Analyzing Ariba's Quarter (Part 2): There's More to the Network Business Than Just the Numbers

See Part 1 of this post here.

Ariba's network business continues to delight investors -- not to mention the great majority of small suppliers whose participation in the network is subsidized by the largest suppliers who pay as much as $20K per year for each transacting relationship on the network (yes, this really is Obamanomics circa 2009 applied to the world of B2B commerce). Redistribution of supplier wealth aside, it's clear that Ariba's network volume and revenues are growing. Ariba shared on the earnings call that the network has seen "25% growth over the past 12 months." Current annual network volume "now stands at $142 billion and that will grow to 170+ billion dollars" factoring in the Quadrem acquisition. Participation is also growing on the network, too. Ariba also noted to investors in discussing its earnings that "over the past 12 months, we have added 52,000 suppliers in the network equating to about 1,000 new suppliers each week and we now stand at 263,000 suppliers and again, that is before adding another 70,000 Quadrem suppliers."

From an organic revenue perspective (not factoring in Quadrem), Ariba saw comparable growth of "41%, resulting from both at volume growth as well as a change in our business model earlier in the quarter." How does this 41% figure break down? Ariba noted on the call that "we are growing network revenues a little over 40% [and] volume growth alone is at least 25%." That "change in business model" is the supplier price increase which you can read about in exhaustive detail in this analysis: Ariba Network Price Hike: Plan for Increased Supplier Fees in September 2010. So it seems that in less than one quarter of the price increase taking effect, Ariba has realized a more than 15% pop in year-over-year quarterly comparable revenue from something other than network volume rises. Moreover, Ariba implied on the call that rising network revenue backlog might be the place with the largest "impact" due to the price increase thus far.

In total, "chargeable [network] relationships hit 27,200, and transaction relationships 77,300." Suppliers accounted for $8.9 million of quarterly network fees, while buying organizations chipped in $5 million. So in short, Ariba network revenue is growing, transacting relationships are increasing, and bigger suppliers are paying more (accounting for a material rise in network revenue). Yet before Quadrem's network revenue begins to hit Ariba's P&L next quarter, network revenue remains a small percentage Ariba's overall top line today. Perhaps most important, from a competitive standpoint, you can be sure that the network business will get much more interesting in general once new fees and revenue models begin to gather steam (e.g., dynamic discounting/supply chain finance, supplier search and discovery, etc.) As a final aside, Spend Matters has learned that Ariba is mandating that all SaaS/cloud P2P customers use the network for sharing PO, invoice, ASN and other information with suppliers (to trigger network fees), yet it is willing to consider alternative models for legacy Buyer customers to keep them on Ariba technology in general.

Jason Busch

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