A Good Sign: Ariba's Earnings Suggest That Deals are Getting Done (Part 1)

A couple weeks back, I wrote a post that offered up three things to expect from Ariba's earnings announcement later in the month. Yesterday, Ariba announced earnings in a report that proved once and for all that the largest best-of-breed vendor in the procurement space can achieve profitability and continued SaaS revenue and customer growth. But from a Spend Matters perspective, I'm less interested in the EPS numbers and more curious about what their earnings report signals for the market and how Ariba's solutions are fairing in the overall competitive marketplace.

In this initial post in this series looking at Ariba's quarter -- check back next week for additional commentary in the second and third installments -- I'll look at the accuracy of my earlier predictions for the quarter. But first, here are the highlights from the earnings announcement and call. To start, Ariba posted a healthy 16% year-over-year increase in their subscription software revenue (i.e., SaaS) business. Because of how revenue recognition for SaaS contracts works, this is the equivalent to at least a 30%+ growth in a traditional software environment (potentially as high as 40% or more). In addition, Non-GAAP revenue came in at $87.1 million for the quarter including, generating some $24 million of operating cash flow. Ariba also got some blood money during the quarter in the form of "$7 million from Emptoris" as part of a patent litigation settlement.

But below the numbers surface, how did Ariba really perform? The first prediction I previously suggested was to look for "significant customer momentum" in the January to March time period. Here, I noted that we should look for "a healthy number of new signed deals (in relation to other quarters from the same period for Ariba)" and that "the amount of new deal activity I've seen in general in the space has continued to pick up nicely, gaining significant steam in Q4 of last year, which I believe will carry into the first quarter of this year."

How did Ariba's actual performance stack up to this prediction? In the quarter, Ariba "added 35 new customers ... and closed 13 transactions over $1 million, including 7 deals with a software component greater than $1 million. On-demand product deals totaled 194." This compares with the previous quarter that saw Ariba close 248 unique customer deals, add 35 new "named accounts" -- i.e., new customers -- and sign 192 on demand transactions, not to mention six software deals over $1 million.

In other words, Q4 calendar year 2009 performance ultimately led to a strong Q1 calendar year 2010 showing. Still, I don't believe that Ariba was alone in realizing success this recent quarter. We should also not read this sign that customers are choosing Ariba at a higher rate than before over other solutions in the spend analysis, sourcing, contract management, P2P and supplier management arenas. Rather, I believe there are simply more net new deals getting signed in the market than before. And all the top vendors in the sector are benefiting as a result.

Along these lines, I suggested that Ariba would face a stronger "overall competitive environment" in the most recent quarter. Owing in thanks to a solid overall performance, Ariba appears to have dodged any hardball questions from the analysts regarding competition during the earnings call. But I stand by my earlier prediction that "Ariba is facing new competition from SAP (and soon Oracle) in the spend analysis area, and competitors are building up steam with solutions in hosted P2P as well. Emptoris is once again popping up more in deals, as are the other usual suspects Ariba often sees: BravoSolution, Iasta, Zycus, etc." In other words, Ariba is winning its share of deals, but I believe that core areas where they previously had high win rates (e.g., spend analysis) could increasingly get shared with new players in the market as competitors continue to roll-out new solutions and ehnance older ones.

The last prediction I made about Ariba's quarter was to expect the growth of both "installed and SaaS" deals in the eProcurement and electronic invoice presentment payment (EIPP) areas (also known as P2P). To this end, I noted in the earlier post that "Spend Matters has seen a significant pick-up in inquiries from customers, channel partners and competitors about some of the challenges of SaaS P2P integration in more complicated back-end and front-end application environments ... Some of our channel and other checks suggest that Ariba may be picking up some momentum on closing CD upgrade deals."

Ariba came through with a strong showing on P2P sales overall, suggesting on the earnings call that their "P2P deal count went up to 19, as compared to five in the same period a year ago." Regarding CD upgrades or migrations to SaaS in the P2P arena, Bob Calderoni noted on the call that "for the most part, most CD customers have stayed CD," suggesting to me that the challenges I noted earlier around complex systems integration in a SaaS environment are still holding back many of Ariba's larger and more complex Buyer customers from migrating to a hosted, multi-tenant environment.

Stay tuned for further coverage of Ariba's quarter early next week.

- Jason Busch

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