The flood onto the market of e-commerce applications over IP networks has raised any product or company prefixed with an ‘e’ to a new level of unquestionable market acceptance, astronomic market capitalization and intense hype – with perhaps one exception: EDI (electronic data interchange). The EDI market, which is characterized by so-called value added networks (VANs) that enable trading partners to exchange data over secure but proprietary networks has been eclipsed by the other ‘e’ – e-commerce. The advantages are manifold and by now well established: it’s cheaper, easier and arguably as secure to communicate with customers over an IP network using a web browser than it is to pay an EDI company significantly more to transfer clunky, batch-processed data over a VAN.
All too aware of the shift in the market, the traditional EDI players such as Sterling Commerce, GEIS and Harbinger have acquired internet-based e-commerce companies to hasten their ability to compete for business in the electronic commerce age. However, their acquisition activities have failed to exert much influence in this brave new world. Market leader, Sterling Commerce which bought Xcellenet last July for $74m failed to match Wall Street estimates in its most recent first quarter. Harbinger, the most acquisitive of the traditional EDI players with 14 acquisitions under its belt in the last two and a half years, has been hit even harder.
Even though its acquisition trail ended with the purchase of arch-rival Premenos for $230m in December 1997, Harbinger has still to prove it has the product, investment and market positioning to compete in the e-commerce space. At the beginning of the year Harbinger guided Wall Street down 10 cents a share to 30 cents for fiscal 99 on the basis that it planned to make a $7m investment in its internet portal Harbinger.net. That would throw the earnings per share forecasts for the year off $0.10. Company executives have also issued two rounds of share repurchasing to further give its stock a lift. But the move has been to no avail. Harbinger stock has not strayed from the $5-$10 range since August 1998. They haven’t turned the corner yet, says Chuck Shih at the Gartner Group.
Harbinger.net is the strategy on which Harbinger’s e-commerce ambitions ride. In essence it does not differ radically in functionality to IVAS (Internet Valued Added Server), the set of internet EDI services the company has been offering for over three years. However, it does have some more front-end functionality that enables Harbinger to lay justifiable claims to the industry buzzword du jour – a portal. Harbinger.net does have some portal credentials in the areas of catalog content, routing and billing. The portal, which was launched in February, is slowly gathering momentum but Harbinger’s expectations of it are great. By the end of 1999, the company plans to generate 30% of its revenues from Harbinger.net and IVAS. The latter currently contributes just 5% to overall revenues.
The company’s e-commerce plans have so far failed to convince an investment community that argues the strategy was ill conceived. Earlier in the year it was obvious that they didn’t have an e-commerce plan and it’s clear that this portal strategy has been thrown together at the last minute, says one investment analyst. Furthermore, there has been some suggestion that the proposed $7m the company plans to invest in Harbinger.net will be more of a smoke and mirrors accounting trick than any concrete investment.
Undeterred by the lack of faith from investment institutions and industry analysts, Harbinger is confident that it will be able to grow its business by 30% to $157m in the next 12 months. We have made a lot of tough decisions. We took a major write-down for restructuring in the third quarter of last year but we are confident that the worst of the pain is over, says Jim Travers, president and COO at Harbinger. He is now forecasting that the company will realize $35m in revenues for the first quarter of 1999 and an EPS of $0.02, $37m in the second quarter and an EPS of $0.07, $41m in the third quarter with an EPS of $0.09 and $44m in the fourth quarter with an EPS of $0.11.
Aside from its e-commerce ambitions, part of this growth will come from consulting services and in particular outsourcing contracts. These will double to account for 20% of its overall revenues by the end of the year, according to Travers. And part will also come from selling re-vamped internet EDI products into its existing installed base particularly the 7,000 customers it picked up with the Premenos acquisition. We plan to aggressively go after our own installed base, Travers told us. There is a lucrative opportunity to upgrade customers to Harbinger’s now vastly slimmer but Internet enabled product line, according to Travis.
Where it had over 60 products a year ago, Harbinger has now consolidated its portfolio into seven core products. These encompass the traditional translation software for MVS, AS/400, Unix and latterly NT on which the company built its business plus newer HTML web-based products that can be slotted into an internet EDI strategy. Of the Premenos products it bought only Templar, the point-to-point security product and Premenos/400, the highly regarded EDI translator for the AS/400 market place remain. By next month, Harbinger will have also sold off its web procurement business Trusted Link Procurement. The only thing the company has got from any of the acquisitions it has made is a dependable customer base in the AS/400 marketplace and some cash in the bank from Premenos, remarked one investment analyst, who argues that Premenos’ acquisition has damaged rather than improved its market standing.
While this view may be unjustifiably harsh and short-termist – investors after all tend to look no further than the next EPS figure to gauge a company’s future economic prosperity – there is some substance here. There is little doubt that the margins in e-commerce are dramatically lower than in traditional EDI and it is hard to see how Harbinger will be able to continue to grow the business when it will need significantly more deals to achieve the same bottom line effect. This fact, in combination with its relatively low market valuation of $289m and string of unprofitable quarters has heightened speculation that it is only a matter of time before the acquisitive company will be acquired itself.
