B2B consortia fuels the buzz
Or is it purely momentum-trading mentality?
By Bambi Francisco, CBS.MarketWatch.com
Last Update: 3:10 AM ET Sep 12, 2000
SAN FRANCISCO (CBS.MW) - Next week, Ariba and Commerce One kick off their so-called "user" conferences to showcase their products, unveil new customer contracts, expand on recent announcements, and of course -- be host to hundreds of suppliers, buyers and analysts.
Already, there is great anticipation that both companies will make some brow-lifting announcements. And both stocks have run up in, well... anticipation of those announcements.
Commerce One (CMRC) indicated last week that it won four consortium customers for MarketSet, the online exchange software that it's jointly developed with SAP. They have yet to be announced. But the hint of those "wins" helped shares break above $70.
Commerce One is also receiving a huge vote of confidence as three consortia it powers - Covisint (for autos), Exostar (for aerospace and defense) and Trade Ranger (for energy) - received the regulatory green light to begin operations, according to Chris Vroom, a B2B analyst at CS First Boston. "These exchanges could launch over the next six to eight weeks," he added.
Since late August, shares of Ariba (ARBA) have stayed above $150. Ariba, which has been chosen to be the technology vendor to run 10 consortia, could be announcing that it's won the contract to run Transora, a marketplace for consumer products, according to Vroom. Ariba would not comment.
Why are investors getting excited about these consortia exchanges, particular for Commerce One, whose business model is more dependent on transaction fees opportunities from these exchanges?
After all, some believe that some of these consortia will fail.
Set-up fees
Some say regardless of that minor detail, there's booming revenue generated from the e-procurement software licenses sold to the members of each exchange. There's revenue to be had from the marketplace software that powers these exchanges, and revenue from implementation and strategy fees. But how much is there really? E-procurement software is expected to be a $13 billion business in 2003. The rest is difficult to estimate. But Ariba and Commerce One have a market value of about $50 billion. Investors must feel that the market opportunity beyond e-procurement is about $35 billion in a couple of years.
Beyond software
But it's beyond these software sales that get everyone giddy again. And it has to, because it's beyond software sales where these companies can generate higher margins.
These ready-to-launch consortia exchanges generate marketplace license fees, which consist of both license fees to set up the exchange and recurring high-margin transaction fees as opposed to just the licenses for the procurement software sold to each member of the exchange, said Vroom.
It is the so-called transaction fee that could expand operating margins beyond traditional software operating margins of between 18 and 20 percent. That and the fact that investors do pay for growth is why these companies are afforded the premium multiples over traditional software companies.
Clarifying those transaction fees
True, but wasn't it the promise of recurring transaction fees that got investors on the bandwagon last year, only to be disappointed this past spring? Lest we forget, recall that Prudential Volpe analyst Doug Crook gave his infamous downgrade on the B2B e-commerce software companies back on March 31. He raised concerns that transaction fees technology vendors hoped to generate were too optimistic. He was particularly concerned about how long these technology vendors could generate those fees as opposed to receiving just a fixed amount for running the exchanges. Crook was not available to comment for this article.
Admittedly, those transaction fees were the great unknown which helped to drive some of these stocks well above 100 times next year's sales at their peak, said Vroom. The uncertainty eventually worked against the group as well, and we know that the wholesale spring-cleaning was as much to blame.
But the bigger problem perhaps was that there was an uncertainty as to what those transaction fees consisted of, Chase H&Q analyst Ian Morton pointed out. "Now companies are clarifying what exactly constitutes transaction fees.
"It's not just connecting buyers and suppliers together because in this marketplace, connecting both sides is just stakes to play. Where you are going to capture value on a transaction fee is by providing a service that sits in the marketplace that companies would have to pay for in the offline world anyway." Those include logistics - like coordinating with shippers, tracking where the shipment is and electronic payments.
These services should generate savings or economic efficiencies for the buyers and sellers. And that would ultimately be passed onto the marketplaces and software vendors that enable those savings.
Economic efficiencies created
And while those efficiencies weren't clear earlier this year, they're becoming increasingly so.
CS First Boston's Vroom believes that there is a greater sense that the technology vendors will be able to extract recurring fees because there is a greater understanding of the economic efficiencies created.
For instance, Covisint could contribute several hundred basis points to operating margins in the automotive industry, he estimated.
Some of that savings would cover the recurring costs paid to Covisint. Covisint should generate between three-quarters of a percent to one percent in fees for the dollar volume of transactions on the exchange. For its part, Commerce One would take about 15 percent of that fee.
Over the next few years, Vroom expects between $60 and $70 billion of transactions to flow through the exchange annually. That means Covisint could earn about $650 million in fees and Commerce One could generate about $97 million of that fee. For the most promising marketplace, it sure doesn't sound like a lot to me. And while it may not, the high margins means much of that revenue flows right to the bottom line, said Vroom.
Of course, all of this opportunity depends on liquidity within the exchanges or how much commerce flows through.
More than momentum?
And of course, all of this may not be relevant to investors who are buying these stocks for the sheer bet that these companies will blow away third-quarter numbers.
And it's not just Commerce One and Ariba, it's the group of them. From FreeMarkets (FMKT), VerticalNet (VERT) and PurchasePro (PPRO), Vroom has been pounding the table that these companies are going to report solid revenue numbers.
And, maybe that's really all that matters in this market.
See Net sense archive.
--------------------------------------------------
Bambi Francisco is Internet editor of CBS.MarketWatch.com.
For late-breaking market news you can't afford to miss, go to CBS.MarketWatch.com
Klingt für mich nicht ganz so gut...
Or is it purely momentum-trading mentality?
By Bambi Francisco, CBS.MarketWatch.com
Last Update: 3:10 AM ET Sep 12, 2000
SAN FRANCISCO (CBS.MW) - Next week, Ariba and Commerce One kick off their so-called "user" conferences to showcase their products, unveil new customer contracts, expand on recent announcements, and of course -- be host to hundreds of suppliers, buyers and analysts.
Already, there is great anticipation that both companies will make some brow-lifting announcements. And both stocks have run up in, well... anticipation of those announcements.
Commerce One (CMRC) indicated last week that it won four consortium customers for MarketSet, the online exchange software that it's jointly developed with SAP. They have yet to be announced. But the hint of those "wins" helped shares break above $70.
Commerce One is also receiving a huge vote of confidence as three consortia it powers - Covisint (for autos), Exostar (for aerospace and defense) and Trade Ranger (for energy) - received the regulatory green light to begin operations, according to Chris Vroom, a B2B analyst at CS First Boston. "These exchanges could launch over the next six to eight weeks," he added.
Since late August, shares of Ariba (ARBA) have stayed above $150. Ariba, which has been chosen to be the technology vendor to run 10 consortia, could be announcing that it's won the contract to run Transora, a marketplace for consumer products, according to Vroom. Ariba would not comment.
Why are investors getting excited about these consortia exchanges, particular for Commerce One, whose business model is more dependent on transaction fees opportunities from these exchanges?
After all, some believe that some of these consortia will fail.
Set-up fees
Some say regardless of that minor detail, there's booming revenue generated from the e-procurement software licenses sold to the members of each exchange. There's revenue to be had from the marketplace software that powers these exchanges, and revenue from implementation and strategy fees. But how much is there really? E-procurement software is expected to be a $13 billion business in 2003. The rest is difficult to estimate. But Ariba and Commerce One have a market value of about $50 billion. Investors must feel that the market opportunity beyond e-procurement is about $35 billion in a couple of years.
Beyond software
But it's beyond these software sales that get everyone giddy again. And it has to, because it's beyond software sales where these companies can generate higher margins.
These ready-to-launch consortia exchanges generate marketplace license fees, which consist of both license fees to set up the exchange and recurring high-margin transaction fees as opposed to just the licenses for the procurement software sold to each member of the exchange, said Vroom.
It is the so-called transaction fee that could expand operating margins beyond traditional software operating margins of between 18 and 20 percent. That and the fact that investors do pay for growth is why these companies are afforded the premium multiples over traditional software companies.
Clarifying those transaction fees
True, but wasn't it the promise of recurring transaction fees that got investors on the bandwagon last year, only to be disappointed this past spring? Lest we forget, recall that Prudential Volpe analyst Doug Crook gave his infamous downgrade on the B2B e-commerce software companies back on March 31. He raised concerns that transaction fees technology vendors hoped to generate were too optimistic. He was particularly concerned about how long these technology vendors could generate those fees as opposed to receiving just a fixed amount for running the exchanges. Crook was not available to comment for this article.
Admittedly, those transaction fees were the great unknown which helped to drive some of these stocks well above 100 times next year's sales at their peak, said Vroom. The uncertainty eventually worked against the group as well, and we know that the wholesale spring-cleaning was as much to blame.
But the bigger problem perhaps was that there was an uncertainty as to what those transaction fees consisted of, Chase H&Q analyst Ian Morton pointed out. "Now companies are clarifying what exactly constitutes transaction fees.
"It's not just connecting buyers and suppliers together because in this marketplace, connecting both sides is just stakes to play. Where you are going to capture value on a transaction fee is by providing a service that sits in the marketplace that companies would have to pay for in the offline world anyway." Those include logistics - like coordinating with shippers, tracking where the shipment is and electronic payments.
These services should generate savings or economic efficiencies for the buyers and sellers. And that would ultimately be passed onto the marketplaces and software vendors that enable those savings.
Economic efficiencies created
And while those efficiencies weren't clear earlier this year, they're becoming increasingly so.
CS First Boston's Vroom believes that there is a greater sense that the technology vendors will be able to extract recurring fees because there is a greater understanding of the economic efficiencies created.
For instance, Covisint could contribute several hundred basis points to operating margins in the automotive industry, he estimated.
Some of that savings would cover the recurring costs paid to Covisint. Covisint should generate between three-quarters of a percent to one percent in fees for the dollar volume of transactions on the exchange. For its part, Commerce One would take about 15 percent of that fee.
Over the next few years, Vroom expects between $60 and $70 billion of transactions to flow through the exchange annually. That means Covisint could earn about $650 million in fees and Commerce One could generate about $97 million of that fee. For the most promising marketplace, it sure doesn't sound like a lot to me. And while it may not, the high margins means much of that revenue flows right to the bottom line, said Vroom.
Of course, all of this opportunity depends on liquidity within the exchanges or how much commerce flows through.
More than momentum?
And of course, all of this may not be relevant to investors who are buying these stocks for the sheer bet that these companies will blow away third-quarter numbers.
And it's not just Commerce One and Ariba, it's the group of them. From FreeMarkets (FMKT), VerticalNet (VERT) and PurchasePro (PPRO), Vroom has been pounding the table that these companies are going to report solid revenue numbers.
And, maybe that's really all that matters in this market.
See Net sense archive.
--------------------------------------------------
Bambi Francisco is Internet editor of CBS.MarketWatch.com.
For late-breaking market news you can't afford to miss, go to CBS.MarketWatch.com
Klingt für mich nicht ganz so gut...
