Keep It Coming: B2B Software Firms Look to Boost Recurring Revenue - TheStreet

SAN FRANCISCO -- Even companies in a new sector are open to change, especially when it means more money.

That's the message that came out of presentations from both

i2 Technologies

(ITWO)

and

Ariba

(ARBA)

on the opening day of the

Robertson Stephens Internet Conference

here Tuesday. (For a schedule of companies presenting at the conference this week,

click here.)

While both companies started with the usual blather about how their software will change the world, they went on to emphasize that they want to build recurring revenue streams.

Software companies, including Ariba and i2, have traditionally made their money by selling licenses to customers so they can copy it. Those licenses bring one-time fees. (The software Ariba and i2 sell enables companies to buy and sell products over the Internet.)

But more software companies are stressing that the real way to make money is by adding services to those licenses and charging customers over and over again as those services are performed. So, for example, a B2B software company might license its product once, but then charge its customer on a monthly basis to access a company-developed-and-operated network of other businesses through the software.

"Licensing fees will always be a part of our revenue," said Bill Beecher, i2's CFO. "But I don't think you want to be that way forever. One goal of i2 is to build up those recurring revenue streams."

Beecher said that i2 has written about 20 contracts that give it "the opportunity" to take in recurring revenue, or go into revenue-sharing agreements, with customers.

Ariba emphasized this approach in its presentation as well. Even though it received about 65% of its revenue from licensing fees last quarter, Edward Kinsey, Ariba's CFO, highlighted his company's "balanced revenue model." Network access fees have been the fastest-growing portion of Ariba's revenue, he said.

"We've been very good at applying the gas and the brake in this area between license revenues and service revenues," Kinsey said.

The new emphasis on recurring revenue represents a shift because investors so far have rewarded companies like Ariba and i2 because of revenue from up-front licensing fees. Meanwhile, investors punished companies like

Commerce One

(CMRC)

and

PurchasePro.com

(PPRO)

that stressed recurring revenue, because it takes time to build that revenue.

Is the tide turning in favor of the recurring revenue model? Well, investors have noticed something different about it lately. While the stocks of Ariba and i2 have held steady over the last several weeks, Commerce One and PurchasePro have climbed upward.

Maybe that's because investors are starting to see the advantage of doing things again and again, and getting paid for it each time. And if that's true, Ariba and i2 are simply telling them what they want to hear.