THE DAY AHEAD: WebMethods serves up hot B2B IPO with XML twist

Get ready for the first new IPO buzzword of the millennium -- XML, or eXtensible Markup Language. The initial public offering of webMethods should sizzle Friday courtesy of the buzz surrounding XML, an emerging standard for sharing data over the Internet.

WebMethods, Inc. (Nasdaq: WEBM, profile) priced 4.1 million shares at $35, well above the $28 to $30 price range. The range was upped from initial price range of $11 to $13 a share. Morgan Stanley Dean Witter is the lead underwriter.

webMethods: Promising future?

Analysts expect webMethod's IPO to do well because it's offering investors something new to drool over. "XML is one of their selling points," said Randall Roth, an analyst at Renaissance Capital, referring to the webMethods IPO. "XML will be one of the big buzzwords of the year."

In regulatory filings, webMethods said it specializes in Internet-based business-to-business integration. What that means in plain English is that webMethods provides software that links suppliers, customers and business partners with real-time information.

WebMethods B2B software suite is based on XML. And so far, the XML-B2B pitch has worked. As of Dec. 31, webMethods had more than 130 customers including Dell Computer (Nasdaq: DELL) and Sterling Commerce (NYSE: SE). WebMethods also has a few key partnerships with Ariba Inc. (Nasdaq: ARBA) and VerticalNet (Nasdaq: VERT) among others.

The financials, however, are typical for most IPOs these days.

For the nine months ending Dec. 31, webMethods reported revenue of $12.6 million and a net loss of $10.4 million. The company, which has an accumulated deficit of $24.4 million, said it will lose money for the foreseeable future as it increases its operating expenses.

But before you get drunk from the buzzword stew webMethods serves up, you may want to note a few risks.

For starters, webMethods could be dinged by long sales cycles. The company said it takes a long time for corporations to adopt its B2B software.

WebMethods also lacks a diverse customer base. SAP AG (NYSE: SAP) accounted for 31 percent of the company's sales for the nine months ending Dec. 31. SAP is also a development partner and gives webMethods access to its customer base. .

The company also competes against basically everyone. In its filings, webMethods said it competes with large software vendors, electronic data interchange, or EDI, vendors, proprietary enterprise application firms and companies that have added XML capability to existing products.

The final wild card is XML -- it has received strong support, but may not emerge as the clear standard. "If broad market acceptance for XML does not develop, webMethods B2B may not achieve commercial acceptance," the company said.

IPO market remains hot

The dire predictions for the IPO market were greatly exaggerated.

As recently as two weeks ago, the consensus opinion was that a flood of new issues would sink the IPO aftermarket performance.

Although we haven't had any real knockout IPOs so far in 2000, performance has been strong. On Friday, there were 10 IPOs on the calendar, including Pets.com (Nasdaq: IPET, profile), which was a late addition to the docket.

Pets.com was scheduled to go next week, but priced its offering at $11 while the market was hot. Pets.com will be closely watched. For starters, the company plays in a crowded space with at least three major competitors. On the plus side, Pets.com has Amazon.com (Nasdaq: AMZN) as an investor and a cool mascot.

A successful Pets.com IPO could open the gate for more e-tailers, especially since the Buy.com (Nasdaq: BUYX) IPO was well received.