Last week, Ariba announced a strong second quarter for Fiscal year 2012. In looking at the performance, our gut feel is that positive customer buying trends (generally) in the sector combined with solid execution on Ariba's part to drive the quarterly numbers (i.e., a rising tide + good execution). Granted, there is no doubt Ariba has built the best lead generation and demand management machine in the business, and this played a key role in their performance. The numbers truly tell the story on their own: "Subscription revenue of $89.2 million, up 32% year-over-year, network revenue of $45.4 million, up 59% year-over-year, total revenue of $131.5 million, up 21% year-over-year...[and] net cash flow from continuing operations of $38.7 million for the three months ended March 31, 2012." Moreover, Ariba shared on the earnings call that they added "51 new logos" in the quarter. Proof of the power of good sales and marketing, in our book.
This is impressive, especially considering that all of the growth has been fueled by the continued sale of existing product lines (which in many cases, have seen limited functional innovation relative to others in the sector in the past few quarters) and transaction volume growth on the network, including inorganic growth. In this regard, it also shows Ariba continues to maintain and grow the Quadrem business, an acquisition that could very well go down as one of the most successfully executed revenue/valuation arbitrage moves in B2B history. Quadrem was the largest P2P marketplace we're aware of that was able to figure out a model in which suppliers would pay transaction fees in lieu of buying organizations paying for functional software and connectivity capability. And Ariba took this model and ran with it.
But in terms of what's new since Quadrem, the list -- at least what has been articulated to investors and customers -- is relatively short. During the earnings call and from our sources at LIVE, we have picked up on four core themes where we are likely to see Ariba focus on and potentially evolve its strategy: usability improvements (in the core P2P product), pricing (including network pricing), partnerships, and M&A. That's it, as far as we can tell, and M&A from a product enhancement perspective has not been a theme in the least for Ariba going back a decade or so. Might this change?
In the past ten years, Ariba has focused on organic solution development. But one area where others have flanked it is the usability of its core P2P product, especially on the eProcurement buying side (search, comparison, shopping cart, etc.) Finally, Ariba has acknowledged its weaknesses here -- perhaps owing to the number of times Coupa and others have taken away business from them -- and has put a newfound investment and enthusiasm behind driving user interface improvements.
"We're also improving our user experience by combining functional innovations with an enhanced user interface, sort of a next-generation user interface with catalogs and advanced consumerized navigation, something some of our customers have said they've never seen before available in Enterprise-buying applications. This is and will continue to enable us to extend and drive more adoption with our customers across a broader range of their processes and spend. So this combination of more nodes, broader adoption and deeper spend penetration is what is fueling our growth today and into the future."
Our sources suggest the new interface (on the buy-side) that Ariba shared at Live is a big improvement (we have not yet seen it ourselves) over the previous UI, however it does not leapfrog the competition. It is merely adequate. But we'll take adequate, given the strength of the rest of Ariba's P2P footprint. As the UI gets closer to launch/GA, we'll be sure to share our impressions of it here. We will also be sharing our analysis of SAP's new SRM interface, which bears a surprising resemblance to Ariba's new UI as well (Coupa, Simplifying IT, BuyerQuest and others essentially schooled the entire P2P market here).
From an M&A perspective, Calderoni shared a few insightful tidbits into where his company was going. First, any non-organic expansion will focus on targeted deals. To wit, "there aren't any very large companies out there that's on our radar screen right now," he notes. But Ariba is considering targeted candidates that "are on the radar." These "have similar characteristics in the sense that'll be network focused, and it'll open up the opportunity for us in either new markets. Or perhaps they're in a vertical or a category of spend that we think would be a complementary addition to Ariba."
Spend Matters readers (customers, prospects, investors and competitors) should note that this is more disclosive than Ariba has been in the past regarding its current M&A plans. We believe that complimentary acquisitions that do more than consolidate network volume might include vertical (e.g., utilities, chemicals/process, etc.) and/or category specific businesses (e.g., marketing, legal, professional services, contingent labor) that could compliment Ariba's strength outside of direct materials and supply chain, two areas it has shed its focus on and understanding of in recent years. Acquisitions that fuel network volume are no doubt top priority, however. Despite the vision/strategy Ariba has shared in the M&A area, we believe the vendor remains at a disadvantage in its ability to screen and execute rapidly on deals relative to other larger providers given a lack of a heavy transactional hitter running corporate development. A key hire in this area would be a very serious signal to the market.
We'll share our thoughts on what this means -- as well as explore Ariba's future direction around partnerships and pricing -- in Part 2 of this post.