Dont they know that Mr. P$nk is the true Cyber Elite when it comes to analyzing InterWorld?
E-commerce engine
Cyber Elite 09/27/00 4:30 PM
By Stanwood Chang
Raging Bull's Weekly Cyber Elite Interview
So your company has decided to make the move to the Web and sell its merchandise online. Simple, no? Just register a domain name, put up your Web page, and you're in business.
But wait, there's the small matter of engineering the whole transaction process, from processing credit cards to synchronizing with shippers. And don't forget coordinating with your manufacturer and managing your flow of inventory. Then there's the database of customers you need to store and track, and possibly mine for marketing and strategic purposes. Before you know it, your company's in over its head.
Enter New York-based Interworld (INTW), which provides software that allows companies to get up and running with their e-commerce initiatives. Founded in 1995, Interworld was positioned right at the beginning of the e-tail boom that got its first serious boost with the arrival of Amazon.com (AMZN), and soon exploded thereafter.
Shifting its weight
But for Interworld, the business-to-consumer e-commerce segment is only part of the story. The company is increasing its focus on the business-to-business market, an industry that Wall Street has found notoriously difficult to get a handle on, but one that holds enormous potential.
Forrester Research projects that B2B e-commerce will grow from $406 billion in 2000 to $2.7 trillion by 2004. And the market for e-commerce software and applications isn't peanuts, either. IDC estimates that the industry can accelerate from $1.7 billion in 1999 to $13 billion by 2003.
The challenge facing Interworld president and chief executive Jeremy Davis is to move nimbly and distinguish the company from larger competitors such as Broadvision (BVSN), Vignette (VIGN), and Art Technology (ARTG). The 46-year-old Davis is also faced with the unenviable task of regenerating confidence among Interworld shareholders, who have watched their stock wither from a 52-week high of 93 1/2 to its Tuesday close of 4 1/16.
An earnings warning certainly didn't help matters, either. Last Friday, the company cautioned that it would likely register a third quarter loss of 35 to 43 cents a share, rather than the First Call consensus estimate of an 18-cent loss.
Davis recently sat down with Raging Bull to outline the challenges facing his company and to describe Interworld's place in the universe of e-commerce infrastructure.
Cyber: Describe Interworld's products for our readers. What exactly does your software do?
Davis: We're an e-commerce company. We develop application software that allows companies to sell products through the Internet both to consumers and to businesses.
Cyber: So let's say I launch my own Web site and starting selling my own widget. Where do your products figure into the transaction chain?
Davis: Basically, when you buy our products, you're getting five things out of the box. You get a merchandising component which does all of your pricing, promotions, cataloging, upselling, cross-selling -- a lot of the core selling functions.
You get a transaction system, so we have the ability to take an order, process an order, and get a bill out.
It has a fulfillment function that allows you to get product logistically from the manufacturer down to the end user, whether that end user is a consumer or a business.
We have a post-sales customer service function that allows you to provide post-sales or after-sales support.
The fifth component is what we call business intelligence, which is an analytical tool that allows you to track and understand and interpret the information flow all the way through that selling cycle that I just mentioned.
Cyber: Now, some of your competitors like Broadvision, Art Technology, Vignette, Click Commerce (CKCM), OpenMarket (OMKT)...
Davis: Well, it really depends how you view the landscape. Companies like Blue Martini or Broadvision or Art Technology are really B2C-focused than anything else, and they're more focused on personalization types of issues than we are. We're more focused on order management, order cataloging, and obviously with the release of our new B2B suite, it really extends our capabilities well out into the B2B space. So it does sort of separate us from that pack.
Companies like Click Commerce are very complementary to what we do. We know them very well. They are very much in the supply chain area, but they're focused on partnership management, whereas we're focused really on the selling function. So it's a little bit different.
Cyber: So who are some of your more direct competitors?
Davis: Ironside or SpaceWorks, companies of that type, particularly as we move into the B2B space. It starts to change the landscape quite a bit so that our traditional competitors like Broadvision and Art Technology start to slide away a little bit, and new competitors start to come into the fold.
Cyber: What differentiates you from your competitors?
Davis: There's several things that we do. One is that we are an out-of-the-box solutions set. What that means is that instead of having to build a solution, you simply buy our solution.
If you look at the trend in these marketplaces over the last 20 years -- with financial applications in the 1980's and with ERP [enterprise resource planning] applications in the 1990's -- there comes a point at which people just stop building the stuff, because they can find a company that has enough out-of-the-box functionality that they can simply buy it.
If a build scenario is necessary, it can take, in this market sector, anywhere between 8 and 15 months. With our solution, we can have most of our customers up and running within 70 days. So the sooner they can get it up and running, the sooner they can start driving revenues, which is what they're looking for.
The second thing that I would highlight is, we've been about 50% B2C and about 50% B2B since our founding. We just announced the release of our new Business Suite 4.0 product, which is a pure B2B play that is designed to deepen the functionality within our product suite for companies that are selling to businesses rather than consumers. We see a huge opportunity with companies that are selling down the supply chain using products like this right out of the box so they can use the Internet in a more efficient manner.
Cyber: Do you see yourself moving more and more into B2B?
Davis: Yeah. If you look at the size of the market, the total combined B2C and B2B markets for application software on the sell side of the equation right now is about $4 billion, going to about $14 billion by 2003. Over 90% of that opportunity is all B2B.
B2B selling is from raw material suppliers to manufacturers, manufacturers to distributors, distributors to retailers. So you've got four or five different selling points in there, whereas B2C is just retailer to consumer. So you've significantly increased the opportunity up the supply chain when you're talking in terms of the size of the market and the opportunity. And what's really interesting about it is nobody dominates that space today.
Cyber: With the recent market crash, we're seeing a lot of companies scaling back their Internet initiatives, and it's especially being felt in the Internet consultant sector -- the Razorfishes (RAZF), Scients (SCNT), Viants (VIAN), etc. Are you seeing any of that in your industry?
Davis: I'll tell you what's interesting about that. There is some slowdown in the dot-com business because these guys just aren't funded anymore, but you don't really see the slowdown in the retail or manufacturing business per se.
I think one of the things that has affected the systems integration companies is that out-of-the-box functionality really is starting to take over. A lot of these guys have built their reputations around the implementation phase of getting a product up and running. In our case, the implementation component is only about two months, whereas if you go with an Art Technology or Broadvision, it's eight, ten, or fifteen months.
With us, the reason why we've been so successful with an Arthur Andersen, for example, is because they don't build their revenue stream on implementation, they build it on post-
implementation. So once the product is up and running, what they do is go in and work with the customer on e-commerce initiatives, and how to get more productivity and efficiency out of the system. So it's a post-sale focus rather than a pre-sale focus.
Cyber: You don't have any CRM (customer relationship management) modules as part of your products, do you? Marketing, e-mail...
Davis: No, not purely. What we would do, for example, is tie into existing systems. So if you already have, for example, a Siebel (SEBL) call system or something of that sort, we have adapters and connectors out of the box that tie into a Siebel system. So you can use your e-mail systems or your CRM systems that you already have, and we will simply tie into all those.
Cyber: Do you ever feel the need to broaden your product offerings, or you think partnering up is the way to go?
Davis: Partnering up is the right way to go. No one company can do all this themselves, number one. And number two, we are very, very focused on the physical goods market. This is another area where we distinguish ourselves from our competition.
Companies like Broadvision sell most of their solutions to the banking industry and services industries of all types, including travel and hospitality, telephone companies, and so on. We focus on physical goods. So if you develop or manufacture and sell a product, that's where we are very clearly focused, and our product has always been focused on that space.
Cyber: But don't you think the tangible goods market is a more limited one than the information and data services market?
Davis: Absolutely not. Think about the supply chain. Think about B2B in its pure way. When you're selling business-to-business, 90% of it is a physical goods business. Of all the B2B arena out there, 90% of that is around products that are being manufactured.
So if our claim to fame is that we have deep and rich functionality out of the box, then we have to have a lot of that built into our product suite. Our belief is that you can't do everything. You can't go off and build deep and rich in the physical goods area, but then also handle it on the services basis where you don't deal with things like shipping and contract pricing. The way those industries have been set up is fundamentally different.
When you think about the physical goods market, you're dealing with very specific, discrete issues. You deal in order splitting. You deal in multiple ship-to centers. You deal in contract pricing, or tiered pricing. So when you think about physical goods activity, it's a very, very specific set of things that you have to deal with.
Cyber: There was an April article in Investor's Business Daily which said that the average size of your sale is around $400,000. Do you offer a more scaled-down suite of products that can be had for less than $400,000?
Davis: No, we don't. We don't have an "Interworld Lite" type of product. We are focused primarily on license revenue and on services and support of that license revenue. You would really have to plan on spending something in the range of $800,000 to $1 million before it would be appropriate for the type of product we sell.
Cyber: Do you think there's any possibility you'll be acquired by a bigger software company seeking to offer a broader or full suite of products?
Davis: Well, I don't know anybody out there who offers a full suite of products. Almost every company out there does partnering in this area. So is it possible? I suppose it's possible. We're not looking for that today.
Cyber: You issued a third quarter earnings warning last week. What are the reasons for the shortfall?
Davis: You understand I can't talk outside of the press release. I can't really provide a lot of color on this. Fundamentally, it's as we explained in the release, which is that we're seeing longer sales cycles in the B2C sector, and we're also seeing a certain amount of issues around the dot-com sector in terms of funding. That's sort of the market that we've been in.
If you look at the B2B market in terms of where we're going, it's not affected by that. We are expecting strong demand for our B2B product going forward, and I think that's sort of the explanation as to what happened this quarter.
Cyber: Were some sales simply delayed for this quarter, and they'll show up in future quarters?
Davis: I'm not allowed to give forward-looking statements right now. We're in a quiet period, and I can't really comment on what the market looks like going forward.
Cyber: Do you think the Street overreacted to your earnings warning?
Davis: Well, the Street will do what the Street will do. I think it's going to be dependent on how the rest of the market really does in the third quarter in this sector.
Cyber: When do you expect to become profitable?
Davis: Most analysts are forecasting that we'll be profitable by the second half of next year.
Cyber: What's ahead for Interworld? What do you envision for the future?
Davis: We have great customers today. On the retail side, we've got customers like Disney (DIS), Ann Taylor (ANN), Jockey, Foot Locker, and many, many more -- over 100 customers altogether.
On the B2B side, we've got well-known names like Ikon (IKN), Oki Data, Belkin Components, Verizon (VZ), MSC Industrial Direct (MSM), and many others. And what we're looking to do here -- not that we're ignoring the B2C opportunity, because we think that still provides a core business for us -- is move rapidly into the B2B space, where we provide sell-side solutions for the full suite along the supply chain.
That's really where we're headed, and we see huge upside opportunity, really no dominant players in that market, and the opportunity for us to partner with systems integrators and other complementary product suites that allows us to penetrate that space fairly quickly.
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