($35)...Ariba shares tumble on "red flags"
(UPDATE: Recasts, adds background, byline, previous New York)
By Lisa Baertlein
PALO ALTO, Calif., Jan 12 (Reuters) - Shares of specialty software maker Ariba Inc. (NasdaqNM:ARBA - news) closed down 19 percent on Friday on investor concern that it will not be able to sustain the pace of the strong revenue growth reported a day earlier.
Ariba, which was hit by as many as five brokerage downgrades on Friday, fell $8-3/16 to close at $35-3/16, just above a year low of $32-1/8. The stock, which has a year high of $183-5/16, was the most active issue on the Nasdaq with volume of more than 74 million shares, more than six times its average volume over the past three months.
The heavy sell-off came as some analysts questioned whether the business-to-business (B2B) software maker can maintain its sales growth and whether it is becoming more exposed to short-term license deals and less credit-worthy
customers.
On Thursday Ariba reported a quarterly operating profit of 5 cents per share, which beat Wall Street's average forecast for 2 cents and made it the first pure B2B play to turn a profit before non-cash charges. While many analysts conceded Ariba's first-quarter results exceeded their own expectations, they worried that the company's growth might not be as strong as it seemed.
Wedbush Morgan Securities Analyst George Santana maintained his buy rating on the stock, but said slowing revenue growth and a significant increase in accounts receivable were ``red flags.''
DEVIL IN THE DETAILS
``While Ariba turned in a solid quarter, we are concerned with a perceived slowdown in sequential revenue growth when deferred revenue is taken into account,'' ABN AMRO Inc. Analyst Robert Johnson wrote in a report in which he also cut Ariba's rating to add from buy.
Some analysts were concerned that Ariba executives refused to say what percentage of the company's first-quarter revenue came from term license versus perpetual license deals, which traditionally have made up the bulk of the company's transactions.
Term licenses revenue is booked immediately but collected over about 30 days, while revenue from perpetual license agreements is collected up front and recognized over time.
``We don't know what the mix was. It's kind of gotten muddled,'' Johnson told Reuters.
The change ``scared the bejesus'' out of investors while the lack of specific details left analysts ``a little miffed,'' Johnson said.
``When people are used to blow-out revenue numbers they want it clean and they want it high relative to expectations,'' Santana said.
He estimated that term licenses -- which in previous quarters have been a small percentage of Ariba's deals -- were responsible for 10 percent to 15 percent of the company's first-quarter revenue. That could mean that about $6 million to $10 million in sales were booked upfront as first-quarter revenue, instead of showing up in the pipeline as deferred revenue.
Ariba delivered total revenue of $170.2 million in the first quarter, a 625 percent increase from the previous year. Considering that revenues may have been front loaded because of the term contracts and that investor expectations were raised by a ``whisper number'' as high as $175 million, the results lose some of their luster, said Santana.
Another factor that stirred concern among analysts was Ariba's accounts receivables and days sales outstanding (DSO).
Accounts receivable totaled $119.9 million, nearly doubling from $61.9 million in the prior quarter.
DSO jumped to 63 days in the first quarter from 41 days the previous quarter, reflecting slower collections from customers.
Several analysts agreed, however, that the increases were mainly due to Ariba's expansion in Europe and Asia.
``We believe these trends are consistent with a maturing business mix and expect the company to sustain sequential growth well above our current model,'' said a Merrill Lynch report. |
