Ariba’s Q3 Fiscal 2011 Results: The Numbers and Beyond (Part 1: The Basics and E-Invoicing)

Yesterday, Ariba reported its Fiscal Q3 2011 results and it's no surprise to many that the procurement vendor keeps chugging along. Wall Street appears pleased, at least from the reports we've seen already today. As reported by management, revenue continues to climb. Specifically, quarterly revenues hit $121.9 million up from $83 million the previous year (owning both to organic growth and, most important, the Quadrem acquisition). Subscription software revenue (the "good" stuff, at least as Wall Street views it), hit $76.4 million, which is a significant 74% increase from the same period in 2010. And network revenue topped $37 million ($37.2 million to be exact), a giant increase of 249% that largely reflects, in descending order of importance (by our analysis): the Quadrem acquisition, network fee price increase and organic volume growth on the network. Ariba generated $22.4 million in cash through the quarter.

On the earnings call, Ariba announced that network volume had climbed to $186 billion (up from $180 billion the previous quarter), "representing a 22% year-over-year growth. But most curiously, management noted that "today we are increasingly capturing more e-invoices that don't have a PO associated with them and these also generate supplier fees, including non-PO e-invoices our network volumes were $193 billion for the trailing 12 months and were up 23% year-over-year." Expanding on the opportunity for e-invoicing, Ariba CFO Ahmed Rubaie commented that "we see e-invoice automation as a key growth area, which will enable us to capture even more of a customer spend including more complex non-PO spend categories, such as business services."

Spend Matters readers (and Ariba customers and prospects) should take note that organizations using the Ariba Supplier Network for just e-invoicing still have the same liability -- or more specifically, their suppliers have the same liability -- as if they were running POs through the network as well. There are no pricing breaks from one document type to the next (all are charged on a percentage of volume basis above a certain threshold) and there is only one charge per buying transaction regardless of how many documents are exchanged and parsed via the Ariba Network. This opens companies -- and their suppliers -- to potential "double-taxation" depending on whether they use multiple services or not to facilitate different aspects of the document interchange and ultimate matching processes.

From a cost standpoint, for lower-dollar volume suppliers (i.e., those with low invoice values and high frequency), the Ariba network is a bargain. For those with just low-invoice values and low volume, network costs are almost negligible. But for suppliers pushing high invoice values on a dollar basis through the network (with higher low, medium or high invoice volume) the costs are often viewed as prohibitively expensive compared with other exchanges mechanisms and methods. It is like the Postal Service or FedEx charging a variable amount to deliver a check based on its size.

Spend Matters has spoken with numerous Ariba customers recently (CD customers) who do not believe Ariba has been a panacea for their electronic-invoicing challenges, especially outside of the indirect/catalog supplier area (and for suppliers of all sizes). These providers are generally open to third-party solutions in this area. Why? From charging suppliers volume (dollar-based) pricing for connectivity to a network interoperability policy that looks more like the diversity and affirmative action views of the Axis Powers to a solution that lacks some of the more in-depth capabilities of leaders like Basware, Ariba does not present a leadership profile in the invoicing space like they do in eProcurement -- where we believe they are the functional target that everyone is still going for.

The interoperability point -- or lack-thereof -- is a major one, especially in the EU, where there are hundreds of smaller e-invoicing networks and providers that work with suppliers in regional markets. Forcing smaller suppliers to register for multiple networks in these markets, including all the integration requirements required, and then the possibility of having to pay new fees on top of existing network fees, only adds insult to injury.

On the pure software side, some companies who've done their homework are also considering functional equivalent (or near functional equivalent) solutions from companies like Verian, that have surprisingly robust capabilities in this area. We checked out Verian's invoicing capabilities last week and were surprised at the depth of capability. Plug-in solutions to SAP like Capgemini and Hubwoo's electronic invoicing capability are also proving to be popular alternatives within the SAP base. The bottom line is that for e-invoicing software and connectivity, Ariba is a contender like anyone else -- but has yet to pull away from the line. Perhaps the fact Ariba emphasized the network on their recent earnings call suggests this will be a major focus going forward. Might Ariba be hinting at a roll-up play of smaller, regional e-invoicing network operators or global ones, such as OB10, following the apparent strategy Basware is pursuing? Regardless, Ariba will need to do something here if e-invoicing becomes as important to their core strategy as it appeared to be during the earnings call.

I'd be curious to get a broader perspective about what Spend Matters readers think about Ariba and e-invoicing (not just for indirect suppliers, but direct and services vendors as well). Chime in with a comment or drop a line. And stay tuned for our continuing coverage of Ariba's quarter next week.

Jason Busch

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