Subject: Commerce One: Friends in High Places From: distribution@epoch.com Date: Fri, 20 Apr 2001 06:00:00 -0500 To: fox@csit.fsu.edu For in-depth coverage of all companies within the Software Sector, please visit http://www.epoch.com/emailalert/software.html Company Note Commerce One Inc. Epoch Partners APRIL 20, 2001 NASDAQ:CMRC Mark Verbeck David Trainer Timothy Madda COMMERCE ONE: FRIENDS IN HIGH PLACES _______________________________________________________________________________ FUNDAMENTALS Price (04/19/01) $13.71 FY Ends Dec 2000 2001 NASDAQ Comp (04/19/01) 2,182 Revenue(MM) $401.8 $697.7 Prev Est.(MM) NC NC NA 52-Week Range $5.12-84.12 EPS Shares Outstanding(MM) 194.9 Q1 ($0.09)A ($0.11)A Market Cap(MM) $2,672 Q2 ($0.10)A ($0.08)E Q3 ($0.09)A ($0.04)E Avg Daily Vol(3Mo.)(000s) 8,902 Q4 ($0.05)A $0.00E Fiscal Year ($0.33)A ($0.23)E Previous Est.($0.33) ($0.23) P/E NM NM Source: Epoch Partners _______________________________________________________________________________ * Commerce One reported full 1Q results that matched preliminary numbers it gave during its preannouncement. Additional balance-sheet details, including higher DSOs and lower deferred revenues, were consistent with our expectations. * The company’s partnership with SAP gives us confidence that it can meet reduced expectations and break even by the end of the year. An expanded relationship with Microsoft as part of Microsoft’s .NET initiative, to be detailed at Commerce One’s eLINK conference, could drive upside in the long term. * With meaningful earnings several quarters away, we expect the stock to trade in-line with other e-business vendors as Commerce One moves toward profitability. _______________________________________________________________________________ Commerce One announced full 1Q results in line with preannounced numbers, presenting few surprises. Revenues of $170.3 million included $69.4 million of licenses and $17 million of network services revenue, a proxy for recurring revenue from commerce services. Operating losses of $25.5 million translated into pro-forma EPS of ($0.11). The company added 63 new customers (down from 89 in 4Q00), of which 16 represented new marketplace wins. Progress in the SAP channel remained strong and was reflected in the high concentration of international license revenues. (Commerce One garnered 55% of licenses from outside of North America, while only 30% of total revenue came from outside North America.) 50% of licenses came through the partner channel, SAP being the dominant source. Days sales outstanding (DSOs) increased to 89 days from 73 last quarter, reflecting weaker license sales and slowing payments from customers. The company’s deferred revenue balance declined $61 million, or 54%, to $52 million. While up to $35 million of this could be attributed to channel pass-through sales, we estimate this leaves $15 million of license revenues recognized from deferred revenue and not through organic sales in the quarter. (Our take here: new-license revenue was closer to $55 million.) The company emphasized building liquidity in its existing marketplaces and Commerce One remains confident its network-services revenue component will comprise about 15% of total revenue by 4Q01. In contrast, we are least confident in the growth in the network-services line and note that SAP can offer little help there. The company’s financial guidance reaffirmed break-even in 4Q01, with revenues slightly below our already trimmed estimates. We are refining our model to reflect this guidance. Overall, we think the SAP relationship and channel remains strong as the German software concern sates pent-up demand in its installed base. The partnership should help Commerce One to continue to perform in today’s difficult economic environment. For joint products, Commerce One said that it splits revenue equally with SAP, which is a better arrangement than we had thought. An expanded relationship with Microsoft is also promising. It includes $25 million to fund .NET development, which Commerce One will detail at the company’s eLINK conference next week in New Orleans. We wonder: Could the company’s Buysite procurement solution finds its way into the MS Office Suite? The addition of FedEx executive Dennis Jones strengthens the management team and also lends experience in logistics solutions, which the company hinted it might offer. The opportunity to sell this additional functionality to existing exchange customers could help offset slowing creation of new marketplaces. Commerce One has set the stage for upside in its business by way of partnerships and new products. However, at 3.6x our 2001 revenue estimate and with meaningful earnings at least six quarters away (we currently have breakeven modeled for 4Q01), we think the company is fairly valued. We expect the stock to trade in-line with the overall e-business applications comparables group at a slight multiple discount due to Commerce One’s comparatively low-margin services business. _______________________________________________________________________________ COMPANY PROFILE Commerce One is a leading provider of software and services to organizations that wish to electronically buy, sell or make markets. Its primary offerings are a procurement solution and a platform for creating electronic marketplaces. _______________________________________________________________________________ The information contained herein is based on sources believed to be reliable but is neither all inclusive nor guaranteed by Epoch Partners. Opinions, if any, reflect our judgment at this time and are subject to change. Epoch Partners does not undertake to advise of changes in its opinion or the information. Epoch Partners may perform or seek to perform investment banking services for the issuers of securities which are the subject of our Research. Most of the companies Epoch Partners follows are emerging growth companies whose securities typically involve a higher degree of risk and more volatility than the securities of more established companies. The securities discussed in the Epoch Partners Research may be unsuitable for investors depending on their specific investment objectives and financial situation and needs. No report included in the Epoch Partners Research is a recommendation that any particular investor should purchase or sell any particular security in any amount or at all and is not a solicitation of any offer to purchase or sell from or to any particular investor. For additional information that may be available on the securities mentioned, please contact Epoch Partners. This document has been published in the United States for Residents of the United States. Copyright 2000, 2001 Epoch Partners. All rights reserved. Member NASD/SIPC. \END THE ABOVE RESEARCH HAS JUST BEEN PUBLISHED. For in-depth coverage of all companies within the Software Sector, please visit http://www.epoch.com/emailalert/software.html Epoch Research A team of industry-focused analysts creates Epoch’s proprietary Research. This team covers four technology sectors including Broadband and IP Data Services, Communications Equipment, Software and Internet. In addition to providing analysis of company and industry fundamentals and valuation, Epoch also filters and aggregates third party information. This third-party information includes hyper links to news including articles, company slide presentations and press releases, and multimedia content including audio and video clips of conference calls and interviews with company management. --- You are currently subscribed to epochebusinesssoftware as: fox@csit.fsu.edu To unsubscribe send a blank email to leave-epochebusinesssoftware-2520836M@pluto.sparklist.com