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WebMethods' IPO Relying On 'X' Factor

To survive in the increasingly crowded markets for business-to-business software and services, Internet companies must stand out from the competition in a meaningful way that attracts customers.

webMethods, one of several Internet companies slated to go public this week, thinks it has that competitive edge by offering software based on Extensible Markup Language, or XML.

XML is a computer language that allows users a flexible way to create online formats for presenting information and data. Supporters of XML, which has become a Web standard, say it will make online transactions easier and less costly.

And there are many XML supporters. Major corporations and start-ups are shipping or planning to ship products that support the language.

Is XML the next Linux? It's too early to tell, but if you think so, webMethods may be a good bet. The company is offering 4.1 million shares of common stock in the $11 to $13 price range under the Nasdaq symbol WEBM. Lead underwriter is A-lister Morgan Stanley Dean Witter.

Even if the market doesn't know XML from XYZ, demand for another B2B offering should guarantee a strong debut for WEBM. Don't be surprised by an opening-day gain of 300% or more.

Longer-term, the outlook is less clear. A number of B2B software competitors have a head start on webMethods, which didn't release its first product until June 1998. With $4.5 million in revenues last year, webMethods lags far behind companies such as Open Market (OMKT)($83 million) and InterWorld (INTW) ($40.5 million).

Further, webMethods relies excessively on one customer, SAP AG, which accounted for 31 percent of its revenues in the nine months ended Dec. 31, 1999.

And unlike most companies that offer software licenses on a perpetual basis - collecting payment when the license is granted - webMethods has issued two-year licenses that require another payment upon renewal. If XML's popularity grows, the move should give the company a recurring revenue stream. If another technology replaces XML, or even if the industry fails to embrace the language fully, webMethods could be facing serious customer churn as early as this June.

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