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Taking Stock: Size Does Matter In Integration Market

Companies rely on the market leaders when choosing EAI software

There are still few signs of IT budgets thawing from their current subzero state. Magically, the useful life of PCs and networking equipment has been extended to save money. Enterprise resource planning projects have been canceled, downsized, or postponed. However, there are a couple of items on CIOs' wish lists that might see the light of day; the most likely are security software and, possibly, integration software. The latter helps to wring more usefulness from already-implemented systems by integrating otherwise disparate applications.

Numerous players entered the market as the enterprise application-integration category flourished. It appeared there was enough room for everyone, but soon it became clear that there were too many players. IBM has its MQ series, which is well-liked by companies where IBM is heavily entrenched but also competes with other companies' offerings. The actual size of IBM's EAI business is almost impossible to ascertain. IBM has shrewdly rolled it into its middleware segment, which generated $11 billion in sales in 2002.

The biggest, strongest independent EAI company is Tibco Software Inc., with revenue of $273.4 million for the last 12 months. However, its momentum appears to have stalled. Tibco now says it expects revenue to decline 10% to 15% quarter over quarter, more than any other EAI vendor. Next in the pecking order is webMethods Inc., which posted sales of $198.1 million for the past 12 months. Behind webMethods is SeeBeyond Technology Corp., which posted $150.8 million in revenue for 2002. Next are various companies struggling with dropping sales or cash-flow problems, including Iona Technologies plc and Vitria Technology Inc.

But this crowded playing field hasn't stopped BEA Systems Inc., and to some extent Microsoft, from entering the fray. BEA made a big splash with its entrance into the integration market, but Tibco and webMethods say they're not yet seeing BEA when they're competing for deals.

SeeBeyond learned the hard way that balance-sheet strength matters. About a year ago, the company's cash reserves were dwindling. Potential customers shied away because of the perceived business risk. SeeBeyond was forced to raise cash through an equity offering at a not particularly opportune time. Now SeeBeyond is sitting on $94.1 million in cash, implying that its market capitalization is about $100 million. Tibco has a hefty $637.8 million in cash and equivalents, and its market cap after subtracting cash is roughly $225 million. That's a tad below webMethods, which is at $278 million after deducting its cash balance of $190.7 million. Iona is worth only the cash on its balance sheet, implying that investors aren't attaching value to its ongoing operations, despite the company's solid technology offering. The forces of a maturing market combined with a severe downturn, tend to favor market leaders, despite the technological advantages of peripheral players.

Potential customers are flocking to what they perceive to be the leaders. IBM's position is enviable with its financial strength and abundant resources. WebMethods seems to be the only company with any momentum behind it. Meeting financial projections this quarter will be challenging given the continued weak economy and geopolitical uncertainty. For the time being, I'd patiently remain on the sidelines.

William Schaff is chief investment officer at Bay Isle Financial LLC, which manages the InformationWeek 100 Stock Index. Reach him at bschaff@bayisle.com.

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