Fatbrain.com: Poised for Fat Gains?

With a name like Fatbrain.com, it’s hard not to like the company. Basically, it is a destination point for everything a
person needs — such as books, videos, magazines — for the Information Technology world.

No doubt, the company’s demographics are in tune with the Web. In fact, online sales surged to $8.2 million in the last quarter
from $2.9 million the in the same quarter a year ago. The sequential growth rate was 42.6 percent. The company had a 58.2
percent repeat customer order rate.

The losses last quarter were lower than expected. The loss was $9.1 million or 80 cents a share, compared with a loss of $2.9
million or 38 cents a share in the same period a year ago. The analysts were pegging earnings at 82 cents.

On a sequential basis, the customer base increased by 36 percent to 188,000. There were also 1,100 new corporate customers.

Perhaps the most exciting aspect of the company is eMatter. Essentially, this allows writers to post their works on the
Fatbrain.com site and readers can then securely download what they want (this is done to prevent piracy). eMatter is the first
type of system in existence (a patent is pending).

In the deal, a writer gets 50 percent royalties on every copy of the digital book sold. So far, 5,500 writers have signed-up. There are
19 publishers that have agreed to provide content, such as Nolo Press, Macmillan USA, McGraw-Hill and the Industry

eMatter has been gaining much popularity and credibility. The best-selling author Catherine Lanigan (author of “Romancing the
Stone” and “Jewel of the Nile”) published her newest book exclusively on eMatter (“Miracles Are Golden”).

The company has small margins — about 20 percent. After all, the company sells primarily brick-and-mortar products. But the new
eMatter program is much different and should command very high margins.

The company is also taking a decided B2B focus. This is facilitated through a technology called FINDitNOW, which has such
customers as GET and Qualcomm. The system allows employees to shop much faster and efficiently. Fatbrain.com used the
B2B platform of Ariba to design FINDitNOW.

The company has also been successful in striking deals to host bookstores for corporate clients. One example is Intraware. The Net software company will allow its 150,000 user base of information technology professionals to have access to
the Fatbrain.com bookstore.

As a sign of confidence, Vulcan Ventures recently invested $20 million in Fatbrain.com. Highland Capital Partners said it would
invest $10 million (this is Keith Benjamin’s first investment as a venture capitalist; he will be on the board of directors).

Clearly, Fatbrain.com is no run-of-the-mill e-commerce company. It has been constantly pushing the envelope — striving to give
investors fat returns.

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