Ariba Rising?

Despite losses, sees brighter days ahead with spend management focus

Sunnyvale, CA  January 29, 2002  Software provider Ariba last week reported a smaller-than-expected net loss for the past fiscal quarter but predicted profitability by the middle of this year on the strength of its new lineup of spend management solutions.

Revenues for the first quarter, ending December 31, were $55.3 million, and the company's pro forma net loss for the quarter, excluding certain non-cash and special charges, was $6.9 million, or a loss of $0.03 per share, beating the First Call consensus estimate of a loss of $0.05 per share.

During the same period for the previous year, Ariba reported profits of $14.0 million, or $0.05 per share, on revenues of $170 million. In a conference call, Bob Calderoni, president and CEO of Ariba, said the higher revenues in the year-ago period represented the tail end of the B2B boom that collapsed last year.

At that time, Ariba, Commerce One and other erstwhile B2B highfliers saw their fortunes flounder in the face of oncoming recession and tightening capital budgets among the software companies' target customer base of large enterprises. Calderoni, appointed last October to help rescue the software company, acknowledged that Ariba was having to fight its way back to profitability. "There's no doubt that this is a turnaround," he said during the conference call.

Calderoni has pegged Ariba's future on its ability to reposition itself from an e-procurement platform provider to a provider of software that addresses various aspects of spend management within the enterprise. "This company is going to be successful because of the transition from an e-procurement company to a spend management company," he affirmed. In addition to its initial e-procurement offering, the company last year rolled out a sourcing product providing reverse auction capabilities and a solution for managing contract labor spend (through a partnership with CascadeWorks). Contract management and invoicing software is due out in February, spend analysis and invoicing solutions are due out this year.

The CEO says that Ariba is in the first stage of a three-step recovery program that calls for stability, profitability and then growth. The company has cut its staff by more than one-third since its heyday and has taken other steps to reduce costs, and the past three quarters have seen declining losses at Ariba. The company's chief financial officer, Jim Frankola, said during Tuesday's conference call that he expects Ariba's expenses to stabilize at around $60 million per quarter, compared to $64 million for the quarter just closed and down from $93 million for the previous quarter and $115 million for two quarters ago.

That still leaves some ground to be made up, given that Frankola said he expected the company's revenues to stabilize at about $55 million. Nevertheless, Calderoni said that he believes the company can increase its sales by $10 million to $15 million at its current "burn rate," allowing Ariba to achieve profitability by June of this year, ahead of analysts' projections. "Pro forma profitability is clearly within our sights," Calderoni said.

Also last week, Ariba announced that pharmaceutical company AstraZeneca had signed on to use the software provider's sourcing solution, and that gardening equipment company Toro will use Ariba's flagship Buyer e-procurement solution.

The Toro announcement is interesting because Ariba's press release on the deal specifically highlights the fact that the equipment company is a medium-sized enterprise, appearing to expand Ariba's customer base beyond the large enterprises it initially targeted. "Toro, a mid-sized company, is proof that all well-managed companies, regardless of size, can take action to constantly improve their bottom line," said Jim Steele, Ariba's executive vice president for worldwide sales, said in the press release.

Overall, Ariba booked 49 deals in the past quarter, including 20 new customers, with an average deal size of about $1.1 million. Calderoni said that while the total number of deals remained flat over the previous quarter, the number of deals with existing customers had increased, indicating, he said, that Ariba was succeeding in "upselling" current clients on new solutions coming into Ariba's product lineup. New customer Home Depot had bought the entire suite of Ariba solutions last quarter, for example, but AirProducts and Chemicals, an existing Buyer customer, had signed up to use the sourcing solution.

Ultimately, Ariba is hoping that enterprises will buy into its vision of spend management as a necessary tool for chief procurement and finance officers, and that the economy will rebound, spurring corporate technology investments. Michael Schmitt, Ariba's chief marketing officer, in an interview last week, said, "If spend management resonates with the marketplace, and large companies like the idea of identifying opportunities to save money, getting it through sourcing, and then keeping it through a compliance engine and supplier enablement  and the economy comes back  those two factors should position us well for growth in the second half of '02 and well through '03."

Schmitt asserted that Ariba's focus on spend management and the breadth of its offering give it a leg up when going head-to-head with vendors of enterprise resource planning (ERP) systems or with suppliers of point solutions that address one aspect of a company's spend, such as strategic sourcing or contract management.

In addition, Schmitt said that Ariba's current cash reserves and deferred revenues give the company the kind of stability that corporate customers are looking for in an enterprise software provider. "In enterprise software, when you buy from somebody, you don't want them to go out of business in a year," Schmitt said. "That pressure is going to remain as organizations open up their checkbooks. If you add our cash of $270 million and our deferred revenues of another $170 million, we can weather a long economic downturn."