On fire online

REVIEW SUMMARY
Company. Jagged Peak
Industry. Technology
Key.A unique product could allow Jagged Peak to capitalize on an enormous — and still growing — market space for e-commerce.

Have you ever been a victim of sales prevention?

You walk into a store, cash in hand, ready to make a purchase and somehow leave without having spent a dime. Whether the product was out of stock, a customer service problem occurred or something else went wrong, you were ready to buy and the sale was somehow prevented.

It happens all the time. And in 1999, it happened to Paul Demirdjian.

Demirdjian wanted to buy a laptop online, and decided to use the site Egghead.com to complete his purchase. He browsed the site's options, made his choice, gave his credit card information, and considered the purchase done.

Three days later, however, he received an e-mail from Egghead, saying the model he'd selected was out of stock, requesting he select a different laptop.

Twice more, Demirdjian would choose a laptop, make the purchase, and find out three days later that Egghead didn't have what he wanted. After his third attempt, he called the company's customer service line, and tried asking someone what computers they did have in stock.

After several minutes, the response: “We don't know.”

At that point, Demirdjian saw an incredible business opportunity. How can a company afford to do business without being fully aware of its own inventory? For Egghead, and likely for many other online businesses, a major problem needed solving.

Today, Demirdjian is chief executive officer of Jagged Peak, a publicly traded, Tampa-based company that aims at the solution.

Jagged Peak works with manufacturers to develop sales channels that directly connect them to the customer. Ideally, clients of Jagged Peak will never have to tell a customer that they don't know what's in stock.

At the same time, the company aims to optimize its clients' distribution systems. As a result, not only do they know what they have in stock, they also know how to ship it as quickly and cheaply as possible.

It's an advantage Jagged Peak tries to give its clients: high-powered software that can save clients hundreds of thousands of dollars on shipping costs.

Trends in e-commerce
Jagged Peak specializes in e-commerce solutions, helping product manufacturers sell direct to consumers via the Internet.

The e-commerce market space is already massive, and continues to grow. In 2003, Forrester Research estimated that consumers spent a total of $12.2 billion online. In 2008, that estimate increased to $204 billion in online sales, and Forrester's projects that number could grow to $335 billion by 2012.

Demirdjian is well aware of the growth trend in e-commerce. “This is not a mature market,” he argues. “We see the momentum, and it is here to stay.”

At the same time, Demirdjian recognizes that most manufacturers are not prepared to take advantage of that growth in online activity.

In fact, his company estimates that 90% of online orders are not connected to inventory infrastructures. That means many potential online buyers are likely encountering the same experience Demirdjian did in trying to purchase a computer, where the retailer simply doesn't know what's in stock.

That 90% represents a lot of potential clients for Jagged Peak's main product.

The product is called EDGE, which stands for E-Business Dynamic Global Engine. It's described as a software system that can help businesses manage every aspect of the demand chain for online orders, including capturing orders, tracking inventory, optimizing warehouse network usage, and more.

It could be the solution for all those companies suffering from a disconnect between physical inventories and online sales. For several big name manufacturers - Nokia, Tag Heuer, Swatch - it's already true.

Cost effective
The company's EDGE software aims to be more than just a stopgap. It can improve customer experience and, most important of all, can do so cheaply.

Successful online retailers have shown that customer experience is crucial to doing well. It's a large part of what made Amazon.com, the online mega-retailer with zero physical stores, a household name. That company brought in a staggering $21.7 billion in revenue between Sept. 30, 2008 and Sept. 30, 2009.

Amazon.com's focus on customer experience was demonstrated in its recent acquisition of Zappos.com, a competing online retailer that built a solid customer base by providing many repeat users with free overnight shipping.

Demirdjian is well aware of what made Zappos so successful. As he sees it, “They're using supply chain excellence as part of their brand.”

Certainly, delivering customer orders overnight can improve user experience. But keeping customers extremely happy can sometimes be an expensive proposition.

In Zappos' case, that's all too true. Their overnight shipping is done via air — more costly than the ground shipment alternative. Demirdjian knows this, and is quick to point out an advantage his company has over the competition.

Jagged Peak's technology promises the same sort of accelerated delivery option that Zappos provides its users, but Demirdjian's company is able to provide that service via ground. That saves clients money, and gives Jagged Peak an edge of a different sort in the e-commerce marketplace.

Approaching profitability
The potential savings for customers are keeping Jagged Peak's revenues going. But saving money hasn't exactly been easy to do from the company's outset.
Demirdjian is blunt about his company's most difficult challenge: “Enterprise software is very, very expensive.”

Furthermore, the problem of software development being very costly is made worse by resulting cash flows — it's all upfront. Imagine paying highly skilled employees for hours and hours of development work before being able to sell a dime's worth of product.

In that sense, the company is proud to have even survived for this long. “It's about perseverance,” Demirdjian says. “It's not easy.”

Fortunately for the company, at least the cash flow issue has eased. From 2004 to 2008, Jagged Peak exceeded $10 million in revenue, and will almost certainly do so again in 2009 (fourth quarter results have not yet been filed).

Now that revenues are both consistent, the company is focusing on turning some of those revenues into profits. In 2008, the company posted a net loss of $194,800, representing 1.2% of total revenues, which were $16,546,700 for the year.

Based on economic circumstances, 2009 doesn't look like it'll be profitable either. Going forward, then, Jagged Peak will need to maintain that edge in cost savings over competitors. “There's only so many people who can actually do what we do,” Dimerdjian says.

The company's potential for success also comes back to the immaturity of the e-commerce marketplace. While online retail sales continue to grow rapidly, many manufacturers still need to improve their online sales models.

AT A GLANCE
Company Name: Jagged Peak
Headquarters: Tampa, FL
CEO: Paul Demirdjian
FY 2008 Revenues: $16.24 million
Stock symbol: JGPK.OB
Recent stock price: $.12
52-week stock-price range: $.11 - .29
Price-earnings ratio (trailing 12 months): N/A
Dividend: N/A
Market capitalization: 1.76M
Source: Yahoo! Finance

Download "By The Numbers" for Jagged Peak here.