What Can Ariba's Numbers Tell Us About the State of the Market?

Last week, Ariba quietly slipped in a decent 09 second quarter earnings report during the same week as LIVE. Some of the highlights from the quarter include generating $22.5 million in cash flow (before a number of extenuating factors -- those always seem to arise, don't they?). But still, in the past six months, Ariba has added nearly $26 million of cash/cash equivalents to its balance sheet (and $17 million in the last quarter alone) -- which should silence any critics worried about Ariba's profitability and overall viability. As an outside observer, what I find more interesting though, are some of the metrics around overall customer growth, deal sizes and the competitive environment. I'll share of the core details in this post as well as my analysis (stay tuned for Part 2 of my take on Ariba Spend Analysis tomorrow morning).

On the earnings call, Ariba claimed that they "closed 216 unique customer transactions, added 39 new named accounts, signed 141 on-demand deals, and closed 11 solution deals, including five software deals over $1 million." These numbers tell me that Ariba is closing more deals, but smaller deals -- and that customers are either expecting more for less or are signing up for fewer pieces of the overall Ariba Spend Management solution puzzle at the same time. Bob Calderoni noted specifically that Ariba is seeing fewer larger deals than in the past, noting that in the previous year, Ariba was averaging approximately 11 seven-figure software deals per quarter.

In talking to Ariba competitors and prospects evaluating solutions in the market, I would not say that there is significant downward price pressure on deals. In fact, I know of many large Spend Management analysis-to-pay deals (some ERP, some non-ERP) that have taken place in recent months. In other words, I suspect that Ariba is seeing fewer large deals because people are buying smaller chunks -- and also because they're licensing less end-to-end software in favor of Ariba SaaS solutions that they can more easily plug-and-play together as they need to (versus all at once).

So what solutions are gaining traction? Ariba noted on the earnings call that sourcing is "trending stronger". In Bob's words, Ariba's upstream solutions (sourcing, contract management and spend visibility) appear to be those that were trending up the most. P2P deals, Bob suggested, are more complex deployments and have longer payback (i.e., more than 3 months). Hence, some are getting put on hold, is one explanation. Another -- not Bob's, but mine -- is that Ariba is beginning to lose or see fewer P2P deals thanks to immediate or planned SAP / Oracle migration. I have seen evidence of this in the market first hand of late approaching SAP's G/A release of SRM 7.0. Given this, Ariba could very well see further erosion of its current marketshare in Global 1000 P2P accounts (especially as hosted versions of SAP and Oracle P2P become more familiar options -- and options not requiring a forklift back-end upgrade to take advantage of the latest release).

Bob also noted that sales cycles are getting longer -- which is consistent with what I'm seeing with other vendors and from advising companies in the selection process. But in my view, much of the delay Ariba and others are seeing is not in the evaluation/bake-off period. Rather, it's the stop/start delay that's happening once the decision has been made to work with a given provider before it's possible to get all parties to sign off to get started. Bob puts it well when he noted that deals are still happening but "they're simply getting pushed out" for various reasons. This is an accurate statement -- not marketing or public company hyperbole.

What are the other takeaways from the earnings report and earnings call? For one, Ariba LIVE appears to have been a lead generation success if you look at the numbers (2,600 procurement and finance professionals registered for it, many of which we have to assume are new prospects for Ariba or current customers that might license additional solutions). Another takeaway I had is that Ariba confirmed the challenge of the current services environment, suggesting that companies are becoming more rigorous in how they scrutinize temporary labor -- including consultants. Ariba is not alone here in selling into a challenging services environment, but I do know of a number of boutique firms -- as well as larger consultancies -- that are having their best years ever at the moment.

Clearly, Ariba is missing out on something from a services secret sauce perspective, especially considering that Bob admitted on the call that the implementation business is actually doing better than the sourcing services business. One theory I have is that Ariba is getting caught up in manufacturing volume declines and its sourcing services business is suffering (given that it has more exposure than most consulting organizations to direct materials). But another theory -- and this one I lend more credibility to -- is that Ariba is failing to build and maintain the level and number of executive relationships it needs to in order to sell large services deals.

Having lost at least two VP-level executives to AT Kearney Procurement solutions that I'm aware of in the past year, I can say that Ariba needs to get more serious about recruiting top (and expensive) client sales and management talent if it is to buck the current downward sourcing services trend. I also do not believe that from a sourcing consulting perspective, that Ariba has the current DNA it needs to thrive. The old Arthur Andersen team that came over originally with Kevin Costello was strong in technology, but not focused on process, operations or sourcing. And look what part of the consulting practice is doing well today. No surprise. If I were Ariba, I would look to make some expensive senior process-oriented consulting hires or to acquire a number of firms to ramp this business.

When it comes to the Ariba Supplier Network, growth slowed as the average volume per supplier was down, owing to declining order volumes in general. However, Ariba did manage to add additional suppliers and increase network revenue year-over-year by about 10%. Not huge, but proof the network model still has legs, even in an overall economic recession when companies are buying less. Towards the end of the call, Bob noted that release 10s1, which is going to be released shortly, or something to that effect, will mark the final integration of Procuri's features and usability into the Ariba platform. In his words, "a number of customers are scheduled to start transitioning" to that platform as soon as it is available. All I can say is that it's about time. Tying up all of the loose ends of the Procuri acquisition, which proved prescient for Ariba on many levels, has been a long-time in the operational making. But it's been worth it on many levels from customer acquisition to the philosophical shift that an On Demand software / services / content revenue model has required.

Disclosure: I am a former FreeMarkets employee who no longer holds any Ariba stock or the stock of any Ariba competitor (unless held indirectly via an index fund or ETF). Ariba is a sponsor of Spend Matters and is a consulting client of my firm, Azul Partners, as are many companies in the Spend Management sector. See full client disclosures here.

Jason Busch

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