Ariba's Q4 2011 Results — Do They Matter to Gauge Overall Market Growth Any More? (Part 3)

Click here for Part 1 and Part 2 of this series.

In terms of new product innovation in P2P, Spend Matters believes that Ariba is coming up short relative to younger, best-of-breed vendors (and even some banks) despite the fact that their core capabilities in eProcurement still tend to come out at the top of the pack in most shortlist comparisons (including our own) from a purely functional level. In short, when it comes to emerging areas, Ariba is behaving extremely conservatively. Consider how they appear to be falling behind a set of growing, best-of-breed competitors (and potentially partners) in the area of working capital management strategy and dynamic discounting program implementation via its supplier network. On the earnings call, one analyst asked the Ariba team if they had "any sort of metrics or proof points on the value add services on your network that you're trying to develop to differentiate your network and create stickiness? You've talked a lot about Ariba Discovery, what about the financing offering? How is that coming? And any metrics or proof points on that?" In response, Ariba's CEO, Bob Calderoni, opted to punt. Answering, but largely dodging the question, Bob stated: "That's coming along. I think combination of -- we've got some supply chain finance pilots that are out there, but I would put in pilot type of discussion. Dynamic discounting is one that I think we see a little more traction on...but not anything that is moving the needle in terms of revenue yet...I would think they're three years out before you see any kind of revenue from that. We need a bit more invoicing business before we can turn that into revenue."

Without spending too much time on this one point, we would further interrogate this statement by urging Ariba to look at the growth of the supply chain finance and discounting programs of major banks like Citi (very impressive) and best of breed vendors like Oxygen Finance and Pollenware -- not to mention Taulia, which we hear good things about, but they're in the early going. There are many others we could list as well (e.g., The Receivables Exchange, an Ariba partner) who would argue with Ariba's statement that effective discounting and supply chain finance programs require complete electronic invoicing adoption first. Tradeshift is pushing the limits here as well with a new early payment model that could potentially disrupt the market. Even discounting the intersection of P2P and early payment programs, some of the banks have figured out pretty clever workarounds to a lack of complete electronic invoicing adoption while still enabling capability in the area. It's our belief that Ariba is letting the supply chain finance and dynamic discounting market pull away at this phase, much as they abandoned a serious pursuit of newer market opportunities in such areas as: contingent workforce procurement (VMS), vendor management, advanced sourcing and supplier risk and performance management.

More broadly speaking, Ariba's growth in both new and existing markets is not keeping up with many of its key competitors in terms of new customer acquisition. By being able to showcase overall subscription growth by raising network fees and the successful upsell of select customers as well as broader suite deals that are priced aggressively to win the business not to mention renewals where Ariba greatly reduces its pricing to keep the business, Ariba is able to avoid breaking out new customer growth in both its upstream and downstream areas. Here is one specific examples: on the VMS front, Ariba has virtually stagnated when it comes to contingent workforce management with new customer acquisition aside from a handful of "toss in" deals where the applications is not fully deployed. SOW is another case, and we hear better things here from the grapevine. Yet Ariba's VMS competitors are growing at a new customer acquisition rate individually at least 5X-10X as quickly.

Or take the P2P area which hits closer to home to Ariba's core business model designed to sign on new eProcurement and invoicing customers to drive network volume (paid for by suppliers). Here, our research suggests that Coupa alone is keeping pace or growing faster than Ariba in new customer acquisitions despite having a commercial team that is considerably less than 20% as large as Ariba's. In its most recent quarter, we requested and received information from Coupa regarding customer acquisition details. They shared that they had 18 net new customers in the quarter (and 29 additional expansions), including 4 for complete P2P + expense management, 29 for P2P, 12 for eProcurement and 2 for expenses. Many of these customers were big names and the deals were competitive with Ariba. Or take the case of Ivalua, which shared with us that they had signed 26 new customer deals in 2011, including 9 P2P solution deals (some which include supplier management and contracts), 11 projects in e-sourcing and SRM and 6 projects for supplier management and spend analysis.

Contrast these results with Ariba's numbers -- when they used to break out these details (they no longer do). One financial analyst shared that the numbers break down as follows -- note, these are not "net new" customer numbers (like the above), but new wins in the particular solution area. He noted, "the last time we got a read on P2P deals was in the December quarter (the five quarter trend was 10, 18, 9, 8, 10). The last time they broke out total 'downstream' deals, which they define as P2P + EIPP, was in June (trend there was 20, 27, 23, 22, 24 from Dec '09 to Dec '10 and 42 in the March '10 quarter)." Looking at these numbers, doing our own calculation of deal volume in the current market and Ariba wins and talking to those close to the Ariba organization as well as the consultant and channel ecosystem has led us to conclude that Ariba's net new P2P and eProcurement customer growth is not accelerating and might be slowing. Further, if you add in the growth of the larger company P2P ecosystem (e.g., SAP [inclusive of Hubwoo, CapGemini and Infosys], Oracle and Basware), then the competitive organic new customer expansion growth metrics look average to slow by direct comparison and trending.

Stay tuned for the final post in this series when we'll conclude and summarize why we must now decouple Ariba's results from the broader customer adoption and trending in the Spend Management market.

Jason Busch

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