A Good Sign: Ariba’s Earnings Suggest That Deals are Getting Done (Part 2)

Late last week, Ariba came out with their latest earnings announcement, suggesting the company had finally turned the corner from a sustainable GAAP profitability perspective. Before getting into some of the specifics of the earnings report and what it means for customer adoption and the overall market, I'll point out a note I received a couple days before the news went public. Before the announcement, an Ariba competitor dropped me a virtual line suggesting that I also point out in my coverage that Ariba's "accumulated deficit" to date is "close to $5B (B as in Billion)." In this e-mail, my colleague suggested that this number represents an amount that's "ten times the current stock holders' equity value" and "three times their total market cap." The note was obviously competitive in spirit, but it does raise a good point.

Moreover, it came a few days after I was talking to a couple of equity research guys. In these conversations, I suggested that one of the current challenges to Ariba's stock price and overall perception in the market -- despite the significant turnaround in recent years -- is the accumulated memory about how many fund managers lost their jobs and the number of personal investors who lost their shirts speculating in the .com B2B bubble. In many ways, Ariba was the poster child for this period. And I believe to this day that the primary reason Ariba is valued less than other similar companies from a revenue multiple perspective -- especially SaaS vendors -- is because of this long memory.

Might it be time to overcome our past emotions? Perhaps. Even though I personally lost over 80% of my own net worth by not getting out of the B2B market when I could have (almost entirely due to a stock that Ariba would end up owning), I do believe it's time to forget, even if we never forgive. Indeed, Ariba's overall traction and SaaS transformation is proof that the company has remade itself into the clear market growth leader in the broader source-to-pay sector even if individual competitors (e.g., SAP and Oracle) find creative ways of attributing revenue for the industry analysts to show they're larger. Indeed, $24 million of quarterly operating cash flow is nothing to sneeze at. In fact, this number itself is larger than the quarterly revenue of many of Ariba's largest competitors, several which have sold FUD to customers over the years that Ariba could not survive.

The details, however, are clearly in the numbers. On the earnings call, Ariba noted that they "closed seven sub software deals over $1 million." But what's most interesting to me is that their "P2P deal count went up to 19, as compared to five in the same period a year ago." Going back to 2008, no one believed Ariba had any life left in P2P, except milking its current legacy CD maintenance deals for as long as it could. Remember? This was the time in which nearly all of us thought Oracle and SAP would ultimately eat Ariba's lunch when it came to eProcurement, leaving the vendor to fend for itself in smaller spend analysis, sourcing, contract management, and supplier enablement/network deals. But flash forward 24 months and Ariba is proving that it is not only holding its own in P2P -- it's continuing to sign significant P2P deals.

Even though competitors such as Coupa and Ivalua are building traction and momentum in eProcurement -- and potentially even acquiring customers at a more rapid clip in the case of Coupa, albeit with smaller customers -- their average deal sizes tend to be materially lower (owing to both overall breadth, depth and deployment complexity as well as pricing, mind you). In other words, this SaaS P2P growth is proof that Ariba proved that all the pundits -- including myself -- were wrong a few years back, and that they could defend themselves from an ERP onslaught.

Moreover, from a shareholder perspective, these wins are far more important than simply direct P2P SaaS revenue from the applications themselves. To this end, Ariba noted on the call that this growth is "not only key to our subscription business; it will also translate to more supplier network revenue in the future. We signed 194 on-demand transactions, as compared to 141 in the same period a year ago."

As Ariba finds new ways of getting more money from its network from raising fee structures, caps and thresholds to creating new benefits from buyer and supplier members (which it charges for), it will be important for them to sustain P2P customer growth at all costs. For prospects considering a P2P solution -- or current customers thinking about upgrading or switching to P2P -- this should provide you with further ammunition to negotiate Ariba's pricing down in competitive situations. After all, they'll find new ways of making it back -- hopefully by providing tangible, new benefits to both buyers and suppliers -- through their network down the road. This is also a reason I'd argue that we might see Ariba get serious about acting as a P2P consolidator, something they've never done to date, as well.

As a final aside, I believe Ariba has made a tactical blunder by not purchasing the eProcurement assets from ePlus. Even though they, themselves, were an eight-figure victim of ePlus' patent trolling, by owning the underlying patent associated with ePlus' claims, Ariba could compel competitors to sell their assets (i.e., their customers, which represent future network fees) to them at a more attractive price than they'd have to pay should they get serious about consolidating the P2P sector. The wildcard here is the time left on the ePlus patent claims.

Stay tuned for further coverage, analysis and commentary on Ariba's quarter and what it means for the broader Spend Management market.

- Jason Busch

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