NECX.com LLC last week celebrated 20 years as an electronic-components distributor, but the next few months may determine whether the company will translate a thriving brick-and-mortar business into a model of new-economy efficiency.
With a goal of moving half its business online by the end of next year, NECX is at ground zero of the e-commerce revolution. The Peabody, Mass., company, which expects to end the year with revenue of more than $700 million, will launch its Global Electronics Exchange in November offering an array of component-sourcing and value-added services to customers looking to buy or sell excess inventory.
In essence, NECX is betting that a deep customer base and decades of experience moving products around the globe will secure its place as a top online exchange. And the potential for success doesn't end there.
Online behemoth VerticalNet Inc., which last year bought NECX for $105 million, is taking the distributor's mature back-end infrastructure and mapping it across the 57 "vertical" information portals it operates in markets as diverse as chemicals and food processing.
Though VerticalNet has an envious market capitalization of $3.36 billion-on second- quarter losses of $87.1 million-it is largely dependent on the NECX model to execute its aggressive online strategy.
Joseph Galli Jr., the former president and chief operating officer of online bookseller Amazon.com, assumed the reins of VerticalNet, Horsham, Pa., in July. In an interview last week with EBN, Galli said the b2b marketplace is on the cusp of breaking out and will require superior logistics capability to ensure reliable back-end order fulfillment.
"Forget the stock market for a second. The real-life benefits and the real active volume in terms of b2b commerce hasn't happened yet ... that's all coming in the next couple of years. You're going to see a tidal wave of activity, of companies increasingly moving their activities from offline to online," Galli said.
"We are still in a nascent phase of creating commerce through our platform, but it is something that's happening very quickly. We are way down the path in building the technology to be an e-commerce portal. The acquisition of NECX was a big step, in that it's an incredibly well-managed exchange and we learned a lot [from it] about operating a many-to-many transaction model online," he said.
On the front end, VerticalNet has identified more than 20 potential markets and is setting up highly targeted sites for buyers and sellers. Most of its revenue is made by hosting and selling software and services to companies looking to establish individual online "storefronts." Additional revenue comes from advertisers hoping to tap into a large, demographically defined audience.
But VerticalNet's real moneymakers-the ones that led analysts to predict profitability in the second quarter of 2001-are the fees the company plans to reap from each online transaction.
That expectation explains to a large degree why the company is so highly valued by investors.
In its second quarter, VerticalNet posted $53.6 million in revenue, a 1,000% increase from $3.6 million in the year-ago quarter. Still, it has not escaped the drubbing all online enterprises received earlier this year, and last week was trading at $37.38, down from a March 10 high of $148.38.
VerticalNet is quickly establishing a presence in Europe and Asia and recently extended its reach into Japan through a deal with Softbank E-Commerce Corp. A reorganization last month divided the company into three groups-markets, exchanges, and solutions-into which each of its holdings is slotted.
To what extent NECX's back-end skills can be overlaid onto these different markets could help determine VerticalNet's early success, observers said. Few products are as demanding of a logistics provider as semiconductor components, which begin to lose value the moment they roll off the assembly line, said Lauriston B. Marshall, NECX's president and chief executive.
In fact, the company hinted it might split off its logistics and order-fulfillment operations into a separate company through which all of VerticalNet's back end would flow.
Having made 20 acquisitions in the past 18 months, VerticalNet could conceivably pick up additional logistics expertise, but in the short term the NECX model appears to be its principal back-end driver.
As it infiltrates the nether regions of its parent company's operations, NECX is keenly aware that it faces competition in its core business from a phalanx of online exchanges like PartMiner and Need2Buy.com.
The NECX Global Electronics Exchange will feature a range of services, from order- fulfillment offerings like tape-and-reel, specialized inventory management, and rebate programs, to question.com, a forum for customers to query experts on specific markets, manufacturing processes, and products areas.
Having completed its acquisition of R.W. Electronics Inc. and a $75 million merger with American IC Exchange, NECX has firm footing on the West Coast and a secure place in the commodity DRAM market.
Marshall defended his company's turf by noting that while fledgling exchanges are scrambling to build their own logistics operations-or tapping into existing channels through distributor partnerships-none has a sophisticated in-house infrastructure at its disposal.
"It is definitely easier for an existing company with a proven back end and a proven business model to 'Webify' that model and bring it online," said Robert C. Damron, an analyst at Tucker Anthony Capital Markets, Milwaukee. "If anyone can be successful at this model, I think NECX can."
That sentiment may explain why the venture-capital community is scrutinizing online sourcing start-ups more closely before releasing investment capital, according to Marshall.
"From my vantage point, the shake-out that's taking place because the money is drying up validates the business approach that we've taken to going online, which is to build it from the back end up," he said. "And if the drying up of investment capital hasn't killed [our competition], the value proposition we'll be rolling out will."