Analyzing Ariba’s Fourth Quarter (Part 3)

In this post looking at Ariba's latest quarterly performance (click here for Part 1 and Part 2), I'll offer a quick summary of new information Ariba shared on the network business, specific to transactional volume and supplier trends. This information is especially interesting to consider in light of the recent network price increase. According to Ariba, the company is seeing a 20% growth year-over-year in network volume (measured on what we believe is a dollar basis rather than a document basis) as well as "significant growth in the number of transacting and chargeable suppliers." Our own research suggests that Ariba's network competitors (e.g., OB10, Hubwoo, Basware, etc.) are growing at a similar or faster clip in terms of transaction volume (some are seeing volume growth exceeding 40% or more).

Ariba continues to leverage the network as a means to differentiate itself in the market and to tap into a customer base that's already using ERP procurement software. On the earnings call, Bob Calderoni, Ariba's CEO, mentioned that "a big Oracle shop" signed onto the network "to handle invoice payment of remittance information and collaboration with their global suppliers" and that this one deal "will drive significant volumes through our network in the coming years." In addition, Spectra Energy Corporation, which uses what Ariba describes as "a combination of SAP and Maximo to handle their MRO procurement," also signed onto the network in the quarter. These are no doubt valuable wins, but our own research suggests that many larger Ariba customers are currently evaluating ways to reduce the impact of network fee increases (and some have pulled the trigger on other providers).

In total during the quarter, Ariba signed 47 "unique deals" that use the network "to connect, transact and collaborate with their trading partners." Yet the overall network P&L is still a small percentage of the Ariba business. Ariba shared on the call that of the $11.2 million in network revenue, $6.3 million came from suppliers and $4.9 came from buyers (the supplier portion increased $100K from the previous quarter). It's important to note that the impact of the network price increase would have been negligible in the quarter due to timing issues. Still, the network promises to be a very, very profitable business model for Ariba if pricing models hold. As Bob notes, with this business, Ariba sells "80% gross margin annuities. And as our customers utilize those products they generate supplier revenues for us which are even higher than an 80% gross profit annuity out there [emphasis added]."

I believe that this very high gross margin from supplier-generated revenues (90%+) on the network is not simple to analyze from a renewal perspective going forward (Ariba claims network renewals are in the "mid-90s or sometimes slightly higher" on a percentage basis). For many companies weighing the costs of keeping their largest suppliers on the network versus taking them off, the answer will not be binary (despite what many I talk to believe). For example, I could easily see scenarios where suppliers stay on the network for some customers, but not others, based on transacting volume thresholds. The key for looking at the impact of the price increase on relative network volume going forward will not be overall renewals, but whether those buying customers that have larger numbers of high-dollar volume POs/invoices end up taking a subset of their suppliers off the network to avoid fee increases.

Jason Busch

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