B2B firms confident of long term survival

Although online business-to-business companies are struggling through another dismal quarter, none of the major players is ready to throw in the towel--at least yet.

Although online business-to-business companies are struggling through another dismal quarter, none of the major players is ready to throw in the towel--at least yet.

With i2 Technologies reporting earnings Wednesday, Ariba on Thursday, and Commerce One next week, analysts will get a clearer picture of where the market is heading. Most analysts agree that despite a rocky road ahead, each company is in a position to survive the market downturn.

Both Commerce One and i2 last week erased any hopes of a rapid recovery when they separately warned they would not meet Wall Street expectations for the second quarter.

i2 saw its losses explode in the second quarter compared with the year before. The company on Wednesday posted a net loss for the quarter of US$861 million--a whopping US$2.08 per share--on US$241 million in revenue. For the same period last year, i2 lost US$281 million, or 83 cents per share, on US$243 million in revenue.

i2's net loss includes a write-down of US$763 million of intangible goods and a US$33 million restructuring charge. i2 announced in April that it would cut up to 10 percent of its staff.

Excluding those and other charges, the company reported a pro forma loss of 16 cents per share. The company also took a bad debt charge of US$26 million in the quarter related to its dot-com customers. Excluding that particular charge, the company reported an amended pro forma loss of 12 cents per share. Wall Street analysts had expected the company to lose about 12 cents per share for the quarter, according to First Call.

Though Ariba has not warned about its third-quarter numbers, analysts said not to expect glowing results.

Wall Street estimates that Commerce One will report a second-quarter loss of 21 cents per share on revenue of US$114.68 million. i2 is expected to report a loss of 12 cents per share on sales of US$237.60 million, and Ariba is expected to post a loss of 12 cents for its third quarter on revenue of US$83.99 million.

Still, many analysts are optimistic about the software makers' viability and expect the business-to-business market as a whole to rise from the ashes.

Ariba, Commerce One and i2 make software that allows companies to buy and sell equipment, goods and services online through Web sites called marketplaces or exchanges.

Some of the latest estimates by analysts forecast continuing growth in the market. By 2005, Gartner estimates that online business-to-business transactions will reach US$8.5 trillion, up from US$6 trillion in 2004.

These forecasts come despite troubles facing the entire technology sector.

The online-exchange market began showing signs of meltdown in May of last year, as public marketplaces started folding, and continued scrutiny by US and European governments scared off many participants and investors, who soon lost interest in the sector.

Public online exchanges, although initially at the center of an amazing rush by traditional businesses to automate their purchasing processes online, have had problems with providing real value, some in the industry say. Though some have made headway in aggregating industry information and some supplier and manufacturer collaboration, as well as transactions, many public exchanges have struggled to gather momentum.

But despite the turmoil, those covering the industry point to a number of factors for each company's possibility for survival, from Commerce One's backing from enterprise resource planning (ERP) giant SAP, to i2's broadening product footprint, to Ariba's refocusing of its business plan.

"Right now, the market that they're in is difficult," said Bob Austrian, an analyst at Banc of America Securities. "They're struggling a bit but they are repositioning as quickly as they can. I'm confident they'll find a reasonable way out of the current jam."

Commerce One's situation has been buoyed by support from German software monolith SAP, which gave the business-to-business company a needed lift with a US$225 million investment on the same day Commerce One warned it would not meet Wall Street's expectations for the second quarter.

SAP has been a partner with Commerce One since it first took a stake in the company a little more than a year ago with another investment of US$250 million.

The latest contribution by SAP to Commerce One's cash store caused some analysts to wonder how Ariba, its chief rival, would compete with such an e-business powerhouse.

Without a similar partnership like the one between SAP and Commerce One, some analysts say, Ariba will suffer under draining cash flow and a limited market for its software.

Richard Williams, an analyst with brokerage Jefferies & Co, said Ariba will have a limited market selling only in the procurement area.

"We view Ariba as being strategically isolated right now. They need a committed partner with a specific ownership in the company in order for it to be successful," Williams said.

Two is better than one
Ariba needs to find a supply-chain partner and an ERP partner to play in the game, Williams added. "They may want to join or merge with another company that does both," he said.

Joshua Greenbaum, an analyst who heads Enterprise Applications Consulting, concurred.

"The fact that Ariba doesn't have a sugar daddy puts it at a huge disadvantage," Greenbaum said.

Greenbaum said Ariba's situation has gone from bad to worse during the past year as its revenue has dried up and its software and business plan have been criticized by analysts. Gartner penned a negative report on the company that sent the stock skidding before it was even released.

Gartner analysts placed Ariba on "problem watch" and advised clients to minimize their investments in Ariba's software.

However, Ariba executives insist that they are doing business just fine without an SAP-like partner.

"Sure, we're limping, but we don't need an IV from Germany to stay alive," Ariba chief marketing officer Michael Schmitt said. "Marketplaces have slowed down, but we started out as a software company before the marketplace buildup. Once that market opened up, we focused in on it. But as it has slowed, we have returned to our core software product."

And there are those analysts who agree with Ariba executives. Though the company is having hard times, this doesn't mean there isn't some wind left in the Sunnyvale, California-based company's sails, analysts say.

Some point to an existing relationship with IBM, which has brought some financial backing for Ariba and has opened new revenue potential for the business-to-business software maker.

"I think they have IBM as their rescue partner," said Laurie Orlov, an analyst at Forrester Research. "Big Blue is their biggest customer. IBM is going to replace its complete requisitioning system with Ariba software, and (IBM) Global Services is out there selling Ariba in a big way."

IBM formed an alliance with both Ariba and i2 last year, in which the company took financial stakes in both. Although the three-way partnership fell apart after the union was strained by Ariba's failed acquisition of Agile Software and i2's successful acquisition of procurement software maker RightWorks, IBM still partners with both companies.

The need to have a partner the size of IBM and SAP has become especially important for Commerce One, Ariba and i2 as the business-to-business industry continues to be hit hard by a slowdown in online marketplace construction and the tech sector downturn overall.

All three companies have ended up trimming their staffs and warning investors of earnings shortfalls during the past six months. In April, Ariba said it was cutting one-third of its staff and canceling the acquisition of Agile Software. On the same day, i2 said it was laying off up to 10 percent of its staff.

Earlier in the year, Commerce One said it was cutting 150 employees from its work force, or approximately 4 percent, primarily to reduce redundant positions related to its merger with Internet consulting company AppNet.

Then, in May, the company said it would slash 360 jobs, or up to 10 percent of its staff, to reduce costs because of the sluggish US economy and a slowdown in information technology spending.

Andrew McCarthy, a spokesman for Commerce One, said the company has an ongoing strategy of rolling reductions, meaning it leaves open the chance of cutting additional staff if needed to streamline its business. He did not comment on whether any cuts will be made in the near future.

Having a partner with deep pockets and a customer market to share provides a raft for these business-to-business companies to float on during the market downturn, analysts say.

In i2's favor is its successful acquisition of RightWorks for 5.3 million shares of i2 stock, worth about US$114 million, based on its stock price at the time of the announcement.

Analysts say i2 will be able to stay afloat because of its efforts to expand its products through the RightWorks acquisition.

"i2 is somewhat different" than Ariba and Commerce One, Banc of America's Austrian said. "For starters...it is a larger company...They're narrowing their scope so that they can stabilize the business, while they broaden their product footprint."

Although i2 has completed a successful merger and has a bigger product presence then Ariba and Commerce One, the company has still been hit hard by slowing sales.

"They sold a lot of product to a lot of marketplaces last quarter, said Chris Rowen, an analyst with Robinson-Humphrey. "That business has slowed down considerably."

So with Commerce One enjoying a long-lasting honeymoon with SAP and i2 continuing to increase its family of products, how does Ariba stay competitive?

Analysts say it needs to stay the course to survive.

With Ariba's stock price hovering around US$4.80--compared with Commerce One around US$4.50 and i2 around US$13.50--some analysts are speculating that the company could be acquired.

Austrian said a buyout of Ariba would not be a bad thing.

"Being acquired doesn't mean Ariba would go away," he said. "Time Warner didn't go away when AOL acquired them. But the question is whether Ariba can succeed as a standalone--and for how long."

Orlov said Ariba can survive as long as IBM is there to support it.

"If their stock sinks any further, I expect IBM to make a significant investment in the software maker or maybe even acquire it if needed," she said.

Either way, most analysts agree that Ariba, Commerce One and i2 still have some tricks up their sleeves and will make it out of the market tailspin.

Ariba "is a good company, with a good product, but it's going through some difficult times," Austrian said. "Either they will emerge doing well enough on their own, or it may decide to merge...which is not an evil thing."

News.com's Melanie Austria Farmer contributed to this report.