Ariba's Earnings — What Stands Out (Part 1)

After reading through Ariba's earnings transcript and consulting my own notes from the call, I've come away with a fairly optimistic view about how Ariba performed in its most recent quarter, and a positive outlook on how Ariba looks to perform in calendar year 2010. Now, there's no doubt that a rising market is providing a lift to Ariba -- Basware, Emptoris, and many other privately held companies with which I've been in touch have put up solid, if not strong, numbers in recent quarters as well. Ariba, however, appears to have cleared a number of hurdles that were holding back its growth; included among its achievements are continued strong SaaS customer acquisition, and a movement away from dependence on larger deals to make its quarterly numbers. In fact, in the last quarter, Ariba closed only "six software deals over $1 million," representing approximately 2% of the 248 unique customer deals closed. Renewals are also trending in the right direction, with an annualized renewal rate "running strong at 90%," which represents "a significant improvement from the mid-80's a year ago."

After the call, a former Ariba employee pointed out to me that, from a positioning standpoint, Ariba appears to have moved entirely away from its "Spend Management" positioning of old. Now, in contrast to previous earnings calls, you see Ariba talking about specific business issues rather than pioneering a segment. As Bob Calderoni put it at the start of the call, "Comments from Chief Executive Officers and CFOs today reflect an underlying theme to operate leaner and more efficiently than in the past. They are looking to reduce cost and risk both within their companies and across their supply chains, and we believe they will increasingly do this through automation."

Part of Ariba's automation strategy is not just to support the source-to-pay lifecycle through providing software that automates processes and enables better decision making; it also plans to act as the plumbing that connects companies through their network business. In terms of network revenue, "the supplier revenue was $5.8 million" and "the buyer revenue was $3.9 million." Over 71,000 companies transacted on the networks and roughly 20% (14,900) of these ended up being chargeable relationships based on volume levels. On the call, Ariba upped the guidance for its network, suggesting the business "has the ability to grow 20% to 30% long-term," up from its previous guidance of 15%."

These assumptions appear to be based on existing network fees, which Ariba last raised in 2007. Future changes in fee structures, thresholds, and percentages could certainly impact this guidance also (or may already be factored in). However, Spend Matters believes these numbers are realistic, given a rebound in spending levels and new SaaS P2P deals. Regardless, it appears that this relatively small percentage of Ariba's overall revenue could be a substantial growth driver in the future. In Spend Matters' view, one of Ariba's major points of differentiation in the P2P space remains its network. Although Ariba has not been successful in deriving material revenue from monetizing the network with non-Ariba eProcurement customers, it has continued to stay one growth-step ahead of competing networks and connectivity approaches. It is important to remember, though, that future network growth must be commensurate with the value it delivers to buyers and suppliers. I already know of some organizations that have taken a minority of their suppliers off of the network, because the equation for the high-dollar-level POs and invoices compared with a relatively small volume of transactions no longer made sense.

From a global perspective, Ariba shared that its geographic split of business was 57%-65% North America, 25%-28% UK/Europe, and the small balance in Asia Pacific. Spend Matters research suggests that Ariba has ceded ground in the APAC region to competitors in recent years, and no longer appears to have a strong foothold in this market. However, Ariba does appear to be gaining traction in Europe thanks in large part to aggressive pricing, which has made it a price leader in many deals (representing a complete reversal of its strategy a number of years ago).

Stay tuned for additional coverage of Ariba's earnings call tomorrow.

Jason Busch

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