The Ariba Network continues to delight investors even though some very smart sell-side analysts we know really haven't a clue what it does, compared to other buyer/supplier connectivity and collaborative information tools in the market. I described SAP Supplier InfoNet recently and a sell-side analyst pinged me to ask if this was what Ariba was up to with its network (the answer is no -- SAP Supplier InfoNet is entirely different). Regardless, Ariba is making high-margin dollars off its network even if Wall Street doesn't really know what it does, which from an investment standpoint is a good thing. B2B transactional ignorance may be bliss. On the earnings call last week, management suggested "this quarter was an outstanding quarter for our Network. Network revenues were $37 million" which represent growth of "more than $8 million quarter-to-quarter and triple what it was just a year ago." Moreover... "network revenue is more than 50%...[of Ariba's] Subscription revenue...today our Network revenue should end the year with more than $115 million of revenue."
On the earnings call, a question came in from an analyst about supplier renewals on the network. This is an important topic owing to the very significant network price increase from 2010, which for many suppliers did not really kick in until 2011. Ariba, responding, noted that "80% of our supplier relationships have renewed to date [of those which have been up for renewal]" so the annual number is "still around 95%" or thereabouts. Of course suppliers don't have that much choice in the matter of working with Ariba, especially mid-tier ones. After all, in a procurement and A/P setting, the customer is the one that dictates how a company will issue POs, receive invoices and pay its bills. But certainly, the network price increase continues to irk larger suppliers. Spend Matters has spoken with Ariba CD customers recently which have taken select larger suppliers off the network in the past nine months, but who in general, have gotten past the price increase as a cost of doing business, at least for most of their suppliers (i.e., the ones not paying Ariba close to $20K per year per transacting relationship).
One of the major reasons for Ariba's solid performance of late has been the number of sales reps it hits the field with. On the call, Ariba noted that "we have taken our quota carrying sales reps up from a low of 77 to 120 today" and on the marketing front, they "have also added capacity to our demand creation organization." Yet if you do the math around how these reps are performing relative to competitive organizations with fewer commercial resources, the numbers tell a slightly different story. Granted, adding "50 new customers" in the quarter is certainly a feat. But contrast this with Coupa, the competitor Ariba cares most about (i.e., P2P), which had over 20 net new deals in the same quarter. Last I checked, Coupa's commercial organization (including sales and marketing/lead generation) was considerably less than 10% the size of Ariba's.
Based on comparisons like this, it's our view that Ariba continues to crank the lead generation and sales arm, leveraging a traditional enterprise software churn and burn quota-carrying rep model. But unlike other vendors in this market, they're able to saturate the field with additional bodies. This suggests to us that Ariba is winning new business because of its overall commercial footprint as much as anything else (solution capabilities, innovation, pricing, etc.) There's nothing wrong with this of course, but it's not something you're likely to read about elsewhere.
Ariba's entire commercial model (and their guidance to investors) is based on driving network and recurring SaaS revenue around the P2P area ("downstream" revenue, in Ariba internal solutions parlance). But because of the breadth of Ariba's solution offering, including all the upstream modules (e.g., spend analysis, sourcing, contract management, supplier management), there's no typical customer engagement pattern. On the call, management noted that if you were to chart the business challenge (and opportunity) of procurement on a chart, "you'd say every customer starts with spend analytics, then they would go to sourcing, then contracts, then procurement, then to invoice automation, and that would be a very logical and searches I believe flow -- sensible flow. The reality is every customer has different pain points, and they start all over the map. Some will start with the invoicing, some will start with procurement. It really has to do with different people are responsible for different things."
Regardless, our own product intelligence suggests that Ariba is strongest where their overall corporate direction is headed -- in the downstream areas. But more on this in our final post analyzing the quarter looking at the current competitive makeup of the market and how Ariba stacks up within it.