Is Ariba more focused on Wall Street versus their chosen market?

Posted on November 2, 2010

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Now some may refer to the headline related to this post as being an exercise in whimsical semantics as they would most likely point to the fact that being able to service clients is ultimately what drives the revenues that leads to Wall Street performance.

However, and as we have discovered over the past year, what happens on Wall Street or the investment markets as a whole often times does not correspond to the everyday world in which we all operate.  (Note: tune in to our April 16th, 2010 on-demand broadcast “The Failings of Institutional Advisers and How You Can Grab The Bull by the Horns!” to get an idea as to what I am referring.)

For example, let’s look at a recent e-mail I received from Craig Hallum Capital Group LLC, and in particular the following key points that they highlighted relative to Ariba’s performance in Q4 2010.

·         Revenues beat while EPS was at the high end of the range.

·         Dec’10 guidance as well as FY’11 were strong on revenues, but modestly lower on EPS ($0.01 – $0.02 lower vs. consensus for the year on EPS).

·         Bookings were up a very impressive 48% y/y this quarter and while this metric can be lumpy in any given quarter, it appears that the aggressive sales hiring is now starting to deliver results.

·         The network vision is finally becoming a reality. The Discovery product, which is currently in Beta, will dramatically increase the volume of network participants and, once interlinked to the subscription software products, will greatly increase the value of both the software as well as the network.

·         The changes on the network front are beginning to lay out a more open ended story for ARBA, which we believe will be more visible as we get into the early part of next year.

·         We are maintaining our Buy rating and $21 price target.

Taking into account the usual disclaimers and disclosures which normally accompany analyst reports, the real question is simply what does the above mean from a practical, everyday standpoint?

Where for example do failed initiatives such as the one referenced in my September 1st, 2010 post “OECM Punts Ariba, Taking a $20 Million Dollar Hit In The Process?” come into play in the calculation of the company’s performance and the $21 price target?

How is this present-day assessment different from the July 14th, 2000 headline in cnet news that excitedly announced that “Ariba earnings zoom past Street expectations?”  After all, if we purely look at performance from an earnings perspective, the fact that Ariba went on to lose $3 billion on $1 billion dollars in sales between 2001 and 2005 should tell us something about the use of earnings as a barometer of future company success.

Even more telling is the fact that last year Ariba had to go through what was referred to as being a “corporate DNA transformation,” which is something to which both the company’s CMO Tim Minahan and CFO Ahmed Rubai referenced in interviews I did with them on the PI Window on Business Show.  Is a company that had to go through a major overall as recent as last year, after bleeding significant sums of cash, one into which I would want to invest my hard earned money?  Even more importantly, would I want to bet heavily on their technology to play a key role in automating my organization’s procurement process?

As I searched for answers as to the relevance of the Craig Hallum report in terms of what it really means, I came across the following presentation that Ariba posted 8 months ago.  Full of interesting information, the slides which caught my attention are 24 and 27.  You can view the presentation in our SlideShare Viewer below:

Focusing on the points listed on slide 27 under the heading Future Prospects, the company’s vision for the future reflects what I would call confident indecisiveness.  You know the kind in which you make a date with one girl for a Saturday night, but leave your options open in case the head cheerleader finally finishes washing her hair and agrees to go out with you.  Not that I ever experienced this type of scenario personally.

On the one hand the company talks about the “expansion” of their consulting services along with looking to make “more acquisitions.”  This is the confident part.

On the other hand, they highlight the fact that there is “strong competition from software firms such as SAP and Oracle,” and then talk about being an “acquisition target for a larger technology firm.”

A classic case of trying to steal second base while keeping your foot on first.

So if you take into account the most recent analyst report, consider the company’s history and, look at their own assessment of their future prospects, one could be forgiven if they believed that the return gained from keeping their money under a mattress in their bedroom would produce better results from an investment standpoint.

In terms of end-user client considerations, throughout this tumultuous period Ariba has always had an aggressive sales strategy, despite mega losses and DNA transformations.  I am not sure that this latest news would inspire me to consider Ariba as my vendor of choice.

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