B2B Software Companies Face Grim Second Quarter

Hopes for any recovery in the beleagured group were dashed last week when Commerce One and rival i2 Technologies both warned they will fail to meet Wall Street estimates for the second quarter.

Although competitor Ariba didn't follow suit, as was widely anticipated, analysts say the warnings do not bode well for the group at large.

"The big, scary surprises are probably behind us," says Ian Morton, an analyst with brokerage firm J.P Morgan Chase & Co., of Commerce One's and i2's warnings. "But that is not a reason to rejoice."

Rejoicing is the last thing on investors' minds right now. With the average B2B company having lost about 80 percent of its value in the last year, most people are philosophical--at least it can't get any worse.

Prior to last week's cautions, there had been a glimmer of hope that things could start to pick up.

"But we're not expecting stellar results from anyone," Morton says.

Analysts are now pinning their hopes on the B2B aspirations of more established software companies, such as SAP and Oracle, to lead the sector into its next growth phase. One more bright spot, say analysts, is FreeMarkets, which has focused exclusively on providing software to help businesses source products and suppliers.

B2B software companies burst onto the scene in 1999 with the promise of saving companies billions of dollars by connecting them with suppliers to buy discounted goods over the Web, in the process threatening to displace established giants in industries ranging from manufacturing to retail.

But as the Internet bubble burst and B2B companies started running out of cash, online marketplaces didn't take off as quickly as once promised.

"The B-to-B marketplace will just completely disappear," says Brent Thill, an analyst at Credit Suisse First Boston. "They'll be a few that survive, but there's not going to be enough to fuel a hundred plus companies."

Like Morton, Thill says he is not expecting any big surprises from the B2B companies when they report earnings next week.

"I don't think anyone is going to change their tune on the environment," he says. "If anything, Europe has gotten weaker. I don't think there's going to be any recovery until early next year."

Two Distinct Segments

Analysts now see B2B as two distinct segments: online marketplaces on one side, and software companies developing other types of B2B applications on the other.

In the first camp sit companies like Commerce One, Ariba, PurchasePro.com, VerticalNet and Internet Capital Group.

"Any of the guys that focused on public marketplaces are pretty much doomed," says J. P. Gravitt, an analyst with Salomon Smith Barney.

Meanwhile, companies such as i2, Oracle, PeopleSoft and SAP, which sold marketplaces as an adjunct to their core business, are now quickly shifting their focus to so-called collaborative applications and private exchanges.

"Every other software company has started to [adopt] the word collaboration," Thill says, referring to applications that let companies collaborate with their suppliers and partners without having to be part of an online exchange.

For that reason, specialist collaboration software companies, like Agile Software--which Ariba planned to acquire before it was forced to call off the deal, Parametric Technology and MatrixOne, are catching more of the B2B limelight these days.

Thill says ultimately technology from companies like Commerce One and Ariba will be subsumed by the bigger players.

"It's hard to envisage how they will be stand-alone entities," he says. "It's not that their software doesn't deliver value, I just think it's part of a bigger picture."

That picture includes linking purchasing, supplier sourcing and auctioning software that companies like Ariba provide with more complex back-office software such as that used to run a manufacturers' supply chain or financial applications.

Tom Berquist, an analyst at Goldman Sachs, agrees.

"B2B as we knew it a year ago has definitely gone," Berquist says. "If you include supply chain and some of the more traditional things inside B2B, then there's some growth there. But if you just look at pure B2B marketplaces and exchanges, that part of it has pretty much gone."

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