Tracking Ariba's Third Quarter Fiscal 2010 Earnings Report: Three Perspectives (Part 1)

It's become somewhat of a regular thing on Spend Matters to track Ariba's quarterly performance as both a proxy for the overall market as well as to see how this specific procurement/Spend Management bellwether organization is performing overall. Yet I sometimes worry in these analyses that I'm not providing much new information each time. I also share the concern, as some Spend Matters readers have raised, that I give the venerable Spend Management vendor too much play on these pages relative to smaller organizations and the ERPs. Yet like it or not, Ariba is still such a critical central force in this market, and I think it's important to continue on with these analyses, adding in some related observations based on what I'm hearing directly from Ariba customers and prospects as well as channels -- not to mention alternative providers for prospects and customer to evaluate in addition to Ariba as well.

In this edition of my quarterly mini-series looking at Ariba's progress, I'll divide my posts into three parts focused first on the financial -- and related user implications -- of the quarterly results. Second, I'll tackle the market and competitive perspective including competitive observations that go unreported or unanswered in the earnings call and related materials. And third, look at the results specifically from a customer perspective and explain what growth and related metrics can tell us, as well as double-clicking on related customer observations I've seen of late. Let's begin with the numbers.

From a growth perspective, revenue numbers were strong -- $93.2 million to be exact, a number ahead of expectations. Of that, roughly two thirds ($60.8 million) came from subscription and maintenance revenue. And to be more specific, "Subscription software revenue [i.e., SaaS or Cloud stuff] came in at $44 million ... up 16% year-over-year." Ariba's cash stash continues to grow, befitting an organization increasingly pushing the "working capital" mantra into its customer base. Specifically, the vendor generated $21.6MM in cash for the quarter prior to its "lease loss payment."

Network revenue growth appears solid, even ahead of the Ariba network fee increases beginning this fall (which will materially impact network revenue in the coming quarters and years). Specifically, "yearly network revenue growth" should climb 25% and overall network "volumes are up double-digits year-over-year." Yet if we dig below the numbers, I'd guess that the largest number of the highest revenue generating chargeable relationships -- 16,100 one-to-one buyer-to-supplier relationships in the quarter above the threshold required based on individual relationship volume and number of transactions -- on the network are largely built on existing CD accounts. And these are the ones I believe are those most at risk right now for migrating off Ariba to ERP or other procurement and invoicing solutions -- or potentially staying on Ariba software but changing which networks they use for higher dollar transacting suppliers -- in the coming years. Not surprisingly, I also believe that it's also within this great where the greatest legacy discontent is regarding Ariba.

Still, at least some customers -- both new and existing -- appear to be signing larger deals with Ariba including "8 seven-figure license deals in the quarter, compared to 4 a year earlier." However, these license deals are probably representative of the exception rather than the norm, even in suite-based deals. There was one selection I was privy to this past quarter where Ariba ended up being a price leader for a completely integrated spend-to-source-to-contract-to-pay-to-manage suite and the three year costs -- aside from supplier fees -- hovered right around a seven figure sum including basic implementation and enablement over the contract term. That's an awfully great deal for everything involved and should also serve as a proof point that in competitive situations, Ariba will drop their spend trousers to get the business.

How is Ariba doing in the market from a competitive perspective and does its overall direction match what customers are looking for? Stay tuned for further analysis on this quarter and beyond.

Jason Busch

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