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Strategies & Market Trends : Steve's Channelling Thread -- Ignore unavailable to you. Want to Upgrade?

To: Pink Minion who wrote (8061)	11/22/2000 9:46:54 AM
From: Logain Ablar	Respond to of 30051

Hi Ex That is not my understanding of how C1 recognizes revenue. I know it is a standard practice of companies like Priceline and others internet companies that are basically in the middle. I also know the SEC frowns on this type of recognition. Below is the specific reference on how C1 recognizes revenue from the latest 10Q on file with the SEC. I have to admit I only checked the companies earnings reports and conference call and it is always safest to confirm what is indicated there with what is actually filed with the SEC. Based upon my understanding the transaction fees have been immaterial to C1, to date, although this is to be the growth driver in the future and transaction fees will be a % of partner gross revenues. C1 also is in compliance with the SEC bulletin 101 on revenue recognition. So at the moment I’m disagreeing with you on this item. Ex I respect your opinion and I can be wrong so if you can show me where I’m wrong I’d appreciate it. 10kwizard.ccbn.com OVERVIEW Background Commerce One is a leading provider of business-to-business electronic commerce solutions that link buyers and suppliers of goods and services into trading communities over the Internet. Source of Revenues We generate revenues from multiple sources. License fees are generated from licensing our BUYSITE, MARKETSITE, NET MARKET MAKER, auction and content management software products to end-user organizations, primarily Fortune 1000 enterprises and major international enterprises. Professional service fees are received from BUYSITE, MARKETSITE, NET MARKET MAKER and auction licensees and their suppliers for enterprise resource planning system integration, content aggregation, project management and other related services. Training revenues are generated from providing in-house and on-site training to customers who have licensed Commerce One products. Software maintenance revenues are generated from product licensees based on an annual amount. Network services revenues are generated from MARKETSITE subscription fees, hosting services fees, auction fees, marketplace transaction fees and revenue sharing from partners who generate revenue from their marketplaces deployed on the Commerce One products. MARKETSITE subscription fees are received from BUYSITE licensees, as well as other customers, for the right to access services built on the MARKETSITE software platform. Auction fees are received from customers who conduct auctions utilizing Commerce One's auction services. Hosting services fees are received for Commerce One hosting the BUYSITE, the MARKETSITE, the NET MARKET MAKER and/or the auction products that are licensed to certain customers. Revenue sharing is received from partners who have licensed the BUYSITE, MARKETSITE, NET MARKET MAKER and/or auction products and share a portion of revenues generated with Commerce One. These amounts are typically based on a percentage of gross revenues earned by the partner through leveraging the Commerce One solution. Transaction fees are received from suppliers for purchase orders the supplier receives through MARKETSITE. To date, transaction fees have been immaterial. However, our revenue growth will depend upon realizing significant network services revenue, either through services we provide directly to our customers or through revenue sharing with our partners. Revenue Recognition We recognize revenues from license agreements upon delivery and acceptance of the software if there is persuasive evidence of an arrangement, collection is probable, the fee is fixed or determinable, and there is sufficient vendor-specific objective evidence to support allocating the total fee to all elements of multiple-element arrangements. If an acceptance period is required, license revenues are recognized upon the earlier of customer acceptance or the expiration of the acceptance period. We recognize revenues from professional services as the services are provided. If a transaction includes both license and service elements, the license fee is recognized on delivery and acceptance of the software, provided services do not include significant customization or modification of the base product, and the payment terms for licenses are not dependent on additional acceptance criteria. In cases where license fee payments are contingent on the acceptance of services, recognition of revenues is deferred for both the license and the service elements until the acceptance criteria are met. Software maintenance revenues and MarketSite subscription fees are recognized ratably over the term of the support contract, typically one year. Transaction fees are recognized as earned. See also my next post Tim

To: Pink Minion who wrote (8061)	11/22/2000 9:53:23 AM
From: Logain Ablar	Read Replies (1) \| Respond to of 30051

Hi Ex: As a follow up (the last response was getting too long) if you look @ the 3rd quarter financial statement (same site reference below) you’ll see of the $113M of revenues (66m license, 46 service) there was $127 M of expenses (the pro forma #’s excl. amortization, etc). The $127M consists of license expenses 2M, cost of services 38M, sales & marketing $50M, product development 27M and G&A of $11M. If you read thru the discussion / description of these expenses you’ll notice (or at least I don’t see) these costs do not include the costs you describe. At least we should agree this is the only place they can hide the “product” costs. So either the company is mistating the report to the SEC or I’m missing something. 10kwizard.ccbn.com Cost of Revenues Cost of revenues, consisting of cost of services and costs of license fees, was approximately $39.5 million in the three months ended September 30, 2000, compared to $4.8 million in the three months ended September 30, 1999. Cost of services, which primarily consists of consulting, customer support and training costs, was $37.6 million compared to $9.3 million in the three months ended September 30, 2000 and 1999, respectively. The increase in cost of services resulted primarily from an increase in personnel related expenses due to the hiring and training of consulting, support and training personnel in the United States, Europe and Asia Pacific and to a lesser degree, personnel related expenses resulting from the acquisition of AppNet on September 13, 2000. Cost of license fees for the three months ended September 30, 2000 of $1.9 million consisted of royalties due to third parties related to the use of third party software. Cost of license fees also includes software media and duplication and software documentation costs, although these costs have not been material to date. Sales and Marketing Expenses Sales and marketing expenses consist primarily of employee salaries, benefits and commissions, and the costs of seminars, promotional materials, trade shows and other sales and marketing programs. Sales and marketing expenses were approximately $50.0 million and $9.4 million for the three months ended September 30, 2000 and 1999, respectively. The increase in 2000 was primarily attributable to an overall increase in the number of sales and marketing personnel as well as an increase in marketing related activity. The number of employees engaged in sales and marketing at September 30, 2000 increased to 535 from 117 at September 30, 1999. This increase includes 64 employees added in connection with the AppNet acquisition. The increase in expense in 2000 was also attributable to increased commission expense, travel related expense resulting from increased sales activity and allocated overhead expenses. We expect that the dollar amount of sales and marketing expenses will continue to increase due to the planned growth of our sales force, including the establishment of sales offices in additional domestic and international locations, and due to expected additional increases in marketing programs and other promotional activities. Product Development Expenses Product development expenses consist primarily of personnel and related costs associated with our product development efforts. Product development expenses were approximately $26.7 million and $5.4 million, for the three months ended September 30, 2000 and 1999, respectively. The increase in product development expenses during 2000 was primarily attributable to personnel and consulting-related expenses to support development of the BUYSITE, MARKETSITE, NET MARKET MAKER and auction products and other strategic initiatives. The overall number of employees engaged in product development was 445 at September 30, 2000 and 150 at September 30, 1999. We believe that investments in product development are essential to our future success and expect that the dollar amount of product development expenses will increase in future periods. General and Administrative Expenses General and administrative expenses consist primarily of employee salaries and related expenses for executive, administrative and finance personnel. General and administrative expenses were approximately $11.2 million and $1.2 million for the three months ended September 30, 2000 and 1999, respectively. The increase was primarily attributable to an increase in personnel related expenses and additional legal costs associated with our portal joint ventures. The number of employees engaged in general and administrative functions increased to 490 at September 30, 2000 from 28 at September 30, 1999. This increase includes 254 employees added in connection with the AppNet acquisition. We expect general and administrative expenses to increase in future periods. Now granted expenses are exploding but in comparison to the revenue this is not so out of line in the grab for market share. The expenses are a significant risk if they can't manage them once revenue growth slows down. Ex I'm the first to admitt I am concerned with my position in CMRC (who wouldn't be with a drop like this in the past few weeks) so I can be missing something (like I only think its market related, insider sales related (I understand the insiders position but I'd rather they were buying not selling) and the revenue shortfall worry). So I look forward to a good discussion on this. I readily admit I can be wrong but I keep an open mind (or try to anyway). Best regards, Tim