Commerce One’s Q1 net falls but revenues jump

NEW YORK: Business-to-business (B2B) software company Commerce One Inc. on Thursday reported a loss for the first quarter that met previously lowered expectations, but said its sales pipeline for the second quarter looked healthy, despite the flagging US economy.

The firm, which makes software that powers online marketplaces, said it lost $25.5 million, or 11 cents per share in the first quarter, excluding charges, compared with a loss of $14 million, or 9 cents per share in 2000. Revenues, though down sequentially, were up 386 per cent to $170.3 million from $35 million last year and compared with the analysts' revised consensus of $170.54 million, according to First Call.

It also announced a strategic alliance with Microsoft Corp., the details of which will be unveiled at Commerce One's user conference in New Orleans next week. "Top line looked pretty good, with revenues up dramatically year over year. But if you look at the $170 million, it looks as if at least $60 million came from deferred revenues," said Tom Berquist, an analyst with Goldman Sachs, referring to sales that a company has already booked before going into its next quarter.

Brent Thill, an analyst with Credit Suisse First Boston, agreed: "They did a good job, the only weak areas were the balance sheet," Thill said. Commerce One earlier this month lowered its earnings estimates for the quarter to a loss of 11 cents per share, excluding non operating charges, compared with its 4-cent loss guidance issued previously.

The revised estimate from analysts polled by Thomson Financial/First Call was for a loss of 11 cents. Including charges, Commerce One had reported a net loss of $228.5 million, or $1.02 per share compared with a loss of $43.6 million or $29 cents per share.

Q2 Sales look better than inQ1

Commerce One's chairman and chief executive Mark Hoffman, said at a conference call with analysts, that the company's second quarter sales prospects looked healthy, despite pressure from the US economy and a decrease in IT spending. "The pipeline today is bigger than what it was in the first quarter," Hoffman said, adding that most of the deals were from customers who had committed to buying Commerce One's software in the first quarter but said they would delay their purchase until the second quarter.

"People were deferring purchases or putting off purchasing decisions through Q1," Hoffman told Reuters. For that reason, Commerce One said it cut its earnings and revenue estimates for the second quarter. Excluding goodwill, the company said it expected to report an operating loss of $15-20 million, or a loss of 7 cents to 9 cents a share.

Analysts had expected the company to lose an average of 8 cents a share, with estimates ranging from a loss of one cent to 20 cents a share, according to Thomson Financial/First Call. The company also lowered its second-quarter revenues to somewhere in the region of $160-$170 million, compared with the average $169.93 million analysts had forecast, according to First Call.

In addition, the company now sees full-year 2001 revenues in the range of $675-700 million, compared to First Call's average of $712.08 million. "I hate missing numbers," Hoffman told Reuters. "But at the same time, I think we're positioned very nicely in the marketplace, in terms of our product set and our international expansion. I feel great about that."

Since last September, when its last rally fizzled, Commerce One stock has fallen nearly 85 per cent, significantly underperforming the Standard & Poor's software index. The index itself is down 23 per cent over that time. Commerce One's shares finished Thursday's regular session up 35 per cent, or $3.50 higher at $13.71, ahead of the earnings announcement.

Partners are the key to success

For the quarter, Commerce One said license revenues made up around $70 million of total sales, with $100 million coming from services. And joint sales with its partners contributed 50 per cent of the company's total license revenues. Hoffman said the firm's partnership with German software giant SAP AG - with whom Commerce One formed a strategic alliance last year to target the market for online exchanges - made up the majority of the partner sales.

Hoffman said the two companies would launch the next release of their joint product, MarketSet, at Commerce One's user conference in New Orleans next week. The new release features much tighter integration between Commerce One's marketplace software and SAP's back office software, enabling companies to share their inventory and product plans with suppliers and partners, Hoffman said.

Businesses and manufacturers are looking for deeper integration to streamline their supply chains and save costs, the whole purpose of B2B software in the first place, but one which has not yet been realized, analysts said. Hoffman said Commerce One would also announce a deal with Microsoft Inc. to optimize its software on Microsoft's .Net server software. The deal will involve a $25 million loan to Commerce One from Microsoft to help the B2B software vendor carry out the integration work.

CSFB's Thill said a combination of factors, Commerce One's lowered estimates, the upcoming product launch with SAP and its new partnership with Microsoft - all worked in the B2B software firm's favor. "Commerce One's taken the revenue bar low enough that we can now start taking it back up again," Thill said. "That's why people are getting back into software now."

Thill said investors weren't combing through the minute earnings details, but were trying to assess the viability of software firms in the long term. "People are looking beyond all the negative aura that's been surrounding the market and saying 'OK, look two quarters out and is this company still going to be standing? Does it have the right products and the right partners?'" "In Commerce One's case, there's definitely data points that suggest life isn't over."

(C) Reuters Limited 2001.