Competition Looms on Horizon For Web-Conferencing Stocks
December 27, 2001
Heard on the Street
By AARON ELSTEIN
THE WALL STREET JOURNAL ONLINE
Web-conferencing stocks have been rallying, as the drop in
travel caused by the Sept. 11 attacks has boosted the use of
video meetings. But looming competition may sap the
strength of these stocks.
In the wake of Sept. 11, investors searched for companies
that would benefit from the changed world. With people
frightened to fly, Web-conferencing seemed a natural, and
WebEx Communications one of the most obvious investment
targets. The company, which helps companies conduct video
meetings over the Internet, saw its shares more than double
after mid-September as its market value crossed $1 billion.
At that time, bulls argued the San Jose, Calif., software
company could boost revenue by 75% and turn profitable in
2002.
Others joined the rush. Shares in similar companies such as
Raindance Communications, Polycom and ACT
Teleconferencing also made strong gains.
But in the stampede to grab the next hot technology stocks,
some analysts say investors have overlooked a crucial fact:
Microsoft and Oracle are moving into the Web-based
conferencing business. In the past few weeks, both giant
software concerns have quietly unveiled their own
Web-conferencing products. The prospect of those two
companies entering the market has had an impact: WebEx's
stock has fallen 36% from its Nov. 8 high of $37.87.
But at $24.13 Wednesday in 4 p.m. Nasdaq Stock Market
trading, up 32 cents, WebEx shares remain well above the
pre-attack price of $17.15, and short-sellers are convinced
the shares will go lower. "Frankly, this is an easy target,"
says David Rocker, managing general partner of Rocker
Partners, a New York investment firm, citing the looming
competition as well as the current lack of profits. More than
37% of WebEx's publicly available shares were sold short as
of the latest monthly data, through mid-December,
according to the monthly short-selling report issued by
Nasdaq on Wednesday. Short sales involve borrowed stock
sold by an investor who hopes to make a profit by buying an
equal number of shares later at a lower price to replace the
borrowed stock.
Industry executives contend they can compete against
Microsoft and Oracle by offering better service. They add that
companies were holding meetings over the Internet more
frequently even before Sept. 11, although the terrorist
attacks certainly heightened awareness of their service.
"Basically, the events of Sept. 11 pushed us and the whole
industry forward in terms of where we thought revenue and
earnings would be," says Paul Berberian, chief executive at
Raindance, which is based in Louisville, Colo. "The reasons
behind the growth are bittersweet, but nevertheless business
is booming."
Raindance said last week that it expects fourth-quarter
revenue to reach as high as $11 million, or $1 million higher
than previous estimates, and its loss -- using the company's
preferred benchmark of earnings before interest, taxes,
depreciation and amortization -- to be $200,000 to $300,000.
That is an improvement from its previous forecast of losses
before these items of as much as $1 million. (The company,
which went public in 2000, doesn't have net income, either.)
WebEx had a third-quarter net loss of $6.1 million, or 16
cents a share, and revenue of $22.1 million, compared with a
net loss of $27.5 million, or $1.01 a share, and $7.5 million
of revenue in the year-earlier period. Analysts forecast the
company will break even in this year's fourth quarter under
the preferred Ebitda benchmark, according to Thomson
Financial/First Call, and in 2002 will report 25 cents a share
of Ebitda, on revenue of about $140 million. Company
officials say WebEx will post net income next year, although
they won't be more specific.
While skeptics gasp at the stock's price-to-earnings multiple
-- a breathtaking 97 times next year's anticipated Ebitda
figure -- bulls see reason for enthusiasm in the steep drop-off
in business travel in recent months. Passenger traffic
dropped 20% in November from the year-earlier period,
according to the Air Transport Association, although that was
an improvement from October's 23% decline. The trade
group's chief economist, David Swierenga, attributes the
slowing decline to low fares that induced leisure travelers to
fly. Business travel remains down due to the recession, and
the bulls in the Web-conferencing sector don't expect it to
come back anytime soon.
Analysts say technology from companies like WebEx can
eliminate significant business travel by allowing people to
smoothly transmit video, voice and documents to other
computers. It costs less than $25,000 for a midsize or large
business to get outfitted with the necessary computer
software, according to WebEx. The company has signed on
new customers at the rate of 250 a month and has 4,700
clients, including Dow Jones & Co., publisher of The Wall
Street Journal and its online edition.
"The service doesn't eliminate the need for all
person-to-person meetings, but it can take out a lot of
them," says John Corcoran, an analyst at CIBC World
Markets. "With companies looking for ways to cut costs
nowadays, the move to Web-conferencing makes sense."
Mr. Corcoran believes WebEx has advantages over Microsoft,
and rates WebEx a "strong buy." He thinks the stock could be
worth $35 a share. Mr. Corcoran's firm helped take WebEx
public last year.
But other analysts expect Microsoft's product to gain wide
acceptance and stunt WebEx's growth. Jamie Friedman, an
analyst at Fulcrum Global Partners, a small New York
investment-banking firm, says Microsoft's Web-conferencing
product, included in its Windows XP Professional operating
system that was launched Oct. 25, can handle "the great
majority of conference needs" and "will take away 75%-plus
of the need for WebEx." He rates WebEx shares a "sell."
For their part, WebEx officials say they don't expect to lose
substantial business to Microsoft. Chief Executive Subrah Iyar
says his company's product is included in Windows XP, so it
will be easy to use for people who aren't happy with
Microsoft's Web-conferencing product, NetMeeting. "My best
customers are early Microsoft users," Mr. Iyar says.
There is another threat from Oracle, which last month
started offering its iMeeting Web-conferencing product to its
base of 12,000 customers, says Mark Barrenechea, senior
vice president for applications development. He adds that
Oracle is pricing its product to be one-third the cost of its
rivals' offerings.
WebEx's Mr. Iyar says he isn't concerned with Oracle, a
longtime WebEx customer and investor, entering his
company's arena. "We have seen challenges from major
companies before and met them all," he says.
But Fulcrum's Mr. Friedman sees Oracle as a serious threat.
While he doesn't expect losing Oracle as a customer will cost
WebEx more than $300,000 in revenue, he says that as
many as 25% of WebEx customers are also Oracle
customers, and he expects many will switch. "WebEx is a
good, innovative company," says Mr. Friedman. "But it's not
a good stock."
Write to Aaron Elstein at aaron.elstein@wsj.com |
