LIVE Dispatch: The State of Ariba's Business

I stopped by the industry and financial analyst lunch yesterday at LIVE, and was treated to a surprisingly informative discourse on the state of Ariba's finances and commercial prospects. Kudos to Ariba (Nasdaq: ARBA) for lowering their standards and letting a blogger sit in on the luncheon.

Jim Frankola, Ariba's CFO, began the presentation by providing what I thought amounted to a good explanation about the current "trough" in Ariba's revenue as the provider moves from high margin, one-time license deals (with recurring maintenance) to longer-term SaaS and solution ones where revenue is recognized over contract length. Thus, revenue is a lagging indicator of deal volume and overall traction / growth (the figures to look at to accurate gauge Ariba's "growth" in recent quarters are new customer acquisition, retention, and overall backlog). According to the numbers shared with us during the lunch, 80+% of new deals in recent quarters have been subscription based, whereas less than 20% were before Ariba swallowed FreeMarkets. Last year, Ariba signed an average of 18 new deals per quarter, but recently this number has climbed to 23 –- a positive sign. And the overall pipeline looks substantially higher than last year (a fact confirmed by the number of prospects I've spoken with at the event).

In Addition, Jim highlighted how Ariba has cut $100 million in costs following the FreeMarkets acquisition -- they still call it a merger, but in my book, looking at who is running the company and strategy today, it was clearly an acquisition -- including $50 million which was non-labor related. Currently, 50% of Ariba's revenue is license, subscription and maintenance based while the other 50% comes from services (with the major difference compared with other software vendors that a significant percentage of the services revenue comes from process, strategy, and operations consulting related to sourcing and supply chain, not just technology implementation). Overall, services and maintenance revenue has been stable in recent quarters.

In other related financial topics, Ariba expects software license revenue to bottom out at approximately $5 million per quarter and stay in that range. And they expect that the old FreeMarkets "FullSource" revenue -- essentially the "outsourced" strategic sourcing offering that FMKT offered as far back as 1995/1996 -– to remain stable. Prior to the acquisition, this revenue was declining, but Jim stated that it has been relatively stable for the past 6 quarters.

After Jim's presentation, Craig Federighi, Ariba's CTO, talked about product, technology, and solution strategy. I'll post my notes and analysis from this part of the presentation later in the week.

Jason Busch

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