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Commerce One jumps on earnings, analysts mixed

    Commerce One (Nasdaq: CMRC) blasted ahead 23 percent Friday following its fourth quarter report. Most analysts praised the company's surprising momentum and positive outlook, but a few questioned its relationship with SAP and business model.

    Shares in the business-to-business company were up 5.06 to 26.75 in early trading.

    Commerce One posted a smaller-than-expected loss on surprisingly strong sales in its fourth quarter Thursday, losing $10.8 million, or 5 cents a share, on sales of $191.4 million. The $191.4 million in sales represents an impressive 1,033 percent improvement from the year-ago quarter when it lost $11.7 million, or 8 cents a share, on sales of $16.9 million. The company also raised estimates for fiscal 2001 and predicted profitability by the second quarter.

    Most analysts reiterated their already strong ratings based on the strong results and upbeat outlook.

    Goldman Sachs analyst Thomas P. Berquist kept the stock on its "recommended list," and raised his 2001 revenue estimate to $916.5 million from $815 million. He also set 2002 revenue estimates of $1.23 billion and earnings of 20 cents a share.

    "The company continues to deliver strong growth and appears very well positioned to capitalize on customers' movement from procurement portals to industry operating systems," Berquist said in a research note.

    ABN AMRO analyst Robert M. Johnson reiterated a "buy" rating and said that he believes demand for CMRC's products remains robust, based on management's indications that opportunities on a global basis are greater than they have ever been.

    Johnson left his earnings estimate of a penny a share for 2001 unchanged, and introduced a 2002 estimate of 42 cents a share.

    He reduced the company's price target from $105 to $42, however, based on a "shift in investor valuation methodology for Internet-dependent technology companies." The analyst explained that companies are now valued less on metrics relative to future revenues or gross profit and more on operating earnings per share, a trend he expects will continue in 2001.

    Johnson added that the company is still "markedly undervalued compared to its peers."

    The SAP variable

    Analysts were mixed over whether the company's relationship with SAP (NYSE: SAP) was a boon or a problem. Commerce One, like its rival Ariba, which has teamed up with IBM and i2 Technologies, partnered with SAP to utilize the German software giant's sales channel and installed base.

    During a conference call with analysts, CEO Mark Hoffman credited the company’s partnership with SAP for the upside surprise and improved sales to private e-marketplaces. But some analysts questioned whether Commerce One was not now too dependent on SAP.

    Although the SAP relationship is barely six months old, it has already paid substantial dividends," Johnson noted. He also called the relationship "CMRC's conduit in the hot field for supply chain management applications." He predicted network services revenue has big potential, and is expected to grow to 15 percent of the company's total revenue by the fourth quarter of 2001.

    Bear Stearns analyst Kaushik Shridharani called the compay's large exposure to SAP one of its greatest risks. Its relationship with SAP was responsible for 30 percent of revenue during the past quarter. "With such large exposure to a single strategic partner, one cannot help but wonder what could happen to Commerce One's top line should its relationship with SAP weaken in any way," the analyst said.

    At what cost?

    Though Shridharani reiterated his "buy" rating, he was one of the more bearish analysts, noting that the company's great revenue growth came at a great cost.

    Shridharani, whose target price was just $35, said the momentum the company showed in the quarter was "costly both in terms of sales and marketing spending and the increase in the share base."

    He noted that compared to Ariba (Nasdaq: ARBA), Commerce One's leveraged distribution model is still far behind. Ariba was able to grow revenues 26 percent last quarter while maintaining its previous quarter's sales and marketing expenses, Shridharani said. Commerce One achieved 25 percent revenue growth while raising sales and marketing expenses 19 percent.

    Other concerns the analyst cited include the decrease in e-procurement customer additions -- it had 89 new customers last quarter, down from the 96 customer wins in the third quarter -- and the company's large exposure to SAP.

    Shridharani concluded that investors should wait "for lower entry points should the stock trade in the high $20's in the near term."

    Wrong business model?

    CIBC Oppenheimer analyst Melissa Eisenstat also came down hard on Commerce One, not because of specifics in its quarterly report, but because she believes the company has got its whole business model wrong. She also downgraded Ariba (Nasdaq: ARBA) to "buy" from "strong buy" based on the same assumption.

    "The brass ring of B2B is centered on the supply chain, not procurement," Eisenstat wrote. She said both Ariba and Commerce One have mistakenly built their businesses on the premise that business is centered around transactions, but "over the last six months, it has become increasing clear that this is not the direction the world is headed," Eisenstat said. "Collaboration is at the hub of business, not transactions. Transactions are simply an outgrowth of collaboration, just one of the spokes around the hub."

    She said that a result of this shift is increasing competition in a field which the two companies used to have for themselves. i2 (Nasdaq: ITWO) and Manugistics (Nasdaq: MANU), both supply chain specialists, as well as ERP stalwarts Oracle (Nasdaq: ORCL) and SAP are now also in the game, and they have much more comprehensive supply chain technologies, said Eisenstat.

    "The game, however, is not over and we do not expect either company to go down without a fight," the analyst added. "We suspect the best options will ultimately be to combine with other entities."


    • Commerce One tops 4Q estimates, raises outlook
    • Downgrades overshadow Ariba's 2Q>