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A second act for Commerce One

Bowed but not broken by the B2B bust, CEO Mark Hoffman has a new strategy and a new product line. Now all he needs is a new economy and everything will be just jiffy.

Two years ago, when everyone knew the creation of a huge business-to-business marketplace was a matter of destiny, Commerce One was sitting pretty. The biggest daily worry was whether the software maker could beat out Ariba for the next megadeal as the two rivals raced the clock to build the electronic future.

Two years later, that now feels like ancient history.

With so many customers shelving purchases until the economy picks up, Commerce One CEO Mark Hoffman faces grave challenges. Can he find new markets for the company's software? Can he revive Commerce One's battered stock price? And can he stay on the good side of wayward partner SAP?

No easy answers are there. Like most e-commerce application companies, Commerce One has suffered because of the downturn in the U.S. economy. But the company has also never managed to turn a profit, and its losses have grown since last fall despite cutting nearly 70 percent of its staff in successive rounds of layoffs. What's more, the company lost its president and chief operating officer, Dennis Jones, who left the company in May, and Chief Financial Officer Peter Pervere, who has since retired.

Meanwhile, a lucrative development and sales partnership with SAP, which buoyed the company last year, has since expired. (Last week, SAP said it will take a $318.9 million charge in the second quarter to reflect losses for its 20 percent investment in Commerce One.)

Commerce One, which expanded its product line in March, has pared down its corporate mission to the more modest idea of helping businesses buy supplies more efficiently. It is also working on a new generation of applications incorporating Web services, expected to be released next year.

The software maker will report its second-quarter results after the close of trading Wednesday afternoon. Analysts expect Commerce One to report an operating loss of 14 cents per share on $28.1 million in revenue. In the same period a year ago, the company recorded an operating loss of 31 cents per share on $101.3 million in revenue. CNET News.com caught up with Hoffman to talk about the future of his company and the relevance of e-marketplaces in what are decidedly different times.

Q: Given the downturn in e-marketplaces and B2B e-commerce companies, is Commerce One still relevant? A: Yes. I think one (reason) is that we have a great installed base. They are mostly Global 1000 companies, composed of people like General Motors, Ford, Daimler Chrysler, Boeing, Lockheed, BAE, Shell, British Petroleum, on and on and on around the world.

Second, we've refocused our efforts around enabling the enterprise to be able to buy and source products more easily. Our pipelines are building on that side of the equation. It's still slow because the economy is tough, but it is a growing market. Third, we've got a very good view of the future and where this market has to go to make electronic commerce as frictionless as possible. And that's the whole concept of Web services and being able to bring standards-based computing platforms into the market.

"Everyone is just getting driven down in this market."
Commerce One stock is trading below a dollar. What are you doing to turn that around?
There are a couple of things that have affected it. One is the cash flow that we had going, and we've reduced headcount by 15 percent a quarter over the last several quarters. We have good cash on hand, so that helps. We need to start to show license revenue growth. We've got to perform against what we're saying in the marketplace. The market turning around a little bit would help. Everyone is just getting driven down in this market.

In May both your CFO and COO/president left. Why?
It didn't make sense to have a COO and chief executive office running a company that's 1,100 people. Dennis Jones (former COO and president) and I agreed that I am more suited to the start-up environment, which is much more of what we are today as we convert to the Web services strategy and rolling out those products into marketplace as a much smaller company.

What about the departure of your CFO? That's sort of considered a red flag, isn't it?
The CFO was Peter Pervere. Peter and I are good friends, and we have worked together for 17 years now. Peter had wanted to retire a couple of years ago, and I kept talking him into staying. He finally got to a point where he wanted to retire, which is what he has done. He's working for a nonprofit and some other organizations now. But I do want to assure you that it's not like anything else in the market. There are no accounting issues.

Do you see the market turning a corner?
I think it's going to be a pretty hard year through the end of 2002. It's better now than in the first two quarters because you can see a little more stability in the marketplace, but it's still a pretty tough market. Everyone is being so conservative and careful. Which is okay, so are we.

Even early on this year, I felt that this was going to be a tough year. I said, "Let's focus all our efforts to getting to 2003 so that in the first quarter we've got all our products rewritten and we've got everything built around the new Web services strategy so that we're poised if the market starts to take off in 2003." I think the market will start to adopt the new shift around Web services, and we'll be in a position to capitalize on that.

Do you have a target for profitability?
I do.

What is it?
We're not talking about it publicly. We've never given a target date. The good thing is we've got cash on hand. We've reduced our infrastructure significantly over the last several months. We won't have profitability this quarter or next quarter, but we cut the cash flow down and we can manage that for an extended period of time. We feel very good about that structure and the ability to manage ourselves until we are profitable.

Is your shift away from a pure focus on e- marketplaces, a move you announced in Jan, paying off?
The pipelines are building around that. It takes you six to nine months to build a pipeline in an application like that. Having said that, we've exceeded the number in the first quarter of sourcing modules we thought we would sell. We continue to sell buy-side and new marketplaces, but not with the high growth rates we've experienced historically.

"It's better now than in the first two quarters because you can see a little more stability in the marketplace, but it's still a pretty tough market."
The first quarter was a rough one for Commerce One, with license revenue totaling just $8 million, much of that coming from SAP. That compares with $69 million the year before. Is your recent agreement to part ways with SAP hurting you?
The issue back then was that we were just introducing the new products into the marketplace. Prior to that, we had been working very closely with SAP to drive products in the marketplaces. And as we announced our independent strategy back in the October/November time frame from SAP, we also had to build independent products and be able to take those to market. We built those products--we announced them in January, which was Commerce One 5.0--and then began to build (demand). Those pipelines are growing, but it does take some time to do.

How much of that $8 million in license revenue were residual payments from SAP for jointly developed product?
Six million. With that $6 million, we were involved in probably every deal that got sold on that whole side. In many cases, those deals wouldn't have happened unless my sales guy was there selling our software into those accounts. The way we split the revenue, my guys didn't care and their guys didn't care either. Now we're trying to get away from that and motivate our sales people to go after a broader market...so I think you'll see that our non-SAP business grows.

According to a recent report, SAP, which has a 20 percent stake in Commerce One, expects you to turn a profit by the end of next year and may end its partnership with you if that goal is not met. Will you turn a profit by then? Does this strain your relationship with SAP?
I don't even know quite how that quote came about. SAP is a large owner of the company, but they don't control the company. We are working very hard on an independent strategy with products that are totally independent.

In March you released Commerce One 5.0, with a more flexible, lower entry price. How is that going over?
It gives people a lower entry point into the market. People are pretty slow to spend millions of dollars getting into these marketplaces today. But if they can spend $200,000 or $300,000 for a module and prove that that module works--they may just buy the auction module, prove that it works and then see the return and maybe even utilize that return to pay for the other modules as they go forward. So, yeah, people like that strategy.

The next release of your product, version 6.0, will have support for Web services? Isn't everyone talking about Web services? How is what you're doing any better or different?
A lot of people are just kind of wrapping their applications in Web services standards. But we are rewriting our applications to completely support Web services. We're building this platform that I don't see anyone else in the marketplace building--a platform that is going to control the interaction between Web services applications and other applications and be able to manage that environment.

Why is it better to rewrite than wrap your application with Web services?
Then you can totally utilize the new infrastructure. And so to the extent that you want to add functionality or modify or integrate the applications, you can do it quicker, faster and at a lower cost.