Interpreting Ariba's Numbers and Guidance (Part 1)

Last week, Ariba reported its latest quarterly results. I usually don't like to closely analyze the numbers, but given the general downward trend in the capital market and the concern of some regarding vendor viability -- and not to ignore the competitive rabble-rousing between Ariba and Emptoris on this blog -- I'm making an exception this time around. In this mini-series on Ariba's results, I'll divide my commentary into two parts: a discussion of the results (this post) and a behind-the-scenes look at what I'm seeing with Ariba -- including what the numbers, trends and guidance means. So without further adieu, let's dig in.

For those looking at just the basic numbers, it was not a bad quarter for Ariba. Non-GAAP revenue came in at the lower-end of guidance while operating EPS came out on the higher end. Ariba did, however, reduce guidance for the coming quarters in line with what many expect will be a difficult environment, especially for professional services. Still, overall performance wasn't bad as Ariba closed "218 unique customer transactions, added 27 new named accounts, signed 109 on-demand deals and closed 15 deals over $1 million" from October-December 2008. But these high-level numbers aren't necessarily as indicative of Ariba's financial performance and customer trends as some of the smaller snippets I heard on the earnings call.

What interests me more are some of the in the trenches numbers and statements that Ariba made which, I believe, provide more substance as to where the business might be headed. On his part of the call, Bob noted "on the services side of the business demand is softer." The amount of effort required to achieve a sale is also increasing. To this end, Bob remarked that "our trending data shows that it now takes twice as many inquiries to generate $1 million in pipeline" relative to the previous year. In my view, this type of environment will favor Ariba and other providers that can ramp-up their marketing and lead generation efforts while hurting those that cut back in this area because of the economy. Clearly, Ariba's marketing investment is paying off in filling the funnel, resulting in "1,500 inquiries" in a recent one-week period from a combination of online and real-world efforts.

So where is the interest coming from? Ariba did not provide too much disclosure on product mix in the call or earnings report, although Bob did note that the most recent quarter was stronger on sourcing than P2P (although the previous quarter was stronger on P2P -- go figure). Even though Ariba does not see any interest falling off in specific product areas, they're not taking any chances. At the same time they are investing in outbound marketing, Ariba is also cutting costs internally, "freezing salaries and not doing any merit increases, promotions," etc. While this might be an important short-term tactic, long-term this could lead to a talent loss, especially on the services side of the business. In the past year, I personally know of two senior individuals (VP level at Ariba) who left Ariba for AT Kearney Procurement services. Whether this trend continues remains to be seen.

During the Q&A, we did learn that the network is still a relatively small business for Ariba, generating $5.0 million in supplier fees and $8.2 million in total fees. When -- if ever -- will the network business become a larger part of Ariba's revenue? I suspect that if they can begin to realize more traction from their Orbian and Receivables Exchange partnerships on the supply chain finance side of the network, that we could see exponential growth in the overall network. But that's a big "if". What Ariba can bank on -- or at least provide guidance for -- is network growth based on supplier and guidance in the 20-30% range for the year (which is the same range for total network growth).

From a vertical growth perspective, Ariba saw the most traction in CPG and retail. Services industries were a strong spot as well. Geographically, Ariba saw "balance" with North American and European growth, but weakness in Asia-Pacific. There was not much talk of manufacturing trends in the call, but I suspect that Ariba is seeing weakness in this sector like everyone else. After all, when volumes are dropping at such significant rates, manufacturers will pull in the reigns on spending -- even when such spending can save money.

On the competitive front, Bob took the time to beat up SAP a bit, citing a recent competitive win (or "save" as the case may be). I'll save my commentary on this for a subsequent post, but it's worth noting in my various discussions with Ariba in recent months as well as general dialogue with folks close to Ariba, that they're looking at SAP and Oracle as their largest competitors in the months and years ahead -- not Emptoris or other best of breed competitors. Getting in front of customers will be a key part of this effort, and Bob suggested on the call that Ariba's approach to conferences would change formats this year because a lot of companies are "opting not to travel." So rather than have one central "big bang" show, Ariba will have "three or four where we take it to the customer" regions. I suspect we'll be hearing more about this from Ariba in the coming days and weeks as conference season is fast approaching. And I'll report what I learn here.

Stay tuned for the second part of this analysis when I dig below the numbers and trends, discussing what I'm seeing in the market and what it means for Ariba and the competitive marketplace going forward.

- Jason Busch

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