least in investors' eyes -- in a space
that's changing as fast as it's growing.
"Ariba, in my eyes, is going after more of the midlevel software market,
and most investment managers are comfortable with that because we've
seen that kind of company in the past," says Ryan Jacob, who is long
Commerce One in the Jacob Internet fund. "With Commerce One, there are
more unknowns, but they're going after a much larger opportunity."
That opportunity is so large, in fact, that Commerce One announced in
June that it would acquire Internet consulting firm AppNet for $1.17
billion in stock because of the dire need for people to help build the
exchanges it's selling. But that was greeted with more negativity by
A Need for Bodies
"They're acquiring a company with more than 1,000 consultants, which,
from a long-term strategic perspective makes sense, but it will affect
their ability to grow margins as quickly as before," says Pacific
Growth Equities analyst Bala Srinivasa, who rates Commerce One a buy and
has no underwriting relationship with the company. "Investors are trying
to get more comfortable with the huge services business that Commerce
One is trying to build."
On the other hand, not everyone is comfortable with Ariba's lofty
valuation at 155 times trailing sales -- no matter how "traditional" its
model now seems.
"I don't follow Ariba too closely largely because of its $20-plus
billion market cap," says Drew Cupps, manager of the Strong Enterprise
fund, which is long Commerce One. "I own Commerce One largely because of
its $6 billion market cap. For anyone who has any valuation sensitivity,
that's one of the attractions."
No doubt, as this round of earnings reports revs up in the B2B sector,
the viability of different business models and strategies will be
scrutinized even further, and which will ultimately be successful is
still anyone's guess. But one thing's for sure. In the B2B sector, it's
becoming clear that these two leaders are starting to fly in very
Commerce One Stumbles Out of the Gate, Shoots for the Finish Line
By Joe Bousquin
7/18/00 10:23 PM ET
It's official. In the second quarter, Commerce One (CMRC:Nasdaq - news)
lost the battle with Ariba (ARBA:Nasdaq - news) for the heart and soul
of business-to-business e-commerce. But that's only because it's trying
to win the war.
Commerce One handed in revenue Tuesday of $62.7 million for the quarter,
which was as much as $15 million more than what some analysts were
projecting. Unfortunately, in a world of gargantuan numbers -- the world
that is B2B e-commerce -- $15 million simply wasn't big enough,
especially given Ariba's stunning performance last week. (TSC wrote
about Commerce One's earnings earlier Tuesday.)
Commerce One shares fell off a cliff in after-hours trading, plunging 6
9/16, or 10%, to hover at 60. The stock had been up 3.4% in regular
trading Tuesday to close at 66 9/16.
Mark Hoffman, the company's chief executive, scoffed at that selloff
after holding a conference call detailing the quarter.
"A lot of people bought on speculation, and obviously, sold it on
hearing this," Hoffman said. "They're probably not the long-term
investors that we've got in this thing anyway."
Of course, Commerce One surged all last week, running up 79% after Ariba
announced its huge quarter, with a startling $80 million in revenue.
Ironically, the $80 million that helped boost Commerce One's shares last
week made its own numbers look paltry on Tuesday.
Analysts on Commerce One's conference call were exhibiting some ho-hum
language Tuesday afternoon. They talked about the company's "decent" and
"nice" quarter, but stopped short of using the words they showered on
Ariba like "perfect" and "outstanding." (Last week, TSC wrote about the
differences in the two companies' business models.)
Not that Commerce One didn't give analysts something to talk about. The
company detailed exactly what it's been doing over the last quarter.
Things like signing up 85 new customers to bring its total to 210. Or
that 34 of its 72 marketplaces are operational. And the coup de grace:
$7 million of its revenue in the past quarter -- or about 11% of the
total -- came from exchange revenue. That's important, because it means
the company is getting paid for goods moving through the exchanges
it's helping set up, a key -- and controversial -- component of its
How High Is the Bar?
So what does this company, which beat earnings estimates by 3 cents and
increased revenue by 1,392% from a year earlier, have to do to impress
the Street? Just pull off the near impossible. That's all.
"We do have a big vision," Hoffman said. "Now we have to keep on
He's heard the comparisons to Ariba too many times. It goes like this:
Ariba has focused on the nuts-and-bolts of corporate procurement,
getting people to buy its software so they can buy stuff over the
Internet. That has produced revenue up front. Commerce One, on the other
hand, is trying to build mega-exchanges for giant industries to link all
the world's businesses on what it calls the Global Trading Web. But to
do that, it often partners with industry, taking equity stakes in future
exchanges instead of getting paid big fees up front for its software.
So far, that's resulted in a market cap of $29 billion for Ariba and $10
billion for Commerce One.
"It's really a different business model, isn't it," Hoffman says
rhetorically. "They get all their money by selling into the [company],
and they charge more by doing that. We're not looking at it that way.
We're looking for this exchange-based revenue model, and there are very
different economics to be generated out of that."
Try a difference in the trillions, if you believe the estimates. The
scope of the numbers estimated for B2B commerce are somewhere north of
$7 trillion globally by 2004. But for now, it's only amounted to the $7
million that Commerce One highlighted on its call.
And not all of that, it should be noted, was from straight "transaction
fees," the toll-like charges that exchanges want to levy on the value of
goods that pass through them. That tactic's lack of popularity among
the businesses that use exchanges has caused Wall Street to be weary of
The $7 million also included other revenue sources such as revenue
sharing with exchanges it has helped set up, Hoffman said. That means
if a third-party exchange running Commerce One's software holds an
auction -- and charges bidders to participate -- Commerce One gets a
small slice of that revenue. As B2B e-commerce proliferates, Hoffman
hopes that slice will get bigger and bigger, and ultimately dwarf the
up-front licensing fees that Ariba's been pulling in.
But for now, there are still hurdles. Hoffman said none of the company's
revenue thus far has come for the big industry mega-exchanges that it's
setting up. Those have in part been bogged down by the Federal Trade
Commission's antitrust examination, Hoffman said..
"Obviously, it's slowing down the implementation of the exchanges to
some extent until that gets resolved," he said. "That said, I think
people feel the FTC review is moving forward fairly well."
But Wait, There's More
Hoffman and Commerce One highlighted some other numbers on the call,
like the 6,900 buying organizations and 500 suppliers connected to its
network. More than 50% of its revenue is coming from outside the U.S.
And its planned acquisition of consulting firm AppNet (APNT:Nasdaq -
news) will add 20% to its revenue after being finalized in September.
That would make the company profitable in the third quarter of next
year, slightly ahead of analysts' estimates.
But mainly, Commerce One's numbers were only cast in comparison to
Ariba's, a battle that Hoffman will surely have to continue to fight for
quarters to come. "Ariba is getting rewarded for revenue and revenue
growth, and you can't complain about that," Hoffman says. "But we get
looked to for having vision and a better long-term business model. I
guess we'll see which is more successful."
For the second quarter, at least, it was Ariba.
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