B2B software makers flout dot-com downturn

Software makers including Ariba, Commerce One and i2 Technologies easily wowed Wall Street this week after reporting strong financial results and will continue to enjoy soaring sales, booming profits and a hefty list of Fortune 500 customers, analysts say.

Robert Johnson, an analyst at ABN AMRO, said the key to strong performances from these companies is their focus on brick-and-mortar customers.

"This is why the dot-com slowdown is not hitting these guys," he said. "There's very high (return on investment) on these (software) products. They show quick payback, which is good, especially in an environment that may be slowing."

All three companies posted blowout quarters this week. Commerce One on Thursday rocketed ahead of estimates, fueled by a surge in software revenue. Ariba, which broke even four quarters ahead of schedule, on Wednesday blew past estimates and said sales increased more than 500 percent. And a day earlier, i2 surpassed expectations and reported a leap in software sales.

The three, along with a slew of other technology players, are scrambling to corner a huge slice of the lucrative business-to-business pie. As the latest quarters indicate, software sales are soaring at Ariba, i2 and Commerce One as a growing number of businesses invest in online marketplaces, or trading exchanges, in an effort to cut purchasing costs and simplify the way they traditionally conduct business between their suppliers, customers and partners.

So far, the quarterly numbers suggest that these companies--their eyes on the big guys with the deep pockets--are on the golden path.

In recent research notes, Chase Hambrecht & Quist analyst Ian Morton called Ariba's fourth-quarter revenue growth "impressive" and upped his expectations for the company, given its growing customer base.

"We believe the current backlog is high, and we maintain our 'buy' rating," Morton wrote in notes. "Ariba significantly increased its customer count this quarter, adding a long list of Fortune 500 and e-marketplace accounts as customers."

Ariba added 114 new customers in the quarter, including giants such as Kmart, Target, Pfizer, Honeywell and Bear Stearns. Commerce One and i2 also trumpeted some huge client wins in the quarter, including, respectively, automaker Mitsubishi and German technology heavyweight Siemens.

Given Commerce One's momentum in the latest quarter, Salomon Smith Barney analyst Gretchen Teagarden raised her earnings per share estimates for the fourth quarter and fiscal 2001. Teagarden said in research notes that demand for Commerce One's marketplace will continue.

Robertson Stephens analyst Eric Upin, which also raised expectations for Commerce One, said the company gained significant momentum as it signed 96 new deals in the quarter, bringing its customer count up to 316.

"Across the board, Commerce One reported a very solid quarter--in our view, clearly establishing itself as a leading B2B name," Upin wrote in notes.

Analysts see clear skies ahead for the software makers, with only a few challenges to overcome. ABN AMRO's Johnson said that the challenges include the ability to continue bolstering client bases and capturing recurring revenue from maintenance, shared auctions, services and transaction fees.

Software sales at these companies will be booming for quite a while, he said. "But the biggest worry is that at some point, everyone will have the enabling software, and it's questionable whether or not the transaction volume (on these marketplaces) is going to offset that," he added.

Still, Johnson reiterated his positive outlook for the sector and said that the industry has a long way to go before hitting turbulence.