Ariba Dances for Joy in Quarter Time

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Event Summary

Ariba, Inc. (NASDAQ: ARBA) released figures for the first quarter of Fiscal 2000 (October - December, 1999) showing revenues of $23.479 million, and a loss of only seven cents per share - significantly less than the eleven cents per share loss that had been expected by analysts. The revenues for this quarter were just over half the $45.372 million in revenues for all of the preceding fiscal year. Where does Ariba go from here?

Market Impact

It is truly amazing that we can't call 1999 "The Year of Ariba." Its big-name rival Commerce One, and quite a few smaller players, also had successful years - or at least interesting ones. But Ariba remains the first name that people think of when they think of electronic purchasing, and at this point in the development of the industry Ariba's success serves more as a bellwether than as an infringement on its competitors.

Ariba's success is reflected in more than the total revenue numbers. Figure 1 shows the revenues broken out into bars representing license and maintenance revenues; the line plots the ratio of revenues that derive from licenses. The Figure shows that service fees are remaining almost flat as license revenues grow. This is an excellent position to be in.

How does Ariba plan to continue its success into the future? A key feature of Ariba's strategy is to build their Ariba Network as more of a horizontal enabler. With the recent acquisitions of Tradex and Trading Dynamics (See TEC News Analysis article: "Dynamic Ariba Trades Up" December 13th, 1999) Ariba Network will host digital markets involving catalog based purchases and various forms of auction. With thousands of on-line marketplaces, the majority vertical in nature, expected to be built over the next few years Ariba hopes to position itself as the leading vendor of marketplace building solutions.

A glance at Ariba's recent press releases provides evidence of their commitment to this strategy. Our count of fifteen press releases in the first quarter - which excludes reports of financial and personnel events - shows that the majority - eleven of the fifteen - described events which emphasize the market enabler rather than the end-user business. These include partnerships with system integrators and software vendors, its purchases of Tradex and Trading Dynamics, and other arrangements which contribute to the company's strength as a marketplace maker and create on-ramps to its marketplaces from other vendors' front-end software. Its first press releases of calendar year 2000 follow this trend.

We don't suggest that Ariba is going to drop out of selling to customers directly. The company is firmly committed to being a vendor of desktop solutions. The four press releases that announced such sales in the first quarter covered National Semiconductor, Dow, Alcoa and Swissair. Still, we observe that there is much less competition for Ariba in the marketplace-enabling arena than on the desktop. We think that as Ariba develops on the Ariba Network side there's some chance (probability 35%) of a separation, such as sale or spawning a company, between the desktop and Network parts of the company.

User Recommendations

We recommend that the largest enterprises continue to evaluate Ariba for provision of their desktop E-procurement systems. For smaller companies Ariba would not be a bad choice, but we see other vendors appearing who may prove to be more facile at satisfying your needs. These vendors will be offering on ramps to large marketplaces such as Ariba's and Commerce One's. With offerings that provide such auxiliaries as asset management or travel and expense tracking, one of them might be a better dance partner.

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