Subject: Ariba: Bright Spots in the Details From: distribution@epoch.com Date: Fri, 20 Apr 2001 13:24:36 -0500 To: fox@csit.fsu.edu For in-depth coverage of all companies within the Software Sector, please visit http://www.epoch.com/emailalert/software.html Company Note Ariba, Inc. Epoch Partners APRIL 20, 2001 NASDAQ:ARBA Mark Verbeck David Trainer Timothy Madda ARIBA: BRIGHT SPOTS IN THE DETAILS _______________________________________________________________________________ FUNDAMENTALS Price (04/20/01) $7.52 FY Ends Sep 2000 2001 2002 NASDAQ Comp (04/20/01) 2,145 Revenue(MM) $279.0 $445.9 $576.3 Prev Est.(MM) NC $445.2 $612.0 52-Week Range $4.38-173.50 EPS Shares Outstanding(MM) 247.8 Q1 ($0.04)A $0.05A Market Cap(MM) $1,864 Q2 ($0.06)A ($0.20)A Q3 ($0.05)A ($0.08)E Avg Daily Vol(3Mo.)(000s) 11.8 Q4 $0.00A ($0.02)E Fiscal Year ($0.15)A ($0.23)E $0.00E Previous Est.($0.15) ($0.33) ($0.17) P/E NM NM NM Source: Epoch Partners _______________________________________________________________________________ * Ariba reported results in line with its warning of April 2, but the details offered reason for optimism. * We believe the next quarter will also be a difficult one for the company as it simultaneously deals with its reorganization and a market that is taking a wait-and-see approach. * We believe the stock will trade in a band as the company repositions itself. _______________________________________________________________________________ The Numbers Ariba reported 2Q results in line with preannounced numbers. Revenues of $90.7 million included licenses of $58.6 million and network revenue of $19.3 million. Average selling price for the procurement solution was up at $1.8 million, reflecting little pricing pressure. Results are down sequentially, but given the collapse of the marketplace business we don’t believe these compares are relevant. This resulted in a pro-forma operating loss of ($0.20). The company took a significant $1.4 billion non-cash charge to reflect the limited economic value the company now sees in the marketplace technologies it purchased in the TradeX acquisition. The company also took a $24 million charge to write down $30 million of investment in B2B exchanges and an additional $9 million charge related to the termination of the Agile acquisition. Next quarter the company expects to take additional charges - $50-$55 million for excess lease capacity and $15-$20 million related to severance payments. The balance sheet provided some reasons for optimism: * Deferred revenues decreased only $25 million, leaving a sizeable $210 million backlog. * Strong collections from customers kept DSOs at an industry-leading 57 days in a quarter where we expected this metric might have grown to more than 90 days. * Unrestricted cash and equivalents are strong at $344 million as a result of near break-even cash flow despite the difficult quarter. The company closed 62 deals in the quarter, down sequentially but still notable because they included some impressive customer wins outside of traditionally strong verticals, including AT&T in telecom, Exxon-Mobil in energy, Saks in retail and the State of North Carolina in the public sector. While specific guidance was not given, Ariba indicated that it expects revenues will be flat-to-down next quarter, an outlook that is consistent with our existing model. We believe our existing revenue estimates are appropriately conservative, so we are not making any top-line changes. The company believes expenses will be between $105-$110 million from the 4Q going forward, but will be closer to $120 million next quarter. We have made appropriate adjustments in light of this guidance, narrowing our loss expectations for the next two quarters. Our Take We believe continued execution here demonstrates the strength of Ariba’s core business, its indirect procurement offering. Competitively, we believe the company will continue to experience strong win rates with its procurement and auction solutions against vendors like Oracle, People Soft and SAP/Commerce One, but will be irrelevant in the marketplace arena against the field of Commerce One, i2 and Autistics. We believe that Ariba is well poised to rebound by refocusing on its core procurement business and reducing expenses in line. To accomplish this, we believe the company may need to make additional cuts. We think the next quarter will be another difficult one, but are optimistic for the prospects from there. We believe corporations are taking a breather from the B2B hype and waiting for additional results from the existing investments. In our view, Ariba’s procurement solution offers a strong value proposition and market leading functionality and will do well in the marketplace when B2B spending rebounds. _______________________________________________________________________________ COMPANY PROFILE Ariba sells a software solution that enables employees to directly order goods with a Web browser and automates the rest of the purchasing process. Ariba also sells an application that allows companies to sell their products to other companies over the Internet. _______________________________________________________________________________ The analyst(s) involved in the preparation of this report has an investment position in the subject security. (ARBA). The information contained herein is based on sources believed to be reliable but is neither all inclusive nor guaranteed by Epoch Partners. Opinions, if any, reflect our judgment at this time and are subject to change. Epoch Partners does not undertake to advise of changes in its opinion or the information. Epoch Partners may perform or seek to perform investment banking services for the issuers of securities which are the subject of our Research. Most of the companies Epoch Partners follows are emerging growth companies whose securities typically involve a higher degree of risk and more volatility than the securities of more established companies. The securities discussed in the Epoch Partners Research may be unsuitable for investors depending on their specific investment objectives and financial situation and needs. No report included in the Epoch Partners Research is a recommendation that any particular investor should purchase or sell any particular security in any amount or at all and is not a solicitation of any offer to purchase or sell from or to any particular investor. For additional information that may be available on the securities mentioned, please contact Epoch Partners. This document has been published in the United States for Residents of the United States. Copyright 2000, 2001 Epoch Partners. All rights reserved. Member NASD/SIPC. \END THE ABOVE RESEARCH HAS JUST BEEN PUBLISHED. For in-depth coverage of all companies within the Software Sector, please visit http://www.epoch.com/emailalert/software.html Epoch Research A team of industry-focused analysts creates Epoch’s proprietary Research. This team covers four technology sectors including Broadband and IP Data Services, Communications Equipment, Software and Internet. In addition to providing analysis of company and industry fundamentals and valuation, Epoch also filters and aggregates third party information. This third-party information includes hyper links to news including articles, company slide presentations and press releases, and multimedia content including audio and video clips of conference calls and interviews with company management. --- You are currently subscribed to epochebusinesssoftware as: fox@csit.fsu.edu To unsubscribe send a blank email to leave-epochebusinesssoftware-2520836M@pluto.sparklist.com