Beyond.com Pins Hopes on Government, E-Stores

By Lisa Terry, Contributing WriterBeyond.com Corp. is elevating its one-time sideline government business to co-star status in an effort to stem its financial losses and bolster its sagging stock.With the introduction of a beefed-up version of its electronic software delivery offering, now called Atlas, the company this year hopes to double its 1999 government revenue of $30 million by continuing the steady influx of new federal agency clients while adding state and local governments to the mix. Best known as a top 10 Internet site that sells downloadable PC software to consumers, Beyond.com of Santa Clara, Calif., is shifting its emphasis to digital downloading and software management for government clients, as well as to creating e-commerce sites for software developers. Among its government customers are the Bureau of Engraving and Printing, the Defense Department, including the Defense Logistics Agency, and the Patent and Trademark Office. Significant wins this year include a $15 million, nine-month contract renewal with the Internal Revenue Service to deliver and maintain Microsoft software on 130,000 desktops, the second renewal year of a 65-month, $120 million contract awarded to Beyond.com and Intellisys Technology Corp. of Fairfax, Va. Although Beyond.com has established itself as a household name among Internet users, the branding campaign cost the company a small fortune in marketing and advertising dollars, an expense that was not sustained by site revenue. "Unfortunately, that business plan didn't work, in part because consumers don't buy much software, and they often buy where they buy their computers," said Daniel Ries, managing director for C.E. Unterberg Towbin, San Francisco, which served as an underwriter in Beyond.com's 1998 initial public offering. Consequently, Beyond.com in 1999 sustained an $88 million net loss on revenue of $117.3 million. The company in April reported a first-quarter net loss of $20.6 million on revenue of $31.3 million.Those mounting losses have played havoc with Beyond.com's stock value. The company went public June 17, 1998, at $9 a share, with a follow-on offering April 14, 1999 at $35 a share. The stock (Nasdaq: BYND) peaked at about $41 a share in January 1999 but is now hovering at the $1.50 level.To stem the losses, Beyond.com in January decided to refocus by capitalizing on two of its strengths: its early wins among large agency clients, including a 1996 National Imagery and Mapping Agency contract; and its experience in building digital download e-commerce sites. The latter skills now will be performed at the behest of clients with established brand names, including Compaq Computer Corp., Hewlett-Packard Co., Microsoft Corp. and Symantec Corp. Beyond.com's head count, which boomed from 137 in May 1999 to 381 at the end of last year, has been whittled to 240 with more cuts on the way. The staff changes have reached all the way to the top. The company announced June 20 the appointment of Ronald Smith as chief executive officer. Smith, most recently president of Merisel, North American Distribution and Merisel, Canada, replaced Mark Breier.In addition, Steve Cooker has been named vice president of government sales, replacing Kendall Fargo, former vice president of enterprise and government sales. The firm has redesigned its Web site (gov.beyond.com/index/htm), now providing local and state government access to open market pricing via Ingram Micro. Previously, only select agencies could buy on the site under General Services Administration and blanket purchase agreements. Other changes include a broader product selection, new search and quoting tools and discussion forums. The company also has introduced Atlas, a new version of its Electronic Download Manager software that offers improved management across multiple locations, two-way integration with Microsoft's SMS and a silent installer, as well as more powerful management tools, among other features.Fueling interest in Beyond.com's services are the desire by government systems administrators to reduce the total cost of software ownership, along with the need to support systems with less staff and the desire for a paperless operation, Cooker said. One government customer estimated systems administrators saved half their time by implementing Beyond.com's services, eliminating activities such as installing CD-delivered revisions and patches on every PC."We are absolutely opportunity rich. We're seeing government take hold of this concept of electronic distribution," Cooker said. The government division will focus over the next six to 12 months on enterprise opportunities within cabinet-level agencies, as well as state and local business.Beyond.com had $30 million in government sales in 1999, almost triple its 1998 sales of $10.5 million. The company plans to double revenue in 2000; first-quarter government revenue was up 23 percent over the previous year's first quarter, to $10.2 million, with the second and third quarters expected to be the year's strongest.Government accounts for 40 percent to 45 percent of the company's business, a percentage that is expected to continue as the firm's less mature e-commerce services offering ramps up. The government division seeks enterprise arrangements among government clients, Cooker said. "If they don't have that need, we look for volume purchase agreements, creating a site so their customers can buy software over the Web," he said. The company is continuing to seek other strategies for exploiting its strengths and market opportunities in government, considering Web development services and other related offerings, Cooker saidSystem integrators and value-added resellers will play a growing role in this strategy. A reseller program was launched about 90 days ago. While Beyond.com typically gets involved at the request for quotations stage, integrators may help the firm enter into the process earlier, as well as ensure new upgrades will be compatible with existing systems. "We're focusing now on 200 government VARs," Cooker said. "Right now, we have relationships with 15 to 20, with two or three of those major relationships. We do business with just about every integrator and reseller, but I think we'll be a lot more active in that area."Current partners include Intellisys Technology Corp. and GTSI Corp., Chantilly, Va. (formerly Government Technology Services Inc). The company spent its first quarter refocusing its business, lowering its operating expenses and cash burn rate, cutting expenses, eliminating marketing obligations and signing new accounts. The company has amassed a year's worth of cash."The e-commerce services model gets us to operating break-even by the end of 2002, with a much lower revenue target than our previous consumer-based model," said Rick Neely, Beyond.com's chief financial officer who served as interim CEO until Smith's appointment. "Our new model has a higher margin potential over the long term."However, the company is wrestling with the implications of the application service provider model for delivering software, which potentially threatens downloading."We view it now as a potential threat, or we as potential players" drawing on our Internet-centric experience, Cooker said. Beyond.com has little competition in the government market, he added, although the company competes with some resellers and e-commerce solution providers on the periphery.Ries, however, is taking a wait-and-see approach and has a neutral rating on Beyond.com's stock. "I think if they can last long enough, they have a decent plan in place," he said. Regarding the company's strengthened government focus, "it's probably a good service, but it may not be enough to sustain the company."