Ariba’s Q4 2011 Results — Do They Matter to Gauge Overall Market Growth Any More? (Part 2)

Click here for the first post in this series.

Owing to its recurring revenue model from buyers and mandated supplier fees -- suppliers pay Ariba before they pay the IRS -- Ariba's quarterly performance continues to be solid, despite being outsold, based on our assessment (stay tuned for Part 3 of this series for more details), by its rivals in key solution areas as measured by net new customer acquisition. On the earnings call, Ahmed Rubaie, Ariba's CFO, noted that "subscriptions software revenue grew to $275.7 million for the year, which was above the top end of our guidance, up 58% year-over-year and up 27% revenue was $119.7 million, up 192% year-over-year and up 62% organically." Spend Matters attributes much of the organic revenue growth on the network not to materially higher transaction volumes outside of expected growth in numbers or new customer acquisition outside of acquisitions, but rather an increase in network fees that took place in the second half of 2010 which suppliers ended up largely paying for in 2011 -- and will continue to pay for in 2012 and beyond as they transact on the network.

On the earnings side, Ariba noted that non-GAAP EPS came in at .81 cents for the year. This translated to Ariba generating "approximately $97.4 million of operating cash flow," a number, which Rubaie suggests, came in at the "top end of our guidance range." On a forward looking perspective, Rubaie suggested that the "medium term growth rate for our subscription software business is 15% to 25%...with the network component of that growing at 20% to 30%." For fiscal year 2012, Ariba guided the street to $525 million in revenue (+/- $5MM) with subscription revenue coming in at $361 million +/- $4MM of which "roughly $7 million" will come from the recently acquired French e-invoicing company "B-Process". Overall, these numbers represent subscription growth of "31% year-over-year growth, or a 19% organic growth."

Yet if you dig below these numbers, Ariba's subscription software business appears to be executing at a rate that is less than competitors when it comes to new customer acquisition, especially in the P2P area. We're not really sure if there has been much organic growth in the P2P business at Ariba in new customer acquisitions at the rates they realized in 2010, especially relative to competitors who have accelerated their new customer acquisition growth rates (e.g., Coupa, Ivalua, B-Pack). At the least, the trend line comparatively is flat (if not down).

Of course, new customer growth is not the only thing that counts. A moderate portion of Ariba's forecast growth is undoubtedly coming from the ramping of existing customers and the up-sell/cross-sell to prospects. If you take these away, Ariba's net new customer count (which it no longer discloses) for specific products is quite curious. Especially if one considers the size of the Ariba commercial organization, which is huge relative to best of breed competitors and more focused than the ERP field team.

As one specific example, based on our own research, it would appear that SAP's rate of new customer acquisition for sourcing, spend analysis, supplier management, supply risk management and related areas is significantly higher than Ariba -- likely 2X or higher based on absolute net new numbers in the area. We'll touch on some more of these numbers, especially looking at P2P, in the next installment in this series, when we continue to highlight that despite the fact Ariba is looking more and more healthy from an income statement and balance sheet perspective, that its core applications growth is no longer a proxy for a market that is taking off.

In fact, one could argue Ariba looks more like a market consolidator along the lines of an Infor, albeit one that is arbitraging network revenue from companies that are valued at a lesser multiple rather than simply collecting recurring revenue streams alone, although this certainly factors in as well. For investors, this may look like a smart play -- I won't judge that -- but for customers and potential customers, there are other factors to consider in building a vendor shortlist that may start with Ariba, but should consider a range of other (often faster) growing players.

Jason Busch

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