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THE DAY AHEAD: Giving Commerce One its due

Business-to-business software player Commerce One has emerged from Ariba's shadow. Nothing like a better-than-expected profit warning to turn things around.

Yes, a term like "better-than-expected profit warning" is an oxymoron, but that's about the only good news Wall Street has these days. Everyone knew Commerce One was going to deliver a profit warning following Ariba's big earnings debacle on Monday.

But Commerce One's warning wasn't half as bad as Ariba's, whose March quarter sales of $90 million will be half of what analysts were expecting. Ariba also missed estimates by 25 cents a share. Relative to Ariba, Commerce One is practically handing Wall Street an upside surprise.

Commerce One said it will report a loss of 11 cents a share on sales of $170 million, or almost double Ariba's sales. Analysts were expecting a loss of 6 cents a share on sales of $198 million, according to First Call. (Estimates dropped to this amount Tuesday amid a series of Ariba-inspired downgrades of Commerce One.)

Commerce One's forecast was substantially lower than its January projections calling for sales of $205 million to $210 million, but the warning could have been worse.

Ariba and Commerce One aren't identical twins, but most folks lump the two business-to-business companies together. Ariba made its name by selling e-procurement software and Commerce One is well known as an e-marketplace builder that has well-heeled customers such as Covisint, an auto parts exchange.

"Commerce One's results, while disappointing, are materially better than Ariba's numbers, indicating a shakeout in the B2B procurement/collaboration space," said Ben Z. Rose, an analyst at Adams Harkness and Hill.

So how did Commerce One wind up looking better than Ariba, which at one point had a market capitalization that easily dwarfed Commerce One's?

Three letters: SAP (NYSE: SAP). SAP, the German software giant, partnered with Commerce One and insulated the B2B company from a lot of turbulence. The key item here is Commerce One's connection with SAP's supply chain management software, the stuff that helps manufacturers plan and schedule production and related operations such as raw materials procurement and product delivery.

Commerce One CEO Mark Hoffman said the company's "understanding of the supply chain" is helping it win deals. In a nutshell, if a B2B company doesn't have strong ties to a supply chain vendor, it could be a niche player in a hurry.

Simply put, SAP helped insulate Commerce One. Hoffman said the SAP partnership has enabled Commerce One too boost its international footprint and land marketplace deals. Rose reckons that the SAP-Commerce One offering has "gained traction in the market."

Now look at Ariba's plight. The reason Ariba is struggling is its lack of a strong supply chain tie. Ariba was linked with i2 Technologies (Nasdaq: ITWO), but the supply chain vendor realized it was much easier to replicate what Ariba does than vice versa. Ariba is partnered with Syncra, but details of that relationship remain sketchy. Now that Ariba's acquisition of Agile Software (Nasdaq: AGIL) has unraveled, the company could have more problems without a complete suite of products.

Some Wall Street analysts didn't seem to get how Commerce One's partnership with SAP would help the B2B company in a downturn. In fact, three months ago analysts were worrying that Commerce One was too dependent on SAP.

For example, Bear Stearns analyst Kaushik Shridharani wrote in a January report: "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."

That line of thinking has gone away with information technology spending. Now the Wall Street chorus is singing about how SAP insulated Commerce One from a far worse fate.

While giving Commerce One its due, it's also important to note the big picture here. Commerce One may be aligned with a big supply chain vendor, but it's not one itself. It's not clear that partnering with a supply chain software giant is as good as being one.

Just look around. i2 Technologies' profit warning wasn't as bad as analysts feared, and Manugistics (Nasdaq: MANU) is confident about its outlook. Supply chain companies are replacing the former B2B stars in short order.

My guess: SAP will eventually buy Commerce One, leaving the B2B software sector in the hands of the likes of i2, Manugistics and SAP. TDAIN
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