WebMethods endures despite competition, stock turmoil

How is this for a suspect business model: Market and stock in turmoil, customers who might not be able to afford your services, and competition from IBM, Oracle and Microsoft.

Not many venture capitalists would write that check. But 4-year-old WebMethods is not only surviving, it is flourishing in its segment of the enterprise software integration market.

The Fairfax, Va.-based company in January turned its first profit, easily topping Wall Street estimates and wowing analysts by upping fiscal 2001 revenue projections to $205 million. The company cited a solid sales pipeline and growing customer base, which already includes heavy hitters such as Eastman Chemical, Dell Computer and Lockheed Martin.

In just the last few months, WebMethods signed integration deals with tech heavyweight Cisco Systems and pharmaceutical giant Solvay. Both companies are using WebMethods' software to tie together systems for real-time exchange of inventory and product requests with their customers and trading partners. And earlier this week, WebMethods was cited by Forbes ASAP magazine as one of the fastest-growing technology companies in 2000.

A smooth ride? Hardly. For one, investors have given the stock a 50 percent haircut during the past month, although analysts say the sell-off is not the company's fault. Perhaps a bigger challenge comes from increasing competition from the likes of Microsoft, Oracle, IBM and a host of smaller players in the software integration market. Finally, for future growth, WebMethods must tap into the small- and-medium-sized business markets, customers who can represent more difficult sells and with smaller pocketbooks.

What is helping the company, analysts say, is its early decision to secure a foothold in the burgeoning world of online marketplaces, or trading exchanges, said Joshua Greenbaum, who heads Enterprise Applications Consulting.

"They really seized the high ground in the whole trading exchanges and Net marketplace world," Greenbaum said. "WebMethods reached over existing companies that lacked the vision to do what WebMethods was talking about" from its inception.

Getting into position
Online marketplaces have grown in popularity because they are thought to help cut costs through improved price and inventory management, as well as by reducing mounds of paperwork. WebMethods had positioned itself as the company businesses could turn to for handling complex integration work involved in setting up business-to-business online exchanges.

"Most companies in the application integration market originally focused on tying together applications, infrastructure and data sources within the enterprise, but WebMethods from the start was focusing on integration between the enterprises," Yankee Group analyst Jon Derome said. "Their messaging and position from the start in B2B integration helped them gain momentum (toward) where the market is headed now."

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The Yankee Group estimates the market for business-to-business integration software will increase tenfold, from $560 million in license revenue in 1999 to $5.4 billion in 2004. Some analysts have said the software engagements could range anywhere from $10,000 in fees on the low end to up to an excess of $10 million.

Another benefit: The jittery economy has not yet spooked WebMethods' customers.

"The integration software market, particularly in B2B, is seemingly unaffected by any slowdown in IT spending," WebMethods Chief Executive Phillip Merrick said. "What our customers are telling us is that they don't plan on cutting back on these initiatives."

In a recent research note, Morgan Stanley analyst Charles Phillips wrote that WebMethods' products "become increasingly attractive as companies seek to improve profitability in a slow-growth economy."

Analysts agree that both ends of the software integration market--linking a company's internal systems and tying together marketplaces--will continue to grow, but that the lines between the two distinctions will increasingly blur.

"The firewall used to be like the Great Wall of China, protecting an enterprise, but increasingly, data is being exchanged beyond the firewall," AMR Research analyst Amy Hedrick said.

A little help from its friends
Some customers said they chose WebMethods over competitors primarily because of the brand name it has built, along with its impressive list of partners, including SAP, Oracle, Siebel Systems, Ariba and Commerce One.

Bob Olwig, chief technology officer of online marketplace Telcobuy.com, said WebMethods won over rival Vitria Technology for his account partly because his company ran on Oracle's back-end software systems, so he was confident WebMethods already had the expertise working with Oracle software. The company also picked WebMethods because of its business-to-business niche.

Now comes the hard part. WebMethods must continue to succeed while all the while battling an uncertain economy, much bigger rivals, and the need to find new customers.

For example, WebMethods faces a stiff challenge to crack the huge market of smaller and midsized customers to gain critical mass. One problem: These smaller companies are not necessarily able to afford, or even equipped to support, the complex software WebMethods sells.

"Being able to help companies integrate (disparate applications) across a broader trading network is where the market is headed," The Yankee Group's Derome said.

Software integration developers "can easily cut their prices down, but it's not necessarily the product cost as much as it is the integration complexity" that smaller and medium-sized companies tend to worry about.

Still, for at least the near term, analysts like WebMethods' chances.

AMR's Hedrick likens the growing need for business-to-business software integration products to the importance of language translators at the United Nations.

"At the U.N., you have a lot of highly skilled diplomats, each very proficient at what they do, but they can't communicate with each other," she said. "You need a highly skilled translator, someone that knows the nuances and intricacies of all the different languages, to make them communicate. That's the role these (software) integrators play. It's highly important. They're enabling diplomats to do their job."