Lindy wrote:
Eric, it is axiomatic to me that a Gorilla is profitable. If it is in early stages of growth, I can see low profits, but not when it is in a tornado. Hell, the whole idea is that the company is able to throw off money like a drunken sailor!
Spot on, Lindy!
As Mike brought up, it's maddening that these days some of the young candidates in games hit the street with their IPO's while the balance sheets from a fundamental point of view carry more risk than should be allowed. Exceptions do occur. Brocade and Foundry hit the street last year in fine financial shape as an IPO should be like in the olden days. That doesn't guarantee long term success in high technology, but it certainly is noteworthy.
Since I do follow godzilla games and early basket games of enabling application and hardware, there are some points to be made on behalf of some of them. None of these points are to be taken as investment advice, simply clarification that there are some interesting things going on with some of these companies from a FA side and to clarify that it is early in the game and the premiums for ownership are high and lofty. The risk is clear from that issue.
I've pointed Andrew Chan's work out before, but here are his #'s on Ariba presented not to draw any conclusions, but to take a look at the building health of Ariba's business model:
boards.fool.com
Well, Ariba's 10Q SEC report came out not long ago. This is always something I impatiently wait for as the company discloses the CF statement. Knowing that Ariba's cash flows are already impressive, I wanted to see how it improved.
You know what? The wait was totally worth it. Some analysts and investors complained about Ariba's lack of profitability, well my friends, it is coming, and coming fast, just look at those cash flows:
CFO (FY1999): $20,448
CFO (2000Q3): $87,590
That's more than a 4-fold increase compared to FY1999 and there is still a quarter left in the current fiscal year.
Operating cash flow margin (CFO/Sales) are also impressive and improving.
OCFM (FY1999): 45.1%
OCFM (2000Q3): 60.7%
Free cash flows were just as solid, especially for a young company.
FCF (FY1999): $12,867
FCF (2000Q3): $64,210
CK Margin (FY1999): 28.4%
CK Margin (2000Q3): 44.5%
The numbers speak for themselves. For those who are wondering why Ariba trade at such a premium compared to C1, well the cash flows are one of the reasons.
Here are C1's CF margins for 2000Q2 (Beware, Ariba's numbers are for the last 9 months, as opposed to the past 6 months for C1, the two companies have different fiscal years):
OCF margin: -17.0%
CK margin: -47.8%
"Ariba is not profitable yet"... Does it really matter when all cash flow numbers are positive? That's another example of the shortfall of focusing on net income.
I continue to make the claim that it is early in the technology adoption life cycle for these companies. No need to doubt that. It is early. Ariba has been cash flow positive for the past twelve quarters and the deferred revenues are currently $154 million. As the CEO of Ariba states, how many of the .com companies can say they have been cash flow positive for 12 consecutive quarters?
The gross profit margin trend for the last 5 quarters reads:
6/99 - 79%
9/99 - 79%
12/99 - 85%
3/00 - 84%
6/00 - 83%
License Revenue Growth for the same 5 quarters:
0.14
0.53
0.61
0.66
1.05
Maint & Service Rev Growth for the same 5 quarters:
0.43
0.34
0.05
0.80
0.96
Total Revenue Growth for the same 5 quarters:
0.25
0.44
0.37
0.71
1.01
Plenty of analysts have tried to wrap a growth projection around companies like Ariba. They base this on IDC numbers for e-procurement software application revenues and many come out using the projection that Ariba could grab 25% of that market by 2004 which, using the IDC numbers, would be $2.2 billion for license revenue. If they grab 25% of the professional services, then the 2004 revenue projection is $3 Billion. Then on the Forrester's projection of revenues derived from the transaction based pot value chain predictions of growing to $6.3 trillion, the per transaction slice of pie is estimated at .20 cents to .50 cents for every $200 spent in a transaction purchase orders. Once again, assuming Ariba has half of a 25% stake (or 12.5% market share), this would be an additional $2 Billion in revenue stream by 2004. That's a lot of if's,and's and but's along with long term WAG's. If you wrap that around the current valuation and early stage of the technology adoption life cycle for this business - head scratching is allowed and certainly recommended. <ggg>
I know we all loathe every analyst's "selling their wares" reports because of the way the 'system' works, but here's an illustrative way of how one analyst is looking at Ariba and i2 just to show what these endless reports say. Remember that i2/Ariba/IBM are a partnership alliance for B2B going up against Oracle and CommerceOne/SAP. This is a separate tornado than i2's position in SCM or Oracle's position in database. The balance sheets of both Oracle and i2 are very healthy indeed passing what we call at the Fool the Rule Maker's criteria of gross margin, net margin, cash king margin, revenue growth, cash-to-debt ratio and Foolish Flow ratio. That puts them in a different 'league' in terms of stability as say the younger companies that will have to grow into such healthy numbers and is the reason they occupy core holding positions in my gorilla portion of the portfolio. Yet, as I mentioned above, last year saw some IPO's that hit those Rule Maker numbers quickly. Likewise, Siebel finally hit all of those numbers this year as did Yahoo! and JDS Uniphase (minus one ratio due to acquisitions). Cisco and Intel pass as well.
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B2B eCommerce Update - Eric Upin
ARIBA'S MOMENTUM REMAINS ROBUST
Last week, Ariba (ARBA $157-9/16) CFO Ed Kinsey and cofounder and SVP Bobby Lent updated investors on their business at the Robertson Stephens Internet Conference in San Francisco. With the company's high profile, leadership in its field and high-multiple valuation come increasing scrutiny from investors, the media and competitors, creating conditions ripe for misinterpretation.
Although nothing substantive came out of the conference to affect our near- or long-term view of the company (Ariba continues to be one of our favorite names in B2B), three issues surfaced:
- the health of the Ariba/i2/IBM alliance
- the strength of business in August and possible European softness
- the composition of revenue.
None of these are of major consequence, in our view, nor do they impact our outlook on the stock.
In fact, we believe Ariba's business momentum, closure rates, development efforts and key partnerships are in excellent condition. In recent weeks, the company:
* announced key customer wins, including Lucent Technologies, FleetBoston (the corporate parent of Robertson Stephens, publisher of the Web Report), Transplace.com (Covenant Transport, J.B. Hunt, M.S. Carriers);
* extended its technology leadership with Ariba Buyer 7.0;
* struck key partnerships, including spearheading the UDDI Project (to develop business registration standards) with IBM and Microsoft and expanding its financial services network with Escrow.com, Pure Markets and VeriSign;
* closed the acquisition of SupplierMarket.com, adding core capabilities in complex, direct goods sourcing.
Therefore, we believe healthy upside is possible to our
fiscal fourth quarter forecasts of $100 million and operating loss of ($0.05). In the previous period, the company reported $80.7 million and a loss of ($0.05), exceeding our estimates by $30.2 million and $0.04, respectively.
We reiterate our Buy rating on the stock and consider it a core name in the B2B software space. Although it is still early in the B2B buildout, Ariba has taken center stage and is well-positioned to defend and capitalize on its position, in our opinion. We believe Ariba has the opportunity to become a $2-billion-plus top-line company with 25% to 30% operating margins in the next three to five years.
i2 TECHNOLOGIES SUPPLIES GROWTH INTO Q3 CFO
Bill Beecher presented i2's (ITWO $175-7/8) story to investors at our Internet Conference last week. Although our fundamental view on the stock remains unchanged (along with Ariba, i2 is our top pick), similar issues garnered attention in the wake of the conference: the strength of the Ariba/i2/IBM alliance and the relative strength of the supply-chain business vis-a-vis i2's B2B marketplace initiatives. In our view, neither is of major consequence. Indeed, we believe we may see healthy upside to our third-quarter estimates of $285 million and operating EPS of $0.10. In Q2, the company reported $242.2 million (with $11 million contributed by Aspect Development, a recent acquisition) and $0.10 EPS, exceeding our revenue estimate by $46.6 million and beating our EPS estimate by $0.02.
The company's pipeline, closure rates and business momentum all appear to be in excellent shape with recent customer wins at Cypress Semiconductor, Sears, DaimerChrysler, Toyota and Volkswagen; major alliances such as Financial SettlementMatrix.com (Enron, i2, S1 and Wells Fargo) and a range of marketing and operational initiatives. As a result, we reiterate our Buy rating on i2, a B2B franchise name in the making, in our view.
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A must read interview between The Street.com and Keith Krach, CEO of Ariba:
thestreet.com
It's certainly an application software company to watch and is not an investment for all. There are plenty of investments that we follow that are more mature in their cycles which meet the criteria we follow. I simply wanted to mention some things about Ariba because it does fit the criteria for some investors who play earlier in the games. That's not to be confused with 'pushing' it on others. I'm not attempting to do that. It is one of my holdings, but percentage wise of my portfolio the amount is small in comparison my core holdings. I prefer to let the companies do their own work and grow on their own to increase their position percentage wise. I've done this with Siebel and i2. Yes, I wish I could have purchased Ariba at the same multiples I purchased i2 and Siebel in 1998, but I was not able to land such a 'deal'.
I think that as the game moves along and the positioning of the companies becomes clearer, compelling reasons might surface where the profits and balance sheet warrant attention to the company. Until then, the risk is clear. I have chosen to focus on the application software portion of the company, but certainly realize the transaction purchase order potential for additional revenue. Either way, using gorilla gaming criteria of proprietary open architecture, high barriers to entry, high switching costs, value chain formation and tornado growth - some companies stand out.
There have been some interesting articles about the B2B space over at the Fool:
fool.com
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Here are some godzilla thoughts from Geoff Moore:
Message 12927965
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