Commerce One Bumps Up Guidance

Commerce Once reported better-than-expected results after the market's close yesterday and raised 2001 revenue guidance. Rival Ariba raised guidance as well last week, but the increase was not as significant. For the time being, at least, it appears Commerce One has captured needed momentum.

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By Mike Trigg (TMF Tonto)
January 19, 2001

Business-to-business (B2B) marketplace enabler Commerce One (Nasdaq: CMRC) reported better-than-expected results after the market's close yesterday, citing strong top line growth and its partnership with back-office software vendor SAP (NYSE: SAP). The news was particularly impressive, considering top line results surpassed rival Ariba (Nasdaq: ARBA) for the first time. The company also bumped up revenue guidance for 2001.

Excluding charges, Commerce One reported a fourth-quarter net loss of $10.8 million, or $0.05 per share, compared to a loss of $14.7 million, or $0.08 per share, in the year-over-year period. The Street expected a $0.07 per share loss. Revenue was $191.4 million, increasing sequentially 70% and beating the Street's projection of $176 million. Commerce One also added 34 new marketplaces, giving it a total of 141.

Network revenue was $15 million, a sequential increase of 50%. That figure is important because it represents the amount of revenue-sharing that occurred on active marketplaces. It should substantially increase as more exchanges go live. Although it currently represents mostly auction and subscription fees, as exchanges mature it will include a greater amount of value-added service and transaction-based revenue.

The SAP factor
The Commerce One/SAP relationship has begun to pay off. In the quarter, partnerships contributed 30% of license revenue with the SAP alliance responsible for the majority. The union brings together the best of both worlds: Commerce One's marketplace platform and SAP's procurement and supply chain management applications. Don't forget that Commerce One is also afforded the ability to market to SAP's 13,000-strong installed base, which helped boost Q4 results.

While Commerce One has been criticized for not having a viable procurement application -- just see the Fool's Stock Talk with Ariba CEO Keith Krach for evidence -- the companies' joint offering provides indirect and direct procurement functionality. It's also impressive compared to the Ariba, i2 (Nasdaq: ITWO), and IBM (NYSE: IBM) alliance. The Commerce One/SAP offering is pre-engaged, while its competitors' is situational -- meaning Ariba and i2 have to first sit down and figure out who's going to do what before anything gets done.

More good times to come
Still in a stage of hyper-expansion, top line growth remains the leading indicator for B2B companies. Commerce One reported sequential revenue growth of 70%, down from 80% in Q3. Ariba's fourth-quarter sequential results lagged behind, declining from 67% to 26%. Commerce One's top line also exceeded Ariba's for the first time by roughly 13%.

Adding insult to injury, Commerce One delivered bullish first-quarter and 2001 revenue guidance. The company expects Q1 revenue of $205 million to $210 million, exceeding earlier expectations of $184 million. For the year, it expects $900 million to $925 million in sales, roughly $100 million more than anticipated. Also, the company reaffirmed earlier guidance of a profit by the second quarter of this year.

Ariba raised guidance as well last week, but the increase was not as significant. For the time being, it appears Commerce One has gained momentum. While both companies appear to be weathering the information technology spending slowdown better than most software companies, Ariba has posted more impressive financial results thus far and is the only B2B company with positive cash flow.

Commerce One will continue to invest additional revenue on product development and marketing activities and expects to break even in 2001. The Street had been expecting a profit of $0.02 per share. An investor willing to overlook its lagging bottom line might find Commerce One attractive at the moment, as it trades at a significant discount to Ariba.

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