B2B Has Few Competitors and Big Sales, yet Intraware Still Gets No Respect

The Street ignores the firm's potential, but a couple of upcoming deals could change that tune.
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might finally be about to get the respect that many who follow the stock say it deserves.

The business-to-business software and services company serves as a middleman between software makers and their clients. Its Web site offers research and tools for companies that want to try, buy and directly download software applications over Intraware's high-powered networks. Those networks are Intraware's trump card: Many vendors can't handle large software downloads themselves because of the prohibitive costs of building out bandwidth.

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But although Intraware's revenue is twice that of any of its B2B peers, its stock has failed to get swept up in the B2B rally that has carried




Commerce One





to record highs.

Yet VerticalNet is trading at 186 times its third-quarter revenue's run rate, or the most recent quarter's revenue multiplied by four. Commerce One is trading at 220 times, Chemdex at 93 times and Intraware at 11 times. Many analysts tracking rapidly growing companies watch their run rate because trailing 12-month revenue can quickly grow outdated.

"It brings up the word 'cheap,' which you don't hear very often," says Bob Herwick, a fund manager at

Herwick Capital Management

. Herwick sold Intraware in October after being frustrated that "Wall Street didn't seem to get it."

Now, Intraware is planning deals that could attract Wall Street's attention at last. Later this month, Intraware will announce service agreements with Commerce One and



, another pricey e-business name. Both are asking Intraware to run sites for their own customers, offering news and software downloads as part of Intraware's SubscribNet service.

The Commerce One deal is expected to be announced Dec. 20 and the Interwoven deal a week later. Intraware wouldn't disclose how much it would make from each, but these arrangements typically start in the low six-figures and grow as partners add new customers, the company says. Four similar deals are in the pipeline and are expected to be announced in January.

"The service is a cheaper, more efficient way to do it," says Mark Hoffman, Commerce One CEO. "It's not my core business." Hoffman is also chairman of Intraware's board.

With these deals, you could call Intraware a B2B company's B2B company. They also raise a question: If Intraware can win the respect of the B2B plays that Wall Street is pouring capital into, why can't it get its due from Wall Street itself?

This is a company without any direct competition and it's cheap relative to B2B peers. "They're a first-mover," says one portfolio manager who holds the stock. Being one of the first ones in their respective markets proved crucial to the success of


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America Online



About 85% of Intraware's $19.2 million second-quarter revenue, ending in August, came from digitally reselling software, a business that is generating 20% gross margins. That's in the middle of the range for B2B companies: Commerce One had margins of 54% and Chemdex, 4.6%.

There's even more promise in Intraware's other lines of business: service agreements, like the one it just signed with Commerce One, and tools that allow customers to evaluate software. Together, these areas made up about 15% of revenue in the second quarter; they have margins above 90%.

As new partners sign on, revenue will follow. And as its customers grow larger, so do the service fees that Intraware charges them. "A couple of billion

dollars in sales a couple of years from now wouldn't be ridiculous," says company president and CEO Peter Jackson, who says profitability is about two years away.

Intraware's early entry into the market will protect it when competition comes. Partner relationships aren't easy to sever because companies find it costly and difficult to switch partners after they've integrated their systems. "If you're absolutely happy with what you're getting and the end customer is happy, then you don't go running off chasing the next one," Herwick, the fund manager, says.

And partners who sell their software via Intraware aren't looking for other options. "We have other resellers," says John Vincze, vice president of worldwide partner channels for



, an Internet software firm. But he says Intraware is the only one that offers the tools, services and sales force all in one. "We could've built it ourselves, but it was cheaper" to go with Intraware, Vincze says.

Plus, "they have a customer list to die for," Herwick says. Some partners include

Computer Associates

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and Vignette.

And Commerce One and Interwoven will soon join that list. Which leaves fans of the company wondering: When will Wall Street join the Intraware bandwagon?