Quick Take: What Does Ariba's Mixed Quarter Tell Us?

Ariba had a mixed bag of a quarter. You can read the highlights from this Reuter's dispatch here. In short, revenue was slightly down year-over-year (to $83.9 million) but profit edged ahead of expectations. Subscription revenue (i.e., SaaS applications) was up 25% year over year. Frequent Spend Matters readers know that Ariba has been aggressive on the cost cutting front in the past nine months (e.g., sales layoffs/turnover and consulting cut backs) so pulling out a penny earnings surprise in the positive should catch no one off guard. Nor should their booming -- well, relatively speaking, given the economy -- Spend Management subscription software business surprise us, given the need for companies to rapidly take out costs in today's climate. Moreover, we know that Ariba is run by a very conservative accountant (albeit a well-paid conservative accountant) which means that no quarter should present a shock numbers wise. But what does this particular quarter tell us about where Ariba might be headed for the rest of the year?

As I quickly look through the numbers -- stay tuned for more analysis next week -- a few things come to mind. First, Ariba has very limited visibility into services growth for the year and in contrast to some of its competitors who are having fair to solid years consulting wise, Ariba is floundering when it comes to sourcing and supply management consulting. I was talking to a friend earlier this week who just left an Ariba competior. His former employer had more than four-dozen sourcing and procurement folks working on a significant cost reduction project for a large global client (yes, you read the number of consultants correctly). In this particular situation, Ariba was not invited to the table to play ball. In other words, Ariba is not seeing enough high-powered opportunities when it comes to procurement and sourcing consulting. They're getting into small deals, but they're not at the table for many of the larger ones. And this is one of the reasons their services numbers are sliding (I'd also suggest that an increase in contingency based arrangements, in general, are pushing out services revenue for Ariba and other providers). Stay tuned for more on this component of my analysis next week. Bottom line: Ariba is underperforming in services relative to some peers in sourcing and supply chain, however, I suspect off-the-books potential contingent revenue from current opportunities could ultimately more than make up for it.

A second observation is that Ariba is seeing material dealflow on the SaaS side of the house. To grow subscription revenues 25% over the same period 12 months prior is a very strong accomplishment given that a comparable growth number for installed enterprise software would be roughly three times as high (i.e., 75%) growth. That's because of the average three-year contract duration that's common in most SaaS deals. In other words, Ariba's strategy of aggressively ramping up its lead generation programs and pipeline, pushing deals through the system, is paying off when it comes to subscription software. Which areas are seeing the most traction? I’ll toss out a few ideas on this area next week as well.

I'll leave you with one final thought today before packing this analysis in for the week. And that's the importance of not taking Ariba's growth (or shrinkage) as a proxy for the market. So many companies and investors I speak with look at Ariba's growth as a signal about whether or not the Spend Management market is growing and healthy. In fact, I believe Ariba's performance represents only one small data point. Especially considering that so much of Ariba's quarterly volatility is based on their ability to close fixed-price services and consulting deals -- which is as much a function of the quality of the sales and consulting organization as it is how much these services are being consumed in the market not to mention the revenue model in each deal -- its quarter-to-quarter numbers are all but useless when looked at in isolation as a tool to size and value the overall Spend Management market opportunity. If you want to look at anything to gauge the health of the overall market, look at the SaaS growth from Ariba and its key competitors. Which to me, presents a very bright picture for the Spend Management sector.

Update: 8:12 AM CDT -- I'm signing off for the day. Some personal things to take care of. Stay tuned for more posts in the queue, but I won't be around to respond.

Jason Busch

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